October 5, 2012
A few weeks back I was at a Starbucks waiting for my Grande Soy Latte. I eavesdropped on a woman talking to her colleague about how her friend just sold his five person mobile startup last month and was now working on his second, which he is hoping to sell in the next two years. I thought to myself, “Wait a minute! The company has not even started but the already successful founder is thinking of selling it!” You may think it’s strange, but trust me it’s a part of daily chitchat in Bay Area coffee shops. It indicates an underlying trend that’s taking place in the Valley and the rest of the tech sector.
If you read my previous article on Social Mobile Data, I highlighted the three forces that are fueling the current tech eco-system. In the last couple of years during the recession, the Fortune 500 companies have been optimizing cost and holding back investments on new technologies. Now, as the companies are reporting profitable quarters, there is a sudden need to obtain or level-set technology to meet the market forces and demand on Social, Mobile and Data sectors.
I will support this claim by the following data point: if you analyze the M&A reports from investment banks (Rutberg & Company), you will find from January of 2012 to June there were 40 early stage acquisitions every month in the mobile sector alone. If you browse through AngelList, you will see the same trend. So, if you agree there is a rising trend of early stage acquisitions, you’re probably wondering, “How does that affect my startup?”
As a startup entrepreneur, it is important for you to be sensitive of the trend. When you are building a startup, your goal is to build a large enterprise and not sell out early. But there are instances when selling out early could mean a good financial return for all the stakeholders, while for others, holding steadfast to build a large enterprise might make the most sense. It’s had to generalize a theory, but it’s important for entrepreneurs to keep their options open.
Regardless of your acquisition strategy, startup founders should focus on building great products, understanding market gaps, and providing thought leadership. Excelling in these three areas is essential to closing a customer deal or wooing a suitor.
From my past experience, I have noticed product and industry dynamics drive acquisitions at a rapid pace. Building great products is not a scarce skill in Silicon Valley. Valley entrepreneurs know how to build great products with good interfaces and experiences. Most entrepreneurs come from engineering backgrounds and will take longer to understand industry dynamics and effectively identify their customers’ gaps. That’s where it’s important for founders to spend time talking to executives in the industry, obtain insights and identify market gaps, instead of outsourcing these tasks to a business development/sales person.