Why Acquiring Always Beats A Startup

It’s not a secret — it’s all about de-risked revenue.

No offense to startups and the culture around them; startups drive a ton of innovation. But this post is an objective comparison of the stats that clearly show why acquiring a company is usually a better option than starting one from scratch. An emphasis on usually as this depends on your personality, skill stack, and goals.

Now according to Investopedia, “As of 2021, 20% of startups failed in the first year, 50% within five years, and 65% within 10 years.”  And if you think that funding is your saving grace, The Wall Street Journal has found that 75% of VC deals fail.

Here are the top 10 reasons why startups fail:

• There is no market demand, and that’s why you should always test the market with the methods in The 4-Hour Work Week and a few hundred surveys.

• They run out of money due to a miscalculation in the runaway, poor execution, or force majeure.

• They don’t have the right team on the bus, especially in the beginning when massive action is needed.

• They can’t compete, and this can be in a plethora of areas, marketing budget, quality controls, and economies of scale.

• They get outpriced; this is especially true when it comes to physical products and commodities.

• They can’t control their costs.

• Their minimum viable product (MVP) is challenging to use.

• They have a product with no business around it.

• Lackluster marketing that doesn’t attract the right clients.

• First-time founders with no experience don’t always get guidance (Join an Incubator!).

Now operating a business is hard enough; having ten extra hurdles to overcome might not be the best use of everyone’s time, money, and energy. Especially if you already have skills or assets that can drive sales, like lead generation or industry-specific knowledge.

Mergers and acquisitions (M&A) have been around for decades, but the spike in boomer business owners retiring has left a ton of businesses without a succession plan; check out our Hyper Growth Via Acquisitions post for more details.

Here are the top 10 reasons that give acquisitions a higher success rate:

• Less risk, you don’t know what the previous owner had to do to get the business to the point that it’s at when you bought it in terms of the time and money invested.  

• More financing options, just to list a few; you have SBA loans, commercial bank loans, private investors, family offices, private equity, and seller financing.

• Instant brand recognition via all the previous marketing efforts.

• Instant employees, and after the great resignation of 2021, this is a lifesaver.

• Instant systems that have kept the company cash flowing throughout its existence.

• Instant contacts in the form of emails, phone numbers, and addresses.

• Instant profits that you can use to start improving the business.

• Instant sales that you can immediately start tapping into for reviews and referrals.

• Instant customers that you can start surveying, up-selling, and down-selling.

• Instant authority as the buyer, once you acquire and successfully operate a company, you as an individual have assets under management (AUM). And this means that funding your subsequent acquisition will be easier than the first.

And all of this adds up to the same capital investment being worth 5 times more with almost no risk of failure when placed into an acquisition where the free cash flow covers the debt service.

Now, ask yourself, if you had $25k to invest into a business, would you rather get a virtually guaranteed $500k ROI with an acquisition or a 10% chance to get a $100k ROI with a startup?

Even a compulsive gambler would have to read that last line twice.

And if you want the newest M&A activity and news delivered straight to your mobile device every month, get your FREE copy of the acquisition aficionado magazine here.