Allen Lau, co-founder and former CEO of Wattpad, has had first-hand M&A experience leading his company to its $754-million CAD acquisition deal with Naver in 2021.
Now, Lau wants to share the lessons he learned with Canadian founders currently pursuing M&A in an ever-changing economy. Ahead of his TechExit appearance on October 25, Lau spoke to the current state of M&A, the value of mentorship, and what role VCs can play.
What is the current state of M&A in the Canadian tech ecosystem? How has it changed over the past few years?
As funding has become more scarce, and tech valuations have become more reasonable, M&A has become increasingly attractive both from the sell side and the buy side—specifically from traditional players with greater purchasing power who were priced out until recently.
Ten years ago, it was rare to see transactions over $100 million—that has since changed. As the size of our ecosystem grew significantly in the past decade, so did the number of scaleups. Larger deals have also become more common. The top 25 Canadian tech exits were highly concentrated in the past few years, even if it was inflation-adjusted and takes the “pandemic effect” onto the 2021 venture boom into account.
Canadian companies have the appetite to be more acquisitive. I believe more scaleups are pursuing growth beyond organic means as M&As become a more attractive route to take. This is a natural transition, as it is hard to maintain the same growth rate as revenue grows. When we talked about M&As in the past, it was more about selling to foreign companies, but today the narrative is evolving, with more discussions of Canadian buyers, and that is super exciting.
How did mentorship and learning from other leaders and founders help you through your journey as a tech founder? Why is it important to create a space for founders to learn from each other when it comes to M&A?
Many of the problems founders are facing today are nothing new. On the other hand, no two problems are the same. Being able to learn from other people on how they solved these problems—or even how they messed it up—helps you learn and grow as a founder. Using it as a starting point, mentorship can help others effectively find the most optimal solution for their own problems at the time.
Most founders never have the chance to sell, with very few only having one chance to sell their company. This is partly because the sell side is typically inexperienced, while the buy side (often the incumbents) are used to acquiring companies—it’s almost a no-brainer. The match, to me, is unfair, and the seller is at a huge disadvantage. This is why peer-to-peer learning from fellow founders is so important. It helps avoid what could be irreversible and consequential mistakes.
Can you discuss the role of venture capital in supporting tech startups’ growth and potential M&A opportunities in Canada?
I can use myself as the best example. Of the three companies I co-founded, I sold two of them. I can testify that these two transactions are drastically different and yet it gives me a wide spectrum of experience.
Now, I’m on the other side as a VC. I can help founders decide if they need an investor to run the process and if so, the right structure to incentivize the best outcome. I can also share experience from how to run a competitive process and even taxation considerations for the founders.
Why did you want to speak about M&A at TechExit?
As I built Wattpad, we focused on building a great business and didn’t spend much time considering selling the company. However, the reality is that most successful companies are acquired instead of staying independent. The numbers don’t lie. You never know when that time will come.
But the realm of M&A lacks widely available resources. Through sharing my own experience of selling two companies that I co-founded, and working with others who have done this before, collectively we can share our unique experiences that people can learn from and leverage for their own ventures. This makes me proud to be part of TechExit.
What is your top piece of advice for founders looking to potentially exit in the next six months?
All you need is one term sheet… but what’s better than one, two! Having two will make sure you get a fair price.