The Growth Stall Problem
At the Seed and Series A stages, VC-backed companies are expected to maintain high growth driven by product differentiation, effective go-to-market operations, and a fully developed management team. When one of these critical building blocks is missing, growth often stalls around three to five million euros in annual recurring revenue. At that point, the top strategic priority becomes achieving profitable operations while sustaining growth, followed closely by planning for an exit.
Understanding the Price-to-Value Gap
There is a critical distinction between post-money valuation and enterprise value. Raising five million euros at a twenty million euro valuation does not mean the entire company is currently worth twenty-five million. It represents an implied valuation: selling 25% of equity for that amount means that fraction of the company is worth twenty million, while the actual enterprise value of 100% of the equity remains unproven.
After addressing profitability, a company might generate five million euros in ARR with modest growth and breakeven economics. For Series A investors who may need at least a 2x return to justify the investment to their limited partners, this outcome expectation can be disconnected from the company's intrinsic value. This is the price-to-value gap, and it is where M&A advisors must implement a well-defined go-to-market strategy to attract the right buyers.
Defining the Right Buyer
The right buyer is characterized by three qualities: a strong intention to buy, a high willingness to pay, and dedicated resources for M&A execution.
A common misconception is that large public corporations or major private companies are the ideal targets because of their dedicated resources. Sellers often assume these strategic buyers will develop strong intent once they see how a product could enhance their offering. But if a large strategic buyer truly needed to integrate a technology to address a gap or boost revenue, they typically would have reached out directly. Outbound approaches to these buyers often generate curiosity rather than intent, leading to unreliable follow-ups, postponed meetings, and unexplained disappearances.
Size Drives Intent
In outbound M&A, the size of the target matters enormously. Integrating a five million euro ARR company demands similar resources as a fifty million euro one, making larger deals a more efficient use of resources. Large strategic buyers generally require a target with at least twenty million euros in ARR to consider an acquisition seriously. For companies at five million euros in ARR, buyers with revenues between fifty and one hundred fifty million euros are generally more inclined to allocate time and resources.
The Overlooked Ideal Buyer
Board members often overlook these smaller buyers due to concerns about visibility in the M&A market, financial capacity, and M&A execution experience. In most cases, these concerns are valid.
However, there is a specific subset that meets every criterion for the right buyer: private equity-backed companies that are majority-owned by a buyout fund. These buyers have a clear mandate to pursue bolt-on acquisitions and operate with the speed of a private equity firm. They are willing to pay for strategic value to unlock synergies. And they are supported by established frameworks and processes that facilitate funding and efficient execution, including strong legal, financial, and consulting relationships.
A well-executed outbound M&A process begins with assessing whether these PE-backed buyers are addressable for the specific company in question.