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Acquihires: A startup strategy worth considering earlier than most do

Use Vator Teams to develop acquihire interest in concert with capital raising and M&A efforts

Financial trends and news by James La Barne (Vator Robot)
April 27, 2018
Short URL: http://vator.tv/n/4b76

Most startups are on to something, directionally. They see a large emerging market and take their whack at trying to create a product to meet these new needs. However, in many cases, something doesn’t quite click with the mechanics of the strategy.

It could be that the product is ahead of user demand, or it’s taking longer than planned to iterate and find the killer application, or three other startups just scooped up all the available capital in the space, or that the largest incumbent just announced a new offering that is likely going to crush competing approaches. A CB Insights poll found, based on 101 startup postmortems, that the top two reasons startups failed was there was no market need for their product and/or they ran out of cash. These two groups represented almost three out of every four startups.

There's probably a good team in place, but the startup itself is just not well positioned with the right near-term product offering (or sufficient capital for marketing and distribution). In these situations, the real asset of the business may be the assembled talent and the collective moves that have been made up the learning curve in the new category. These talents and learnings can be hugely valuable to larger players who have also developed a similar directional view and now want to accelerate their efforts in this new market.

The challenge for the startup is how best to capture this value.

The common term for these situations is an “acquihire.” In this case, time is your friend in this process, if you start early. Although typically more modest in size, the good news is that it's much easier to generate interest in acquihires than it is for full acquisitions.

In a full startup acquisition there has to be alignment on product strategies, technical architectures, roadmaps, deep financial and economic analyses, and so on. These mean the transactions are extremely complicated and the very nature of them (and the ultimate value) can vary wildly from acquirer to acquirer, making it hard to attract multiple concurrently interested parties and forming competitive bidding situations.

By comparison, acquihires are actually pretty simple. There’s a team and interested parties aren’t likely all that interested in the rest! This reality makes the subject-of-interest pretty straightforward and the ability to articulate its value relatively easy. If there are some other residual assets (like patents, great domain names, and the like) those could even potentially be excluded from the acquihire and sold later as a bit of upside for the startup’s stakeholders. As a result, in acquihires it’s much easier to attract multiple interested parties and work to develop an understanding of which one wants the team a bit more than the others.

But you need some time in order to form this mini-market. Most startups think of an acquihire as the thing they pursue with their last gasp, and as such they tend to get lousy terms as by that point they are out of money, out of energy, and forced (or resigned) to take the first offer that comes through the door.

There’s an argument to be made that earlier stage startups should approach acquihires like the third column of their corporate development strategy, alongside their capital raising and M&A efforts. It may just be the case that later stage investors don’t see enough of what they need in the startup to make a big bet, and that acquirer product strategies aren’t going to align to create full acquisition opportunities on the visible horizon, in which case a well-considered acquihire strategy will prove very wise, as your team is likely something that has real, near term, value.

Starting earlier enables startups to establish relationships with a number of potential acquihirers, and when the time comes to develop a competitive market among them. The challenge is that startups (often rightly) fear that if it becomes known that they're open to acquihire opportunities they may be perceived negatively on other fronts. So, the trick is to develop these acquihire conversations in as discreet a fashion as possible.

We've seen a lot of great startups in our community. We've also seen a lot of great teams struggle. That's why we're launching Vator Teams, a new service that leverages our network of thousands of companies and enables startups to opt-in to receive confidential acquihire interest on an ongoing basis.

This aligns with our other efforts to help startups find investors, customers, or opportunities to be recognized through our VatorX platform, which aggregates hundreds of startup competitions, programs, challenges, etc. Some of these challenges are public; most are not, meaning no one knows a startup applies besides organizers of the individual programs.

With Vator Teams, this is private and confidential. Startup profiles are anonymous and introductions are made only to those companies startups approve. This process puts the startup in the driver's seat and enables them to develop an acquihire strategy that aligns with their other capital raising and M&A efforts.

Consider all of your options and don’t wait until it’s too late to develop a strategy for how to play what may very well be your strongest card, your team.

If Vator Teams sounds interesting and you'd like to use the service to confidentially explore acquihire opportunities, sign up here at Vator Teams - but when leveraging Vator Teams, or going full DIY, don't wait until it's too late to explore every avenue for your startup!

(Image source: Odyssey