Try Before You Buy: Why Companies Prefer Partnerships Before M&A

I’ve previously discussed the importance of investing early in business development and the potential of that to drive your eventual exit strategy.  While I would never advocate pursuing partnerships unless it is part of your overall strategy, the more you can focus on building strong relationships and partnerships, the more options you will likely have for an eventual exit. A company that you’re partnering with today could easily become your parent company tomorrow.

At SurePath, we tracked all exit activity across the SMB software market, so I decided to go back and look at a bunch of examples over the last few years of acquisitions across the SMB space that started with a partnership. In this post, I thought I’d highlight some of the more notable ones and how the partnership helped to create a foundation for the eventual purchase.

Intuit’s acquisition of TSheets

When Intuit announced that “we are acquiring long-standing partner TSheets” for $340M, few industry insiders were surprised given the excellent product fit and long standing partnership these two had.  TSheets had invested years in this partnership — building both a deep product integration and strong relationships across the Intuit employee base.  Anyone who knows the TSheets brand would often see those iconic TSheets t-shirts at various industry events.  Rumors has it that Intuit employees would even wear them at the Intuit campus.  The TSheets marketing and BD teams were very good at establishing relationships across the board to ensure they always stayed top of mind for the Intuit decision makers.  Relationships matter.

Xero’s acquisition of Hubdoc

Recently, Xero announced they were acquiring Hubdoc for $70M.  This was another purchase that shouldn’t have come as a surprise to anyone following the space.  From a strategic standpoint, Xero continues to battle Intuit here in North America, and is working hard to eat up some of the market share that Intuit has.  This article does a great job laying out the full strategic rationale for why Xero made this move, so I won’t go into too much detail here.  From a partnership perspective, however, is that Hubdoc was a Xero partner since 2014. The company invested a lot of time and resources in driving its success across the Xero customer base.  Also, M&A is not something Xero does very often, so looking to stay close to home (i.e. their partner network) had to give them a lot of confidence that the acquisition would go smoothly, both internally and externally.

Square’s acquisition of Weebly

Square continued to show that they are so much more than just a payments company when they announced earlier this year that they would be acquiring ecommerce platform Weebly for $365M.  As the linked article points out, moving into ecommerce and expanding internationally were two key strategic objectives.  When Square’s product and corp dev team decided to accelerate growth via an acquisition, they naturally looked to their existing relationships.  Given their long standing partnership with Weebly, it was a natural fit for Square to make this move.  This was specifically called out by Weebly’s CEO in their announcement: “Weebly & Square have a long-standing partnership that integrates our services to provide a seamless and powerful experience for our customers. That partnership has been a perfect way to prove out how this relationship could be so much more.”

Endurance’s acquisition of Constant Contact

When Endurance bought Constant Contact, they purchased one of their oldest partners and a proven channel. Many resources — across Product, BD, Marketing and Sales — were spent developing this partnership over the years, and when Constant Contact felt it was time to explore strategic options, approaching Endurance was likely a top priority for their bankers.  Gail Goodman, the only CEO Constant Contact ever had, sums it up best when she said:

“It became clear we could do so much more if we were part of the same company. It really was one of those really great acquisitions that starts from a partnership. And so we go into this knowing each other fairly well and knowing we can cross–sell into their customer base.”

Yelp’s acquisition of NoWait

Lastly, I thought I’d highlight an acquisition that had a different foundational partnership compared to the more traditional ones presented above. When Yelp initially approached restaurant waitlist service NoWait, they were looking for strategic partner to help them test out that space. At the same time, NoWait seems to have been fundraising, and having a strategic partner (as opposed to looking for traditional institutional money) is always something worth exploring. As part of their partnership, Yelp made a strategic investment and likely (as is often the case) secured different levels of exclusivity as they went to market. Ultimately, after pushing the partnership to market, it was clear that the strategic fit was so strong that Yelp decided to buy NoWait a mere six months later.  

What do these examples of partnerships-turned-purchases tell us? From an exit perspective, there’s actually a lot to think about. Here are three key takeaways about how these companies were able to transform their relationships into acquisitions:

  1. In each case, the startup was able to fill a key product gap that quickly became a strategic necessity to their acquirer. The partner realized that the relationship gave them a huge advantage that they really couldn’t afford to share. They needed to own it. 
  2. It pays to invest in relationships.  Not only at exec level, but across the product, sales, and marketing teams, as they will prove to be your biggest cheerleaders internally.
  3. Most importantly, the acquiring companies were all able to mitigate many M&A risks by first “testing” the relationship via a partnership. This allowed them to see what works, and clearly demonstrate the specific value the partnership brought to their respective businesses.  In addition, it gives both senior leadership teams an opportunity to get to know each other prior to getting “married.” As we like to say here at SurePath, it’s hard to imagine marrying someone without dating. M&A is just as much of a commitment, and should be treated the same way.

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