The current downturn is likely to see a wave of startup consolidation across Europe this year. Public and private tech valuations have slumped, the era of cheap money is over and VCs are being far more careful with their cash. In this environment, many companies with short runways will be looking to exit — while growing startups with committed backers will aim to buy rivals on the cheap.
Despite a widespread M&A slowdown in the second half of 2022 (Refinitiv data just revealed that the global value of M&A deals fell from $2.2tn to $1.4tn between the first and second half of last year), insiders tell Sifted that 2023 will see corporates and big tech companies with deep pockets emerge from the sidelines with offers now that valuations have come back down to earth.
All this suggests that founders will be wondering how to navigate a potential exit, or an acquisition, in a down market. How best to reach out to a rival about a sale? What moves are most likely to result in a peaceful merger? And, if you're the CEO of a well-capitalised startup, how do you work out which companies to target, and play negotiations?
William Reeve, a serial founder and adviser behind several household name startups in the UK — and current CEO of lettings software startup Goodlord — has some answers to those questions, and a new acquisition to announce to boot.
Reeve cofounded DVD rentals site LoveFilm — which exited to Amazon for £200m in 2011 — just after the dotcom bust, and led real estate platform Zoopla to success as a founding non-executive director in the wake of the financial crash. He also went on to launch the holidays site Secret Escapes.
His latest company, Goodlord, which launched in 2014 and has raised $69m to date from backers including LocalGlobe and Highland Europe, is today announcing its purchase of rival London-based tenancy management startup Halo, for an undisclosed sum.
The Halo deal is Goodlord’s third acquisition since 2020. The company bought Sheffield-based peer Vouch in an all-share deal that year, followed by bill-splitting fintech app Acasa in 2021 — and Reeve tells Sifted that he now aims to acquire more rivals. The ideal next purchase would be an easy-to-consolidate direct competitor, he says.
I'm sure that the current downturn and funding drought will lead to some creative destruction. And I’m optimistic enough to think that the exciting word there is ‘creative’
It’s a clear turnaround for Goodlord which, back in 2018, was haemorrhaging cash and had just laid off 40 people. It was then that LocalGlobe drafted Reeve in to head up the business, and it has since grown from 75 to 350 employees, processes over 50k tenancies each month and raised £27m last March to fuel expansion. The startup is currently loss-making, but says this is an active choice as it's still focusing on growth.
Reeve has been on both sides of the deal table in turbulent times, and has some helpful M&A pointers for Sifted readers.
Always start with the people
Tech is a people business, and not forgetting that is Reeve's top tip for any founder looking to buy another startup.
"It's about people, it's about culture and it's about fit," he says. If founders hate each other, “even if all the numbers are screaming out in piles of profitable black ink, it is not going to happen”.
He also advises against ever buying a startup with an incompatible founder, even if she or he is leaving the company post-exit.
Even if the sellers say: 'Oh I can't stand these bastards, but I'm going to leave the day after the deal, I don't really care', it still won't really work
“Even if the sellers say: 'Oh I can't stand these bastards, but I'm going to leave the day after the deal, I don't really care', it still won't really work, because if there's that much hatred that will've rubbed off on some of their team.
"These things are stressful, complicated deals, and you just won't get it done if there's not some basic compatibility. The deal you really want to happen is where two businesses have a very really strong cultural affinity to each other, and you are almost thinking: 'It's ridiculous that we're actually competing’."
Eliminate the competition
This is the philosophy Reeve followed with Goodlord's latest acquisition. "In Halo's case we see it as an opportunity to combine the customer bases," he says.
Both Goodlord and Halo cater to lettings firms, with Goodlord offering all-encompassing support — including referencing and helping new tenants switch utilities and split bills — to larger landlords. Halo’s signature pre-tenancy product, catering mainly to smaller letting agents and tenants, offered an appealing new approach that could be rolled out across the board, the company says.
Halo was founded in 2019, and had raised £1.3m before the sale. Last summer, its founder and CEO Kipras Gajauskas approached Goodlord about acquiring Halo and its technology (its team have already left, and aren’t joining as part of the deal).
"Instead of essentially having two teams working in competition with each other, building the same feature twice, we get to combine forces and focus everybody on building one technology platform, and have one offering for customers. That will enable us to leverage our economies of scale and extend the leadership we have in our space," says Reeve.
Be a nimble buyer
In a down market, Reeve says it’s vital to strike a balance between doing extensive due diligence and taking time to get to know a company, with being ready to sign at a moment’s notice (in case, for example, another potential acquirer swoops in with an offer).
Ideally you want to wait as long as possible between meeting these people and when the deal happens
"Ideally you want to wait as long as possible between meeting these people and when the deal happens. But at the same time you need to be as nimble and agile as possible for when the opportunity actually emerges — because often the deal is going to get done with the guy who can complete it this weekend. Those are often the most favourable opportunities."
Don’t make rapid-fire acquisitions — your culture won’t survive
Reeve says that for startups looking to grow via M&A, "there's a real practical limit on how many acquisitions you can do in any given period of time".
"You don't want to do it so fast that the culture can't keep up, and the organisation ends up as a collection of separate subcultures and fiefdoms. You need the chance to reorganise the business and streamline it, and make the most of the acquisition."
He says that buying one company a year has proved a "pretty good cadence", as "you need to prove one [acquisition] is successful before moving onto something else".
Avoid targeting a startup that has a direct rival on its cap table
As the former chairman of online wealth platform Nutmeg, Reeve oversaw its sale to JP Morgan in 2021. Goldman Sachs was an early Nutmeg investor, and that dynamic was "one of the things that we had to handle pretty carefully".
"That transaction would've been easier if I hadn't had Rival A trying to buy the business partly owned by Rival B," Reeve says.
Be careful in handling even small cultural differences
Goodlord has a policy of offering unlimited holiday days. When Goodlord vetted Vouch for acquisition, Reeve realised the startup had a much more traditional leave policy.
He says founders should note that although such a culture clash can seem like a "pretty minor thing", unlimited holidays are the sort of perk that defines company morale and helps retain staff through acquisitions.
“You’ve got to be eyes open, careful and thoughtful about what’s going to happen... Everyone is going to be asking that question [about whether they will get to keep unlimited holidays post-merger], even if they don’t say so in the first all-hands,” he says.
Now is the time to get the ship straight first
He advises founders facing similar situations to “try and get a shared understanding of what the combination of the two organisations can achieve together, and align around the mission and the purpose of the business”.
In the 2023 tech market, focus on target company profitability
Goodlord was approached by several founders about being acquired last year, but Reeve declined as their startups were unable to show a path to profitability — a big red flag in the current environment.
"I need to see some way where what I acquire can become profitable very quickly,” he says, because even if a target business is consolidated and streamlined, “usually it's not enough to turn a very loss-making business into a profitable business”.
… And if you’re looking to exit, start cutting now
Approaching a rival about a potential sale is often welcomed, Reeve says. But in the current environment, he suggests that for any founder leaning towards an exit, "now is the time to get the ship straight first".