How to Assess Tech Startups for Acquisition
By Richard Frankel
May 26, 2023

The tech startup landscape has flourished in recent years, with entrepreneurs founding a staggering 50,000 new startups yearly worldwide and an estimated global investment of $420 billion into startups in 2021 alone. As a result, businesses have been increasingly turning to acquisitions to expand, gain access to new technologies, and enhance their competitive edge.

A recent report revealed that 48% of companies surveyed viewed acquisitions as a critical strategy for business growth. However, assessing tech startups for potential acquisition can be a complex process, requiring a thorough understanding of the target company’s product, team, and potential for growth.

As the market for funding startups pulls back in 2023 and deal sizes shrink, startups will look for fundraising alternatives. Acquisitions will become more attractive. In other words: there will be more opportunities for buyers.

This article provides a step-by-step guide for companies of any size looking to assess and acquire tech startups effectively in this tumultuous time. But even with more attractive deals, buyers must follow best practices to make good decisions. 

If all of this sounds like a lot of work, that’s because it is. Companies that make regular acquisitions usually have a Corporate Development team. This group of experts knows the ins and outs of growing a company through acquisition. They find potential startups to buy, work out the terms of the deal, make sure everything checks out, and help combine the two businesses. They make sure the whole process fits with the company’s bigger plans.

Step 1: Define your acquisition strategy and objectives

What do you hope to gain from this daring venture? Is it to conquer new markets? To hire fresh talent? Or are you eyeing that sweet piece of proprietary tech? Whichever the case, make sure your acquisition strategy dovetails neatly with your overall business plans. 

When defining the objectives, it is also essential to consider the financial implications of an acquisition. Set a budget, understand potential costs, and consider how you will foot the bill. Remember, no one wants a surprise financial headache.

Be wary of acquiring startups that target different markets than your core business. One of the biggest mistakes acquirers can make is thinking that their current sales channels can take on new products directed at new buyers. If you plan on targeting a new market for your business, include the price tag of developing this new sales and marketing operation in your cost structure. This isn’t Field of Dreams; just because you build it doesn’t mean they will come.

Step 2: Develop an acquisition target profile

Once you establish an acquisition strategy and objectives, develop a target profile that outlines the characteristics of the ideal tech startup. 

  • Industry Focus: Understand their core business, customer focus, and the market they are operating in. This will help determine whether the target has a viable product or service that would benefit your company’s operations.
  • Company Size: The size of startups can vary widely, which could impact the success of an acquisition. Acquiring larger startups might be challenging to integrate, whereas smaller ones might require additional financial and operational support to blend into your existing processes.
  • Geographic Location: A target’s location can make integrating it easier or harder. They may also have access to resources and talent in their local markets that complement your current business.
  • Revenue Potential: Revenue potential includes the size of a startup’s current and potential customer base, pricing structures, market size, the potential for expansion overseas, and the efficiency of capacity for scaling. 
  • Target market fit: Can your current sales force sell this new company’s products? Or do you need to invest in new channels and learn how to engage with new sets of clients? 

Keep in mind, there’s no ‘perfect’ startup. Each one brings its own strengths and challenges. Comparing opportunities often involves weighing these trade-offs to find the best fit for your business.

These criteria will help narrow the search and ensure that leadership only considers suitable acquisition candidates.

Step 3: Seek legal and financial advice early

Engage the expertise of legal and financial advisors during the acquisition process. These specialists serve as a navigational compass, helping you through the intricacies of the deal, ensuring you remain within the boundaries of relevant regulations, and steering you clear of potential pitfalls.

For legal advice, find an attorney with a wealth of experience in technology-related matters. They understand the particular nuances and complexities associated with tech startups. These legal eagles can assist in negotiations and craft vital documents such as non-disclosure agreements (NDAs), term sheets, and merger agreements. Their insight can help mitigate legal risks and ensure a fair, sound deal. But remember, the deal is yours, not your attorney’s – don’t let them unnecessarily drag you down legal ratholes.

