When Is a Good Time for Your Start-up to Be Acquired?
BY Scott Jones
You fill a niche and the money's flowing. You need more capital and you can't compete. When do you hang on to your company and when do you let go?
It has always seemed ironic to me that, in the tech startup space, entrepreneurs have a pervasive fear that one of the cash-heavy Silicon Valley giants might suddenly decide to unleash their nearly limitless talent and resources in a start-up’s direction and launch a similar business that could well put the start-up out of business. Yet, at the right moment, many of us want to be acquired by one of those large companies.
And why not? Take a look at the facts.
Since 2001 Google has made about 130 acquisitions, from the more notable YouTube, DoubleClick, and Motorola Mobility to smaller companies focused on a variety of functions such as cloud computing, online payment, facial recognition, and mobile software.
Apple, since 1988, has grabbed up nearly 50 companies, perhaps most notably Siri.
Facebook has acquired 39 companies since 2005, including the brilliant move of absorbing Instagram before it was too late.
Since 1987, Microsoft has bought about 225 companies, including those focused on mobile phones, social networking, online gaming, advertising yield management, and 3-D sensing technology.
Yahoo has ingested nearly 100 companies in 15 years, and seems to be picking up its pace of acquisitions again now that Marissa Mayer is at the helm.
Why wouldn’t you want your company to be acquired?
1. You think you’ll make more money in the long run by keeping your company.
2. You think your company fills a niche that no other company can fill. You have a product or service that people are psyched about--something they want to use often and which they rave about to their friends. With social media, it’s easier than ever to monitor and measure how your buyers are responding to your company’s products and services.
3. You can’t let go of your "baby." Your own image is intertwined with your company.
4. You don’t want to pay taxes on a lump-sum sale of your business.
5. You don’t want to be an employee, rather than the boss, in your former company.
Why would you want your company to be acquired?
1. Your company is growing quickly, but you don’t have enough working capital to keep on growing at a fast pace and to expand into new markets.
2. There is more competition in your particular area.
Warning: You might be forced to be acquired before you’re ready.
Remember that when you take money from investors of practically any sort, they expect to be paid back, with varying degrees of expectations. You might not realize what friends and family investors, venture capitalists, or institutional investors expect when they lend you money or invest in your venture. Be sure to ask them their "exit timing" expectations, in addition to negotiating all the other terms, such as preference rights on sale, etc.
If you get an offer to buy your company that nets an investor five times their investment, are they going to be sellers? Will you have any control to say no? If you did say no (assuming you still had the authority to do so), would you be defending a lawsuit from investors if the company subsequently didn’t have a better future?
What should you do if you want to get acquired?
Out of the companies I’ve founded or co-founded, two have been acquired for head-turning amounts. Boston Technology got acquired by Comverse Technology in the mid-90s for a fat $843 million and Gracenote sold to Sony in 2008 for $260 million.
There was a time in the life cycle of each of my start-ups when I was worried sick that a tech behemoth would recognize that I had a viable product aimed at a well-populated market. I feared taht they'd invade my space, develop products or services similar to mine, and use their considerable muscle to squeeze me out of the market.
I tied each of my company’s marketing and PR departments in knots: I challenged them to get us enough attention to generate a presence with potential customers, but not so much that it would garner the competitive attention of bigger players.
At Boston Technology, I was fortunate to have employees dedicated enough to spend long and smart hours making sure we got our voicemail product to market before any of the bigger players did. Our advantage over a large company such as AT&T was our ability to be far more nimble, which let us adapt to market feedback much faster. (And we worked night and day.) If I slept, it was often at the office to avoid losing focus or wasting time commuting.
Then came the day when sufficient value had been created and the timing became increasingly right. Then there was nothing I wanted more than for the company to be noticed by one of those Silicon Valley giants--because I was ready to sell. As it turns out, we were acquired not by a "giant" but by an "equal" that merged with us--but the logic and emotions still hold.
Ask these questions when you want to find the right buyer.
Does your company make the buyer more valuable?
Is your product or service actually more valuable in the hands of that buyer? Or will the acquirer change your product or service so that it’s no longer as desirable?
Will your products or services find their way to more customers in the hands of that buyer? Or does the buyer actually want to "take you out of the running" to reduce competition?
Does the buyer want to acquire your company to help it grow or to gain control of a specific device or patent?
What will the environment be like for your company within the larger company?
If your goal is to be acquired, you must first build a solid foundation that consists of a quality product or service that meets a real market need. You must then build a track record of success, including increasing sales, share of market, and share of mind. Your financials must be spotless and your management accomplished. Do these things and the acquirer will come find you.
Scott Jones: Scott A. Jones is a veteran entrepreneur, venture capitalist, and co-founder of ChaCha, a real-time Q&A service that has answered more than 2.5 billion questions from 45 million+ unique users per month. Jones co-founded Boston Technology and Gracenote, the planet’s largest music meta-data service. Jones has been featured in the Wall Street Journal, The New York Times, CNN, and Fortune Small Business. @@chachaman