4 Reasons Early Stage Acquisitions are Difficult

Ben T. Smith IV, co-founder of Merchantcircle.com & Spoke.com (btsiv.com), discusses the difficulty of acquisitions in the earlier stages. Four tips will give you reasons for these problems.

  1. 80% of the value is based on anticipated performance
  2. The cultural dynamic is strong among startup employees
  3. Every employee plays a vital role in the performance of the company
  4. Loss of greater opportunity

One of the more interesting opportunities in buying companies is me on to buy some extremely early before it gets too expensive. And you can really use that team to change the future trajectory of your company. Facebook has done this a number of times with companies like Parakey.

But they’re different. All the acquisitions are difficult. I mean there’s plenty of studies out there that say 75% of large corporate acquisitions are you know waste of money. Early said acquisitions are really even more difficult, and them more difficult for four reasons.

One is that in a startup, 80% of the value is what the startup is going to accomplish in the future not what they have built, not was already in place, but what they were going to build so the risk of you destroying is much higher doesn’t even exist yet.

So you really have a huge risk of destroying their future and never allowing them to become successful, and this happens of course all the time. You only have to look at what you know the Yahoo! Acquisition of Delicious and then Delicious being bought back for next to nothing or 50 other deals that have happened like that to see.

Second reason that they’re more difficult is that there is an extremely tight, strong culture in most startups. Yet, the team involved who has the culture is very small. So if you have a 20% team with a very strong culture and really believes that things should work one way. And then absorb into a 2000 person company, I don’t care how strong the leaders are in the 20 person company, it’s very hard for that culture and that DNA survived being absorbed into a large company.

A lot of you will talk about making sure you acquire companies who have enough of a critical mass and they can survive in their own just so that not only can inspire them financially but so they can protect their culture that made them successful in the past.

The next is when you’re doing a big acquisition, you usually identify 20 or 30 key players across even a billion dollar company to make sure they’re really locked in and or sent in the right direction because you could sort of figure it out if a few people leave or even 10% of your salesforces leaves, you could figure it out because you got a big enough team that you can sort of balance things out.

The problem with a startup is that a lot of times for any one role in the company, there’s only one player who does it. So that employs by definition key. They’re the only one who knows how to do it. And if you lose that one key person, the entire company can be less effective.

So you really have to focus on early stage company of how to make every employee retain and every employee excited about the future or risk the entire company coming apart. In fact, in small companies individual employees are very hard to replace.

And the last and most important reason is the loss of hope. People work in small earlier stage companies on the hope of taking over the world and changing the world. You know, as excited as you can expect them to be about the fact that they all just made a million dollars, you just destroyed their hope of making a hundred million dollars. And that loss of hope, not only on the financial side, but their loss of hope will really change in the world.

It’s hard to believe you’re going to have the same opportunity to change the world when you’re part of big company as when you were the small group of 20 people who’s making things happen every day. You have to protect the loss of hope both by providing you know good financial incentives in the long term as well as protecting their ability, their ability to accomplish division they have to start with.

Again early stage companies are great opportunity to change the trajectory of your company. They are great way to inject new DNA in your company but most of them fail and most of them fail because they’re focused on these four points.

The future, a lot of the value is tied up in the future and not the past. They destroyed the DNA and the culture of the company. They don’t understand that every employee no matter how generous is probably critically important to the company. And they destroyed the hope of the company employees have before they start and look for the result.

On the other hand, for anybody has used Facebook today and seeing that rich experience you have in the browser of how you know that all these unique things have the browser never had before had Facebook and had acquired an earlier stage company called Parakey, that might have not never happened.

Everybody who you know has an experience with YouTube and sees what happens. Had Google now and not been successful in acquiring YouTube, a lot of that probably would have never happened what you see today.

There’s a lot of opportunity to build value in early stage company acquisitions, but you have to approach them differently.