While building the next Facebook or Google may be a worthy goal, the best possible outcome for many venture-backed startups is to be acquired by a larger company. In a sense, the entire startup ecosystem — founders, venture capitalists, lawyers and other service providers — forms a kind of ad hoc research and development lab for bigger companies.
Given the importance of being acquired, you would think founders would spend some of their time optimizing their startup for this outcome. Surprisingly, though, many founders don’t think about this eventuality because they don’t want to get distracted from building the product.
The problem with this approach is that startups may end up building a perfectly good company that nobody ever wants to buy. There are far more sellers than buyers, and the chances of being acquired are less than 50/50. Here are some things that can help increase the odds:
Team. Acquiring companies pay a premium for startups with highly skilled employees, especially software engineers. If you are a tech startup and want to get a good price for your business, do not outsource all of your development work. Hunch, the recommendation engine acquired by eBay, had a good result due in part to the quality of its engineering team.
Marketing. Will the startup’s brand, positioning and all the associated marketing help maximize the value of a future acquisition? Buddy Media is a good example of a wonderfully marketed company that sold for many more times than others in its space.
Partnerships. Like having good customers, having a number of productive business relationships demonstrates that a startup has achieved a level of industry acceptance. At Pictela, our technology was certified by AOL, Yahoo and Microsoft, leading to an eventual acquisition by AOL.
Reputation. For a deal to happen, startup principals must have a good reputation. Background checks are standard fare if the acquirer is a public company. Deals have been nixed at the last minute when a founder was discovered to have an unlawful background.
Proximity. If you’re a media or technology company, it’s easier to exit if you’re based in New York City or Silicon Valley. If you can’t be based there, then you should at least have a presence or significant relationships in either one or both of these areas.
Patents. Despite the problems with the U.S. patent system, if you want to be acquired, it doesn’t hurt to have a few patents filed. This shows buyers your startup has created some intellectual property that could be of value to them later.
Timing. A lot of acquisitions are a result of timing. A startup may have created a new market just as a larger company was planning to do the same. Or a big company may find itself without a key technology that it needs. It’s important to think about what the market wants now and in the future.
Paperwork. Contracts, P&L statements and hundreds of other documents must be provided to an acquiring company for a deal to go through. Keeping good records from day one helps ensure that a deal gets done.
The good news is that almost everything that makes a startup better positioned for an acquisition also makes the startup a better business. But it’s important to look through the lens of a potential buyer to make sure your company can actually be bought.