When Instagram sold to Facebook for $1 billion in 2012, many observers focused on the user growth, the photo filters, or Zuckerberg's vision. But part of the real logic was simpler:
Facebook could have built Instagram's software-side of features in 6-12 months. What they couldn't easily replicate was the 18+ months of network effects, the cultural momentum with the brand backing that up, and the competitive positioning Instagram had already captured. Facebook wasn't buying technology. They were buying time.
This pattern repeats across countless acquisitions, yet Boards (and founders) can misread what's actually being valued for an acquisition-type exit down the line.
Based on my experience as part of and observing M&A transactions (in the project economy and outside), I've noticed that most startups believe they're exiting technology, experience elegance, or product differentiation when acquisition conversations begin. A sub-set can add revenue and revenue growth in the mix.
What I've observed instead is something different: in the majority of cases, founders are actually selling time to the acquirer - specifically, the time it would take the acquirer to replicate what they've built and the cash flows earned during this time.
This dynamic becomes particularly pronounced in the project economy - the 22-40% of global GDP delivered through discrete projects rather than continuous operations. At Foundamental, we focus on this space because project-based businesses operate under fundamentally different M&A dynamics. Projects don't buy software tools at 1-3% of spend. They buy guaranteed outcomes at 85%: materials, labor, equipment, delivered results. When acquirers evaluate companies like Infra.Market, EquipmentShare, or Anduril, they're not asking "how good is your software?" They're asking: "How long to build this capacity and how much cash flow during that re-build period?"
This article builds on a framework originally developed as a "strawman" analysis - a deliberately simplified model designed to provoke discussion and stress-test assumptions about M&A pricing logic. In M&A contexts, strawman frameworks serve as starting points: intentionally bold positions that clarify thinking through debate and refinement. The goal isn't absolute truth, but rather a useful mental model that explains patterns I've seen repeatedly.
What follows is a practical and alternative point of view for founders of how M&A premiums actually work, particularly in the project economy where I invest. Your mileage may vary, and I'm sure there are important exceptions. But this framework has helped the companies I work with understand why certain companies command premiums while others don't, and why capacity-driven businesses often create more defensible value than pure software plays. And what to keep in mind as you build towards your dream outcome to maximize optionality.
tl;dr
- Acquisition premiums price the time savings, not your technology
- The "replication timeline" determines your leverage in negotiations
- Software moats erode fast; capacity, brand, and ecosystem lock-in last
- Project economy startups face longer substitution timelines structurally
- Track record compounds differently than code - it opens adjacent categories
- You're selling the gap between "buy now" and "build ourselves"
- The shorter the delta, the lower your price; extend it through hard capacity
Quick glance at my framework:
I'll walk through each in detail.
1. Acquirers Almost Always Have More Resources Than You
In nearly every acquisition scenario I've observed, the buyer is the larger player. They have deeper capital reserves, good-enough talent pools, and more established distribution channels. While outliers exist - distressed incumbents, strategic gaps they genuinely can't fill internally - my working assumption has become clear: in many cases, they could build what you've built (in principle).
They just haven't yet.
This means acquisition often is not indispensable. Acquisition is optional and choice. But optionality can still command a premium if time favors you.
The question becomes: why would they pay you instead of building it themselves?
2. Acquisition Premiums Reflect Accelerated Cash Flows Over Time
From what I've seen, M&A premiums are rarely about the elegance of your technical architecture. Most acquisitions appear fundamentally driven by cash flow acceleration.
The acquirer runs a modified "Make vs. Buy" analysis: if they acquire you, they gain access to revenue, capabilities, or markets sooner than if they built internally. The faster and more meaningful that acceleration, the more they're willing to pay.
In rare cases - DeepMind, OpenAI in its early acquisition discussions - acquirers chase unique IP or unreplicable technical edge. But for the vast majority of startups I've tracked, the value proposition seems temporal, not magical.
You're selling compressed timelines.
3. The Central Question: "How Long Until We Replicate This?"
This is the question I believe gets modeled in many M&A teams.
Acquirers simulate their internal roadmap: How long would it take us to build what this startup offers? What would it cost? Where are the execution risks? What's the opportunity cost of waiting?
This mental model appears to define the ceiling of what they're willing to pay. If replication looks quick and low-risk, acquisition logic deteriorates rapidly. If it would take them 12-24 months to reach the same point - and you've already captured user traction or revenue - the acquisition becomes a shortcut worth paying for.
The analysis isn't just about time. It's about time plus risk. Building internally means execution uncertainty, team allocation conflicts, and the possibility of getting distracted from core business. Buying you eliminates that uncertainty.
But only if the delta is meaningful enough.
4. M&A Premiums Price the "Delta Period"
In my observation, the premium isn't random. It appears to reflect the cash flows the acquirer expects to unlock before they could internally replicate your position.
That delta period - the time between now and replication - is where your leverage lives.
The shorter the delta, the lower the premium tends to be. In competitive processes or when strategic value runs exceptionally high, premiums can exceed this formula. But the baseline pattern I've noticed holds: the acquirer pays for speed, not magic.