In parallel, secure financial guidance from an investment bank or a boutique corporate finance firm with a deep understanding of tech startup mergers and acquisitions. They can offer valuable financial modeling, valuation, deal structuring, and financing assistance. 

Smaller companies working on smaller deals may be best served by less expensive solo specialists. Ask your friends or investors for connections.

Remember that every deal is unique. They may involve financial arrangements such as earn-outs, stock-for-stock swaps, or performance-based payouts. A financial advisor with M&A expertise can provide insights into these and help to structure a deal that aligns with your financial expectations and risk tolerance.

Some companies hire consultants to take charge of the entire acquisition process. These professionals come in handy if the acquisition is large or complex or if your company needs to gain substantial experience.

Engaging these professionals early on in the acquisition process is key. This allows you to access expert advice when needed most, and it helps avoid last-minute scrambles or overlooked details that could cause headaches. It also allows these advisors to gain a deep understanding of your objectives, enhancing the value of their guidance.

Step 4: Conduct market research, identify potential acquisition targets, and identify merger funding

This phase is all about doing your homework. That means conducting detailed market research to pinpoint potential acquisition targets. Review industry publications, hit up startup events and conferences, tap into your professional networks, and dig into startup databases and platforms.

Next up is sorting your potential targets. It’s not about quantity; it’s about quality. You’ve got a list. Now it’s time to prioritize. Determine which targets align with your strategic goals, have strong growth potential, and fit neatly with your company’s objectives.

Money matters, so let’s talk about funding. Now is the time to get clear on your financial resources and your budget. If your piggy bank needs a top-up for acquisitions or your corporate financial structure needs tweaking, get on it pronto. When your strategy and business models are sound, you’ll likely find funders who’ll back you up, providing capital when the deal closes or even just before. Well-prepared beats well-intentioned every time.

Step 5: Engage with the target and conduct a preliminary assessment

Before going all-in with thorough due diligence, you’ve got to break the ice with your potential targets. It’s time for a preliminary assessment, and it’s a two-way street. You get to see if the startup is a good fit for acquisition, and they get to peek behind the curtain of your business. Think of this as your company’s first date with the target startup. 

During these early stages, you’ll want to focus on a few areas:

  • Product or Service: Dive into the startup’s offering. What makes it unique? How scalable is it? And what’s its market potential? Chat with the startup about their vision and see if it meshes with your own.
  • Financial Health: Request high-level financial information from the startup, such as revenue growth, profitability, and cash flow. While detailed financial data might not be available at this stage, this information can provide valuable insights into the startup’s financial stability.
  • Technology and Intellectual property: Engage with the startup to understand the strength and defensibility of their technology, patents, trademarks, and copyrights. At this stage, the focus should be gathering an overview of the startup’s platforms and IP portfolio rather than conducting a detailed review.
  • Market Position: Where do they stand in the grand scheme of things? Dig into their competitive edge, market share, and customer base. Does the acquiree’s market position align well with yours, or the direction you want to go?
  • Management Team: Engage with the startup’s leadership team to evaluate their experience, skills, and industry knowledge. This can help you assess the compatibility of the startup’s team with your corporate culture and long-term objectives.
  • Client Perspective: Are their clients happy? Are they using the product and planning to use it more in the future? What do they think of the startup and its people? (Note that talking to clients is sensitive, and may be done at this stage, or possibly later during due diligence).
  • Culture and Talent: Does the startup’s culture vibe with yours? Look at the compatibility of their talent and culture with your corporation. This might involve chats with the startup’s employees, reviewing company policies, and looking at the cultural fit between both parties.

As you come to understand the reality of the product, pricing, market size, and fit of your target, you’ll want to start modeling what the value could be when it is integrated into your company. What is the long-term potential for growth? Will the acquiree be a stand-alone business that benefits from shared administrative resources? Or will it be integrated with current business units or sales channels and drive more efficient or scalable growth? You should build at minimum a three-year model that clearly lays out the potential investment required, revenue growth anticipated, and path to profitability. The model should include sensitivity analysis for over- or under-performance. Ultimately your board of directors/CEO/CFO will want to understand why the valuation you ultimately arrive at is justified with a financial model that makes sense. 

