Is acquisition a valid exit strategy?
6 comments
Trick question. It is a valid exit strategy. But it's not a good plan to make your corporate strategy = an exit strategy. You should never be in a position where you depend on getting bought.
You should never be in a position where you depend on getting bought.
Why not?
Not that I disagree, but just for the sake of discussion. You may sell things, services or ideas, as well as you may sell entire companies. Is there a fundamental difference?
Why not?
Not that I disagree, but just for the sake of discussion. You may sell things, services or ideas, as well as you may sell entire companies. Is there a fundamental difference?
Consider relative bargaining power when you enter into acquisition negotiations. If you NEED to sell, then you will most likely accept any offer, no matter how bad, from the buyer. When you can take or leave any offer put on the table, you're in a much better position to bargain from.
Valid point, although same applies to any type of bargain, be it selling a mass product or closing a one-off deal. Any business depends on a need to sell, and there's nothing wrong about it, except you may want to pretend you are doing Ok. Acquisition is generally the same game, except it's meta-business.
After all, doesn't everybody know YC depends on a need to sell?
After all, doesn't everybody know YC depends on a need to sell?
The market for startups is so illiquid that it's qualitatively different from buying and selling most other things.
You're doing a single big sale, instead of a flow large enough to generate a smooth curve in response to demand. And the buyers are extremely fickle-- so much so that needing to get bought makes you way less likely to get bought.
You're doing a single big sale, instead of a flow large enough to generate a smooth curve in response to demand. And the buyers are extremely fickle-- so much so that needing to get bought makes you way less likely to get bought.
In addition to Kaizyn's excellent point, making acquisition your corporate strategy is basically admitting you have a product that can't survive on its own. That's a problem - why can't it work without acquisition?
Acquisition as a strategy means the founder(s) want to move on and build new stuff. Why can't a company viewed as another product?
Because a large majority of consumers using your product do not want to commit to something that unstable.
When ownership of a popular company changes, it doesn't immediately make consumers dump the product. They rather wait and they can give up basically when the new owner is doing terribly wrong. In general, consumers don't care that much about ownership.
What if Steve Jobs sells his shares and leaves the company? You can't even tell for sure if Apple would become better or worse after that.
What if Steve Jobs sells his shares and leaves the company? You can't even tell for sure if Apple would become better or worse after that.
You're not Steve Jobs and your company isn't Apple, it's a piece of paper. When the first thing you say is "I'm looking to sell this company", myself as a customer thinks: "The guy running it is only in for a quick payday, I think I'll try someone else."
Acquisition is not a bad thing, planning on acquisition prior to you even building something worth acquiring is something that probably won't work out too well. If you instead build something lasting, finding people to give you money so you can retire won't be that big of a deal, really.
Acquisition is not a bad thing, planning on acquisition prior to you even building something worth acquiring is something that probably won't work out too well. If you instead build something lasting, finding people to give you money so you can retire won't be that big of a deal, really.
That doesn't make sense. Even if my whole strategy WAS to get acquired, I wouldn't plaster it in 48-pt font on the website. What do you think Twitter's strategy is? It's a pretty cool idea, but I fail to see how anyone could monetize it. Does that mean no one uses Twitter?
I think that's just a cliche and reality proves the opposite. A lot of acquisitions are going on constantly in all industries, and there is no or very little correlation between that and sales.
Do you have anything to prove that? I don't have anything to prove my assertion (other than personal opinion) so I'd be interested if you had something.
Can't remember when was the last time that change of ownership influenced my decisions on buying or using products, at least immediately after acquisition. Of course new owners can dump the product, but likewise they can improve it. I didn't think about it before starting this discussion, but it seems to be true.
As opposed to what... IPO?
M&A is about the only likely exit strategy. Hopefully you look good on that front-- if you don't have a liquidation event (selling, IPO, etc) and hum along with a healthy 10% growth rate and 10% profit margin, you are a total failure as fair as an investment goes. It's good to think about who could theoretically want you and what asset you are creating that they'd want. Give some thought to WHAT the big 3 buy when they buy a company:
1) A profit center... Profitable businesses are easy to sell. 2) A team of innovators. Hiring is expensive. 3) A feature-set they don't offer and couldn't develop as quickly. 4) A user-base that they can integrate with their own, making their collection of services more "sticky" (Yahoo does this a lot-- they want the @yahoo login to be hard to give up). 5) A targeted user-base that advertisers love... Having a service that caters to 10,000 male CEOs is better than having a service that caters to 50,000 people you know nothing about. 6) An appearing of "coolness". Corp dev guys LIKE BUYING STUFF. It's their job, it gets the company PR, etc. If you are a service that is loved by a particular audience, you might get bought to acquire that goodwill. While it's not the only reason, I think this is part of the MS Facebook investment... To appear slightly less lame on the web front.
As PG says, it's a fairly bad business strategy to focus too much on. Set out to build a business that CAN be profitable. You don't want to be looking at a dwindling bank account praying that someone swoops in to acquire you.
M&A is about the only likely exit strategy. Hopefully you look good on that front-- if you don't have a liquidation event (selling, IPO, etc) and hum along with a healthy 10% growth rate and 10% profit margin, you are a total failure as fair as an investment goes. It's good to think about who could theoretically want you and what asset you are creating that they'd want. Give some thought to WHAT the big 3 buy when they buy a company:
1) A profit center... Profitable businesses are easy to sell. 2) A team of innovators. Hiring is expensive. 3) A feature-set they don't offer and couldn't develop as quickly. 4) A user-base that they can integrate with their own, making their collection of services more "sticky" (Yahoo does this a lot-- they want the @yahoo login to be hard to give up). 5) A targeted user-base that advertisers love... Having a service that caters to 10,000 male CEOs is better than having a service that caters to 50,000 people you know nothing about. 6) An appearing of "coolness". Corp dev guys LIKE BUYING STUFF. It's their job, it gets the company PR, etc. If you are a service that is loved by a particular audience, you might get bought to acquire that goodwill. While it's not the only reason, I think this is part of the MS Facebook investment... To appear slightly less lame on the web front.
