For someone who had successfully founded a startup, the most probable exit strategy is an acquisition. Initial Public Offerings (IPOs) are an expensive, heavily regulated move, and maturing a startup all the way into a "real" large company requires a skillset not every entrepreneur has, brilliant as he or she may be.
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As an entrepreneur, you should be careful not to spend a disproportionate amount of time thinking about the exit instead of focusing on your product and users. However, understanding the importance of an acquisition scenario and what you can do to make it happen is crucial if you don't want to miss out on opportunities.
Many entrepreneurs believe that they have to wait around passively until they are “discovered," but this is wrong. There is a lot you can do to improve your odds. So while you develop your product, grow your revenues and make your users happy, you should also try to identify your potential purchasers and their specific needs.
To do that, you need to understand why big companies buy small companies. One reason is diversification: a product developed by a startup is just what a big company needs to enter into a new field or reach a new target market. Another reason is synergy: when a startup's product or technology completes or improves on the buying company's existing products.
Big companies invest huge amounts of time and money trying to figure out where their business would be five or even ten years into the future. It is not rare for these companies to declare their intentions and publicly share their plans and areas of focus, even calling on startups to collaborate.
Even if such information is not directly available, an entrepreneur should be able to forecast with some success where his or her industry is headed and identify the key players.
Making the connection with these market leaders is an art. Having a contact person is, of course, the best and easiest way to initiate a conversation, but opportunities like that are rare. You should try to find connections through friends, colleagues, investment bankers, lawyers, and advisors.
I cannot emphasize enough how important it is to hire advisors with the right industry connections. In many cases, one solid introduction is worth more than all the professional advice in the world.
While it is important to be on the big companies' radar, it's not always enough. In many cases, you'll need to develop strategic business relations with your potential buyer long before an acquisition offer is on the table. A large percentage of the startups that ended up being bought started as suppliers for the companies that went on to buy them.
This kind of "pilot" allows a startup to show off a product or service and nurture a need for it. When negotiating a pilot agreement or any other commercial deal with a potential buyer, you should always aim for the deal you are ultimately after, for example being bought by the company, and not invest too much effort in securing short-term benefits.
That said, you need to make sure you are not tying yourself up to a company too hastily since a business agreement with one company could make other companies lose interest in you.
An excellent way to draw a company's attention is to secure significant business alone, or better yet, with its competition. Helping a competing company win a big contract can demonstrate to your potential buyer that you are just the thing they need.
Here, too, you shouldn't offer exclusivity unless you absolutely must. You can never know who will want to work with you once you succeed.
Do you need to have a revolutionary product or a fantastic business model to get acquired? The answer is no. Sometimes a solid user base can be the thing your buyer is after. Even with a slim profit margin, a loyal customer base could make you seem attractive to a big company who knows how to use your client base in other, more profitable ways.
Instead of trying to squeeze a little more from each client, you should do your best to make your clients happy and loyal to your brand. Make sure your product is awesome, that your client support is great and that as many of your clients are repeating clients. Remember that your client base might be a more valuable asset in an acquisition transaction than your product itself.
One final advice about your product. Once you have identified your potential buyer, make sure your product is easy to implement into the buyer's technology and business model. Being able to apply your product efficiently and quickly test the market is one of the most critical considerations big companies have when mulling over an acquisition.
Adv. Zachi Zach is a lawyer and a mentor in the online industry, specializing in online gaming, adtech, ecommerce and other online related fields. Among others, Zachi serves as Of Counsel to the law firm of Pearl Cohen, an international law firm with offices in the US, Israel and the UK.
Zachi is also the author of The Online Startup blog: www.zachizach.com.