Oleg Netepenko is Founder and Managing Partner at Flintera, which makes strategic investments in SaaS, blockchain and EdTech companies.
Abraham Maslow is reported to have said, “In any given moment, we have two options: to step forward into growth or to step back into safety.” In business, stepping back into safety can spell disaster. That’s why most entrepreneurs will tell you their primary objective is to grow and expand their business. But what’s the best way to do that in today’s business environment?
Put simply, once a company matures beyond the startup phase, it can expand organically or complement organic growth through mergers and acquisitions. While both methods are effective, M&A tends to be more efficient, especially for companies with an established market presence that want to grow quickly. And one of the best strategies to use is that of a roll-up.
Understanding The M&A Roll-Up Strategy
A roll-up is simply a growth strategy where a private equity firm, venture capital group or corporate venture fund invests in consolidating two or more companies. The roll-up operator then works to streamline operations, reduce duplicative costs and implement best practices across each business. We’ve used this approach with our portfolio companies.
There are two main goals of a roll-up strategy: customer acquisition and product acquisition.
Companies typically leverage roll-ups for customer acquisition when sales cycles in an existing market are expensive and long. However, most often it’s about expansion into an adjacent vertical or geographical expansion—especially those that involve different languages and cultures.
Product acquisition becomes relevant when in-house development is long and expensive. In this case, the acquisition of intellectual property and the development team makes a lot of sense. But what’s even more important is that the more products a company sells to the same customer, the less churn they likely get—because customers tend to stick with the products they know.
An example of a customer-focused acquisition is Adobe’s 2022 bid to buy Figma. By acquiring Figma, Adobe would gain access to an expanded market that might be interested in both products. Conversely, the creation of Marigold (formerly CM Group) is a great example of a roll-up focused on acquiring products. The company has completed several acquisitions, including Delivra, Emma, Liveclicker, Sailthru and Vuture. In 2019, Marigold announced a $410 million round of financing to bring more companies together under one roof.
Opportunities And Challenges Of A Roll-Up
A major upside to implementing a roll-up strategy is access to capital and operational expertise via the PE or VC funds backing the M&A strategy. Another advantage is the potential to own more of a market, as a roll-up enables firms to consolidate multiple competitors under one roof. A roll-up also opens the possibility of an attractive exit for smaller companies looking to sell later.
But unfortunately, like every business strategy, roll-ups present their own challenges, such as integrating infrastructure. Blending different technologies, processes and personnel can be overwhelming. And because of that stress, it can be tempting to impose the parent company’s systems on the new company immediately. However, this could lead to the alienation of new employees.
Best practice dictates analyzing the company’s processes and tools before making broad decisions. An efficient way to tackle this is to create a detailed plan with a dedicated team. To do this, the acquiring company should allocate enough resources for the integration and hire experienced professionals to manage the process. The parent company should also involve both sides in decision making. Collaboration can help employees adapt quickly to new tools, systems and culture.
Another challenge with roll-ups is combining the products and services of each company. This requires a careful examination of the market demands and strengths of the products and services. This will help the parent company streamline its product offerings and remove redundancies, which brings clarity to cross-selling or upselling opportunities. By pairing complementary products or services, businesses can leverage the combined customer bases and create more value through bundling or add-ons.
A Case For M&A Roll-Ups In E-Commerce SaaS
Although the market for e-commerce software-as-a-service products has been around for more than two decades, it shows few signs of a slowdown. One forecast even predicts that the market will grow from $6.1 billion in 2021 to $26.2 billion by 2031, with a CAGR of 15.5%. And that equals a lot of opportunity for roll-ups. Here’s why:
When the first e-commerce SaaS companies were launched, they focused on developing solutions with a singular focus on things such as email marketing, SMS and push notifications, personalized customer experiences, data management, loyalty programs, digital advertising, etc. It makes sense that early startups would develop their products this way because each solution is a highly complex piece of software. As a result, midmarket and enterprise e-commerce companies had to maintain several independent solutions. That struggle continues today as e-commerce businesses combine numerous solutions to improve their sales and retention capabilities.
While the numerous SaaS solutions available are intended to solve different problems, they are labor-intensive, expensive and challenging to integrate. But if these disparate tools were integrated into a holistic SaaS solution, the impact on midmarket and enterprise e-commerce businesses would be tremendous (better data management, improved workflows, cost savings, etc.). And that makes the industry an excellent opportunity for those focused on M&A roll-ups. By consolidating the complex and fragmented world of e-commerce SaaS tools into a holistic single-stop solution, investors can gain an edge in this potentially $26 billion market.
Roll-ups are an effective way for businesses to grow and expand by unlocking new revenue streams and penetrating new markets quickly. However, as with all investments, there are inherent risks associated with this approach. The success of a roll-up depends heavily on many factors, and poor planning and timing can lead to underperformance and value destruction. That’s why companies need to have a clear strategy in place before moving forward with a roll-up.
When planning, it’s important to remember that a roll-up isn’t for every industry. Those better suited usually have multiple companies serving the same buyer. SaaS businesses, especially B2B, tend to be the best candidates in the tech world.
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