Weekly Update: Is Tech M&A Picking Up?
Highlights from SaaS & VC & Markets from the week of 2/6
The hot streak ended for the WCLD after 5 consecutive weeks of gains. The benchmark cloud index closed the week at $29.00, down 5%.
It was a “risk-off” week overall as the S&P had its worst month since December. What happened?
The economy continues to show signs of strength. According to a NYT headline on Thursday:
What Recession? Some Economists See Chances of a Growth Rebound.
When will the Recessionistas wave the white flag?
Unemployment is at 3.4%. Consumer credit card and debit card spending are hot:
If the economic activity is robust, unfortunately, inflation might be a bigger threat than January’s bull market would suggest. That’s Larry Summers’ concern:
Then again, the NASDAQ surged 16% in January, so it’s reasonable for the market to give up some gains. Regardless, it’s safe to say that the tug-of-war between economic growth & interest rates will continue to drive public markets over coming quarters.
Turning to the startup market, one intriguing dynamic in 2023 is the prospect of increased M&A activity. Some VC pundits have been predicting an M&A boom. Undoubtedly, amidst the glut of over-funded startups of the past few years, there will be plenty of motivated sellers. But will there be many buyers?
Enter dbt, the pioneering software startup that’s vaulted into a leadership position in data engineering. dbt raised a year ago at a $4.2b valuation. It’s one of the few recent unicorns that I think is more likely to appreciate than depreciate in the next few years.
dbt’s CEO, Tristan Handy, just announced the acquisition of Transform:
Transform had raised 24.5m and, according to its CEO Nick Handel:
“We were well capitalized and had customers”
In other words, Transform didn’t have to sell. Kudos for dbt for executing on the transaction. While this type of deal makes strategic sense, it’s not easy to pull off for a typical venture-backed startup.
Why? The three E’s:
Economics: in a tough funding market, VC-backed companies must be careful with cash, meaning they must use stock in M&A. Is this attractive to potential sellers? Few founders want to take illiquid stock in a company they don’t control. Most would rather keep the (illiquid) stock of the company they control. Of course, many startups have majority VC ownership. But getting multiple classes of VCs aligned on a deal makes herding cats look easy.
Egos: the deal was likely contingent on the Transform founders committing to staying at dbt post-deal. Do those founders truly want to have a boss? Most don’t. Also, did I mention there are VCs involved?
Emotions: where there are big egos, there are big emotions. As a former deal-market, I can assure you that it’s common for emotions to run amok even in the best of market conditions. This difficult market moment is forcing both founders and VCs to process very challenging emotions. This can make M&A negotiations resemble marching with lit matches through piles of oily rags.
Given those obstacles, how did this deal come together? My guess is that the spectacular growth of dbt likely soothed Transform’s concerns and gave dbt the confidence to move decisively. It’s rolling up the market while 3x’ing revenue:
It has some 19,000 companies overall, 65,000 open source community members and more than 3,000 businesses on the paid tier of the product, called dbt Cloud.
Handy said that revenues have grown three-fold in the last year and headcount has doubled to 400 from 200.
I’d bet that only a small minority of unicorns are fit enough to attract sellers & handle the rigors of M&A execution. While 2023 might see more activity than the M&A graveyard that was the 2nd half of 2022, I don’t expect a wave of M&A any time soon.
Podcast Recommendation of the Week:
The Logan Bartlett Show had a great interview with Matt Mochary. In the podcast, Mochary explains how he transitioned from tech founder to becoming executive coach to Silicon Valley luminaries such as Sam Altman, Naval, and Brian Armstrong. If there’s a magic formula behind Mochary’s approach, it’s how he helps clients improve their understanding of their own emotions and then use that knowledge to better achieve their goals. Check out his “Mochary Method” wiki for more details.
In the interview, Mochary offers many useful tactical insights. I love the hiring tip of using 15 min first calls with candidates. If the conversation goes well, then you can extend the conversation. This tactic is to maximize time spent with the best candidates and minimize time spent with inferior candidate. The underlying principle is to move as quickly as possible with great candidates — that’s the way to make them feel most loved, which maximizes the chance that they will accept an offer.
Reading Recommendation of the Week:
The major story of the past week in tech is the new, AI-fueled rivalry in search between Microsoft and Google. Given the $260b global search advertising market, this is a story that’s likely to garner major headlines for some time.
The NYT has an excellent review of the new Bing search product. One intriguing aspect is that Microsoft will incorporate Bing into their Edge web browser:
Microsoft has also incorporated OpenAI’s technology into Edge, its web browser, as a kind of superpowered writing assistant.
Until I read this, I had no idea that the Edge web browser existed. Also, that feature sounds awesome! The review gives a good summary of the current state of search:
After years of stagnation and stasis, Microsoft and OpenAI have made search interesting again.
Personally, I suspect that Google will execute well as the “fast follower” given its given its history of investment in AI, its massive scale, and its vertical integration. In any case, the rivalry virtually guarantees that users will experience a big improvement in search experience. As a power user who currently pays zero dollars for Internet Search, this feels like a big win.