I’ve been learning more about start-ups recently and have noticed a lot of them want to be acquired. Why is this? Could they also choose to grow their business?
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If they get acquired, the folks who started the business or folks who have invested make out good. Think of it as they spent a long time and lots of energy creating a product (the business itself) so the goal is to sell it for as much money as possible
Because a lot easier to grow revenues than be profitable. Startups are usually massive cash incinerator that only look to grow at all costs
By being acquired, you don’t have to worry about being profitable but rather look as attractive as possible with a high customer base/recurring revenues and then be bought out to reward investors and employees
The same reason that you might make paintings with the goal of selling them instead of amassing a huge art collection.
When you start a business, you own it. If you can sell it for a lot of money, you get an easy out and a lot of money, and then you don’t have to care what happens to the business after that.
Mostly two reasons – hopefully a good pay day, and/or more resources to expand the business.
A lot of start ups are fairly niche. You’re not going to be the next Amazon doing a bit of everything on your own with a small start up crew – you’re focusing on a specific thing. Once you get good at that one thing, you can try to work on and grow into another thing, and maybe another thing after that, but that’s a long, slow, and hard process.
Depending on who you’re being acquired by, that long, slow, process can become very easy or happen immediately. If you’re acquired by a strategic for example, that would be a large player in your general field. Your company would help fill their need – either by getting your customers, expanding their own larger business into your niche field, etc. A venture capital (VC) or private equity (PE) could help by injecting more money into your business, help form relationships with vendors or potential clients, etc.
It could also mean a good pay day out. Start a business, sell it for a lot of money, and get out of there.
It’s easier.
If a start-up has some great intellectual property they are basically trying to sell that as an asset. If you take a lot of tech companies for example, great IP needs to be maintained and worked on, so the company basically exists to facilitate that IP, but it isn’t necessarily designed to sell or leverage the value of the IP for its intended purpose.
For example, take a machine learning / AI product. Let’s say it’s a product that’s going to file emails really well, we’ll call it filester for now.
That’s an excellent product, I think it has enormous customer potential. It’s created by an engineering team and it does its job OK. They’ve patented some of the algorithm and they’re working on it. The product itself is 2 or 3 years from being great at what it does. So right now the start up is only about funding that 2 years of development time. Everybody who works there is really just focused on finishing the product.
This company needs to raise money to get those 2 years, so they bring in investors. Investors want returns in 5 years (for something like this which is private and direct).
The company can continue its 2 years and then start to build a marketing team, sales team, product maintenance, graphics, integration teams for multiple platforms, etc etc etc. This will take a lot of time, and even more investment (money the company doesn’t have because it isn’t cash positive yet (it has nothing to be able to sell, much less someone to sell it).
Or they can knock on the door of a company that already has all of that. It has 2 primary benefits going this route;
– general efficiency. It’s almost never the case that you need to double an existing sales staff to sell 2 products instead of one. But to do it from 2 independent companies you need 2 full separate staffs.
– Speed to market. Building a company is really hard. Growing people building out processes and systems. It’s a lot easier said than done.
Now of course it’s a calculation. If you are successful at building out another company the profits would be much higher, but there’s a lot more risk with that route, a lot more that can go wrong and a lot more stakeholders to resolve. The odds of success are daunting compared to sell and run.
This is an example of an IP scenario which I think fits into a lot of what you’re talking about with current start-ups. This model doesn’t work for example with a start-up franchise for cleaning services, because that isn’t an IP based business, that’s more of a volume proposition – but it has similarities in that it takes investments to grow. An existing franchisor has infrastructure and can support accelerated growth – so both beneficial in a growth scenario, but for different reasons.
Acquisition is a fairly quick way for founders to exit the company and realize their gains. Growing a company, building operational experience, finding customers and markets, hiring and training are time consuming, resource intensive and require skill sets that many founders lack. A tech founder, for example, might want to spend more time developing new ideas and products rather than spending the next 3-5 years doing mostly corporate management duties to grow and sustain a startup through an IPO phase. (An IPO takes between 12-18 months to do. Lots of investor communications, regulatory filings and meetings with analysts, bankers, lawyers etc on top of the daily job of running the company. This can suck up a lot of top management time since many of these things can only really be done by the CEO and CFO.)
That’s how tech startups make money from the business. The owners start the business with money from investors and they spend that money operating and trying to build as much hype and market control as possible. Remember when Uber was unbelievably cheap? They were acting like they had revolutionized cabs but really all they were doing was undercutting the competition to force them out of business. They lost money year after year but eventually they get bought out by a different investment firm that actually operates profitable businesses. They take the name recognition from when the business was in the “make everyone think we’re cool with free money” phase and cut costs to the bone so they can squeeze profits out.
Doing this over and over again is a lot easier and less risky than scaling a success startup into a large business. Other big businesses will destroy competition in the crib if they can’t be bought out
Because that’s when the fun part is over.
A lot of people who make a living out of creating startup companies do it because they enjoy the challenge of starting a compan. Opening a business with the intention of keeping it is kind of a lifelong project as well and a lot of people who do startups and house flips like that they have projects that will be finished so they can move on to new ones.
Conversely there are investors who hate starting up companies and only want to invest in companies that have some time under their belt.
These two groups go really well together.
Additionally depending on the industry the startup enjoys the benefit of getting out of that business before the overhead goes up due to maintenance costs.
Becoming a truly big company is extremely difficult, you would have to compete with tech corporates that can build the same product you have in half the time if they just throw enough money and resources at it, in addition to having lots of connections and a huge amount of salespersons that will sell it.
You simply cannot compete.
So if you get an offer from another company to buy your startup, this may be your best chance at both successfully profiting from the company and also the startup’s best chance at survival.
Now all the people who are invested in it can bank on their investment and do something else with that money (new startup for example)
Let’s say you start a business and have massive success and you as the owner are making $100k a year profit. That’s awesome!
Suddenly, big daddy Google comes knocking and says “hey, cool thing, we will give you $15 Million dollars for your whole business, today.
Now you have to decide. Do you want $15 million in cash, today, instantly, or do you want to keep the company and bet in your ability to keep making it successful long term. Maybe in 10 years your company is now making millions a year and worth a billion dollars. Or maybe just two years later you fuck up, make a bad business decision, and now the company is out of business.
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