AcquisitionsBusinessOctober 7, 2021by startuplogin0Companies stepping up hunt for small startups

In 2013, when Amazon acquired a little known one-year-old startup EVI Technologies, one would have hardly imagined the value it would bring to the e-commerce company. But now we know how important that deal was. The $26 million buy played a key role in development of Alexa, the digital assistant which is now one of the central projects of Amazon.

These small acquisitions may not make headlines like the multi-billion dollar deals, but play no less important a role in the growth of established players. Over the years, tech giants Apple, Amazon, Google and Facebook have acquired over 100 startups/companies each and many of them were as small and little-known as EVI Technologies.

And this trend is now catching up with other companies and startups as well. It has become so popular that some in the industry term it as ‘Micro Startup Acquisition’. With technological advancements happening at a fast pace, established players see frequent startup acquisitions as the only way to stay updated. A 2020 M&A trends report by Deloitte found technology acquisition to be the No. 1 driver of M&A pursuits in coming years. Technology acquisition and digital strategy alignment together accounted for about a third of all deals being pursued, according to the report.

A look at the 2020 M&A data also indicates the same. In a recent report, Bain & Company said tech M&As accounted for 81% of industry deals in 2020. The study found that ‘scope deals’ have grown “from representing 44% of large tech deals in 2015 to 81% in 2020 (year-to-date in September), far outnumbering traditional scale deals that generate cost synergies”. Scope deals are deals where the aim of acquirer is to gain new capabilities, intellectual property, or talent.

 

Source: Bain & Company

 

So, why is it that companies prefer acquiring startups with small teams rather than building the capability internally?

The rapid pace of digital innovation has meant that companies have to implement new capabilities quickly to be able to benefit from it. And as you would have guessed, acquisition is the fastest way to do that, especially when the target startup is a small one.

According to industry insiders, a lot of companies are looking at micro acquisitions as a replacement for internal R&D centres. This is because the former is more cost effective and allows instant access to intellectual data, talent and propriety data. Thus providing an easier path for companies to accelerate adoption and compete in the talent war.

Apart from these, takeover of small but robust startups helps companies in the following ways:

 

Fills gaps in product lineup/technology

Companies often come across issues with their products and technologies that are difficult to fix internally. Hiring and putting together a team too becomes unviable at times because of limited supply of certain skillsets.

Micro Acquisition comes in handy during these problems. The exercise allows companies to buy and plug holes in their products and technologies.

 

Facilitates expansion

Smaller startups may not have a substantial customer base but their acquisition can still lead to enhancement of market share and reach of the acquiring company. These startups often at least have a good understanding of the market they operate in. Companies looking to establish themselves in that market can make use of this knowledge through their well-established processes.

 

Provides competitive edge

Acquiring new technologies, bringing in prized talent and making strategic expansion are necessary for every company to stay in the competition. M&A is one exercise that can facilitate all the above requirements through one deal. Smaller startups become the bulk of the target in such acquisitions as they cost less and are easier to assimilate.

Is the trend beneficial for startup owners as well?

The popularity of micro acquisitions is testimony to the fact that such deals are a win-win proposition. The fact that there’s a market for early-stage startups provides comfort and confidence to many entrepreneurs and investors. They now know that their business would be worth something even if it doesn’t take off.

The trend has also opened the startup doors for innovators who are good at building products but do not have the skills needed to manage a company. These entrepreneurs can now start their startup without worrying about how they would go about managing the whole business. With companies on the lookout for small startups with robust product, team and technology, they know their efforts would not go in vain.

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