How to Build a Start-Up that gets Acquired?

The modern founders have a lot of funding-related tools at their disposal. They have access to large amounts of risk capital from venture capitalists as well as angel investors. In recent years, start-up companies have been able to raise huge sums of money by selling their equity shares to investors. However, professional investors are not like regular investors in the sense that they do not buy shares to hold on to them indefinitely.

Almost all venture capitalists and angel investors have an investment horizon of anywhere between five to ten years. Hence, at this point, they will pressurize the founders of the start-up company to have an exit event. There are many founders who are oblivious to this fact. They spend their years building the business without giving any thought to an exit route.

Now, being acquired by another company is one possible acquisition route. There are large companies that buy start-ups and also there are start-ups that buy other start-ups. Hence, the list of potential acquirers is large. However, founders need to build the entire business in a manner that is suitable for acquisition. To an outside observer, it may appear that the acquisition of start-ups for a hefty valuation is serendipity. However, in most cases, start-up founders meticulously plan for such acquisitions for many years before it becomes a reality.

There are some steps that are commonly followed by these start-ups which increases their probability of being acquired by a third-party company. The details of these steps are mentioned below:

  1. Step #1: Clear Understanding of Value: The modern start-up world is much more complex as compared to the earlier financial world. This is because previously all businesses were measured by their ability to generate free cash flow. However, now a lot of new measures of success are used to measure the value being generated by a start-up. One of the most common measures of value is the number of active users. This is generally used by technology-based companies making apps. Other measures such as FDA approval etc. are also considered to be important milestones for value creation when it comes to the pharma business.

    A founder who is building a company with the objective of being acquired tries to have a deep understanding of the value generation process as well as the milestones associated with it.

  2. Step #2: Have A Database of Likely Acquirers: If the objective of the founder is to ensure that their company gets acquired for a hefty valuation, then they need to know exactly who the people are that will pay this price. Depending upon the type of product being built, it is not difficult to come up with a list of potential acquirers.

    The current financial position and investment philosophy of the acquirer may not be so relevant. If there is a possibility that they might see value in the start-up at a later date, they must be listed in the database. The founders must try to make this list as exhaustive as possible.

  3. Step #3: Connect with the Relevant People: Every company that makes acquisitions generally have specific people who are in charge of finding the right targets. The start-up company would be much better off if it tried to find out who these relevant people were for their target companies. They should also try to get in touch with these acquisition officers.

    The start-up company must consider them to be like a customer group. They should conduct focus group activities with a sample of these potential investors to understand their needs. The start-up companies must then use this feedback while taking decisions in their start-up company.

    Start-ups which regularly engage with potential acquirers are likely to build a business model which is more suitable for acquisition. It would also make sense to use the network of venture capitalists as well as other investors already involved in the start-up. These investors tend to have contacts that can help the company further in building the right contacts.

    The company would also benefit if it regularly connected with the thought leaders of the industry. If the start-up is able to gain the validation of these thought leaders, they are much more likely to be acquired.

    The start-up company should ensure that this connection is not sporadic. Such connect sessions should be periodically scheduled since they help in expanding the network of the start-up firm. Showing up a lot makes a start-up company more likely to get acquired at a good price.

  4. Step #4: Figure Out the Acquirers Business Model: Start-up companies that are aiming to get acquired try to study their potential acquirers’ business model. The objective of this study is to find shortcomings in the business model of the acquirer. For instance, does the potential acquirer have a gap in their product line? Are they lagging behind in some type of technology? Are they unable to tap a certain market?

    The start-up founder has to then position their company as a solution to the problem in the acquirer’s business model. This drastically increases the probability of their company being acquired.

  5. Step #5: Accurately Guess the Right Time: The start-up company needs to understand the right time when it can maximize its value. For instance, some companies will increase in value when they start producing positive cash flow. On the other hand, some other companies will increase in value when they reach other milestones.

    However, if the company does not have the capital to reach the milestones, it would be better off selling out at an earlier stage. The founders have to accurately guess the stage at which the company will appear to be most attractive to investors.

The fact of the matter is that companies seldom get acquired because of a happy coincidence. More often than not, they are built to support an acquisition at a later stage.

❮❮   Previous Next   ❯❯

Authorship/Referencing - About the Author(s)

The article is Written and Reviewed by Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to and the content page url.

Startup Finance