In an era of rapid change and disruptions, companies have no option but to buy smaller peers from time-to-time to stay relevant as is evident from the rising M&A deals every year (According to 2019 data, the year saw a total of under 50,000 deals worldwide with a combined value of $3.7 trillion).
For large establishments, buying new entrants has always been an important tool to further penetrate existing markets, upgrade operations, and reach new customer segments, industry and geography. In a way, the strategy helps them survive longer by stretching the existing S-curve.
However, this is not an easy task. Given the huge amount of money and other risks involved, it becomes imperative to study every aspect thoroughly before making any such move.
From when to acquire to what to look for in the prospects, here’s a lowdown on all the important aspects:
WHEN to activate the ‘buy’ mode
1. Stable Business
“To do two things together is to do nothing.”
Taking up another challenge while you are already struggling with one is not an advisable move. It’s important for the company to be on a firm ground itself before expanding or diversifying. Being financially stable, having a strong leadership team, and good consistent performance are some of the signals an acquirer should look out for before going for startup shopping.
Acquisitions should ideally be made to add steam to the upward movement of the company. That’s because the use of M&A to save struggling companies has not worked out well at times. Yahoo’s acquisition of Tumblr is the perfect example in this regard. Desperate for revival, the company went for the deal hoping that it would result in a 50% increase in the audience but that never happened. Instead, they were forced to roll back their integration after employee exodus, resulting in huge losses.
2. The perfect fit
Finding the perfect partner, be it in business or life, is rare. That’s why it becomes extremely crucial to get hold of the ‘right fit’ startup whenever you find one.
At times, buying a startup makes sense even if its product fails to invoke interest. Reason: its prized talent pool. In the technology sector, it is often far cheaper to buy a startup with good talent than to spend all the time and money to try and find and lure and hire and train people.
There’s an acute shortage of certain skills in the IT sector. A survey in 2019 found out that skills shortage in the tech industry is at an all-time high, with 67% of companies struggling to find the right talent. Given the state of affairs, acqui-hiring — the act of buying out a company primarily for the skills and expertise of its staff — has started to gain traction.
The ‘Which’ question
Before scouting for startups, it’s important to map out the plan. As acquisitions are very risky endeavours, companies ought to have a clear vision and strategy. This implies that beyond looking for a successful technology and a talented team, the acquirer should think over as to how the purchase will be effectively incorporated.
Facebook’s acquisition of Instagram shows how a well thought out plan can work wonders. Over the years, Facebook has proved that no price for a startup is too high if it fits your plan. The internet giant applied its own advertising and monetisation strategies on Instagram, all the while keeping it as a separate brand. The great level of synergy between the two has ensured that Mark Zuckerberg’s reign over social media continues.
Things to look out for:
IT industry is all about talent. For long, startups have been a major stream of talent, both technical and managerial, for established players. Walmart, for instance, bought Jet.com not just for the technology, but also for its leadership as is evident from the fact that the startup’s founder went to head the company’s US Ecommerce operations.
That’s why, when scouting for startups, finding a good team should be at the top of the priority list. This is also one area that is tricky when it comes to figuring out the true price of a startup and extremely crucial to success post the acquisition.
Coming to the product, it’s important to see if the startup has a proven business model with the product/service getting at least some traction. Needless to say, the technology used should be amongst the latest in the market.
Having a market with significant reach is also of great value for the acquirer, especially when the startup is a late entrant to an existing market.
3. Competitive Advantage
The biggest edge that startups hold over established players is the uniqueness of their product/service. There has to be something about the product that sets it apart, makes it difficult for others to match up.
4. The X Factor
We all keep meeting up people who share business ideas with us. But there are only a few who succeed to impress us. That’s the X-factor. This is what acquirers also need to factor in. Even if the startup falls short on some criteria, a passionate and driven founder makes a strong ‘buy case’ for the startup.
Finally, The ‘How’ part
There are not many avenues available where you can find startups on sale readily. Startup Login comes to your rescue here. Let us know your requirements and our expert team finds the right fit for you. Stay updated on our dealflow so that you can act quickly when you find a good acquisition option.