Acquiring start-ups is risky business. No matter how good an idea sounds, or how simple a solution a start-up offers, the acquisition may never pay off. The inherent risk is why most buyers look for user traction and revenue, the two most obvious metrics to a start-ups early success.
But there are other things to consider. For the buyer, user and revenue traction are important, usually the most important factors, but the reality is a complicated web of reasons all pulling a buyer toward acquisition, or pushing them away.
Similarly, investors in start-ups should be considering the same reasons and focus on more than revenue and traction. We’ve been lucky with our investors in CityFALCON who allowed us to focus on building solid technology and products for the last two years instead of chasing users and revenue with a half-complete product.
Here are four reasons why startups get acquired.
If someone looking to make an acquisition of a start-up, and doesn’t love everything about that company’s business model, that doesn’t necessarily kill the start-up in its crib. If a startup has built solid and competitive technology around itself, that may be reason enough for some buyers.
It could be be a case that the bigger company is looking to integrate a small start-ups tech for reasons that may not be clear until a little bit later, like when Snapchat bought Bitstrips for $100 million, only then to announce their new sticker function. The purpose of your start-up belongs to you, but to potential buyers, the possibility of the technology you’ve built might hold the greatest value.
The reason technology gets overlooked, especially when you compare it to revenue or user traction, is big companies might want your tech to slide into a new marketplace, or to build a new product faster. If a start-up has tech that reinvented the wheel, it’s going to be valuable, but it’s especially valuable if a much bigger company is looking to reinvent the wagon.
Maybe even more important than your tech is what your company does with it. That is; if you’ve built some stellar tech, that’s worth something, but if you’ve gone the extra step and actually figured out a new, innovative way to sell that tech to people who can use it a fresh way, you’ve really done something special.
When it comes to acquisitions, from the perspective of the buyer, they’re not only looking at cash they have to pay upfront to actually own a start-up, but also at the costs down the line. If a company is looking to acquire a start-up because they want to tap into a new revenue stream, they’re much more likely to buy a company that has already done that, rather than a company that has built tech that makes it possible.
The other thing to consider in terms of product is how complimentary it can be to potential buyers. For example Twitter buying Vine, because Vine is essentially the Twitter version of Youtube, so a perfect fit for the microblogging fold. Another example of the product being more important than the revenue it generates is Youtube. It can be difficult to remember that when Youtube was bought by Google in 2006, it was still an unprofitable start-up with an excellent product.
In some cases, acquisitions have nothing to do with your product, your tech, or even your revenue and user traction. Sometimes, the team you’ve assembled is the product, and that’s what companies will buy.
For an example, look at the string of acquisitions Yahoo!’s made over the past few years. Much of the time Yahoo was only looking to get the people behind the start-up on their team. Obviously having a good team is essential at every point in a start-ups journey, but when it comes to the acquisition, your team might not only be important, it might literally be the only metric that will get you acquired.
Companies acquire start-ups with a great team because talent is becoming harder and harder to stumble across. That’s why buying a start-up to get the the people who worked on it was worth it to Yahoo. The trouble for start-ups comes when they’re looking to build that great team is the same trouble that big companies face, and start-ups don’t’ have the cash to just buy talent.
What will make your team valuable is a combination of factors. You’ll need to have a core group that grows with the company, and adds value to the start-up as they grow, but also be willing to change so you can add talent and cut fat as you need to.
Mind you, not just revenue or user traction-we already know those are vital to getting acquired- but ‘traction’ in a broader sense.
It’s important to view traction as an umbrella term. Beyond revenue, the overall profitability of a start-up is a valuable way to view its traction. And even beyond the dollars and cents of company, traction lies with users. Obviously having a lot of users is crucial, but breaking users down further into an engagement rate, active users, or even overall traffic, are key indicator for companies looking to make an acquisition.
(Disclosure: CityFALCON and its stakeholders may have business relationships with some of the companies listed in the article, and may even receive affiliate revenue in some cases.)