How to Choose Your First Startup Acquisition
Photo from MicroAcquire
Is there anything more exciting than acquiring your first startup?
Second only, perhaps, to founding a business, your first acquisition is one of the most defining moments of your career.
You get to apply your hard-earned skills and experience to transform an established business, and then, ultimately, sell it for a life-changing sum.
However, all “firsts” have the capacity to disappoint as well as delight. Think of your first acquisition as a trial run rather than an all-in bet on your first hand.
Consider your goals, which startups would be a good fit for your expertise, and how you’ll generate a return on your investment.
If it doesn’t work out, you can apply what you’ve learned to your next acquisition. But if you bite off more than you can chew now, you risk everything with no guarantees.
First, Identify Your Strengths
Before you even look at startup listings, start with some self-reflection.
What are you good at? What are you passionate about? What makes you different from other entrepreneurs? Where do you add the most value?
You’d be surprised how few entrepreneurs ask these questions before acquiring a startup, only to later realize they lack the skills to grow the company or hate the industry or work so much it’s a chore to do so.
Identify your strengths and use them to assess which startups are right for you. If you’re an ex VP Sales, for example, who loves building relationships and hitting targets, your shortlist will differ to that of a full-stack engineer who adores APIs and algorithms.
Start Small and Work Your Way up
The same wisdom applies to building companies as it does to acquiring them. Your first few won’t do that well but later on, when you’ve learned from your mistakes, they’ll do much better. The same is true of acquisitions.
Start small until you’re comfortable with the acquisition process. Smaller businesses require less capital, reducing risk and leaving you more funds to play with post-acquisition. It’s easier to recover from a failed acquisition at $20,000, for example, than one at $200,000.
Before your first acquisition, you’re a rookie prone to mistakes. But once you’ve dealt with LOIs, due diligence, negotiations, and so on, you’re a veteran capable of acquiring bigger startups without getting lost in the process. You can then pounce on opportunities your “greener” peers might’ve missed.
Keep It Simple
Your first acquisition should be simple, too – an easy fit for your current expertise. What are you capable of now? Your chances of a return on investment dwindle when you have to learn new skills, declutter your schedule, or hire new teams.
Your first acquisition is tricky enough without adding a sprawling, labor-intensive technical product or service you may know little about. Even if you possess the right skillset, give yourself time to understand the acquisition process. The simpler the startup, the easier it is to transfer ownership, leaving you more time for post-acquisition planning.
Be Patient Until You Find the Right Business
Knowing what you want is vital if you want to acquire the right business. The more specific you are, the less likely you are to be surprised or disappointed. Don’t rush into acquiring a startup just because it’s got an attractive ARR, asking price, or tech stack. Think about size, product, market, customer acquisition strategies, and so on.
When you need a new outfit, you don’t walk into a store and grab the first clothes you see. Instead, you browse by color, style, and fit. If you find the right match, you buy, otherwise you walk away empty-handed. The same applies to acquisitions: don’t acquire until you find the right fit – even if it means walking away from otherwise attractive deals.
Choose a Business in Which You Can Make a Difference
Think of a startup as a jigsaw puzzle missing its last piece. Do your strengths align with the business? Does your expertise fill any gaps? Your skill set should be the key to unlocking growth, which means choosing a startup that dovetails with your experience.
For example, you might be a fantastic marketer but have zero coding experience. It would make more sense, therefore, to acquire a business that either needs a marketer or sells a marketing product than one that needs technical expertise or to communicate in developers’ language.
That’s not to say you can’t acquire a company for other reasons, but it’ll be harder to generate a return on investment. You might think, “oh, I’ll just hire an operator to run the business,”, but this adds complexity (keep it simple, remember?), and no operator in the world is a substitute for you rolling up your sleeves.
Does the Acquisition Help Achieve Your Goals?
You’re an entrepreneur with an exciting career ahead of you. What’s the plan? What do you want to achieve in the next five years? The next ten? Your goals dictate which startups to acquire but have you seriously thought about them?
You might want to operate a number of smaller startups or acquire and sell them one at a time. Or perhaps you’ll assemble a new product or service from several acquired technologies. You might also acquire missing expertise or customers in new markets. It all depends on you.
If you want your first acquisition to move you closer to achieving your goals, which it should, think carefully about the size, type, and industry of the business. Otherwise, you might find you take a step backward or sideways, delaying your ambitions.
What’s Expected of You Post-Acquisition?
Acquiring companies is hard work. You must win the loyalty and trust of employees, customers, suppliers, and partners. Just keeping everyone happy and motivated post-acquisition is a job in itself and you’ll certainly experience some uncomfortable conversations. This is on top of any growth strategies you have in mind to generate a return on investment.
Spinning all these different plates can be a strain on the mind and body. But it’ll be worse if you haven’t understood what’s required of you post-acquisition. Will you enjoy the work? Will you get on with the people? Are you ready to field challenging questions on your plans for the business? Once you can say “yes” to these questions, you’re ready to acquire.
Your first acquisition won’t be perfect – and that’s okay. It’s all part of the learning experience. Start small, start simple, and choose a business that plays to your strengths. It’ll then be easier to earn a return on your investment, leaving you stronger and more confident in making your next one.
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