Why Startups Should Stop Being so Eager to be Acquired
It’s common practice among startups to begin preparing for an acquisition from day one. When entrepreneurs mention a new startup they are beginning, one of the first questions their peers are bound to ask is, “What is your exit strategy?” It shapes the way their company is formed. Rather than wondering, “Does this next move fit my original vision?” or even, “Is this the direction that is best for my business?” they focus on, “Is this what will get my startup bought by a major player?” So, why are startups so eager to get bought out?
To start, the vast majority of startups are doomed to fail. When you’ve spent countless time and money on a project, the last thing you want is for it to dwindle into nothing, or even end up owing money you don’t have. Getting acquired early and for a high price is considered a huge success and enables you to begin more ventures. Plus, the longer you go without being acquired, the less likely it is that you ever will be. The chart below shows how many startups who raised capital were able to continue raising it in subsequent rounds.
Clearly, it becomes more difficult as you go on. But is planning for acquisition from the start your only chance at startup success? According to Jonah Peretti, who cofounded The Huffington Post and then BuzzFeed, it isn’t. Peretti wrote in one email:
My advice is you shouldn’t do a startup for financial reasons. Most startups fail and there are easier ways to make money with less risk…And if a company is successful, which is very hard to achieve, the money comes whether you build a fat company or a lean one.
Now, I disagree on the first part. Considering how much work goes into creating a startup, it’s more than reasonable to expect compensation. But the second part makes sense. If you build an amazing, game-changing product, the money will come one way or another. If you sell, you have to be prepared for the consequences. Dennis Crowley, Foursquare creator, once had a company called Dodgeball. When he sold it to Google, they quickly ended the app. These days he’s more hesitant to be acquired.
It’s a tough decision because you’re trying to figure out what’s the best thing to do for your company. Your company is your baby at that point…You have to make a call and weigh the pros and cons.
Can you imagine Google being acquired? It almost happened once. Google tried to sell itself to a company called Excite for $1 million and was denied. They then tried to negotiate $750,000 and were still rejected. Ever heard of Excite before? I know you’ve heard of Google, which is now worth $527 billion. Clearly, becoming acquired isn’t always the best option. Focus on how to make your startup the best company it can be. Once you’ve done that, you can decide between an acquisition or going public. Either way, you will have created something valuable and true to your vision.
