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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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.
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