7 Examples of When You Should Acquire a Startup Rather Than Build One
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It’s hard to build a successful startup. Around 90% of startups fail, usually in the first five years. Even those lucky enough to raise venture capital fail to generate a return for investors 75% of the time. This presents a dilemma: with such tough odds, do you risk your time and money building a startup from scratch or acquire one with a proven track record?
Failory interviewed founders of over 80 failed startups and found the most common reasons behind failure were product-market fit (34%), marketing (22%), and teams (18%). You might spend $100,000s and years of your life trying to overcome these challenges. But when you acquire the right startup, you acquire these things ready-made – buying you time.
That said, acquiring or building depends on whether you’re a builder or scaler. You might be better suited to building a business if that’s what you love and where your expertise lie. However, if you’re a scaler, it makes more sense to acquire a startup that dovetails with your skill-set and lets you sync and scale with ease.
Other examples include:
#1 You Lack Expertise or Motivation to Build
Success is dictated by how passionate or adept you are at something. Focus on your strengths. If you’re a scaler, there’s no point in pushing yourself through a builder-shaped hole (you’ll just get stuck). Acquire a startup instead.
The same applies to motivation. You’ve probably heard of flow, that trance-like state of happiness where creativity and productivity flourish. Achieving flow through doing what you love feeds back into the pleasure of doing it, creating enormous momentum.
Even if you consider yourself a builder, for example, you won’t enjoy all aspects of building a startup. Acquire one, however, and you can choose a startup that’s missing the thing you enjoy doing most. As Steve Jobs said, “The only way to do great work is to love what you do.”
#2 You Lack the Time to Build
When you acquire a company, you’re buying time. Let’s say you’ve hit upon a great idea but your job, business, or other responsibilities prevent you from developing it. You might run multiple SaaS businesses, for example, to boost your chances of a life-changing exit.
However, being a serial entrepreneur, you’re probably time-poor, and acquiring a growing startup takes the pressure off you. This way, you behave more like an angel investor, focusing your strengths on scaling startups instead of building them from scratch.
You might also consider an operator to run the startup for you. Or, you might acquire a suite of technologies for another business you own instead of building it. Both shave months and potentially thousands of dollars off the process of doing it solo.
#3 You Want to Derisk Your Next Venture
When you build, you take on the risk of turning an idea into a business. Imagine all the late nights, setbacks, and stress that accompanies it – with no guarantee of success. Going from zero to one is a lot harder than spring-boarding from a solid one, especially if you’re moving into a new niche, product, or service.
Despite the risks, building a startup teaches you a lot about entrepreneurship. Some of those lessons are worth the invested time, effort, and dollars if you fail to get one off the ground. That said, if you’re risk-averse, failure might be difficult to recover from (mentally or financially), and in that case, you should acquire not build.
#4 You Want to Iterate on Something Already Good
You’ve probably heard the phrase, “evolution, not revolution.” The idea is that iterative changes are both easier to do and more impactful as you have time to react to the world around you. Revolution, however, is a radical reimagining of a whole system, whose ambitions, however well-intentioned, may misfire in any number of ways.
When it comes to acquiring a startup or building one, let’s put it this way: It’s a lot easier to acquire a good business and make it better than it is to start a business and make it good. Not only is it less effort, but it’s also more enjoyable to ride upwards momentum rather than start from inertia – you’ll see results a lot faster, too.
#5 Your Skills Are More Suitable to Scaling Than Building
Just because you can build doesn’t mean you should. You should only build if you enjoy it and are good at it. Otherwise, you’d have more success (and, dare I say it, fun) if you acquired a startup and then applied your unique experience levers to elevate it, be that increasing revenue and profit, reducing expenses, or improving the product.
You’ll have noticed a theme here: what you do depends on your passions and abilities. I understand the cachet attached to being a founder, but it might not be right for you. Don’t push yourself to build because you believe it’s an entrepreneurial rite of passage. Whether you acquire or build, the ends are identical: you want the startup acquired for a life-changing sum.
#6 You’ve Spotted an Opportunity
Great startup ideas can simply be iterations of what already exists. A better service, better marketing, a more efficient business model, and so on. Logically, it follows that revitalizing a tired industry is a lot easier than creating a new one. It’s even easier to acquire one of these flagging businesses, fix the problem, and then watch revenue double or triple.
Opportunities are everywhere. Many startups plateau because the founder lacks the experience or skills to scale, and being able to do what the founder can’t is all that’s required to turn a business around. Network with founders and fellow entrepreneurs, check out startup marketplaces like ours, and see if you can’t see an opportunity to profit from an acquisition.
#7 You Want to Beat the Competition
Acquiring the competition is usually easier than competing with them. If you spot a new startup doing something better than you, why not acquire it rather than reinvent the wheel? At the very least, run the numbers: how much would it cost to engineer some new tech or refresh operations? Then compare that to the cost of acquisition.
This becomes more prudent as your current businesses age. Younger entrepreneurs entering the market with some cool new tech might be willing to part with it given their first startup is rarely the one that makes them rich. You could, therefore, acquire something that would’ve taken you months to build and at a commensurate or even discounted price.
Unless you’re building a truly disruptive product or service (such as the next Uber), you’ll find the best opportunity is to acquire niched startups. You don’t need to work through that 1-2 year period to figure everything out. Instead, buy a profitable, niche saas startup, learn from the founder what worked, and then rinse and repeat until you’ve hit your goals.
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