As PG says, it's a fairly bad business strategy to focus too much on. Set out to build a business that CAN be profitable. You don't want to be looking at a dwindling bank account praying that someone swoops in to acquire you.
Don't 'target acquisition' what you should be targeting is making a profitable product. Make your customers happy, make money, then figure out the 'exit strategy'. When I worked for Accel I would have been very uncomfortable with an entrepreneur that presented an exit strategy. Yes, acquisition may be the end result, but don't make it your end goal.
That's interesting. I've always been uncomfortable even describing my exit strategy, because it seems to be like presenting one means my idea is just the means to an end. Not only is that not really how I feel, but it's sort of at odds with an entrepreneur being prepared to sweat blood into a project to make it succeed at all costs.
It also seems like saying "acquisition is my exit strategy" is the equivalent of saying "I'm not sure this is a sustainable business model". Honestly, if the business is profitable enough to attract enough attention that it might be acquired, I'm not sure I'd be interested in selling anyway. :)
It also seems like saying "acquisition is my exit strategy" is the equivalent of saying "I'm not sure this is a sustainable business model". Honestly, if the business is profitable enough to attract enough attention that it might be acquired, I'm not sure I'd be interested in selling anyway. :)
If you are concerned about your 'exit strategy' from the business you're planning to start, maybe you shouldn't even bother. Seriously, if you're not interested in building something to last, you might as well go into another fields such as financial derivatives or hedge fund trading. As a consumer, I would be less inclined to do business with a company run by folks whose goal was to 'exiting' as quickly as possible.
I agree entirely, but you have to look at it from the perspective of the investor. The only way they actually get paid is if the company has a liquidation event. That's (at least in my understanding) why all VCs want to know your exit strategy.
If you can get past step 2, you can almost always find a way to monetize your business. Now, is that going to be enough for an investor to invest? No. You'll have to show that you will be able to grow and create something that someone will be willing to pay a large amount of money to own. Many companies end up being lifestyle companies and don't have a lot of upside for serious investors to really consider investing. M&A is definitely a valid exit strategy and make sure you have a list of possible exit targets but don't make 'chasing suitors' your business strategy! IPO market has been anemic lately so M&A is definitely the way to present your case to investors.
I'm working on a similar business plan right now, and am having the same difficulty. Our software solves a problem and I believe we can get a lot of users, but despite adding in ad revenue and a vague "enterprise edition," the numbers just don't add up into something attractive.
Is it best to be honest about this, or beef up the numbers?
Is it best to be honest about this, or beef up the numbers?
Start with the assumption that you can get lots of users. If you can then listen to those customers very, very carefully. You will discover some additional value that you can bring by adding specific features; charge extra for those features. It's OK to have lots of free users, it's also OK to say that you are not sure about the revenue, but I'd be on the lookout for an opportunity to charge a customer to extra value that your product is bringing.
Is it really okay to say you're not sure about revenue? I keep reading that that's one thing you really need to nail down. (Then again, I see these companies like Twitter with no realistic business model get funding...)
I used to sit through presentation after presentation every day and they all had revenue estimates.
No one in the room believed those estimates, not the entrepreneur and certainly not the VC. It's important to have them because they indicate that you've tried to think about how you are going to make money. Also, no one manages to actually make those estimates either because there's always something that goes wrong, or better, or sideways.
So, think about how you are going to make money, make a revenue plan (and an expense plan). Present the plan you have, but don't be ashamed if you don't make it.
It's worth asking yourself about Twitter. Why would you fund Twitter? Well, you might look at the enormous traction they have, and if you think the team is smart then you'd say to yourself "Here's a team with lots of 'customers' and the smarts to figure out how to monetize them".
No one in the room believed those estimates, not the entrepreneur and certainly not the VC. It's important to have them because they indicate that you've tried to think about how you are going to make money. Also, no one manages to actually make those estimates either because there's always something that goes wrong, or better, or sideways.
So, think about how you are going to make money, make a revenue plan (and an expense plan). Present the plan you have, but don't be ashamed if you don't make it.
It's worth asking yourself about Twitter. Why would you fund Twitter? Well, you might look at the enormous traction they have, and if you think the team is smart then you'd say to yourself "Here's a team with lots of 'customers' and the smarts to figure out how to monetize them".
JGC, personally I'd love it if you blogged/wrote somewhere about being/becoming an independent consultant, especially in a righteous/sexy domain like anti-spam/text learning. :)
I can summarize it like this:
1. I had no other choice. After years of working for people I just needed a break.
2. It's harder than it looks... my income is totally variable.
3. It's the best thing I ever did. I get to choose what I work on (to a certain extent).
I'm actually thinking of going back full time, but that's only because a start up is enticing me with an interesting combination of good team, interesting problem, and stock.
We'll see.
1. I had no other choice. After years of working for people I just needed a break.
2. It's harder than it looks... my income is totally variable.
3. It's the best thing I ever did. I get to choose what I work on (to a certain extent).
I'm actually thinking of going back full time, but that's only because a start up is enticing me with an interesting combination of good team, interesting problem, and stock.
We'll see.
1. Make website 2. Get lots of users 3. ??? 4. Profit!
...investors might not appreciate it.
Is targeting acquisition looked down upon, or is it considered a valid exit strategy? Honestly, I'm at a loss how else would you exit the business other than selling it once it's profitable.