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How to Design Your Startup for Acquisition

How to Design Your Startup for Acquisition

Getting Started by Kris Olson
June 16, 2008

In my inbox today appeared SandHill's newsletter with an interesting post by Jon B. Fisher, who recently sold his startup, Bharosa, to Oracle. Selling his startup to Oracle was his plan from Day One. He covers the considerations a startup entrepreneur needs to weigh if acquisition is the most likely exit route: how can you design your startup to have the highest valuation and be likely to get acquired? Jon calls this new thinking "Strategic Entrepreneurship (SE), which can " can maximize your chance of success while minimizing your risks."

The general philosophy of Strategic Entrepreneurship is to maximize your change of obtaining a return by exiting earlier in a planned way, using less capital as you go.

"The typical business model for a startup assumes that the longer a company stays in business, the higher its valuation will become - but that’s not always true for two reasons. First, the longer a company stays in business, the greater the chance of failure, either through changing market conditions or growing competition. Second, the more funding your startup receives, the greater the dilution of ownership for the entrepreneur. The longer you hold on to a company, the greater the risk that your valuation may decrease."

Tips from Jon:

Instead of trying to become the one dominant company in your market, Strategic Entrepreneurism says that you want to be the one company that a larger, and more dominant company, wants to acquire.
From day one, create and design your company to become an attractive acquisition candidate. Identify the companies that you believe would most benefit from acquiring your company.
You must rely on far less investment capital to guard against dilution. The more money you accept to startup your company, the more you’ll have to pay back to these initial investors before you can make any money yourself.
You must build your company’s products so that they can seamlessly integrate with a potential acquirer in mind.
Find a niche for your company... look for a crucial problem that needs solving and then provide that solution for a Fortune 500 customer that a Fortune 100 company would want to do business with or is already doing business with.

Kris Olson Microsoft Startup Zone Manager

At Microsoft, I focus on innovative startups on the Microsoft platform as well as the investors who back them. This year I am officially editor in chief of The Microsoft Startup Zone. Our goal is to convey the story of the business value of our platform and programs to future and current entrepreneurs in venture-back

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