Entrepreneurship is an incredible risk.
The risk of your livelihood in many cases.
There are certainly safer ways to make money.
But even with the daunting statistics widely circulated, many of us are unavoidably drawn to it.
We know only 1 in 10 new businesses succeed.
We know only about 1 percent of startups will make it through to the last stages of funding.
But those facts ultimately aren’t enough to kill the dream of taking on what Ben Horowitz calls, “the struggle to build something out of nothing,” in his book The Hard Thing About Hard Things.
We thrive on the idea of building something enduring and elegant.
Yet few early startups ever actually get built.
One research firm analyzed 101 startup failures and compiled the top 20 reasons they failed.
The top reasons on the list are quite revealing:
- They had no market-need
- They ran out of cash
- They didn’t have the right team
- They were out-competed
- They ran into pricing/cost issues
- They made a user unfriendly product
- They began with a product but no business model
View the list from the right angle, and a single concept emerges – the concept of synergy.
The startups that failed were missing that key element to real success.
What is synergy?
It’s that difficult to quantify but critical element that all the most enduring forms of human achievement seem to share.
It’s defined as the interaction or cooperation of two or more agents to produce a combined effect greater than the sum of their separate parts.
It’s what accounts for the difference between an unformed block of marble, sitting mute and anonymous in a quarry, and Michelangelo’s David, towering over visitors at the Academy of Fine Arts in Florence.
It’s what accounts for the difference between a group of athletes playing a few games of basketball, and the iconic 1995-96 season of the Chicago Bulls.
You can’t truly succeed at business without it.
Meanwhile, one form of entrepreneurship comes to mind that solves most if not all the problems on this list…
Acquisition entrepreneurship.
What’s acquisition entrepreneurship?
It’s a form of business that harnesses the power of synergy.
It’s the pursuit of success that, instead of creating something out of nothing, creates something more and something new out of what’s already there.
It’s the difference between you struggling to get your idea off the ground, and you implementing strategies and executing on your ideas profitably.
As entrepreneurs, we watch the stories of big buyouts and dream of being that person who built and then sold for astronomical figures.
From a distance and after the fact, the experience looks exhilarating and brilliant. We all want a piece of it.
The numbers are amazing – from a bootstrapped few thousand dollars at a kitchen table somewhere to an 8 figure deal a few years later.
There’s certainly a synergy that had to take place among the founding team members to get to product-market fit without running out of cash.
But acquisition entrepreneurship tells the story of a different type of synergy.
It’s the story of what happens when you buy then build.
And one that anyone who’s looking for success as an entrepreneur should consider.
It’s the synergy that happens when an existing company’s profitable business model and sustainable infrastructure combine with an entrepreneur’s innovative thinking and relentless drive to create value.
At its heart, small business acquisition is about creating value.
Let’s look at that list of reasons startups fail again and see how acquisition solves those very problems.
- You already have product-market fit and existing cash flow to work with.
- There’s an existing team and price strategy in place which is already succeeding.
- You have a business model that’s working and current products with which to expand.
You already have a platform on which to build something greater than the sum of its parts.
The Advantages of Business Acquisition
The goal for any investor is to realize a return on investment.
The goal of any entrepreneur is to manage and operate a successful business.
What makes acquisition a streamlined and elegant way to accomplish both those goals?
Several advantages come into play as you step into your role as CEO of a successful organization from day one:
- You have critical tools to work with that a startup doesn’t have.
An existing company on the market comes with customers.
You won’t have to begin at square one in the mind of consumers but will have brand awareness from day one.
You’ll have existing employees and operating systems that have been in place for some time.
You’ll have existing financial data and metrics in place.
All extremely useful tools with which to build value.
- You enter an established market.
When you acquire a small business, you acquire an infrastructure on which to build.
By inheriting an established market, you remove the anxiety of getting to market too early or getting beat to market share by a competitor with more funding.
You won’t be attempting the futile exercise of creating a market where there isn’t one.
And with target annual revenues over $1MM in most cases, you’re removing the bulk of the risk of starting from scratch.
- You have an existing model on which to innovate.
Many small businesses have been around for decades and often succumb to a type of inertia that keeps them profitable but stops them from moving ahead or in new directions.
These businesses may be paying a hefty opportunity cost daily, until you come onto the scene bringing fresh insights and your own unique set of skills.
Some businesses haven’t considered new strategies or proven concepts that save money and time or result in new growth.
Considering the vast innovations in marketing and tech in the last 10 years, there are often doors standing open and waiting for you to walk through as the new owner.
On the other side of those doors lie untapped profits and value growth.
Of course, this list of advantages isn’t meant to hide the very real risks inherent in any business venture.
When looking over the merits of a particular business, don’t ignore the vulnerabilities.
Just know that with the right strategies, some of those vulnerabilities can be used as fuel for growth. (More on this below.)
You’ll need to weigh the weaknesses you find against the skills and ideas you bring to the table very carefully.
A Quick Reality Check on Venture Capital
Venture capital has brought a great deal of innovation into all our lives, no doubt.
And brought the money.
In the first two quarters of 2018 alone, $57.5B of venture capital was invested in US companies.
Achieving the status of “VC-backed,” sounds like the holy grail of entrepreneurship.
Is it though?