Think about it from their perspective. If they can recreate your product in six months, why would they pay a significant premium? Your window of leverage is narrow. But if replication realistically takes 18-24 months, and you're generating meaningful traction during that period, suddenly the economics shift in your favor.
5. A Real Estate Analogy: Buying Cash Flows, Not Just Property
Here's a mental model I find useful.
Imagine a property developer choosing between buying a fully rented office building versus purchasing land to build from scratch. The rented building commands a premium because it delivers immediate cash flow. The land has potential, but time and risk separate it from monetization.
Now extend the analogy: if a similar building is likely to go up next door within six months, your price premium evaporates. The buyer knows they'll have alternatives soon.
The same logic seems to apply in M&A. If your product or market position is easily replicable, the acquirer discounts your value accordingly. But if you're the only "building in town" - and building another one takes years, not months - the premium follows naturally.
6. AI Means Software Moats Are Eroding Faster
In the digital era - particularly with AI - technical moats appear to be shrinking rapidly.
Open source tools, pre-trained models, and increasingly accessible infrastructure make replication faster than ever. What once took years of engineering effort can now be rebuilt in quarters or months.
I've seen this pattern repeatedly: a startup builds something genuinely innovative, gains early traction, then watches competitors launch similar capabilities within 6-12 months. The technical defensibility that founders counted on simply doesn't materialize.
Acquirers seem to have grown skeptical of pure software plays unless they're paired with harder-to-copy elements: data network effects, proprietary distribution, embedded ecosystems, or workflow lock-in.
Code alone doesn't carry the weight it used to. The "we have great engineering talent" pitch doesn't create moats in 2025.
7. Defensibility Comes From Hard Capacity, Brand, and Community Lock-In
If tech replicates easily, differentiation must come from what doesn't.
Physical capacity - supplier contracts, manufacturing relationships, distribution infrastructure - takes time to replicate even for well-funded acquirers. Trusted brand equity compounds slowly through consistent delivery. Active user communities and embedded workflows create switching costs that pure feature advantages never will.
If your company owns a niche but passionate user base, is deeply embedded in industry workflows, or controls scarce supply relationships, those assets materially extend the "replication timeline."
That extension buys you premium in acquisition conversations.
8. Acquirers Run NPV Models on Substitution Timelines
Behind the scenes, sophisticated acquirers appear to model net present value scenarios: acquiring versus building internally.
At what point does internal development match your outcome? What's the risk-adjusted ROI of buying versus waiting? How does the NPV shift if we assume six months faster or slower internal execution?
Substitution timelines become core to the analysis. If your startup can generate 18 months of meaningful cash flow before the acquirer catches up, the NPV often supports an acquisition price. If the catch-up point is too close, the math breaks down.
In the project economy, substitution timelines extend structurally because capacity takes longer to build than code. This makes project economy startups inherently more defensible against the "we'll just build it ourselves" threat.
Consider the difference:
A pure software company might face 6-12 month replication timelines. A project economy company with embedded capacity relationships might face 24-36 month timelines. That difference fundamentally changes M&A economics.
9. You're Building to Sell Cash Flow Over Time, Not Just Product Fit
Many founders optimize for product-market fit or technical leadership early on - and that's essential for getting started.
But as you approach M&A-relevant scale, value increasingly appears to derive from the cash flow you deliver and how defensible that cash flow is over time.
Your uniqueness opens doors. Your timelines determine price.
In the project economy, this shifts even further. You're not selling future revenue projections based on software adoption curves. You're selling:
- Contracted capacity with predictable utilization
- Utilization guarantees that de-risk supply relationships
- Embedded supply networks that compound with every delivered project
- Track record that opens doors to adjacent capacity expansion
The more you compress go-to-market time for an acquirer - by owning the hard stuff they'd struggle to build - the more you justify premium pricing.
10. From An Acquirer’s Perspective: Startups Are Shortcuts
Founders often seem to overestimate how necessary their company is to the acquirer.
What I've observed: the buyer can probably build most of what you've done. What you offer isn't irreplaceability. It's a shortcut.
You're accelerating their roadmap, capturing market faster than they could, or eliminating execution risk. The moment they believe they can catch up quickly on their own, your window closes.
This makes timing and narrative control absolutely essential.
In capacity-driven markets like the project economy, this dynamic intensifies in interesting ways. An acquirer might initially think: "We could build this cloud manufacturing platform or robotics fleet ourselves."
But then they model the actual work required:
- Negotiating factory contracts and minimum volume commitments
- Incubating franchisee networks with consistent quality standards
- Earning customer trust through hundreds of successfully delivered projects
- Building the operational infrastructure to manage complex supply coordination
Suddenly, the "build" option looks expensive, slow, and operationally risky. The shortcut becomes valuable precisely because the work is harder than it initially appears.
11. To Command Premium, Sell the Delta Between Now and Replication
Your pitch in acquisition conversations should focus relentlessly on the gap: the time, cost, and uncertainty the acquirer faces if they choose to build instead of buy.
Make this delta as real and quantifiable as possible:
- Timing: How many months or years of cash flow would they miss?
- Relationships: How difficult is it to replicate supplier networks, customer trust, or distribution partnerships?
