Large corporations are constantly buying startups. What’s the reason? Here are some of the most obvious explanations.
For the past few years, Google has been buying a company every 2 weeks. In each case, these acquisitions were “strategic” rather than “financial”, i.e. the company was acquired not for the sake of its financial flows, but for the sake of unique developments, team and market expertise. For large corporations, acquisitions are the most effective way to maintain their sluggish organic growth.
Here are the main reasons why large companies buy small ones:
1. Offer new products for their existing customers
The most common scenario of a strategic takeover is when a company with a large customer base buys businesses with new interesting products that are interesting to the same audience. For example, if company A with a large customer base buys company B with a good product but a small customer base, it can offer a new product to existing customers and quickly increase revenue with minimal marketing costs. This principle works both in the consumer market and in the world of complex corporate products.
2. Use new technology to improve their existing products
New product development is an area where startups always have an advantage over larger competitors. They have a stronger motivation to do something special and unusual, less internal bureaucracy, higher risk tolerance. In the end, if a startup puts a completely unsuccessful product on the market, it will close, and analysts will forget that it ever existed. If the product of a large corporation fails it can cost billions in losses and damaged reputation.
Now we even have tons of startups which start with one sole purpose of selling the company. They outsource their startup development, happily there are many companies which offer development services for startups.
9 startups out of 10 will try something new and fail, and the only successful one will immediately attract the attention of big business, which will be willing to pay a premium for all the risks that this startup has taken.
3. They want to get the smartest employees
Large companies constantly buy smaller ones for the sake of their employees. Silicon Valley even has its own unofficial “price lists” for specialists of different levels. Each qualified engineer on the team adds $2 million to the business value. If they have a doctorate in their specialty, it increases the cost. A team of 10 engineers with a proven ability to make quality products can be bought for $20 million even if the takeover results in its products being thrown into the trash. Such acquisitions are called “Acquiring” (Acquisition + Hiring) or more politically correct “Talent Acquisition”.
4. Get a new market for their products
You will have the best negotiating position when selling a business if people sitting across the table want to reach your customers. The strategic value of sales channels is so high that it often sidelines the economic feasibility of these channels. Turnover becomes more important than profit. Leading players like Amazon can afford not to show profits for decades and still continue to actively grow and develop due to new investments. This cannot be considered a pyramid in its purest form, although the scope for manipulation is huge. In the first rounds of Monopoly, it is more important for you to capture or collect strategically important street cards than to keep the money you received at the start.
If you are thinking about selling your own business, then you should understand what the motivation for buying a particular company may be. You also need to be able to explain to a potential buyer how a combination of the capabilities of both companies will cost more than each of them separately.