My Investment Thesis

As an angel investor, these days I focus exclusively on pre‐revenue technology companies that provide ancillary services to established corporate ecosystems. What exactly are ancillary services, and why do they present such unique opportunities? Allow me to walk you through the concepts in detail.

Core Businesses (Messi) vs Ancillary Services (Ronaldo)

At the heart of the matter, we have two distinct models. Core businesses are those that build direct relationships with end customers, fully owning the primary value proposition and the overall customer experience. Take MTN, for example. They not only control the communications journey but also own the intricate web of customer interaction, ensuring that every touchpoint delivers on their promise of convenience and reliability.

By contrast, ancillary services exist to enable and enhance these core businesses without ever owning the direct relationship with the end customer. Consider Paystack: rather than competing with banks or attempting to craft consumer-facing payment products, they have focused on building a robust infrastructure. This infrastructure is designed to empower thousands of businesses, helping them process payments more effectively. In this way, ancillary services succeed by improving the capabilities of other businesses, not by replacing them.

This distinction is fundamental, as it shapes every aspect of strategic planning – from go-to-market tactics right through to exit opportunities. This is particularly significant when operating in markets such as those in Africa, where the dynamics may differ from more mature ecosystems.

Frameworks for Success: Focussed (Kendrick) vs Broadcast (Drake)

The business models we see in the field generally align with two broad frameworks for success. The first is Focused Success. This scenario unfolds when a company creates a tailored value proposition for a defined set of larger players. As a result, the company eventually becomes an indispensable part of a larger ecosystem and is ultimately acquired by one of these entities. This pathway is often shorter, less capital intensive, and ideally suited for strategic acquisitions – a particularly attractive outcome in capital‐constrained environments like many African markets. Paystack is a great example of this, its ultimate acquisition by Stripe is evidence of this. Stripe, hence, is now in Africa in a contextually correct and impactful way.

On the other hand, we have Broadcast Success. This model is characterised by the company building direct relationships with customers on a massive scale, eventually becoming a self‐sustaining entity. While this route can eventually lead to an initial public offering or the emergence of a large private business, it typically demands significant capital and comes with heightened execution risk. The rewards, however, can be greater, albeit over a longer period. Take Amazon’s acquisition of Zappos or its acquisition of Ring. both allowed Amazon to enhance their position in the online retail market by effectively acquiring the fiercely loyal customers of these well recognised scalable brands.

From my perspective as an angel investor – and given that I most often exit through secondary sales rather than waiting for the possibility of an IPO – the Focused Success model aligns perfectly with the nature of ancillary services. This approach not only provides a clearer route to liquidity within a more manageable timeframe but also minimises the capital required upfront.

Allow me to be perfectly clear: If you are developing an ancillary service that addresses a specific pain point for large corporations, your most likely successful outcome is not to pursue an IPO or attempt to build a massive, standalone business. Instead, the strategic acquisition by one of the companies you support is usually the most viable and rewarding path.

The Ancillary Advantage

Ancillary services possess a distinctive edge when it comes to acquisition dynamics. As these services do not directly compete with the core offerings of a corporation but rather serve to enhance them, they naturally foster a partnership dynamic. When a large corporation recognises that your solution fills a critical gap within its ecosystem, several positive outcomes ensue. The value of your service is acknowledged almost immediately, the decision-making process regarding an acquisition is streamlined, the integration process is generally smoother, and it becomes much easier for stakeholders to understand the strategic rationale behind the acquisition. Emphasis on the word partnership here.

Insights from the Other Side of the Table

Having spent many years (too many) working within corporations as an acquirer – in addition to working with the usual middle men, investment banks and consultants who facilitate these transactions – I have gleaned insights that many founders often overlook. One crucial observation is that it is typically quicker, easier, and more cost‐effective for a corporation to acquire a startup that enables its mission than it is to develop the same offering internally. It is also easier for a board to approve an acquisition than development and this is because we now have the data - inorganic growth (acquisitions) well integrated and managed well, lead to 25% more growth over 5 years.

These realisations open up a tremendous opportunity for well‐positioned startups. When a corporation identifies a gap in its capabilities, it generally considers three options. Firstly, they might attempt to build the solution internally; secondly, they might consider partnering with an external provider; or, thirdly, they may decide to acquire a company that already possesses the necessary capabilities. So, make it easy for them buddy.

Developing the solution internally often encounters a host of challenges – bureaucratic hurdles, resource limitations, and conflicting priorities, to name a few. This scenario makes acquisition a far more attractive alternative, especially when a startup can convincingly demonstrate that it offers a working solution, that its team brings robust domain expertise, that its business model is both compatible and sound, and that the integration process will be straightforward.

