What builds value in startups? Since in one way or another, sooner or later, directly or indirectly acquisitions occur to create and/or increase value, we can address the question from an acquisition stand point. Why do companies acquire?
Acquisitions typically occur because of five stand alone or combined reasons.
The team is usually the most valuable asset in an early stage startup. Passionate, skilled, and committed members with complementary skills working together towards a common goal represent value especially if the goal and culture are shared with acquirers’ internal projects, teams and/or future plans.
One of the value metrics in a technology based startup is user base. WhatsApp wasn’t acquired for over 19 billion dollars because of its revenue or potential profits, Facebook saw a lot of value in acquiring the exponentially growing user base of the company.
Startups at their initial stages spend most of their time seeking a repeatable and scalable business model. Reaching a product/market fit is the first step in repeatability and scalability. When the value proposition (product) matches the need of the targeted segment (market), startups move from the building to the execution stage. It is usually then when companies start generating and increasing revenue. Therefore, companies interested in acquiring startups for their revenue tend to focus on those at the execution stage of their venture development.
A line of code or an algorithm can be written in many ways making it hard for startups to avoid competition. Mostly in hardware based startups that we find intellectual property. Acquirers target companies with intellectual property that can create barriers to entry and an unfair competitive advantage for them over their competitors and the rise of other high growth startups.
Companies often acquire targets for their product line. More specifically, most valuable products are ones that solve problems, address needs, complement and/or substitute the product line of the target firm.
In sum, startups can build value by starting with the foundation; team, proposing solutions that address urgent needs and solve problems uniquely which will then build and increase user base from whom research and better product development can be achieved, and consequently revenue follows naturally. An acquisition can occur at each one of these stages depending on the acquirer’s goal from the deal.
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