Tag Archives: Acquisitions

Sharing articles

When I started investing, I would frequently share articles covering what other companies in the same sector as a company we’re invested in were doing. With tens of new articles emerging every day, there’s no shortage of content to share.

However, as time passed, I realized that there was little informational value in the majority of the articles I was sharing. The articles tended to fall in two categories. They were either highlighting a financing event for a competitor, or talking about a specific product development that a competitor had made.

Sharing news about financing events produced two results. First, they would highlight the size of the opportunity in the sector. However, since the entrepreneurs decided to build a company in that sector, and since we decided to back the company, we shouldn’t have any doubts about the opportunity. We wouldn’t be in the sector if we didn’t believe in the opportunity.

Second, they would make the founders feel like they were behind. No one publicizes the smaller financing events so the ones you read about in the press are the big ones. This makes founders question why they haven’t been able to raise as much money and this often creates unnecessary stress. How much money you raise isn’t necessarily a proxy for how successful your company is, and even when it is, founders need to focus on building their product, not worrying about how much money a competitor has raised, in order to catch up.

Sharing news about product developments also rarely serves a purpose. There are two types of product developments. The first category are the ones that a company doesn’t share in public because they represent a unique insight that they don’t want competitors to copy. These are a minority and since they’re non-obvious, you won’t read about them in the press.

The second category, which are shared in the press, are those obvious features that everyone agrees on the value of. A personalized product recommendation engine for an e-commerce site, or a signup campaign to build up interest prior to launching in a new geography, are good examples. Everyone agrees that they’re useful, but they’re also obvious. Knowing that a competitor built these features isn’t that valuable. What matters is actually building them yourself, and ensuring that they work better than those offered by competitors. A founder’s time is better spent sweating the details of the execution of these obvious product developments than reading about the obvious developments that others are making.

I’ve outlined the types of articles that I don’t think create value when an investor shares them with a founder. This doesn’t mean that there aren’t articles that contain valuable information. For example, the global market leader in your sector may have just bought a competitor in another geography, and this may be a signal that they’re looking for similar acquisition opportunities in other geographies. However, such valuable articles are the minority, not the majority.

I therefore no longer share the majority of the articles that I read about a sector with our founders operating in that sector. Only in the rare case that an article contains a non-obvious and meaningful insight is it worth sharing.

Startup acquisitions in emerging and developed startup ecosystems

There are four reasons for an acquirer to buy a startup. These are its team, product, revenue, and profits.

If your team is good enough, you might receive an acquisition offer because the acquirer wants your team to be part of their team. You don’t even need to have launched your product.

A second reason a company might want to buy you is for your product. This is one step further along than having built a team.

For a team or product acquisition to take place, two conditions are required.

First, the product that the team has the potential to build or has already built needs to be something that the acquirer can’t or would find very challenging to build in-house. This tends to happen in businesses where the value lies in the technology itself (for example software) rather than businesses that use technology to enable another behavior (for example e-commerce).

Second, the team or product need to have the potential to scale enough to pose an existential threat to the acquirer. This requires a strong startup ecosystem including deep funding and knowledge of how to scale startups.

Of the geographies we invest in, we rarely see team or product acquisitions in Turkey. This is because most Turkish startups use technology as an enabler rather than as the core value creator and the local startup ecosystem doesn’t have sufficient funding or knowledge of scaling startups for these startups to pose an existential threat to large companies. I’m using Turkey as an example because that’s where we invest, however the same is true for other emerging startup ecosystems across the world.

Team and product acquisitions do take place in developed startup ecosystems like Silicon Valley, Boston, and New York where both of these conditions exist.

The third reason for an acquirer to buy a startup is its revenue. In other words, even if a startup isn’t profitable, an acquirer may want to buy it for its customer base and path to profitability.

And the fourth reason is for its profits. This one is pretty self-explanatory.

Acquisitions made for a startup’s revenue and profits don’t require that the target be a company where technology is the core value creator. Using technology as an enabler is enough. And they also don’t require that the company have the potential to pose an existential threat to the acquirer. The company’s customers, revenue, and perhaps profits already show that this is the case.

As a result, we see acquisitions driven by revenue and profit motivations in startup ecosystems across the world.

But once a company has significant revenue and a path to profitability or is already profitable, is it still a startup? In other words, do we see startup acquisitions in emerging startup ecosystems?