Acquisitions · Strategy

Why do big companies buy startups? What are the motivators behind exits?

Dimitry Rotstein Founder at Miranor

August 9th, 2016

Personally, I prefer an early exit strategy, and within such strategy I believe it's important to tailor your startup to the expectations of a potential acquirer from day one. To achieve this, it's crucial to understand the acquirer's motivations and adjust your strategy accordingly. So here are a few motivations that I know of:

1. "Equi-hire" - buying a startup just for its workforce (the startup itself is typically closed down and its products are discontinued). The appropriate exit strategy would emphasize building the best team with as much relevant talent as possible (which is a good idea in any case, but still).

2. "Mining" - buying a startup to get its non-HR resources: client base, client data, IP, brand, or technology (but not its cash - that would be stupid). The startup is usually gutted and re-sold for scrap (a-la Motorola, even though that wasn't a startup). The exit strategy would emphasize growing patent portfolio, the following, crowd-sourcing, or building a truly innovative technology, even at the expense of profit. In the case of building innovative technology, the strategy may even involve getting a seed investment from a potential acquirer.

3. "Competicide" - buying a startup because it's a potential threat. The strategy would involve positioning yourself right in the path of a potential acquirer and (pretending to) be more successful than the numbers warrant.

4. "Competigeddon" - buying a startup so that no one else would have it (a-la Waze). The strategy would be to position yourself in a market segment with 2 or more big competitors of comparable strength and get them to bid against each other.

5. "Rev-up" - buying a startup for its future revenues. The acquirer would typically be a stagnating company seeking to revitalize itself (without working hard). The exit strategy is to emphasize revenue growth (even at the expense of profit or equity), making it (seem) exponential, or at least create an impression that it might become exponential, especially if utilizing the resources of a big company.

Can you think of anything else?

Which of these, would you say, occur more frequently than others?

Bob Snyder Editor-in-Chief, Channel Media Europe

August 9th, 2016

Enjoyed your topic plus the clever descriptions.  I think there are at least a couple more reasons, based on my coverage of acquisitions.

"Buy-in..." buying a start-up to add a new Business Unit, a BU that might either overlap or run in parallel to existing business.

"Cover-up"  buying a start-up as a distraction to sharehholders, gaining time for management to figure out what real problems they are having.  (Hey, sad but true. CEOs get away with this and it keeps them in a very lucrative seat for another year.)

Rob G

August 9th, 2016

often acquisitions are a combination of all of the above plus a few more:
6. speed/time to market: this is one of the most common acquisition drivers, especially in tech and biotech/pharma - markets that move quickly or take a log time to bring new products to market. It's not that the acquirer doesn't have the resources or expertise to build what they need, but by the time they get their act together someone else could gain significant marketshare, competitive advantage, key customers, etc. making the 'build-in-house' path that much more costly.  
7. pricing power: this is more common when acquiring larger, established competitors. 
8. instant market credibility: this is common in the tech consulting/services business. 5-6 years ago when mobile application development was starting to catch fire large consulting firms went on shopping sprees so they could market their expertise in mobile app design/dev. and avoid the perception of a competitive disadvantage. 
9. access to key customer(s) and markets: sometimes it's just a key customer or 2 the acquirer is after. 

Giles Crouch Digital Behavioural Economist | Speaker | Writer | Technology Strategist | on Twitter @Webconomist

August 9th, 2016

These are all quite good, I like Bob Snyder comments as well. Another I've noted and experienced is IP for patent trolls. Builds their defensible portfolio. Conversely, others will buy to block patent trolls.

Sudhakar Atmakuru CTO, Director (Business & Marketing) at JT TechnoSoft

August 9th, 2016

Two things are missing in your list,
1. Built-up customer base : This would be an excellent advantage to the acquirer where he does not need to start from ground. (Whatsapp for Facebook, (competing against the behemoth Amazon) for Walmart, etc).

2. Expertise in the line of business (Marc's e-commerce experience is a big plus for acquision by Walmart, and Walmart admits his expertise is much needed).

And last but not least,
3. Business similarity and customer base advantage: (Microsoft's failed bid forYahoo, but successful for Verizon with similar strategy)

Alan W. Urech

August 10th, 2016

There are many reasons that big companies buy startups, as I did when I worked for a startup that grew into to a factory.   In no particular order, one is for customer acquisition, second is for their technology/ know-how, third is to get them off the street because they are better then what the big company has in its product line (I have done this), fourth is for their name requisition, fifth is for their management/staff team. sixth is to get a lighthouse in their geographic location and seventh is because of the cash they have in their pockets.  Hope this helps.

Dimitry Rotstein Founder at Miranor

August 9th, 2016

> a bit much to imply startup founders pretend or make things seem to be what they
> are not in order to get acquired

For the record, I'm not suggesting that one should deceive the acquirers (or anyone else for that matter). I'm not even sure it's possible with due diligence and all. But certain things are intangible or non-deterministic, like a brand value or growth extrapolation, and leave some perfectly valid room for imagination :-)

> The best exist strategy is to build a solid business first.

Sure, but it's not the only strategy that worksThere are a lot of startups that make some nice exits while still being unprofitable. Besides, if you manage to build a successful and stable business (if that's your definition of "solid"), then perhaps you need not an acquisition, but an IPO.

Rafiq Ahmed

August 9th, 2016

While it's important to have exit strategy and potential acquirers identified early and updated as you go along, it seems a bit much to imply startup founders pretend or make things seem to be what they are not in order to get acquired. The best exist strategy is to build a solid business first.

Josh McCormack Securing funding for my pre revenue startup app in recruiting space.

August 10th, 2016

Big companies often punish experimentation, risk taking and innovation. They end up with extra cash on their books. Buying startups give them the output of risky innovation, and the fresh thinking employees. What often happens subsequently is the startup is not properly integrated, and innovation is still discouraged.