Step 6: Valuation and deal structure

Before embarking on the detailed due diligence process, it’s crucial to establish preliminary deal terms, often summarized in a Letter of Intent (LOI). The LOI outlines the core terms of the proposed acquisition, serving as a basis for subsequent negotiations and due diligence.

Writing an LOI involves clearly defining the proposed deal structure, which could include an initial valuation estimate for the tech startup, proposed payment terms (cash, stock, or a combination), any contingent payments or earn-outs based on future performance, and key terms related to governance and post-acquisition integration.

Valuation at this stage is typically more of a range than a specific number, as it may change based on findings during due diligence. You can determine this range using initial financial analyses and industry comparisons. Considerations may include the startup’s growth potential, competitive advantage, and unique assets.

Also, consider potential synergies with your existing business. Would merging reduce costs through shared administrative functions? Could existing channels and clients drive more efficient revenue generation? How swiftly and easily could you leverage technological assets?

Remember, these preliminary terms are the starting point for negotiation. During due diligence, both parties must work towards a mutually agreeable final deal structure. This early agreement, while not legally binding, sets the stage for the next phases of the acquisition.

Step 7: Conduct in-depth due diligence

After reviewing your acquisition targets, it’s time for due diligence. When you do diligence, you examine the target’s operations, finances, legal standing, and lurking risks. This isn’t a quick skim – it’s painstaking and time-consuming. Don’t begin this process unless you are ready to pull the trigger on the deal if everything checks out.

Key areas to focus on include:

  • Financial and Operational Performance: Time to dig into the nitty-gritty financial data. Look at past financial statements and forecasts to gauge the startup’s growth potential, profitability, contracts, and long-term stability.
  • Legal and Regulatory Compliance: Ensure the startup’s been playing by the rules. This involves checking their compliance with relevant laws and regulations, like data privacy, employment laws, and IP protection. You should tag in legal advisors familiar with tech startup acquisitions to help navigate these tricky waters.
  • Tech and Intellectual Property: Here, you assess the startup’s tech toolkit and IP assets. Look closely at their technology stack, software architecture, and IP portfolio to see if they fit well with your existing technologies. Don’t overestimate how easy technology integration will be.
  • Clients: You may have already spoken with clients, but if you haven’t this is the time to do so. Ensure that the client’s understanding of the target, its product, and people reflect what the acquiree has told you.

Throughout this due diligence stage, keep the lines of communication wide open with the startup. Any concerns or questions? Address them straight away. This cooperative approach can build trust and smooth the path to a successful acquisition and integration.

Step 8: Finalize the acquisition and execute post-acquisition integration

Once the deal has been negotiated and finalized, the focus shifts to executing a successful post-acquisition integration. You should carefully plan and manage this process to ensure the seamless integration of the tech startup into your company’s operations, culture, and alignment with strategic objectives. 

Critical aspects of post-acquisition integration include:

  • Integration Planning: Develop a detailed integration plan that outlines each team’s key objectives, timelines, and responsibilities.
  • Communication: Maintain clear and open communication with the startup and your employees to ensure a smooth transition and address any concerns.
  • Talent Retention: Develop strategies to retain and incentivize key talent from the acquired startup, such as offering competitive compensation packages and clear career development paths.
  • Synergy Realization: Identify and execute opportunities to create value through the integration, such as cost savings, cross-selling, and leveraging shared resources.
  • Technology Integration: Don’t be seduced by supposedly easy technology integration. Integrating software – usually on different platforms, code bases, programming languages, databases, etc. – is always extremely hard. Find success paths that don’t require any major software integrations.


Assessing tech startups for acquisition can be a complex and time-consuming process. However, by following a structured, step-by-step approach, businesses can identify, evaluate, and acquire tech startups that align with their strategic objectives and drive long-term value.

By defining clear acquisition objectives, developing a target profile, conducting thorough due diligence, and executing a well-planned post-acquisition integration, you can successfully navigate the tech startup acquisition landscape and stay ahead in today’s rapidly evolving business environment.

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