7 Examples of When You Should Acquire a Startup Rather Than Build One When 90% of startups fail, acquiring one that has already proved it works might be a better option.
By Andrew Gazdecki Edited by Jessica Thomas
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It's hard to build a startup. Around 90% fail, usually in the first five years. Even venture-backed startups never earn a return 75% of the time. This presents a dilemma: Do you risk your time and money building a startup from scratch or acquire one with a proven track record?
Failory interviewed founders of over 80 failed startups and found the most common reasons for failing were product-market fit (34%), marketing (22%) and teams (18%). Why spend a fortune and years of your life overcoming these challenges when you could acquire a startup that's already conquered them?
Related: How to Transfer Assets in a SaaS Startup Acquisition
That said, acquiring or building depends on whether you're a builder or scaler. You might build if that's what you love and where your expertise lies. However, if you're a scaler, you should acquire a startup that dovetails with your skill-set and lets you sync and scale with ease.
Other examples include:
1. You lack expertise or motivation to build
Success is dictated by how passionate or adept you are at something. Focus on your strengths. If you're a scaler, there's no point in forcing yourself through a builder-shaped hole (you'll just get stuck). Acquire a startup instead.
The same applies to motivation. You've probably heard of flow, that trance-like state of happiness where creativity and productivity flourish. Achieving flow through doing what you love feeds back into the pleasure of doing it, creating enormous momentum.
Even if you're a builder, for example, you won't enjoy all aspects of building. An acquisition, however, lets you choose a startup that needs what you enjoy doing most. As Steve Jobs said, "The only way to do great work is to love what you do."
2. You lack the time to build
When you acquire a company, you're buying time. Let's say you have a great idea but your job, business or other responsibilities prevent you from developing it. You might run multiple SaaS businesses, for example, to boost your chances of a life-changing exit.
However, being a serial entrepreneur, you're time-poor, and acquiring an established startup takes the pressure off you. This way, you behave more like an angel investor, focusing your strengths on scaling startups instead of building them from scratch.
You might also consider an operator to run the startup for you. Or acquire a suite of technologies for your business instead of building it. Both shave months and potentially thousands of dollars off the process of doing it solo.
Related: Free Webinar | Feb. 10: Buy-Side Essentials for M & A Transactions
3. You want to de-risk your next venture
When you build, you take on the risk of turning an idea into a business. Imagine all the late nights, setbacks and stress — with no guarantee of success. Going from zero to one is a lot harder than spring-boarding from a solid one, especially if you're moving into a new niche, product or service.
Despite the risks, building a startup teaches you a lot about entrepreneurship. Some of those lessons are worth the time, effort and dollars if you fail. But if you're risk-averse, failure might be difficult to recover from (mentally or financially), and in that case, you should acquire not build.
4. You want to iterate on something already good
You've probably heard the phrase, "evolution, not revolution." Iterative changes are both easier and more impactful as you have time to react to the world around you. Revolution, however, is a radical reimagining of a whole system, whose ambitions, however well-intentioned, might misfire in any number of ways.
Let's put it this way: It's a lot easier to acquire a good business and make it better than to start a business and make it good. Not only is it less effort, but it's also more enjoyable to ride upwards momentum rather than start from inertia — you'll see results a lot faster, too.
5. Your skills are more suitable for scaling than building
Just because you can build doesn't mean you should. You should only build if you enjoy it and are good at it. Otherwise, you'd have more success (and, dare I say it, fun) if you acquired a startup and then applied your unique experience levers to elevate it.
I recognize the cachet of being a founder, but it might not be right for you. Don't push yourself to build because you believe it's an entrepreneurial rite of passage. Whether you acquire or build, the ends are identical: You want the startup acquired for a life-changing sum.
Related: Why Seller Financing Could Save Your Acquisition Deal From Disaster
6. You've spotted an opportunity
Great startup ideas can simply be iterations of what already exists. A better service, better marketing, a more efficient business model and so on. Revitalizing a tired industry is a lot easier than creating a new one. It's even easier to acquire a flagging startup, fix its problems and then watch revenue double.
Opportunities are everywhere. Many startups plateau because the founder lacks experience or skills. Being able to do what the founder can't could turn the business around. Network with founders and fellow entrepreneurs to find profitable flipping opportunities.
7. You want to beat the competition
If you spot a new startup doing something better than you, why not acquire it rather than reinvent the wheel? At the very least, run the numbers: How much would it cost to engineer some new tech or refresh operations? Then compare that to the cost of acquisition.
Younger founders, for example, might be disposed to sell given the first startup is rarely the one that succeeds. You could, therefore, acquire something that would've taken you months to build at a commensurate or even discounted price.
Unless you're building a truly disruptive product or service (such as the next Uber), you'll find the best opportunity is to acquire niched startups. You don't need to work through that one- to two-year period to figure everything out. Instead, buy a profitable, niche SaaS startup, learn from the founder what worked, and then rinse and repeat until you've hit your goals.
