In 2014, investors in private technology companies made a bundle:
Multi-billion dollar acquisitions of companies like Beats, Nest and WhatsApp netted them more than $100 billion.
But 2015 has turned out to be a different story entirely…
Instability in China and Greece is causing volatility in the stock market—and this volatility is leading big corporations to put the brakes on mega deals.
In fact, according to recent data from Thomson Reuters, the number of big deals in Q2 2015 was as low as it’s been since the year 2003.
But despite this dismal picture, one sector of the M&A market continues to mint money for investors like you…
And today we’re going to show you how to get in on it.
IPOs Versus M&A
There are two main ways investors like you get “an exit” (i.e., make money) from your private technology investments:
Either the company you invested in goes public (an IPO), or it gets acquired by a bigger company (M&A).
The most common type of exit is an acquisition.
And despite the multi-billion dollar acquisitions you read about in the press, most M&A takes place at levels that are more down-to-earth.
In fact, a recent study by Exitround—a marketplace for buyers and sellers of small to medium-sized technology companies—determined that 88% of acquisitions take place below $100 million.
And if you dig deeper, you’ll find that most of those acquisitions take place at about $30 million to $50 million.
What’s going on here?
What’s going on is something called the “Acqui-Hire”—
Formed from the words Acquisition and Hire, an Acqui-Hire is a sub-$100 million acquisition where the primary agenda of the buyer is to hire a start-up’s team.
The buyers embracing this acquisition strategy are big household brands:
Hearst, the publisher of such magazines as Esquire and Popular Mechanics, recently bought a small tech company called BranchOut…
As one industry publication noted, “Hearst doesn’t need BranchOut’s users or data, it needs its employees’ expertise: people steeped in the Silicon Valley way of life....”
Capital One acquired a web services company called Adaptive Path that can help it create consumer-friendly websites and innovative mobile apps.
And in the past four years, Walmart has made 15 of these small acquisitions.
The Acqui-Hire has now become such an accepted business strategy that the head of Yahoo’s strategic M&A department is also Yahoo’s head of Human Resources.
But these acquisitions aren’t just good for the buyer—
They can also be good and profitable for investors like you…
The “Sweet Spot”
Exitround recently analyzed nearly ten years of data from more than 200 sub-$100 million acquisitions.
They discovered that most of these acquisitions are of companies that have raised small amounts of capital—i.e., the types of start-ups that are raising capital using equity crowdfunding.
And they found a “sweet spot” where the best exits occur:
The sweet spot is for companies that raised $2 million to $3 million
This group of companies had an average exit price of about $18 million, indicating a return-on-capital of up to nearly 10x.
Forget About Mega Deals…
So forget about those mega billion-dollar deals…
Exitround’s data show that early-stage investors can generate solid returns by investing in smaller deals.
So as you’re keeping an eye on the volatile public markets this summer, think about taking advantage of the Acqui-Hire trend.
To find early-stage tech companies raising small amounts of capital, check out our deals page >>
Or take a look at the new deal roundup email we send you every Monday.