The quest for product-market fit is perpetual and always on the mind of the CEO. Keeping customers, adding more customers and building a team are the foundation of a growing technology business, no matter where your business is at on its journey.

In contrast to product-market fit, let’s consider the concept of merger-market fit. Merger-market fit considers how acquirers could view your business and what they would be looking for when they consider your company for an acquisition. Is the fit strong enough for investors and acquirers to do a transaction with you? Is there really a “fit” at all?

Merger-market fit is sometimes elusive as markets move—and in tech, move rapidly. Pick a market, and we’ll show you how quickly leaders emerge, funding comes in and then a small group of winners dominate as the market consolidates.

Common themes of merger-market fit

How often do you hear a CEO say that they’re a 20-year-old start-up? Ask them why this happened to them, and you’ll probably hear some common themes:

  • Not reaching escape velocity
  • Underfunding
  • Team problems
  • Addressing the wrong market
  • Waiting too long to sell

As you think about your next moves for growth (or your end game, if it is time for the next adventure), figuring out your readiness for a successful exit or recapitalization isn’t a straight path. We’ve talked a lot about this in recent webinars. The You’re Baby Isn’t Ugly and Beware of Perfection webinars look at topics dealing with timing, preparedness and what the CEO needs to be thinking about as they get ready for an exit.

What are some key considerations as you consider merger-market fit? Could your company be acquired at some point in the future and achieve an outcome that stakeholders will approve?

Considering your businesses future is a daunting task. Some common themes keeping CEOs up at night are discussed below.

Does what we’ve built even matter to buyers?

Buyers will consider the strategic fit and the financial fit of your company against the backdrop of their growth or investment thesis. Does the market want what you’ve built?

Often companies are started because it is a passion project of the founder. Does it solve a real problem in the market, though? Can it scale? Is the addressable market large enough to warrant investing and taking the business to the next level? Does an investor have a point of view on how to grow the business?

A lot of these questions will be answered and clarified during a market calibration with a properly run process.

Are we in too far to turn back?

Sometimes CEOs recognize that what they’ve built may not be able to scale, but they’re too far in—no turning back. Or the problem that they thought they were trying to solve for with their product ends up not having a large enough TAM. Perhaps the actual drivers behind the problem aren’t what the founder thought they would be and there is a fundamental flaw with the business.

CEOs typically see things that others don’t, but sometimes it doesn’t matter. You’ve taken outside investment, and you realize that what you are building will be challenging to scale. I’ve seen this recently when a company builds out a go to market channel that doesn’t yield customers, or they can’t find their ideal customer profile before they run out of money.

The options here are to pivot, shut down or—if there is technology—see if there is a buyer in the market that wants the tech and existing customer base.

How many pivots can we afford?

Markets move so fast today that if you don’t have a finger on the pulse, you’ll get passed up by market shifts, competitive advances, capital shifts or changing customer needs, to name a few.

Look how fast AI and NLP changed over the last 12 months with the explosion of LLMs. Moreover, with LLMs being applied to coding, new companies are going to be able to achieve MVPs exponentially faster than in the past. Forget about people in their garages—we are well past that. Any person with a laptop can create a business in days. These shifts typically happen gradually then suddenly, and they will force you to pivot to remain relevant.

While great tech does not a great business make, the game has been rapidly changed forever. The things that keep you up at night are being solved by someone else somewhere in the world.  Moreover, you can’t figure out where to place your bets with limited resources. What do you do when your strategic partner acquires a company that does what you do for reasons you hadn’t imagined?

We have patents now, but who cares?

I get asked this a lot: “How will our patent help us with acquirers?” It depends. Does it create a moat for the business? Is your current product that you are selling leveraging the patent?

IP is important but not more important than speed. Carefully consider your intellectual property strategy. Cease and desist letters typically don’t drive value in tech M&A, unfortunately, and it will be difficult to create a competitive auction if you have patent litigation in the works. The financial drain of litigation may not be surmountable, and I’ve seen companies attempt to wake up a buyer using the threat of litigation. Caveat venditor.

Selling your product vs. selling your business

If you can’t cross over to understanding the difference between selling your company’s products and selling your company as the product, you may not be able to get the attention of a buyer. You’ll wear a buyer down with extensive pitch decks that are product focused instead of business and future focused.

For many CEOs, selling the product rather than the business is one of the hardest things to overcome when getting ready for a process. Put a team in place to help you with this critical piece of the M&A puzzle.

Caution for lifestyle companies:

Lifestyle companies can be hard to sell. You’ve built the business to support your lifestyle, but that may not be what a buyer wants to buy. They may like the TAM and your product, but your go-to-market may be underfunded or driven by CEO-based sales. Some buyers will run from a lifestyle company, and some may see it as an opportunity to extract additional value by updating the go-to-market approach.

Product-market fit and merger-market fit

You need to be considering both product-market fit and merger-market fit when you’re building your company. Is there a market for what you’re building for customers and is there a market of acquirers for the business? Sometimes what you’ve built doesn’t have a lot of potential acquirers. Building a business for sale when N=1 for the possible acquirers is dangerous.

The days of “if you build it, they will come” are few and far between, but oddly enough, I still see companies building their business on a hope and a prayer that a particular strategic will buy them.

Companies that engage Corum’s process are better positioned to adjust to the market’s interests. If necessary, Corum allows you to hit pause with a hiatus. You take what you’ve learned in a process, make the necessary adjustments to the business and re-enter the market in the future.

Different rules now

You’ve heard the idea that CEOs are (or need to be) always fundraising. In today’s world, you need to be always selling or on the precipice of always selling your company.

The same challenges you face are being faced by the incumbents in your sector. This will drive M&A in new ways that we haven’t seen before. It is happening today, and we see it at Corum with continued solid activity. We do hear “valuations are down” being thrown around by “the market.” Really?

Take a look at the chart below. More transactions will occur in 2023 than in any prior year.

Recent annual tech M&A activity. Source: 451 Research's M&A KnowledgeBase.  © 2023 S&P Global.

Recent annual tech M&A activity. Source: 451 Research's M&A KnowledgeBase.  © 2023 S&P Global.

This isn’t a coincidence. You cannot time the market for the sale of your business in very fast-moving tech waters. You need to be rethinking your M&A strategy and always in the conversation in today’s market.

To join in the conversation today, contact Corum for a no-obligation assessment of your business from a tech M&A expert. Now is the time to know your business’s merger-market fit.