What Acquirers Really Want (Christina Aguilera voice)

From the perspective of an acquiring corporation, the appeal of ancillary services as acquisition targets lies in the strategic value they deliver. Firstly, there is revenue enhancement – the ability to expand product offerings, reach untapped customer segments, or increase the wallet share of existing customers. Secondly, there are cost efficiencies, whereby solutions streamline processes, reduce operational expenses, or automate tasks previously done manually. Thirdly, such services contribute to competitive positioning by neutralising threats or bolstering market dominance. Fourthly, they offer innovation acceleration by advancing a corporation’s product roadmap by several years. And finally, they facilitate talent acquisition, granting access to specialised expertise that is difficult to secure through conventional hiring channels.

When a service manages to deliver on several of these dimensions simultaneously, acquirers are often compelled to act swiftly, frequently offering premium valuations in order to secure the asset before competitors recognise its strategic potential. For corporate boards tasked with approving acquisitions, a proposal that addresses a critical need with minimal risk is exceptionally compelling. In my experience, such acquisitions tend to receive not only faster approval but also better financial terms.

How to Position for Strategic Acquisition

1. Map Your Acquirer Ecosystem from Day One

Before you write even a single line of code, it is imperative to identify the three to five corporations that stand to benefit most from your solution. You should ask yourself pertinent questions: whose mission would be accelerated by your service, which aspects of a corporate roadmap could you help deliver more efficiently, and where exactly do you see inefficiencies in their current processes that your solution can resolve? This exercise is not merely academic; it lays the strategic foundation for every decision you make going forward. In African markets – where ecosystems are still in a developmental phase – having this clarity from the outset is even more crucial. I need to stress something here; your business is part of a sector, an industry and an economy - get familiar with it and know your role.

2. Frame Your Solution as Mission-Critical

The language you choose is of paramount importance. Rather than positioning your solution as a “nice to have” enhancement, you must articulate it as an indispensable component for the acquirer’s success. For example, rather than saying “Our tool helps improve productivity by 15 per cent,” you might reframe it as “Our solution addresses the critical gap that is preventing you from capturing market segment X.” By doing so, you not only elevate the perceived value of your service but also transform acquisition into a strategic imperative rather than a mere optional benefit.

3. Build Relationships, Not Just Products

It is vital to remember that corporations are inclined to acquire companies that they know and trust. They do not purchase technology from strangers. On average, the journey from the first time that a corporate hear about you to an acquisition takes somewhere between 18 and 24 months. This extended period underscores the importance of beginning relationship building immediately. I loathe Linkedin in but found out and follow the key decision makers in the corporates that you hope to be acquired by, attend industry events where corporate development teams are present, join corporate accelerator programmes when possible, seek out pilot programmes even before your product is fully developed, and identify internal champions who appreciate your value proposition. In the context of African markets, where personal relationships often carry additional weight, establishing these connections early on is absolutely essential.

4. Structure Your Business for Easy Integration

When developing your company, it is crucial to think of acquisition as a potential outcome from the very beginning. This means choosing technology stacks that are compatible with those of your likely acquirers, structuring contracts in a way that facilitates easy transfer, maintaining thorough documentation of processes, designing your systems with an API-first approach where applicable, and considering acquirer compliance requirements right from the start. These decisions not only signal to potential acquirers that integrating your company into their operations will be a seamless process but also help to mitigate any perceived risks during due diligence. A smart founder once asked a corporate for advice regarding which accounting software to use, the acquirer naturally recommended their service provider - this lead to easier integration.

5. Always Be Ready: The Timing Question

One question that frequently arises is when to actively pursue an acquisition. This is where your mother’s advice is relevant, you know: “ always be presentable as today might be the day that you meet your future spouse“.

You should always be acquisition-ready. I advocate for founders to maintain an ongoing dialogue with corporates, both on a personal and professional level. By networking aggressively within your industry and nurturing relationships with partners and customers, you ensure that acquisition opportunities surface organically. What is crucial is that when these opportunities present themselves, you are fully prepared. This preparedness is why good governance and robust operational practices must be prioritised from day one, alongside meticulous record-keeping. Experience has shown that companies which are able to move quickly when the right opportunity arises often secure the most favourable acquisition terms.

Optimal timing for acquisition might be signalled by various indicators, such as interest from a major competitor in your solution, demonstration of product-market fit prior to scaling, deep integration of your solution into a strategic partner’s core products, or evidence that larger players are beginning to develop similar capabilities internally.

Operational Excellence from Day One

One lesson I have learned repeatedly from my time on the corporate acquisition side is that best practices are not solely the domain of large companies – they are critical acquisition enablers for startups as well. When evaluating potential acquisition targets, corporations undertake thorough due diligence that covers multiple dimensions. Startups that have implemented sound fundamentals from the beginning can dramatically reduce friction during this process.