- Execution risk: What pitfalls have you already navigated that they'd likely face?
- Opportunity cost: What else could their team be building instead of recreating your work?
The more pain you associate with the "build" option, the stronger your leverage becomes.
In the project economy, this argument becomes dramatically more concrete. You're not selling abstract "network effects" or vague "product stickiness." You're selling hard capacity:
- The factory lines you've locked up with utilization guarantees
- The installation crews you've trained to consistent quality standards
- The portfolio of completed projects that customers reference
- The track record that opens doors to adjacent categories
These aren't software features competitors can replicate by hiring engineers. They're structural advantages that require years to build and cannot be fast-followed.
When a profitable marketplace sits down with a potential acquirer, they're not defending their e-commerce interface. They're defending the hundreds of factory relationships, the working capital financing infrastructure, the logistics network, the cash flows and margins, and the brand trust that took years to establish. That's a completely different conversation than "our software is better."
The Capacity Advantage: How Project Economy Founders Can Crack All 11 Principles
The 11 principles above explain M&A pricing mechanics broadly. Let’s apply them to my favorite market - the project economy:
Capacity-driven businesses amplify them structurally.
Now with AI, many (not all) software companies face 6-12 month replication timelines if without distribution or community advantage.
Capacity companies face 24-36+ months - nobody can quickly replicate factory relationships, installer networks, or customer track record (moat moat moat !).
The delta extends naturally. Building capacity takes years, not quarters.
Funnily, AI is the proof of my thesis. Don’t believe me?
Who receives the money from more and more inferences?
Chip-makers, data center owners, and utilities.
What are these 3?
Capacities of hard assets.
This compounding works differently than software in three specific ways:
Track Record Becomes Currency
When you reliably deliver units of supply - walls, documents, equipment outcomes - customers develop trust that transcends product features. They start asking: "What else can you do for me?"
This is why United Rentals or XPO Logistics expand into adjacent categories successfully. Track record in one category creates trust that transfers to related categories.
Multi-Capacity Expansion Multiplies Value
Project customers face massive coordination costs managing hundreds of vendors per project. This creates powerful demand for one-stop shops. Every capacity integration you add multiplies value by reducing coordination costs and deepening switching costs.
Tech-enabled companies like Infra.Market, EquipmentShare, or Anduril demonstrate our playbook: use technology to coordinate capacity expansion far more efficiently than traditional players could.
Utilization Risk Transfer Creates Margin Expansion
You convert customers' variable costs (hiring per project, buying per order) into your fixed-cost production, then sell that capacity back as variable cost to them.
This margin scissor - producing fixed, selling variable - is how Visa, AWS, Coca-Cola, and McDonald's built empire economics.
In the project economy specifically, you lock up factory capacity with utilization guarantees, build robotics fleets or incubate installer networks, and sell outcomes on a per-unit basis that scales with their revenue.
This is EXTREMELY hard and lengthy to rebuild. When paired with cash flows, this is a massive acquisition premium.
When an acquirer evaluates this model, they're pricing:
- Option value on future capacity additions
- Structural defensibility from utilization risk management
- Lock-in effects from outcome guarantees and track record
- Expansion potential into adjacent categories
This is why capacity-driven companies command acquisition multiples that confuse traditional software investors. They're selling compressed timelines on hard-to-build infrastructure with compounding expansion potential.
Founder Mode (Towards Exit Optionality): Time Is The Asset
In many cases, startups will exit code, features or experience (though that is what the crowd of “I’m such a product nerd investor” will focus on). Exceptions exist, such as DeepMind exiting to Google.
But by and large, think of your viewpoint as you’re selling a fast-forward button on a roadmap the acquirer could theoretically execute themselves.
In software markets with eroding moats, that timeline advantage narrows quickly. AI has created that effect. Pure software plays face constant commoditization pressure.
So what can you do to make cash flows over time your hardest asset - and maximize exit value for yourself?
In the project economy - where 22-40% of global GDP depends on capacity, not code - the timeline advantage extends naturally and compounds over time.
Hard capacity takes years to build. Track record accumulates slowly through repeated delivery. Supply relationships require proof of consistent execution. These aren't features you ship in sprints. They're structural advantages that compound with scale.
If you're building in this space, your M&A positioning should emphasize what traditional venture regularly misses:
You're do not have to be a thinner efficiency layer optimizing workflows at 1-3% of customer spend.
You're a capacity integrator who owns the hard stuff - the supply networks, the delivery infrastructure, the utilization risk management, the outcome guarantees - that makes projects actually happen at 25-50% of customer spend.
That's not something the acquirer can replicate in two quarters by hiring engineers. That's infrastructure requiring years to build, compounding with every delivered outcome.
And that's what commands a premium.
It’s also why we like capacity-plays in the project economy :)
You Can Find More Analysis On The Practical Nerds Podcast
Spotify: https://open.spotify.com/show/1Q86tEwusNGwAmRdDqjFL4
Apple: https://podcasts.apple.com/de/podcast/practical-nerds/id1689880222
Foundamental: https://www.foundamental.com/
Patric Hellermann: https://www.linkedin.com/in/aecvc/
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