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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I work for a startup. One reason why startups aim to get bought is scalability. Right now, there are six people covering product development, sales, registration, manufacturing, quality assurance, and marketing globally. I technically run a nationwide research program, but in reality, it’s a patchwork of a few key cooperators in a few states. If I had an entire team (and a larger budget), I could manage a true nationwide research program.
Getting acquired allows the innovative product to be scaled and marketed much easier than building everything from scratch.
There is a big difference between creating a business and running one long term.
Take tech as an example.
A few very smart people can create a new “thing”.
To actually sell that thing you need to make it (manufacturing), tell people about it (marketing), sell it, take the money (and all the tax and accounting to go with it), support customers who have problems, offer refunds, etc.
Some people feel it’s better to sell the idea once they have proven it work and let someone handle all the “business stuff”. Then they can go on to do what they are best at, creating a new “thing”.
I’ve worked in manufacturing for a long time, and have consulted on equipment financing and acquisitions (my good friend worked in both, and I became a resource into manufacturing financing and acquisitions/sales).
From my experience the most common type of company acquisition is based solely on the founder getting to retirement age, and literally having all (or the vast majority) of their net worth tied up in the business. Building the business to sell is their retirement plan.
Remember, most small businesses and startups aren’t those weird tech dudes out in California. It’s regular dudes operating in the $1-$10m revenue arena.
Startups fail, left and right. Investing in early stage startups is very risky as in most of the startups will just use up the money and die, so the 1% successful have to compensate with outsized returns.
The same investors already taking a huge risk do not want to wait for another 15 years until the startup maybe grows, they want their returns fast.
The whole model is built around the notion of trying to “grow” a basket of customers and sell it to an established entity to be fucked over.
Why do they want to be acquired? Money/profit. That’s the simplest answer. People start businesses like “start-ups” to enrich their lives as the main reason. You start with very little money or all your money gets tied up into the start-up, and you build out your product/service. It’s tough going, you have a pauper’s life for a bit as most businesses hemorrhage money at first… sometimes for years you just lose lose lose.
So you hope some bigger company comes along and acquires your startup before you run bankrupt, and because you own the company so you get the money if you do sell. Usually these startups sell for many millions of dollars, and most of that goes right into your pocket. Well, you and the other owners/investors in the original startup.
Could they decline to sell and keep growing the business? Absolutely! Of course, happens all the time. If the start up grows enough, and turns a profit, you can finally start to pay yourself a bit and you can keep your company growing.
It’s risk vs reward. Do you want to sell now to speculative investors and exit? Maybe you can retire with tens or hundreds of millions depending on the business. Sounds pretty good and you no longer have to do shit! Or if you believe you can make billions and you love your work you keep going!
However, those offers aren’t always there. So you could turn down millions of dollars to sell your business in 2018, then a new larger competitor comes in in 2020 and starts stealing your market share, and by 2023 you are begging anyone to buy you out before bankruptcy but no one is buying now… that’s the risk. You want to sell while the hype is high, sell an inflated value based on that.
If you build a chair, you can sell it for more than what the materials cost you. This means you get paid for your time. With a startup, the time and costs invested can be made into a product worth millions to a buyer and then you, the founder, get to walk away with that money just like you walked away when you sold your chair.
A few factors, time is money, investor goals, economy of scale
For entrepreneurs and startup types, they are not the ones to grow the business organically. Once it’s past the start up phase, they are bored and want to do something else.
Investors have a goal of return the clients money in 5 years with growth. Having it sit in a business that’s steadily growing would not be what the investors want
Economy of scale, there’s only so much the startup can do, only so many customers they can reach. But if they are acquired by Google or Microsoft, they would gain access to greater infrastructure of international market or existing customer base. This is something that will take any organizational decades to build, even if its successful
Being acquired means your stock options are now worth something where before they could not be sold and worth nothing.
Most of these answers are correct. The decision very much depends on the founder’s motivation.
If the goal is to exit quickly, then an acquisition is cleaner since you don’t have to worry about the preparation or the lockup period.
Preparation for an IPO includes finding a sponsor and an underwriter. While both IPO and M&A include due diligence processes, the IPO due diligence is more restrictive since it requires abiding by SEC regulations.
Lockup period refers to the time after an IPO when the company’s stockholders are NOT allowed to sell. This is a rule by the SEC to protect investors but it means that if the stock price starts to fall, you literally can’t do anything about it; even if it’s caused by external factors (e.g. recession, bad market conditions, etc). M&A may include other clauses that restrict payout terms, but those may be negotiable.
Another common goal is to maximize impact. An acquisition may make more sense since it may be faster (in years) for a bigger company to deploy your technology to their customers than it is for you to sell to their customers directly. They may also have complimentary products and services where bundling makes sense, or they may have patents that you don’t want to risk infringing upon.
5x your annual average is what a good company will sell for.
And many people see businesses as a way to create a product (the business itself) for the sole purpose of selling it, not nurture and build.
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