Startup acquisitions in emerging and developed startup ecosystems
There are four reasons for an acquirer to buy a startup. These are its team, product, revenue, and profits.
If your team is good enough, you might receive an acquisition offer because the acquirer wants your team to be part of their team. You don’t even need to have launched your product.
A second reason a company might want to buy you is for your product. This is one step further along than having built a team.
For a team or product acquisition to take place, two conditions are required.
First, the product that the team has the potential to build or has already built needs to be something that the acquirer can’t or would find very challenging to build in-house. This tends to happen in businesses where the value lies in the technology itself (for example software) rather than businesses that use technology to enable another behavior (for example e-commerce).
Second, the team or product need to have the potential to scale enough to pose an existential threat to the acquirer. This requires a strong startup ecosystem including deep funding and knowledge of how to scale startups.
Of the geographies we invest in, we rarely see team or product acquisitions in Turkey. This is because most Turkish startups use technology as an enabler rather than as the core value creator and the local startup ecosystem doesn’t have sufficient funding or knowledge of scaling startups for these startups to pose an existential threat to large companies. I’m using Turkey as an example because that’s where we invest, however the same is true for other emerging startup ecosystems across the world.
Team and product acquisitions do take place in developed startup ecosystems like Silicon Valley, Boston, and New York where both of these conditions exist.
The third reason for an acquirer to buy a startup is its revenue. In other words, even if a startup isn’t profitable, an acquirer may want to buy it for its customer base and path to profitability.
And the fourth reason is for its profits. This one is pretty self-explanatory.
Acquisitions made for a startup’s revenue and profits don’t require that the target be a company where technology is the core value creator. Using technology as an enabler is enough. And they also don’t require that the company have the potential to pose an existential threat to the acquirer. The company’s customers, revenue, and perhaps profits already show that this is the case.
As a result, we see acquisitions driven by revenue and profit motivations in startup ecosystems across the world.
But once a company has significant revenue and a path to profitability or is already profitable, is it still a startup? In other words, do we see startup acquisitions in emerging startup ecosystems?
Originally published at Thoughts of a VC.