Any entrepreneur will attest that customer acquisition is among the most significant challenges facing any young company. As such, startups must try a multitude of customer acquisition channels and methods to effectively grow their brand and acquire new customers.
As a young startup, my company Travefy -- an online group travel planner -- has a variety of customer acquisition channels including ads, direct sales and content creation, but we have also looked to new approaches including the recent acquisition of one of our top competitors – Tripeese.
In a fragmented startup ecosystem, a "roll-up” strategy of acquiring or merging with competitors represents a valuable and often overlooked way to considerably increase customers and consolidate knowledge and expertise. However, the big question facing many startups is when to recognize such an opportunity and what role your company should play in any such transaction.
From our first foray into growth through acquisition, here are our tips for recognizing and executing an opportunity.
Maintain open lines of communication. In any competitive environment, many individuals have the tendency to be closed off and “elbows out” in the way they deal with peers and competitors. This is no different from the hyper-competitive environment that often exists among startups within the same industry.
While this might seem like a sound strategy, in the end it can hurt you. Startup communities are tight-knit with so much shared learning (and you should always position yourself to learn as much as possible).
From day one, we have built personal relationships with our competitors. While it does not extend to confidential or material information, it does however involve shared discussions on the industry and the major challenges facing all the actors in the sector.
Know your strengths (and weaknesses). Introspection is very difficult. However, as an entrepreneur you should be keenly aware of your company’s strengths and weaknesses relative to your market and its competitors.
Do you have the best (or worst) software platform or specific features? Can your team outsell anyone with a larger customer base? The list goes on.
This knowledge is invaluable not only for your internal strategic roadmap, but also for the effective assessment of the value of any potential acquisition or merger. As a general rule, complements unlock the most value.
This can help you answer the most important question: What do you hope to achieve by acquiring a competitor?
Understand and align incentives. Before even considering the possibility of partnership, merger or acquisition with a competitor, you should first put yourself in their shoes as both a company and founder.
Just as you have identified your own strengths, weaknesses and goals from such a transaction, you should do the same from their point of view. This step will be easier and more rewarding if you have worked on better knowing your competitors.
Does your competitor have complementary needs that could have value from combination? Does your competitor want to grow their platform? Is your competitor exiting the market and only seeking to unload assets?
With infinite possible motivations, understanding the precise incentives of all players allows you to create a proposal that best aligns them.
Think like a distribution channel. As noted, a "roll-up” strategy of acquiring or merging with competitors is a powerful way to acquire customers and or consolidate industry knowledge. As such, when pricing any transaction (with cash or equity), be strategic and fair to all parties by equitably pricing whatever assets are being acquired and ignoring soft factors like PR value.
For example, if the primary transaction value is the customers, you should ask yourself "what do I pay per account to acquire customers using other channels like AdWords?" Similarly, if talent is the primary driver, look into what a similar industry hire would cost in terms of cash and equity.
With clear benchmarks like those above, an otherwise fluid discussion can become precise.
Overall, if structured well, mergers and acquisitions are a powerful way to speed up startup growth. For Travefy, our recent acquisition of Tripeese proved to be the alignment of two solutions with a similar vision, and we’re excited for the road ahead.