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What You Need to Know Before Acquiring an Early Stage Startup

Acquiring startups can be an effective growth strategy for your business. It can allow you to expand your market share, grow your customer base, and add new dimensions to your business. However, there are some special challenges associated with acquiring an early stage startup.

At Northstar Venture Partners, we know about early stage startups because we work with startup owners every day. If you’re considering acquiring one, it’s essential to educate yourself and make research a priority. Here’s what you need to know.

What Makes an Early Stage Startup Valuable?

Let’s start with the attributes that make an early stage startup valuable and therefore, worth buying. There are many reasons that your company might want to acquire an early stage startup. Here are some of the most common.

  1. Technology or Ideas. The first big attractant for startup buyers is intellectual property. An early stage startup may not have much in the way of revenue, but if there’s a brilliant idea or a game-changing prototype in the mix, even a company with no profits can fetch a high price.
  2. Talent. When a talented individual starts a company, buying the company may be the only way to tap into their talents for your own enterprise. An acquisition can help you bring talented people into your organization, giving you a leg up on the competition.
  3. Demographics. When you have an established brand, you may struggle to expand your audience. Acquiring a hot startup can help you tap into their target demographic quickly.
  4. Platform. Even in its early stages, a startup can sometimes build a unique platform that you want for yourself. For example, you might see potential in a platform that could become the industry go-to and decide to acquire it early -- before someone else does.
  5. Distribution model. Sometimes, a startup represents a whole new way of doing business. A key example? Dollar Shave Club, which was acquired by Gillette after creating a new distribution channel (mail subscriptions) for razors and other shaving supplies.
  6. Your brand. An early stage startup might not have a lot of brand recognition -- but it’s possible, particularly when a company has a lot of buzz around it. Sometimes acquiring a startup with great word of mouth.

You might be enamored of a startup, but if you can’t quantify its value to you, then it may not be worth buying.

 

Take Due Diligence Seriously

All startups are not created equal, and early stage startups are largely unproven, which makes the risks of acquiring one higher than they would be if you were acquiring an established company.

The secret to minimizing risk is our old friend, due diligence. Due diligence is the research stage of acquisition, when you dig into the financials and other aspects of the company you’re acquiriting to make sure it is what it seems.

Your due diligence should include:

  • A complete review of the company’s financials, including its debts, assets, and inventory.
  • A review of all existing contracts, including confirmation that contracts may be assigned.
  • A review of all intellectual property, including prototypes, patents, and human assets. For example, sometimes IP is in an employee’s brain -- and that means you’ll need to retain the employee to get the IP.

It’s essential to take your time with due diligence. A casual approach may mean that you miss something crucial and if you don’t find it until after the acquisition, it will be too late.

 

Evaluate the Company Culture

If your acquisition plans include keeping all (or some) employees as part of your company, then you must make company culture a topic of discussion during the acquisition.

Not all cultures are a good fit. A company with a casual, fun culture may not mesh well with an enterprise with a formal, stuffy culture.

Company culture is an issue that doesn’t get enough attention, but it can make or break your acquisition in both the short and long run. If you want to have a successful acquisition, you should think about how you will integrate new employees into your company.

 

Have an Integration Plan

Even an early stage startup with few employees will need to be integrated into your company -- and we’re not just talking about employees. Here are some of the issues to consider:

  • Technology. If you have different operating systems, which one will you use? How will you train employees?
  • Workflows. How will you allocate work among employees? Do teams need to be realigned?
  • What’s the timeframe for integration?
  • How and when will you communicate changes?

You’ll need to have a concrete plan -- and you should include the topic of integration in your acquisition meetings. The owner of the startup you’re acquiring is likely to have concerns and it’s your responsibility to address them.

 

Conclusion

Acquiring an early stage startup can be a good way to expand your company and increase your profits. The key is to ask the right questions and gather the necessary information before you proceed.

Need help acquiring an early stage startup? Click here to work with NorthStar Venture Partners!

 

 

Julien Meyer

Written by Julien Meyer

NorthStar Venture Partners is led by Julien Meyer, MBA. A veteran of the tech community, Meyer is a 3x startup founder with 2 exits, a published author, a Harvard Business School Leading with Finance Alum and a Top Rated Startup Consultant (UpWork, 2018). Meyer advised on over 50 successful transactions before starting NorthStar. His experience has helped him understand the unique challenges that founders experience when trying to exit their ventures.