Financing rounds via a safe note structure are completely different from acquisitions. The latter are actually much more complex.
When looking to find a favourable acquisition for yourself and your company, these two options might be prominent from the start. In this article, we take a look at each in great detail. We’ll discuss what they are, the benefits and disadvantages of each, as well as other things you should consider while searching for the best deal.
What Is A Strategic Startup Acquisition?
Strategic startup acquisitions arise when an existing company purchases a startup, in order to synergise their technology, operations, workforce, and their own metrics. Synergising is when a combined effort is more productive than the two individual companies would be on their own.
These acquisitions are common for two main reasons – to operate more effectively. For example; reducing costs or to increase revenue. Sometimes, a startup will also be acquired to fix an existing problem within another business. Here are how some of these factors can be addressed and improved.
Operating More Effectively
After an acquisition, it’s more than likely that the company in question will need to deliver more products. In this scenario, they can benefit by cutting costs with economies of scale. You may also gain highly motivated and knowledgeable staff during an acquisition, helping the business to operate at a higher capacity.
Gaining market share after an acquisition is the case more often than not. The newly acquired company may also have a large base of loyal customers that the acquirer can tap into. Not only does this expand their client base, it can also lead to a higher average sale price if cross or upselling is used effectively.
Fixing An Existing Problem
If a business is having trouble creating and delivering a certain product, they can acquire a technologically-driven startup for production. There are also instances where sales are beginning to dry up for a prominent existing company and the acquisition of a successful new product has hugely helped.
An example of a strategic takeover would be if a large candy company decided to acquire a vegan confectionary startup. This would allow them to offer a different product within the market they currently operate in, while also increasing their target audience and giving themselves a distinct advantage over their competitors.
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Benefits Of A Strategic Startup Acquisition
There are a range of benefits to a strategic acquisition for your startup.
Can be easily incorporated – Strategic acquisitions are usually done by a company in an identical or similar niche. This often means that the incorporation can result in one larger, cohesive unit, with more efficiency.
Within the best interests of the business – It’s said that strategic acquisitions are, at least on average, more successful than financially-based alternatives. Again, this usually comes down to the knowledge and experience of the acquirer, as they have likely run a successful business within a similar niche previously. They know what it takes to keep the business running optimally and may have numerous growth strategies to apply in the future.
Valuation – In some cases, you may actually receive a better valuation or offer from the viewpoint of a strategic investor. They may see certain aspects of your business in a similar way to you, allowing them to see the big and long picture.
Drawbacks Of A Strategic Startup Acquisition
Now that we’ve had a look at the advantages, it’s only fair to list a couple of the potential drawbacks.
Your company might get ‘lost’ – In the event of a strategic acquisition, your brand could easily be absorbed by the company purchasing it. While this may not really have a financial effect, it could certainly be disheartening to see your company fade into the shadows of another.
The acquisition may fail – Acquisitions as a whole have a bad rep for often being unsuccessful. Sure, a strategic acquisition might have a better chance at success, but this doesn’t mean it’s a guarantee by any means.
Diversification issues – Just because two companies are in the same niche, doesn’t mean their products are overlapping. This can create confusion amongst customers, as well as disagreements between staff and management.
What Is A Financial Startup Acquisition?
A financial startup acquisition is usually oriented solely around the numbers. It’s important to know that this type of acquisition can be hostile. These types of acquisitions, as hinted to in the name, are driven by financial returns. Investors are typically looking to make as much revenue as possible from this deal and may not be too concerned with some of the other dreams and values of the target company. It is often about revenue, yield and cash flow, from a pure investment perspective. Such as adding a new asset to the portfolio of a private equity fund.
Benefits Of A Financial Startup Acquisition
Benefits of a financial startup acquisition include:
Simpler pricing – As the investor is most likely concerned with the revenue that they can generate through the company. There is less to worry about in terms of integration, or success and earn outs based on that integration working.
Usually easy to find – As opposed to a strategic acquisition for your startup, a financial alternative may be much easier to source. It doesn’t require synergy in operations. Of course, this is only true if your accounting lines up with their portfolio criteria.
A faster process – Never count on a fast closing. Yet, financial buyers are typically experienced acquirers and have a process.
Drawbacks Of A Financial Startup Acquisition
A list of potential drawbacks to financial startup acquisition can be seen below:
Restructuring of the company – This is often a trend during a financial driven acquisition. The new owner seeks to cut costs in any way possible, with re-structuring of the staff being a fairly quick and common method to implement. They may also hike prices, turning off your most loyal customers. You could always talk to the potential acquirer and discuss this with them, perhaps coming to an agreement for this not to be the case.
Pricing – Financial buyers are really focused on the finances. You may have a disruptive product and massive freemium customer base, but that may not be fully appreciated and valued in these types of transactions.
The Mission – Financial acquirers can often think in a different way to their strategic counterparts. They may not share your vision and values when it comes to focusing on the mission and serving customers or the market. If you created something to do good in the world, you may find that compromised, and all decisions are made on the net profit instead of the initial impact you wanted to make.