The Not-So-Secret Formula To Startup Success
Today’s Start-up founders seem to all be chasing the big buy-out dream – the “1 Billion Dollar Buy Out By Google” dream.
The not-so-secret formula is:
- Have an idea
- Get funding
- Grow fast
- Get bought-out by a ‘strategy’ partner (ideally Google)
Which is cool. But it’s just not a sustainable business model – for the company or it’s investors.
It’s the ‘pray and hope’ method of business that seems to be in vogue right now.
Kind of like during the dot com bubble in the late nineties. The only difference now is that it’s private equity funding the start-ups, rather than public IPOs. So there’s less transparency, more gossip and lots of hype.
Nonetheless, the formula is the same. Have a cool idea, get funding, and hope that somehow you’ll make a profit in the future (or not even think about profit because that’s what the buy-out is for)
However, the cracks in this plan are starting to show. The shining beacons of startup world, Uber, Dropbox and AirBnB have recently had their valuations cut.
Which makes you wonder, what if the sale of your company falls through, what if the buyer is delayed or what if they never come at all?
What if they have internal issues, change their plans and their new plans don’t involve you?
What if when they decided to buy you, the money they offer is tiny?
The way to avoid all this is simple, but not easy.
The key is to have a product or service with clear profitability.
The buyer everyone’s looking for can only afford to pay you 1 billion bucks, because they’re going to earn more than 1 billion from it. They need to be able to see that profitability, not you.
It’s easy for a founder to fall in love with their idea and say that a bigger company can make millions or billions from it. However, it’s the buyer who needs to be able to see that.
So from an investor’s perspective, here are the 3 steps to making sure you’re big day comes:
Make a profit or a clear, believable and achievable plan to make it. This makes the idea more viable, gets more investors, and allows you to keep the company going even if you don’t have investors.
Have more than one potential buyer in mind. Betting on one buyer is a dangerous gamble.
Get to know the potential buyers inside and out – making sure your idea is a strategic fit in their eyes, not just your own. This is the hard part. It requires not just industry knowledge, but also knowledge of the potential buying company’s goals and problems (as they understand it). It’s not point creating a solution to a problem they don’t think they have.
With these things in place, whether the buy decides to come around or not, you’ve still got a viable business that can grow and service it’s purpose – to serve the customer and it’s community.