For example, consider the following areas:

• Values and Culture Documentation: It is important to have clearly articulated company values that are aligned with those of potential acquirers, supported by documented cultural practices and team norms, and underpinned by evidence of values-based decision-making.

• Financial Hygiene: From the outset, maintaining proper accounting systems, keeping a clear separation between business and personal finances, ensuring auditable financial records, and establishing transparent reporting practices are all vital. Documented financial controls and processes can further bolster confidence.

• Governance Structure: Regular, well-structured board meetings, clear decision-making frameworks, documented policies and procedures, and a robust corporate structure are all critical elements of sound governance.

• Comprehensive Record Keeping: This involves organising documentation of all key decisions, properly assigning and protecting intellectual property, maintaining complete records of employees and contractors, and thoroughly documenting product development processes.

• Contract Management: Standardised customer agreements, properly executed vendor contracts, well-documented partnership agreements, and clearly structured IP assignments and licensing are all essential for smooth operations.

• Reputation Management: Finally, a professional online presence, consistent brand messaging, ethical business practices, and strong customer references can significantly enhance a startup’s attractiveness to potential acquirers.

What do you do with all of this? You use it to produce this.

I must also add the words of the formidable Laurie Fuller whom I had the pleasure of meeting last year: “You want to be exciting but safe”.

These operational fundamentals are not only best practices for sound business management but also have a direct impact on acquisition timelines and valuation outcomes. I have witnessed cases where startups with impeccable operational practices closed acquisitions in a matter of weeks, whereas others with similar technology but less rigorous practices encountered prolonged due diligence or even failure.

Why I Focus on Ancillary Services

As an investor, I am drawn to ancillary service opportunities for several compelling reasons. Firstly, there is a clear exit path; these services come with defined potential acquirers from the very inception. Secondly, the value proposition of ancillary services is typically straightforward and easy to demonstrate to both customers and acquirers alike. Thirdly, they often reach acquisition-readiness much more quickly than core business competitors. Fourthly, they tend to require less capital to achieve this state. Finally, the strategic necessity of these services frequently commands higher acquisition multiples, leading to premium valuations.

The Data Behind Premium Valuations

Data supports the notion that well-positioned ancillary services can command premium valuations. For instance, accounting firms that offer ancillary services such as wealth management or payroll typically achieve EBITDA multiples in the region of 3X-11X. Profitable SaaS companies, benefiting from recurring revenue models and scalability, often trade at 20X EBITDA or at multiples of 5X-9X times revenue in mergers and acquisitions transactions. Strategic buyers are particularly interested in the synergy-driven returns – cost efficiencies and market expansion – that can result in annual returns exceeding 25 per cent if the integration is successful. Moreover, companies with diversified portfolios of ancillary services, spanning areas such as tax planning and insurance, frequently command EBITDA multiples ranging from 7X - 20X. These figures are not merely theoretical; they represent actual transactions in which acquirers have paid a premium owing to the clear strategic fit and a straightforward integration path.

In the realm of venture-backed exits, while later-stage SaaS or tech companies might typically align with certain revenue multiples, the strategic acquisitions of ancillary services often balance lower volatility with a premium liquidity profile.

Important Disclaimer: On “Limiting” Growth Potential

I often encounter criticism that this investment approach restricts founders to smaller exits when there might be potential to build expansive, standalone businesses or even achieve IPOs. However, this criticism misses a fundamental point: it is not about artificially capping a company’s potential but rather recognising that different business models naturally lead to varying growth and exit trajectories. For ancillary services, strategic acquisition is typically the most logical and value-maximising outcome for all stakeholders involved.

Let us consider several key points in this context:

Firstly, value maximisation is at the heart of this strategy. Strategic acquisitions often command premium multiples precisely because of the inherent strategic necessity they offer. This approach can lead to outsized returns in relation to the capital invested and the time to liquidity. Secondly, it is important to acknowledge that not every business model is suited to becoming a massive standalone entity. Forcing ancillary services to pursue a “broadcast success” model may require a pivot away from their core strengths, diluting the unique value proposition and increasing the execution risk. Thirdly, the efficiency of the focused success path – which generally requires less capital and time – is beneficial for both founders and investors, leading to less dilution and faster capital recycling. Lastly, while successful strategic exits provide a robust foundation, nothing precludes founders from leveraging their experience and capital to build larger businesses subsequently. Moreover, such acquisitions contribute to ecosystem development, particularly in emerging markets like Africa, by strengthening established players and attracting further investment.

