Reality shows like Shark Tank glamorize startups. But the reality of starting a new business is a different story. For most entrepreneurs, the smarter move is to buy an existing business and grow it into something bigger and better.
Debunking the Startup Myth
There is no denying that startups play an important role in the U.S. economy. You don't have to be a business expert to see that startups have been instrumental in launching and shaping the tech sector as well as many other industries.
But the success of a handful of high-profile startups has created a startup myth, i.e., the idea that launching a brand new company is the only way to truly make it as an entrepreneur.
Unfortunately, Shark Tank and similar shows perpetuate this myth by depicting the startup model as a fast track to business superstardom. If these shows are to be believed, all it takes to succeed is a novel business idea and the backing of VCs like Mark Cuban or Kevin O'Leary.
The pictures these shows paint are distorted. In fact, many of the deals on Shark Tank are never finalized in the real world because the investors have post-show vetting requirements - a process that often results in a renegotiation and a less attractive deal for the entrepreneurs.
Even when the deals pan out, founders are surprised to discover that VC funding isn't all that it's cracked up to be. In addition to taking a significant ownership stake in the company, VCs typically enjoy a certain amount of control over the direction of the companies in which they invest.
But the reality is that in most cases, entrepreneurs are better served buying an existing business and growing it rather than starting a brand new business from scratch.
Why It's Better to Buy
I don't want to create the impression that growing an existing business is easy. Experienced small business buyers will tell you that growing their acquisitions into larger, more profitable companies is the hardest thing they've ever done.
But many small business buyers have an easier path to growth than their startup counterparts. Here's why:
- Ownership Control - Few, if any, entrepreneurs launch their careers with the intention of letting someone else control the direction of their companies. Yet, many VC-funded startup owners are forced to relinquish a certain amount of control to VCs and other investors. By acquiring an existing business without giving a lot of ownership and control to outside investors, you can ensure that you are firmly in the driver's seat when it comes to your company's future.
- Established Financials - Entrepreneurs who launch new companies usually forecast financial information by making educated guesses about revenue, earnings and other financial metrics. But existing businesses have established financial histories that reduce risk by eliminating the guesswork from forecasting. Likewise, existing companies frequently have existing revenue streams, so you can achieve positive cash flow from day one.
- Market Traction - Another important advantage existing companies have over startups is market traction - proof that there is actually a market for your products or services. Launching a new business is always a leap of faith. Even if you intend to offer an established product or service, you can never fully know how your target market will respond. An acquisition eliminates uncertainty because it already has traction in the marketplace with an established customer base, providing a solid foundation from which you can build and expand.
- Vendor Relationships - In addition to customer relationships, acquired businesses have existing relationships with vendors. Startup owners, on the other hand, have to develop vendor networks on their own. Too often, the supply chain suffers while the business struggles to identify reliable, quality suppliers.
- Proven Team of Employees - Many aspiring entrepreneurs fail to appreciate the value that a proven and established team of employees brings to the business. Building a reliable and competent workforce can take years, even for experienced entrepreneurs. But with the right acquisition, it's possible to kick off your ownership tenure with a talented staff supporting your efforts.
An acquisition may not be an option for all types of businesses. For example, if you are attempting to disrupt an industry by introducing a completely new product or service, you will likely need to start a new company.
But in general, a business acquisition offers benefits that a startup simply can't provide. So, here's my advice: Before you commit to a startup, take your time and at least explore what's already available in the business-for-sale marketplace.
You may be surprised by the opportunities you find.