When does acquiring a Start-up make sense?

Instagram- The photo sharing app was acquired by Facebook for $1 billion with only 13 team
members at that time. Everyone thought and said that it was insanely overvalued at the time, but
now I wonder if anyone would dare oppose the fact that it might be one of the greatest acquisitions
of all time.

So, what makes an acquisition a success or a failure? Well, to be honest no-one can say it for sure,
beforehand. The world has seen the biggest business houses and minds like Nokia and Motorola
making mistakes. Simultaneously, we have also witnessed some of the most amazing acquisitions
including Whatsapp, Youtube and if things go the right way, we might see Elon buying Twitter. Going
back to our question what makes it a hit or a flop. Any normal person’s answer would be the Cash
flow. That means if the business is making money, it’s successful, if not then, well, bad news. Now, if
you ask me, I may not agree to the same. Reason? I’d say the first reason will be the nature of start-
ups.

Before discussing the success or failure of an acquisition, let’s first understand what makes a start-up
acquisition worthy. As we know that more than 90% of the start-ups die in their 1 st year. Contrary to
the popular belief: Most of them do have a potential solution to a real problem. So, why do they fall,
Sir? So that we can learn to pick ourselves up? The answer sadly is No. Start-up world is not like ‘The
Dark Knight’ and more importantly start-up founders don’t have Bruce Wayne’s resources either. A
very evident problem is investment. Due to lack of investment, most start-ups don’t get the kind of
marketing they should be getting and eventually bite the dust. So, a clear sign to start thinking of
acquiring a start-up is the duration for which it has been running.

Now, how are you thinking of acquiring one? Does the founder or owner want to sell? Why? A start-
up is something start-up founders find very close to their heart. They have worked very hard without
payment for years. They have worked as a boss, as a secretary, as a cook, as a labour and whatever
else the set-up needed. Now, when it’s time to cash in some of their efforts, why are they running.
Try and find the problem they’re having. If you have the solution to that problem then only move to
the next step, otherwise, I’ll say keep the cash stashed in a place which pays you good interest.

Now, there may be many reasons a start-up is up for sale. Let’s discuss it one by one. First and
foremost being the lack of money. Now, believe me, when I tell you there are a lot of guys sitting
with mediocrity in their hand calling it revolutionary day and night. Lack of funds raises a lot of red
flags. Questions like why did no-one funded the idea, if it was so good. And, if you believe you can do
wonders with the same idea. Even if you own a crazy amount of money, I’d still recommend you to
try and pitch the same to some wealthy people, banks or VCs other than your managers, employees
and a bunch of yes sirs around you, just to see if people are willing to bet their hard earned money
on something you want to invest in so earnestly. If yes, well then my friend you have another
checkpoint you may move to the next system.

Another reason for someone to think of selling a start-up might be the inability to manage the scale
or growth properly. Well, according to me, a very beautiful problem to have. If, a start-up has been
scaling for some time and the amount of customer and enquiries they’re getting is out of their hand.
They don’t have the resources to match the expenses needed to cater such growth. Since, it’s a
happy go lucky phase for them, they just want to bargain the maximum out of it and live rich for the
rest of their lives. Now, This kind of phase is very crucial for a start-up. If it gets a suitable leadership,
it may become the next Notion or Canva. If not, we all know companies which were supposed to be
the next big thing but can’t find them anywhere now. No matter how tempting this situation looks,
other than reading this article do more important analyses first like what are risks? How much
expansion it needs? Will you need to raise funds? If yes, then who’ll be giving them to you? Even,
consider the problems your mother says you may face despite she not knowing a thing about
economy, market or startup.

The last checkpoint where it makes sense to acquire one is if it matches your area of existing work.
Which means, the start-up itself is not in that good a state but you believe that with your existing
system and resources either you can make the start-up profitable or with the tools and resources of
the start-up, you can make your existing problems go away. In both the cases, if you have done a
good market research and odds are in your favour. Chances are that you might end up getting the
acquisition at a fair amount and make it the best of both worlds. Sounds like a private jet. Doesn’t it?
Remember, proper research and analysis is the key.

Finally, after this entire discussion, only thing you can say about an acquisition making sense is that-
“It depends”. Depends on how much time the start-up has spent in the market, depends on what
problems they are having, depends on your capability of solving those problems and also depends
on the resources you have to make it work or using the start-up’s resources to make something of
your own known to the world. The thing is if this all makes sense, then “Go for it.”