Is acquisition a valid exit strategy?

https://news.ycombinator.com/item?id=85913

by nkohari • 19 years ago

11 26 19 years ago

news.ycombinator.com

I'm working on a business plan for an internet startup, and I'm not exactly certain of my exit strategy. I figure if I do the old...

1. Make website 2. Get lots of users 3. ??? 4. Profit!

...investors might not appreciate it.

Is targeting acquisition looked down upon, or is it considered a valid exit strategy? Honestly, I'm at a loss how else would you exit the business other than selling it once it's profitable.

jgrahamc4• 19 years ago

Don't 'target acquisition' what you should be targeting is making a profitable product. Make your customers happy, make money, then figure out the 'exit strategy'. When I worked for Accel I would have been very uncomfortable with an entrepreneur that presented an exit strategy. Yes, acquisition may be the end result, but don't make it your end goal.

nkohari4• 19 years ago

That's interesting. I've always been uncomfortable even describing my exit strategy, because it seems to be like presenting one means my idea is just the means to an end. Not only is that not really how I feel, but it's sort of at odds with an entrepreneur being prepared to sweat blood into a project to make it succeed at all costs.

It also seems like saying "acquisition is my exit strategy" is the equivalent of saying "I'm not sure this is a sustainable business model". Honestly, if the business is profitable enough to attract enough attention that it might be acquired, I'm not sure I'd be interested in selling anyway. :)

vorace• 19 years ago

I'm working on a similar business plan right now, and am having the same difficulty. Our software solves a problem and I believe we can get a lot of users, but despite adding in ad revenue and a vague "enterprise edition," the numbers just don't add up into something attractive.

Is it best to be honest about this, or beef up the numbers?

jgrahamc4• 19 years ago

Start with the assumption that you can get lots of users. If you can then listen to those customers very, very carefully. You will discover some additional value that you can bring by adding specific features; charge extra for those features. It's OK to have lots of free users, it's also OK to say that you are not sure about the revenue, but I'd be on the lookout for an opportunity to charge a customer to extra value that your product is bringing.

nkohari4• 19 years ago

Is it really okay to say you're not sure about revenue? I keep reading that that's one thing you really need to nail down. (Then again, I see these companies like Twitter with no realistic business model get funding...)

pg2• 19 years ago

Trick question. It is a valid exit strategy. But it's not a good plan to make your corporate strategy = an exit strategy. You should never be in a position where you depend on getting bought.

mojuba6• 19 years ago

You should never be in a position where you depend on getting bought.

Why not?

Not that I disagree, but just for the sake of discussion. You may sell things, services or ideas, as well as you may sell entire companies. Is there a fundamental difference?

Kaizyn2• 19 years ago

Consider relative bargaining power when you enter into acquisition negotiations. If you NEED to sell, then you will most likely accept any offer, no matter how bad, from the buyer. When you can take or leave any offer put on the table, you're in a much better position to bargain from.

run4yourlives4• 19 years ago

In addition to Kaizyn's excellent point, making acquisition your corporate strategy is basically admitting you have a product that can't survive on its own. That's a problem - why can't it work without acquisition?

pg2• 19 years ago

The market for startups is so illiquid that it's qualitatively different from buying and selling most other things.

You're doing a single big sale, instead of a flow large enough to generate a smooth curve in response to demand. And the buyers are extremely fickle-- so much so that needing to get bought makes you way less likely to get bought.

nickb• 19 years ago

If you can get past step 2, you can almost always find a way to monetize your business. Now, is that going to be enough for an investor to invest? No. You'll have to show that you will be able to grow and create something that someone will be willing to pay a large amount of money to own. Many companies end up being lifestyle companies and don't have a lot of upside for serious investors to really consider investing. M&A is definitely a valid exit strategy and make sure you have a list of possible exit targets but don't make 'chasing suitors' your business strategy! IPO market has been anemic lately so M&A is definitely the way to present your case to investors.

webwright• 19 years ago

As opposed to what... IPO?

M&A is about the only likely exit strategy. Hopefully you look good on that front-- if you don't have a liquidation event (selling, IPO, etc) and hum along with a healthy 10% growth rate and 10% profit margin, you are a total failure as fair as an investment goes. It's good to think about who could theoretically want you and what asset you are creating that they'd want. Give some thought to WHAT the big 3 buy when they buy a company:

1) A profit center... Profitable businesses are easy to sell. 2) A team of innovators. Hiring is expensive. 3) A feature-set they don't offer and couldn't develop as quickly. 4) A user-base that they can integrate with their own, making their collection of services more "sticky" (Yahoo does this a lot-- they want the @yahoo login to be hard to give up). 5) A targeted user-base that advertisers love... Having a service that caters to 10,000 male CEOs is better than having a service that caters to 50,000 people you know nothing about. 6) An appearing of "coolness". Corp dev guys LIKE BUYING STUFF. It's their job, it gets the company PR, etc. If you are a service that is loved by a particular audience, you might get bought to acquire that goodwill. While it's not the only reason, I think this is part of the MS Facebook investment... To appear slightly less lame on the web front.

As PG says, it's a fairly bad business strategy to focus too much on. Set out to build a business that CAN be profitable. You don't want to be looking at a dwindling bank account praying that someone swoops in to acquire you.

Kaizyn2• 19 years ago

If you are concerned about your 'exit strategy' from the business you're planning to start, maybe you shouldn't even bother. Seriously, if you're not interested in building something to last, you might as well go into another fields such as financial derivatives or hedge fund trading. As a consumer, I would be less inclined to do business with a company run by folks whose goal was to 'exiting' as quickly as possible.

nkohari4• 19 years ago

I agree entirely, but you have to look at it from the perspective of the investor. The only way they actually get paid is if the company has a liquidation event. That's (at least in my understanding) why all VCs want to know your exit strategy.

Is acquisition a valid exit strategy?

Related Stories