Tier and Dott’s merger is not a sign of what’s to come

Earlier this week, European micromobility companies Tier and Dott said they had agreed to merge. The companies, which offer scooters and bikes to rent, also plan to raise €60 million from some of their existing investors and plan to close the deal within two months. The companies hope they can become profitable if they work together, my colleague Romain reported.

This seems like a solid outcome for the two startups, since they likely weren’t going to reach IPO scale on their own. After all, if the companies weren’t going to survive as solo entities, it makes sense to at least try another direction.

Last year I came up with a hypothesis about M&A in 2024; I was inspired by Getir acquiring FreshDirect to fill a gap it needed to potentially reach profitability. While FreshDirect isn’t a startup, my hypothesis was that we’d see a lot of consolidation this year as startups realized they would have a much better chance of reaching scale — or be more attractive to potential acquirers — if they teamed up with another similar startup.

I ran my hypothesis by some M&A lawyers to see if it aligned with what they were seeing, and while they expect M&A activity to increase this year, they actually think deals like the one between Tier and Dott will be few and far between.

Ed Chapman, a partner at law firm Taylor Wessing, said that such deals are usually the most difficult to close for a few reasons. He’s seen multiple transactions like this one fail to make it to the finish line because it can be hard to reconcile two cap tables on price and valuation, and find someone to foot the bill to close the deal.

“You have got two sets of investors and two different liquidation preferences. Bringing them together in a single company is not easy,” Chapman told me. “It’s complicated. You are trying to persuade these investors [to fund] a combined entity in circumstances where they weren’t willing to fund the enterprises on their own.”

I think that last part is the biggest takeaway here. Capital is almost always necessary for two startups to combine, and landing financing gets much harder if the investors aren’t keen to further back their investments in the first place. It’s a much more difficult task than a company acquiring another using funds off its balance sheet.

Paul Thorpe, another partner at Taylor Wessing, said that a merger might be a good option for Tier and Dott in particular, because micromobility is a relatively new category that has exploded in recent years. With numerous companies launching with very little differentiation, it makes more sense for a category like this to consolidate, he added.

In contrast, a sector in which startups are innovating on legacy technology will have more potential acquirers, making it easier for a startup to find a better fit at a larger company instead of teaming up with another similarly sized startup.

“At most of these companies, unless they are at a certain stage in their life cycle and have adequate funding, you are asking both sets of managing teams to face the fact that neither of them are individually going to be the next big thing,” Thorpe said. “That, I think, is a challenge. The question is whether the economic climate at the moment is sufficient to have those types of discussions. Things have cooled down, but they are not bad yet.”

All of this makes a lot of sense to me. At first, I thought this flavor of consolidation would be a particularly solid option for SaaS startups — especially those that are more features than products so they can combine and become a real suite of offerings. But Thorpe pointed out that it’s likely such a startup would probably get scooped up by a strategic who could offer the startup’s tech to all of their existing customers.

Both Thorpe and Chapman think we are likely to see more M&A this year, with the buyers being well-capitalized and strategically making deals to acquire either a startup’s team, IP or tech. But of course, all of this depends on interest rates, the upcoming elections across the globe, and just how desperate startups and investors get for liquidity.