Capital is Expensive: for privately held firms, acquisitions are often heavily skewed to cash. Until public markets provide transparent valuations on equity, cash-centric deals are often required buy attractive targets. And cash is dear in a new and rapidly growing enterprise!
Risks are Lower: integrating a 5-10 person team is a very different exercise than integrating a 50-100 person organization. Fewer moving parts and the opportunity to build on a small, focused crew improves chances for increasing, rather than declining, momentum.
Returns Can Be Attractive: a mid-seven figure or low eight figure deal can offer dramatic returns based on revenue and/or EBITDA multiples in relatively short periods of time. While larger deals can look good on the income statement out of the gate, they often don't provide comparable paybacks.
For example, while we made several solid acquisitions at Demand Media under Shawn Colo's M&A leadership, many of us are quite proud of our CoveritLive deal. There, we first invested in CoveritLive while they were pre-revenue and early in market. This investment gave us an opportunity to get to know the team, better understand their product, and help them begin to monetize.
A year in, we bought the company at a reasonable multiple that enabled a positive outcome for the founding team and their investors. Further, Demand Media -- as a much larger company -- was able to accelerate explosive, and profitable, revenue growth while retaining the core people and customers that made the company great.
As you're pondering impact-deals for your emerging software company, don't miss out on thinking small, especially in the beginning.