So You Want to Buy a Startup? Don't %$@#! it Up!

So you want to acquire a startup business? Great! But before you act on this wish, let’s examine some pitfalls that you should avoid at all cost.

Large companies can innovate in different ways. In another entry on this blog, René Jongen discussed possibilities such as forming a growth team, but corporations can achieve the same goal by acquiring startups. In this way, they stay close to emerging trends or establish a funnel for corporate venture capital investments.

As a side note, at RevelX, we follow this path ourselves. We take minority stakes in companies we believe in, either with our own capital or we arrange larger stakes through our extensive network of private equity, VCs, and angel investors.

It seems so simple: some creative guys or gals come to you with a savvy business plan that has the potential to be the next YouTube or Hotmail. The only thing that you have to do is to buy them out, and you will be the next Google or Microsoft…

Of course, unruly reality steps in. Many great ideas will never become viable. According to growth hacker Neil Patel, 9 out of 10 startups will fail. Hence, it would be silly to take famous success stories such as Instagram as your starting point and reason back that all struggling, small businesses with a nice idea will be ridiculously successful someday.

That is not the only pitfall that you should avoid when shopping for a startup. For that reason, below I describe the tips that you should not follow. Indeed, a favorite method of mine to illustrate how things should be done is to describe the exact opposite. It makes things very clear, and it is funny too! So, don’t do this:

1. Focus only on the startup’s proposition. For example, some companies make terrific products, but their workforce lacks the skills to adapt to a scale-up of the business.
2. Investigate which systems the startup uses and whether they are compliant with those of your own company.
3. Only take the firm’s superficial profit figures into account. Don’t go looking for skeletons in the closet.
4. Read some random tech blogs and think: “Well, that latest trend can become big!”
5. Make your choice fast and ill-considered.

I see that you are grinning, but I only exaggerated to get my point across. On a more serious note, below I will describe the correct method to approach things:

• The product or service is just one of the elements you can use to value a business. An important factor to take into account is the quality of the employees and the team.
• Ask yourself if the proposition of the startup complements your portfolio and possibly also creates synergy. Why would a cheese manufacturer, for example, want to buy a dating app?
• Compliance of the systems should always be considered. In our age of big data, you can’t underestimate the importance of the Customer Relationship Management (CRM) and other digital systems. Whether or not this is a decisive factor pending a potential purchase will depend on the circumstances.
• Perform a thorough due diligence. This process focuses on determining the accuracy of the information presented to you, the buyer. The risks and opportunities of the company to be acquired are also identified.

And there is one last piece of advice, a tactic that has never failed to assist me:

USE. COMMON. SENSE.

When making an important decision, take your time. Don’t be fooled by trendy buzzwords, and never believe propositions that are too good to be true.

After reading this article, and if you have the means to pay for it, the chances are that you are very hungry to acquire a young and innovative company. Hopefully, my advice given above will be of help to you. If there are any questions that I have left unanswered, though, please feel free to contact me.