Most startups end up getting acquired. Except for the few that make it to an IPO, it almost feels like startup founders are business manufacturers that build to sell, which is not a bad thing. Entrepreneurs that build a successful startup deserve the option to sell their venture and get compensated for standing out when the majority failed.
Just in the first two short months of 2020, there has been over a thousand startup acquisitions ranging from a few hundred thousand dollars to over ten billion dollar deals. If your goal is to sell your startup eventually, it’s important first to understand what makes it worthy of an acquisition. You need to think and plan for who can be a potential acquirer, when and why.
In the early stages of your startup, your potential acquirers should be treated like your potential customers. You want to know their needs, expectations, challenges, plans, options and goals. In fact, talking to potential buyers is one of the best ways to learn about the market, key players, and priorities, which can help you identify opportunities worth pursuing.
There are several reasons why you want to know when you want to sell your startup. First, because you have options. As soon as you prove the value of your startup, even with a few users or customers, someone out there might be interested in buying you out. Acquirers range from independent buyers to private equity firms and multi-billion dollar corporations. Each one of your buyer groups has different budgets and expectations from the acquisition.
Understanding your acquisition goals allows you to focus on the right buyers and what they expect from your startup. While it’s important not to obsess over the acquisition potential of your venture, it’s important to think about it and prepare for it strategically. In other words, answering what makes your startup valuable to acquirers will essentially guide you to building a promising startup.
What makes your startup acquisition-worthy typically falls under four categories. Once again, to find out which of the four you should focus on, figure out your potential buyers’ priorities and roadmap.
Revenue. Especially for smaller acquisitions, usually one of buyers’ most important acquisition factors is a company’s revenue. For an acquirer, strong numbers means the startup has passed the early validation stages to build a scalable business model with a product people like and pay for. Many private equity firms look for proven and profitable startups they can quickly scale.
If you’re looking to sell your startup soon after hitting profitability, start researching buyers of similar companies to find what might catch their attention.
Market share. Instagram had zero revenue when Facebook acquired it for one billion dollars. The main reason for the acquisition was Instagram’s exponential user growth and market share in the social media space. This scenario is also common for unprofitable startups with a significant market share. Companies like Airbnb and Uber can find it easier and cheaper to expand into a new location by acquiring an existing player even if they are not profitable.
If you’re looking to build market share value, venture capital backing may be necessary. Especially for revenue models like on-demand or marketplaces, it may take years to hit your transaction target volume to break-even. The startups that last usually get acquired for their market share before they hit those numbers.
Intellectual property is the most common way to build a defensible product. In fact, many startups with a proprietary product get acquired before they even take their solution to the market. This is common for hardware products in the medical space after successful clinical trials.
It can take years to build proprietary solutions worthy of an acquisition. If there’s one category where interacting with potential acquirers is essential, it’s for startups building intellectual property. The last thing founders want is waste years building a product no one cares about.
Acqui-hire is when a company buys out a startup for the talent of its members. Essentially, it’s a recruiting acquisition. The benefit for acquirers is a cohesive team that’s proven to have the required skills and insights to solve challenging problems.
If an acqui-hire deal is one of your potential acquisition options, start by learning your potential acquirers’ priorities, challenges, strengths and weaknesses. This will help you identify what issues to tackle and how to do it better.
Finally, get noticed. Meet project leads at conferences, add them to your social network and share updates they would care about, prove your value and make yourself available. This also applies to each one of the four acquisition categories.
In conclusion, if you’re ultimate goal is an exit, you should prepare for it since the beginning. There are four things you need to do. First, identify potential buyers. Second, understand your acquisition inflection point, that is, at what point does your startup become acquisition-worthy? Third, choose and focus on what makes your startup valuable. Finally, show up and get noticed.