Why is it Necessary to Design Start-ups for Buyouts
You're reading Entrepreneur India, an international franchise of Entrepreneur Media.
21years after developing their first video game in school, Divyank and Bhavin Turakhia are billionaires today. They, recently, sold their six-year-old advertising tech firm Media.net to a consortium of investors in China for a whopping $900 million.
Both the brothers have created a range of businesses – cloud infra, web hosting, digital payments and voice & messaging services. Entrepreneurs like them are driven by the idea of creating new things. I am a serial entrepreneur, who had failed in his first venture. But, it didn’t stop me from trying yet again and I start my recruitment business.
After spending 25 years in the industry, today I often get to counsel students from IITs and IIMs, who aspire to be entrepreneurs. While discussing their business plans, I realize that most of them aim to create a million dollar business. Stories like Turakhia brothers inspire people, but only after they get into it they realize that it is very difficult to make the first idea a big hit - only one in a thousand can actually do it.
A more realistic goal would be to build certain scale for the company, where a bigger company would be interested in buying it. The amount from the buyout would be sufficient to start another venture from scratch, scale it up and then sell it. This can be a non-ending process. Starting the first company and then selling it off would be quite difficult due to lack of funds and expertise.
But, the experience gained from the first venture would help him create something more sustainable. If I had the choice, I too would have built for exit, rather than building multiple start-ups simultaneously and not being able to sell them.
Aversion for Exit:
Why don’t people take exits seriously?
People are tuned to believe that success in businesses means building a million dollar company. Speaking more realistically, most of the burgeoning entrepreneurs lack the skills required to take their company to one million dollar valuation. They usually come with a one-track focus to take a company to million dollar valuation but one can’t work single-handedly and win through.
Start Preparing Early
However, someone who has opted to make an exit should learn how to make the company fit for buyout and how to get investors.
1. You need to build the second line early so that the company does not fall apart when it is going to be sold. When you exit, the second line would be able to hold the reins of the company. The team should have the skills to be able to handle all the areas of business efficiently; the company should not be a one man show.
2. Look for investors from the very first year. First, the investors can come as angel investors. Later, you can scale-up the company and look out for the second investor. Also, if you start meeting the investors early, you will get know what they look for in companies to buy them out. Do not hesitate to appoint a person solely to source and engage with investors.
3. You have to determine your customer base at an early stage because it will in turn determine who your investors would be in the future. You have to work on the list of who would be your prospective buyers in three years time.
Research thoroughly and get in touch with them. Meet people at conferences and workshops and stay in touch with them and build relationships. After the first buyout, when investors realize that you are successfully exiting the business, they will develop confidence in your future ventures.
The second buyout would be significantly easier, both in terms of building the company and getting investors to buy it. So, if you want to become a million dollar company, you have to build and exit the first few companies at the least. When you are building the first company, you may not have enough money. But for your later ventures, you will have sufficient funds from the previous exits.
(This article was first published in the August issue of Entrepreneur Magazine. To subscribe, click here)