When Ancillary Services Evolve: The Exception That Proves the Rule

Although I generally advocate for the strategic acquisition pathway for ancillary services, there are notable exceptions. Consider, for instance, this story of an ancillary e-money service designed to facilitate the account opening process for millions of EU migrants arriving in the UK, it was intended to support traditional high-street banks by streamlining the account opening process - what was often a protracted, cumbersome procedure. At the time, many migrants faced delays of up to a month when trying to open a bank account. This innovative service was meant to simply aid and enhance the existing banking framework. However, through a combination of technological ingenuity and an acute understanding of customer needs, it evolved far beyond its initial remit. Instead of remaining a mere support tool, it transformed into a standalone financial powerhouse, redefining how digital banking could operate in a modern, interconnected world. Today, you know this former ancillary service and now Core Business, as Revolut.

For most ancillary services, however, attempting such a transformation introduces unnecessary risk and diverts focus from the key value proposition that originally made them attractive.

The African Context: Collaboration Over Competition

In the African context, challenges abound and many parties are actively seeking solutions to the same pressing issues. This raises a fundamental question: why not contribute by enhancing the efforts of those already effectively addressing these challenges? I reject the notion of a “charity model” in which every entity embarks on its own initiative purely for vanity’s sake. Instead, I advocate for leveraging one’s skills, networks, and expertise to add real value to existing endeavours. Africa does not need further fragmentation – what is truly needed is collaboration.

For startups in Africa, building an ancillary service that complements the efforts of established corporate players – creates immediate and tangible value. These larger entities, which already possess significant resources, require specialised solutions to fulfil their broader missions. When an acquisition occurs, there are two powerful outcomes: either you join forces with a larger entity to address major challenges with greater resources, or you secure the financial means to tackle another critical problem independently. This approach is especially pertinent in Africa, where liquidity is frequently in short supply. Every successful exit not only generates wealth for founders and investors but also contributes to a stronger, more mature ecosystem, thereby attracting further capital to the continent.

Moreover, this strategy is beneficial for investors as well. Through co-investment and knowledge sharing across the ecosystem, venture capitalists can create significantly more value by backing ancillary services that complement existing infrastructure rather than directly competing with core solutions. Ultimately, this focus can accelerate Africa’s capacity to address its most pressing challenges, creating a virtuous cycle where each successful acquisition strengthens the overall ecosystem and fosters further sustainable growth.

Common Mistakes to Avoid

It is important to recognise some of the pitfalls that can derail the path to acquisition. One common mistake is building in isolation – developing your product without soliciting regular feedback from potential corporate partners. Another error is overvaluing independence; this involves refusing early partnership opportunities that could otherwise lead to an acquisition. Additionally, focusing on metrics that impress venture capitalists rather than those that resonate with strategic acquirers can lead to misaligned priorities. It is also a mistake to position your service in a way that competes with the potential acquirer rather than complementing them, and waiting too long to begin corporate development discussions can be detrimental. Finally, neglecting proper operational practices – such as sound governance, thorough documentation, and meticulous business practices – can result in significant risks that derail the acquisition process.

For Founders: Your Action Plan

If you are in the process of building an ancillary service with clear acquisition potential, it is imperative to take deliberate and well-thought-out steps from the very beginning explicitly name your top three potential acquirers in your strategy documents and schedule regular, quarterly conversations with relevant teams within these organisations. Ensure that your roadmap is carefully structured to align with their strategic priorities, and frame every pitch and piece of material around the concept of how you enhance their mission. Building relationships at multiple levels within these organisations is key, as is implementing proper governance, maintaining detailed documentation, and ensuring financial transparency from day one. It is also wise to consider the acquirer’s requirements in every operational decision you make.

For Investors: What to Look For

From an investor’s perspective, evaluating ancillary service startups involves a few key considerations. Look for startups that have clearly identified potential acquirers and have a robust strategy for cultivating corporate relationships. It is essential that the founders understand their role within the broader ecosystem, and that the technology and business structure are conducive to a seamless acquisition process. A realistic perspective on valuation and exit timelines is critical, as is evidence of operational excellence and adherence to best practices. An acute awareness of acquisition readiness is what ultimately sets successful startups apart from the rest.

Final Thoughts

Strategic exits for ancillary services are not a matter of chance; they are the result of intentional positioning and diligent relationship building from the very first day. The most successful founders are those who understand that they are not merely building a product, but are in fact creating a strategic asset for a specific corporate ecosystem.

By focusing on ancillary services that serve to enable larger ecosystems, founders are able to generate significant value while simultaneously establishing a clear and practical path to acquisition. Moreover, when these ventures implement robust operational practices from the outset, they effectively eliminate many of the friction points that can slow down or derail the acquisition process.

Ultimately, the path to a successful acquisition begins with viewing your company through the eyes of your potential acquirer. Become indispensable to their mission, and ensure that you are as safe and straightforward to acquire as possible.

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The aforementioned Laurie Fuller said something else that I have now adopted:
“What information can you provide a corporate about their customer that they don’t already know”. (inserts an excessive amount fire emoji’s)