Ask HN: Why are startups usually eager to get acquired?

https://news.ycombinator.com/item?id=2031675

by rick_2047 • 16 years ago

8 11 16 years ago

news.ycombinator.com

Hello HNinizes,

First of all a little disclaimer, my question is just out of curiosity and does not imply any stand I take on the subject. I do not consider myself to take a stand as I have not done any startup of my own.

I have been frequenting HN for over two years now, and it has inspired me a lot. The discussions and posts over here have helped me grow at quite and accelerated pace. But as I started to read about startups, I found a very odd similarity. 90% of the startups I hear about on HN either have an exit strategy right from the start or are working towards an exit strategy when they "figure things out". All in all, the prime goal of making a startup is to get acquired.

I find that rather odd. People give a big chunk of their life working on something they care about. And when that thing finally starts to pay them back, they sell it to someone else. I think if I will ever succeed in making my own dream company, I will sell it only when it is not making profit for me.

Please help me understand the rationale behind the this craze of getting acquired.

jeffmould• 16 years ago

When it is not making a profit for you, it is not worth anything to others and as such probably will sell for less than you have invested if it sells at all.

It is good to have an exit strategy, even if that exit strategy includes holding on to your company forever. But with the IPO market as non-existent as it is in the US, your chances of making a bundle there are the null. Most entrepreneurs enjoy the thrill of the startup itself, not the management of some big company years down the road. It is not that they are "eager" to sell from day one, but by seeking funding and planning the future of the company they are forced to evaluate exit strategies. Since acquisition can be a lucrative exit strategy it is most often looked at as the end result. The adrenaline rush comes in creating the company, the product, and delivering it to customers (free or paid). At some point you have to look to an exit whether it be an IPO or acquisition if you took on funding (the investors want their money back with a return at some point).

rick_20472• 16 years ago

wow, when you put it like that it kinda makes sense!

byoung2• 16 years ago

I think if I will ever succeed in making my own dream company, I will sell it only when it is not making profit for me.

At that point, no one will want to buy it from you. The goal for most startups is to either get big enough to go public, or get acquired by a bigger company. The second option is attractive because in theory you can use the resources of the bigger company to grow your startup at a much faster pace, and you don't have the risk of running out of funding. With today's startups getting by on a lot less funding than in the past (thousands to millions today vs tens of millions to hundreds of millions a decade ago), the road to IPO is a lot longer than the road to acquisition.

I personally would rather bootstrap a startup or just take a small seed round and get acquired for $10-30 million (I believe these are called "dipshit companies") than raise round after round and doing an IPO 10 years out (risking having a competitor come along in that time and put me out of business).

presidentender• 16 years ago

First, there's a difference between the type of person who can build a successful product and the type of person who can run a successful business at scale. These two characteristics may reside in a single person, but they don't have to.

There's also a lack of excitement inherent in running a company that's no longer a "startup."

There's an exchange of current capital for risky future earnings which may be attractive.

There's burnout.

Perhaps there are more reasons than that, but that's what I can think of.

keiferski• 16 years ago

I have no experience selling a startup, so my opinion is probably not worth much...

1. Running a company isn't the same as building a startup. Two different skill sets, for the most part.

2. On to the next thing. Unless my startup is fighting some huge, globally important problem, I'd rather take the money and put it towards something that is more relevant.

Just think what Zuckerberg could do with billions of dollars towards a serious issue. Staying at Facebook isn't a bad thing, per se, but with that sort of financial power one could really make a bigger difference than connecting people online.

revorad• 16 years ago

This is what I have gathered from PG's essays:

To do what you love, you need the time to do it. You can make the time in one of two ways: either go the organic route, where you take a job in a field you like and slowly increase the interesting part of your work. The other option is the two-job route, where you have one job that pays the bills and another which is your true love.

Startups are the extreme case of the two-job route, both in terms of time and payoff. You do the not-so-fun job of creating enough wealth (something people want) quickly, so that you can sell it for lots of money. And hence time.

For most people with exit strategies, their true love is not the startup. It's just building cool stuff, even if people don't pay money for it.

It's more fun designing a programming language than making a web store builder.

fleitz• 16 years ago

Simple answer, to guarantee fuck you money.

Long answer, most startups will never be Facebook, Google or Twitter. Hence the economically rational founders believe it is better to hold cash than stock in the company. If the founders aren't rational economic actors then any reason will do. This is where passion, and emotion come into play. You will never sell because you aren't a rational economic actor. (It's ok, almost no one is)

You mention selling a compnay when it is not making a profit. Selling a company when it is not making a profit is a really good way to get a crap valuation, the point is to sell the company of the apex of belief in its future to produce profit. A company that is shown to have apex'd is not one that most people want to invest in. You're going to have to sell at that point to a 'corporate raider'.

Ideally, you want to sell when investors think the growth curve is going to keep on going but it has actually reached a plateau, and you are selling on a multiple of expected profit in the future.

Thats pretty much why startups sell. Not all startups are built from passion, some are built to flip.

knowsnothing613• 16 years ago

QED Silicon valley has turned into a giant ponzi scheme.

ncash• 16 years ago

One of the biggest reasons you see acquisitions is for realized gains for investors (including the founders). When you seek investors for your business, you'll find that they expect you to have an exit strategy; this is because they eventually need to get their money out (and then some), and an acquisition is one of the best (and easiest) ways to do that. Some investors may even build legal terms into the agreement governing your course of action when an acquisition might be possible.

For most founders, the acquisition is typically the end of the rainbow. You quite literally cash out/sell your investment. You stop assuming the risks of the venture, but you also give up your rights to future profits. Startups are very risky, and like any investment people gain the most by selling when times are good. A startup that is doing fine today could be dead in two years, or it could go on to be Google. Would you rather have $30 million today or a chance between $0 and $1 billion+ a few years from now?

Of course you don't have to be acquired. If you like what you are doing you can simply keep going (if you are profitable). If you have investors then you'll need to figure out an alternative way to compensate them.

As a founder I personally tell you that I'm more interested in building my products and business than I am running the business long term. I love my company and everything we are involved in, but the further we go the further I get away from my hacker roots. Someday I'll need to get back to that.

rick_20472• 16 years ago

After reading the 7 comments (till now) here I feel dumb to have missed out on two obvious points:

1) Not every idea is supposed to be the next google or facebook. There are some ideas which are just inherently supposed to be small and not make much money on a regular basis. Thus selling them and having a big payday is a better option financially.

2) As the company grows you get separated from your hacking roots, thus you just sell it to someone else and do something which is more close to your hacking roots.

tchock23• 16 years ago

Speaking partially from experience, I think people just get tired after a while... It's a lot of work to run a startup and a lot of the fun stuff in the beginning just gets not-so-fun after a few years.

I caught a post on HN a day or so ago about the varying states of "uninformed optimism" and "informed pessimism" (before eventual despair or "informed optimism") and I think that just about perfectly sums it up.

My startup of nearly five years just recently turned down a serious acquisition offer in the final stages because the deal wasn't right (unrealistic earn-outs, long-term employment contracts, nasty non-competes, etc.). The only reason we were really considering it in the first place is because we were tired of having to compete on limited resources (we bootstrapped it entirely and have never taken on financing or debt - in hindsight maybe not the best idea).

Like anything else, it also helps to have a long-term goal in mind, and having a clear exit strategy from the very beginning is often a great way to set your eyes on some sort of prize. I find few entrepreneurs nowadays who are really looking for a lifestyle business only. Most that I come across are the serial entrepreneur type.

Ask HN: Why are startups usually eager to get acquired?

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