While survival rates for venture backed startups are slightly higher than the rest, the real relationship between a VC fund and a startup is complicated.
To understand that relationship, you’ll need to take on an investor perspective.
For the investor, a startup fund is the ultimate high-risk investment, worth the risk due to the potential for enormous yield.
Investors are betting on one or two companies to pay off big.
In a typical fund, the returns come from only 20% of the investment.
That means the expectation going in, for investors, is that out of the dozen or so companies that receive funding, only a few will make it.
The rest are expected to fizzle out and die over the life of the fund.
May the odds be ever in your favor.
To make matters worse, VCs get paid either way. Investors pay hefty annual fees on the money they invest, win or lose.
And even if your company survives the early rounds of funding, you don’t call the shots.
The funds have the power to block any exit opportunity that won’t give them a 10-30x ROI.
When you go the acquisition route, you maintain control and end up with positive cash flow to work with right out of the gate without diluting your ownership.
When is the Best Time to Buy?
Once they’ve realized the extensive advantages of buying a small business, many soon-to-be entrepreneurs still have questions about the feasibility of doing so.
Questions like:
- Don’t I have to be rich to buy a business with that type of revenue?
- Shouldn’t I work for a few years in the same industry to gain experience first?
Most of the time, the answer to the question of when is now.
Before you make millions.
Before you fail “fast and often” at a string of startup ideas.
Before you work that nine-to-five into the ground.
Instead of deciding to toil away as an employee for years while you put away funds for an acquisition someday, understand the realities of financing the purchase of a profitable business.
Seller financing, personal loans, and SBA loans are all viable options.
It may be a sellers’ market right now, but why is that?
It’s largely due to a favorable regulatory environment and improved financing terms – all factors that make now a very good time to buy.
According to the NFIB’s Small Business Economic Trends data from 2018, optimism among small business owners is high right now.
This year’s scores, in fact, exceeded a 35-year record.
Among small-business owners as of August of this year…
Plans to increase employment were up.
Plans to make capital outlays were up.
Plans to increase inventories were up.
Clearly owners believe now is a good time to expand.
If that’s not encouraging enough, consider the recent changes to the SBA rules that lowered the minimum down payment from 25% to 10%.
Also consider that every day for the foreseeable future, another 10,000 baby boomers, who make up over 40% of all small business owners in the US, reach the age of retirement.
Retirement remains the number one reason owners decide to sell.
Meanwhile, do you have to be wealthy to consider buying?
Not at all. Typically, a deal involves 2/3 debt and 1/3 equity and looks like this:
These Mindset Shifts Predict Success
An acquisition entrepreneur seems uniquely suited to think and make decisions from the standpoint of an investor at the outset.
The payoff of this type of thinking will be a stronger more sustainable company and shouldn’t be underestimated.
Thinking like an investor marks the first mindset shift.
Buying to build also requires you to master the essential skills of operating a profitable company before you innovate – another massive indicator of future success.
It’s the correct order – choose a company for its potential ROI, learn to manage a successful company, and then innovate and take that company to the next level.
In the startup world, that natural order is reversed in a rush toward disruption and sometimes innovation for innovation’s sake.
As a result, many struggling founders lose perspective, confuse equity investment with revenue, and fail to build the basic skills required to sustain success.
All avoidable when you buy a profitable company as a platform.
Understanding the natural order of steps for successful innovation marks the second mindset shift.
Here’s the Truth About Innovation
Innovation doesn’t belong to the startup and SaaS worlds alone.
Across the board, businesses either innovate or die.
But of course, it’s not that simple.
Jim Collins, author of How the Mighty Fall, found that change for change’s sake can be just as destructive as stagnation.
For innovation to build value in a company, that requires a strategy.
The type of innovation associated with a startup calls for building a business model from scratch and creating new technology.
Think Apple.
But innovation doesn’t have to mean disruption.
The type of innovation most relevant to acquisition entrepreneurship involves leveraging an existing business model and serving existing customers in new ways.
According to Collins, the ability to innovate by embracing a potentially disruptive technology allows a company to not just endure but dominate.
What is the company’s core competency?
What other market segment can benefit from that?
If disruptive technology exists, how can it best serve existing customers?
And in what new ways?
Coupons and wedding registry are two old practices that have been made new again by companies who embraced the digital disruption of their industries and now dominate.
On the other hand, a quick drive past your local mall is a great reminder of industries that stayed the course at their own peril.
When you buy a company and step in as owner, you have a golden opportunity to combine an established market and ready customers with a solid innovation strategy.
All using the cash flow from the company.
It’s synergy at its best.
Like a sculptor, when you chip away at the rigid stone of industry tradition, you might be surprised at what new forms emerge.
The Future is Yours
Entrepreneurial success takes many paths, and small business acquisition offers a shortcut.
It teaches you to think like an investor while building the skills of a seasoned CEO quickly.
The risk is real but so is the opportunity to create value.
And the built-in advantages over starting from scratch.
You’ve probably heard this formula for creating the future… Act. Learn. Build. Repeat.
With one minor adjustment, it becomes a powerful form of leverage worth basing your career on… Buy. Learn. Build. Repeat.
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For more on acquisition entrepreneurship, check out the book Buy Then Build on Amazon.
