“Every once in a while, however, a $1 billion or even multi-billion M&A deal for a venture-backed, relatively young company pops up, such as the recent Nest/Google announcement. These deals defy conventional valuation logic since the acquired companies are early in their revenue curve or sometimes even pre-revenue. Where do these billion-dollar deals come from and what factors are involved in their creation?”
Who said it: Glenn Solomon, Partner with GGV Capital
In Context: In an article providing guidelines on entry into the billion dollar M&A club, published on the GGV blog (featured in TechCrunch), Solomon also describes drivers of outlier billion dollar M&A valuations. To put a billion plus price tag in context, he pointed out that the average valuation for venture-backed M&A deals is USD 161M in the US. So such mega valuations are truly outliers. The three drivers are 1) “Rocket Ship Riding”, where fast early growth drives a decision to pay a premium for potential growth. Google’s near USD 1 bn acquisition of Waze and Facebook’s buyout of Instagram are examples. 2) “Fear of Losing Out” Acquisition prices can be driven up to billion dollar levels when an acquirer develops the fear, real or not, that they might lose an opportunity, either to a competitor or to the target itself. Examples are Google paying USD 3.1 bn for DoubleClick in the face of Microsoft’s rumored pursuit of the target. And 3) Lottery Pick on Draft Day a seemingly random event where management at a larger, established tech company want to bring in a new team who are perceived to have skills and abilities to drive innovation.
Where we found it: Techcrunch