Startups are businesses in their initial stage of growth and development. They often face the challenge of financing in their early stage of growth and development. This challenge makes startups a likely target for big companies looking for expansion opportunities. When buying startups, big companies use some metrics to determine the startup fit.
These big guys tend to buy startups that have the potential for growth, with a competitive advantage, increasing market shares, etc. In buying startups, they are often on the lookout for some of the listed metrics.
Things Big Companies Look For When Buying Startups
Big companies often lookout for startups with the plausibility of growth. Startups with the potential for growth make attractive investments for large companies seeking expansion. Target startups are startups that can aid the big company in achieving expansion in market diversification and positioning. It will help them secure market share and increase revenue.
Also, they look for startups that will give the company a positive outlook. Startups with great growth metrics, business models, traction, and potential to scale are always likely targets for big companies seeking expansion.
Team And Talent
Startups with an excellent managerial team are plausible targets for big companies. This is often because the management of human capital to achieve productivity is valuable to companies whose key resource is human capital.
Human capital can be challenging to acquire, manage, and gain than technology and growth. Therefore, to manage this challenge, big companies often buy startups with proven talent in managing human capital. This is often cheaper and valuable to the company than investing in training managerial teams.
A good example of this was the acquisition of Jet-com, an e-commerce retailer by Walmart. The founder of Jet-com was a managerial leader at Amazon.
Intellectual Property And Technology:
Intellectual property rights are one of the most valuable assets of startups as it is the core of any business. Startups with well-established and well managed intellectual property assets are attractive investments to big companies.
The intellectual property rights of startups are important to big companies because when acquired, they can be used to increase market share.
Intellectual property rights such as goodwill and trademarks can be used to enhance the positive outlook of the products and services of big companies. Consequently, increasing revenue and profits.
Startups with well-patented technology disarm competition and help big companies dominate the market.
Market Share & Demographics
The market share of the startup is a major factor that influences big companies when buying startups. When companies want to enter a new market, they look for startups existing in the market. Buying the startup is often easier than trying to penetrate the market from scratch.
Also, big companies buy startups in their own market to eliminate competition and increase their market share.
Most times, the reason for the acquisition is control. These big companies want to monopolise their industry and, any new startup gaining ground, and acceptability may pose a threat to them. And often, the solution is to buy the startup off since they can afford it.
This factor may seem irrelevant but it is important to big companies seeking growth. In this age of technology, data has become a bargaining chip among companies when marketing its products.
Companies with a large database of its customers and prospective customers find it easier to market and distribute their products conveniently, and intimately. Thereby increasing its market share, revenue, and growth.
These assets are a goldmine for big companies operating in the same industry. The big guys know what these data can do to their market share and revenue when mined. This is especially important for e-commerce retail companies and fintech companies.
Goodwill and brand image is the most important thing when building a business. Startups who have been successful in building a positive brand reputation have loyal customers. These customers will always choose their products and services over competitors’.
It is an attraction and one of the things big companies check when buying a startup. It is cheaper in the long run to buy a startup that has a good brand image and positioning than building the image from the ground up. The startup will come along with loyal customers and if quality service and product continue to be delivered, they will stay with the brand.
Big companies seeking to diversify their products often acquire startups with complementary products or services. This is often done to gain a competitive edge over competitors in the market place. This can strategically expand network and market share thereby increasing revenue.
Big companies often eliminate competition by buying startups which pose a future threat. Once they see that a new startup, if allowed to thrive, will become a competition and affect their market share, they buy it off.
This is used by big global companies to maintain monopoly of the industry. Facebook acquisition of WhatsApp and Instagram is a typical example of how big companies crush out future competition.
Big companies often look out for startups with an efficient distribution network to boost the distribution of their goods and services. Besides this advantage, the acquired startup’s distribution network gives the company access to new demography, increase in market share, and revenue.
This could be targeted at startups in the same industry with a good distribution network or a startup in a different industry. For instance, a big company may buy a logistics startup company to have control over the distribution of its goods and service.
To reduce the cost of production, big companies often look out for startups producing the raw materials required for the production of their goods. This is known as buying the supply chain network.
Big companies are often motivated to acquire a supply chain network where the procurement of raw material is difficult to obtain. Thus, to have control of their raw material and reduce production costs, big companies buy startups focused on producing the raw materials they need.
Other miscellaneous factors that big companies look out for when buying startups include the size of the business, labor costs, knowledge, geographical location, and cost of running the business.
However, all these factors are hinged on the aim of the big company when buying startups.