After being part of three big exits (total value over $600 million) in three years, I am frequently asked, “What must an entrepreneur do to successfully build and sell a company?” I have one piece of advice I give—not necessarily what you would hear from an uber-VC—that I think is the key to creating and selling a business. It comes down to building a company another company needs.
Think about your customer
Just as it is crucial to understand the consumer need when creating a product, you must also understand why your company would be attractive as an acquisition target. In a competitive marketplace, you need unique selling points to gain market share. As I have previously written, your best chance of success is pursuing a blue ocean strategy; rather than competing with everyone else (in a red ocean) you create a unique offering. In other words, rather than create another hamburger store, sell fast food hot dogs and sausages. The same can be said for building a business that will have an exit.
The question you should ask is “Why would another company buy my company?” Although there are sometimes exits when a company wants to acquire cash flow, almost all deals are to add a competency, IP or product that the acquiring company needs. It could be one of the following:
- The ability to sell in new international markets, such as Europe or Asia
- Expertise on a platform (e.g., iOS or Win8)
- Understanding of an emerging business model (free-to-play, subscription, etc.)
- Unique marketing channels (e.g., affiliates, search engine marketing)
- Experience working with major brands and IPs
This is only a small list of factors that can make a company attractive to a potential acquirer. The important thing is understand what unique attributes you can develop that another company will need.
If instead you focus on building a business that just does what your competitors are doing but better (unless you achieve it with a unique technology or other non-replicable process), it will be hard to excite an acquirer. They will probably first try to copy what you are doing. Even if they are not successful in copying your processes, they are likely to feel that your company’s skills will not translate into making their company better.
Game companies often fall victim to this situation. Many game development companies are built on creating games that are more fun than its competitors or being a more efficient developer. The problem? They are trying to do what everyone else is trying to do. Even if successful, another development company or publisher will usually not buy a developer who is “better” (unless they have some secret sauce or IP that cannot be replicated). In the social game space, there are a lot of solid mid-tier social game companies who have multiple good products but no reason for another company to buy them.
It is not enough to build a good or great company
When I started my first company, my business partner and I followed the strategy “Create a great business and only good things happen.” That strategy works if you want to build a profitable company that you may be able to work at and enjoy your entire life (and even potentially turn over to your children). However, if you want to sell your company quickly, then you need to focus on building something to sell.
Case in point: It took us 17 years and three pivots to turn our company (Merscom) into an entity that someone (Playdom) wanted to acquire, despite being profitable 15 of the 17 years. Only when we started looking at the mergers and acquisitions market and understanding the profile of the companies being acquired, were we then able to not only evolve to fit that profile, but also find a suitable suitor within a year. Potential acquirers were not interested in our current cash flow; they were interested in the capabilities that we could add to their organization.
What I am not saying
First and foremost, this is not the strategy everyone should pursue when building a business. There are many, many satisfied and happy entrepreneurs who have created successful business in which they make a comfortable (or better) salary, set their own hours and control their destiny. These people are often happier than the serial entrepreneur; if that satisfies your needs, then build a business to achieve these goals. Only you know which approach will make you a happier entrepreneur.
Also, I am not suggesting ignoring profitability and revenue. Actually, it is quite the opposite. By building a profitable business, you have a longer runway and more leverage in finding a suitable suitor. You just need to make sure that the profitability and revenue fits a need from a potential acquirer.