The (hopefully, touchwood) million dollar question - it's not all spreadsheets and board meetings, but it's definitely not a game of chance either. Speaking to hundreds of startups over the last few months, we have identified a few personas and understood their personal motivation to “explore” a sale. The answers are varied but hopefully this gives you clarity as you think of your own startup or if you are a buyer, worry less about why is a startup on Done Deal, and delve more into, “I want to speak to them before someone else does”
There is so much more to it than just cashing out; it's also about creating liquidity for shareholders, giving employees a piece of the pie, and maybe even leaving room for that upside in the post acquisition journey!
Serial entrepreneurs love the 0 to 10 journey, but once they hit a certain scale, the excitement wanes and they are already thinking of the next idea. This is ideal for micro-saas startups who have cracked a certain product or innovative online consumer brands who have created a great product, told a story with solid brand value and repeat rates. Roll-ups and corporates are ideal acquirers for these companies, and we have seen a slew of deals in this space during the last few years. While valuations have dipped, there is still immense value to be created by scaling these brands from 1 to 100.
These adaptors are like chameleons in the business world. When they sense change is in the air, they're not afraid to sell and create liquidity for everyone involved. Regulatory changes can hit smaller companies hard, and a great product may need a new home to monetize. The gaming space in India is a great example, with recent tax regime changes, real money gaming startups found it difficult to keep scaling, but what they built may have immense value in the hands of a larger player or someone who wants to take the product to the global market.
Challenger brands have been forced to innovate to create wallet share from the MNCs, but it isn't necessarily a war. Strategic alliances can create immense value for both parties, with larger MNCs having typically cracked distribution and trust over decades, which can give an immediate boost to sales for smaller startups. ITC, Marico, Dabur, Unilever, Tata group and Reliance have been aggressively scouting for companies that have built niche vertical plays and created win-win situations by acquiring a stake in these brands.
This entrepreneur, facing a limited funding runway, may choose to sell their promising business to secure the financial support needed for growth. Reasons could vary from being on the wrong end of a funding cycle to having high customer acquisition costs which impact profitability while still having fundamentally solid gross margins. They seek buyers, such as investors or larger companies, capable of providing the required capital and expertise. This strategy ensures financial stability, business continuity, and the opportunity for continued involvement while overcoming funding challenges.