When to Acquire a Startup? | Factors to Consider for Startup Acquisition

Mergers and acquisitions (M&As) have become an effective strategy for business growth. Many growing companies are adopting this strategy to grow inorganically. When targeting companies for inorganic growth, it's recommended to target small but multiple companies in order to avert risk of a large investment in a single company. And, if you want to expand into a new market, acquire new skill sets, technologies or gain competitive advantages, then startup acquisition can be a beneficial solution. This works as an efficient growth strategy as it helps to acquire intellectual and talent property. Besides, this strategy also provides an opportunity to leverage synergies.

Currently, in the startup industry, acquisition has become a major concern. When a startup is not flourishing steadily and lacks potential capital to grow further, then a bigger and more successful organization can acquire the startup. When a large company has the potential capital and other resources to expand their market and want to be benefitted from cross-selling opportunities, then, it can start with a startup acquisition strategy.

However, before you start targeting potential companies for your 2023 M&A activity, let’s have a look at which factors play a significant role in this acquisition procedure.

1. Cost of developing services

The first thing you need to consider is the human resources as well as the time required for this development. In addition to that, opportunity costs are also important as acquisition can be fulfilled if you have substantial savings of money and time.

1. The actual time of starting revenue realization

Initially, it is important to consider the rationale behind the acquisition. Before acquiring a startup, it is necessary to consider whether revenue realization will start immediately. If it cannot be started immediately, then before proceeding, know the time for gaining revenue after the procedure of acquisition. The interest expenses related to the gestation period can take away the profitability gained from the venture.

2. Work culture in the startup

We have observed that every workplace has its own specific work environment as well as a work culture that starts and then flows from employees and leaders. When a startup can successfully create an optimistic work culture, it is the outcome of hard work and good efforts of everyone, who is associated with the organization. In this regard, to ensure this success continuity, existing employees need to synchronize with the new business owners. For this reason, some specific systems need to be incorporated. For example, for scaling up the startup, there should be communication clarity that can be resisted by old staff.

3. Startup reputation

An important factor for startup acquisition is the startup's reputation which considers the position of the start-up according to the consumer views. As everyone uses at least one social media platform, negative feedback can make a major impact on the brand's reputation. On the other hand, positive feedback spreads less quickly. For this reason, before proceeding with the procedure of acquiring startups, check the reviews and feedback given by current users positively.

4. Profitability

In the current era, often profitability becomes less important in comparison to higher valuations. Though valuation plays a vital role in the context of investment, the profitability of investors needs to be prioritized more. Due to this reason, in both sectors–the concerned startup itself as well as the operating sector of the start-up, due diligence has to be done.

5. Synergy

Another important factor in startup acquisition is synergy. In this checkpoint, if the acquiring business area matches your existing work area and can also amplify profits, you can proceed with this acquiring procedure. This factor reveals the status of a startup, in terms of market stability. However, if you are assuming that you are capable enough to make this startup profitable with the help of resources and tools, then you can take help from a startup database. In this database, you can find lists and relevant information of startups as well as other organizations that are at an early stage of inception. In these conditions, conducting in-depth market research is important before the implementation of any of these two way-outs. In this way, there is a high chance that acquisition is done with quite a fair amount.

6. Pricing for services

Often, it can be seen that many startups deliver specific services by charging any price or they offer an unusual discount to increase the number of users in the service. Though in this way, the valuation of a startup can increase, it can have a negative impact on the profitability of the company. The procedure of due diligence needs to examine if customers want to pay high prices for their services.

In this question, confusion arises about whether the quality of services or products is good enough that people will buy them at higher prices. Often situations arise where service quality is so poor that customers will only purchase it only if it is offered free of cost and this situation is quite discouraging.

In this regard, if it becomes important to place the value strategically for cash flows in future, then before the acquisition, establishing a proper pathway of profitability within a specific time is necessary.

7. The life cycle of products

From a macroeconomic aspect, the “product life cycle” is also an important factor for startup acquisition. For example, almost 4 years is required for a startup to reach the break-even point. In this condition, it is necessary to consider whether the services offered by the startup can be innovative and relevant up to this time.

So, it can be summed up that startup acquisition is dependent on various factors. The time, the concerned startup spent in a business sector, the nature of issues and their solving procedures and the resources.

If you wish to get rid of the intricacies involved in such complex decision making, it is recommended to seek help from experienced startup acquisition consultants like GrowthPal. We provide services based on an in-detail analysis of stakeholders’ data, organizational information and proprietary algorithms to provide you with the best M&A recommendations.

If you wish to take the first stride in your M&A strategy and build an M&A pipeline, reach out to us.