How to Make a Successful Acquisition to Grow Your Company
The journey of building a startup is filled with milestones: first hire, first investment, first big client. However, what's not often talked about is the milestone of making your first acquisition.
I realized this when my company, Chime, began to think about an acquisition strategy for the first time. Chime is building an operating system for the real estate industry and we had primarily focused on rounding out our product set for agents. By focusing heavily on the buying side, we didn't have the capacity to also build out features for the seller side, and the lack of seller-focused tools was probably one of the platform's greatest weaknesses. There were already a number of great companies innovating in the seller space, so this seemed like a prime opportunity.
However, recognizing an acquisition opportunity is just the first step in what can be a long and complicated process. Just how long depends on the size of the companies involved, but there are always many moving parts.
Many companies, as they evolve, begin to look for other companies that can strengthen their offering and fuel their growth, but the "when," "why," "what" and "how" are not always clear. Here are a few things I learned while navigating Chime's first acquisition.
Be financially stable.
First and foremost, if you are going to start acquiring companies, you need the financial capacity to do it. The business has to be in a healthy place, generating revenue with strong product-market fit and strong investors behind you. Usually, this point won't arrive before the Series B. During the seed funding stage, you're just trying to find product-market fit and get customers and stickiness. The Series A is the time to step on the gas pedal and grow and it's at the Series B when you need to think about diversifying revenue streams and expanding the product and customer base, which acquisitions can support. Take a good, hard look at your company's financial landscape to figure out how much you are willing spend.
Determine whether it's the right time to acquire.
Beyond the financial capabilities, you also need the capacity in terms of team size and traction to make an acquisition viable, and most pre-Series B companies just aren't there. Acquiring another company can seem great from the outside looking in -- you need X feature or to expand in Y market, and here's a company that can deliver that -- but it's a ton of work. The integrations of team, processes, customers and procedures bring a lot of challenges to a startup, especially if you are not staffed appropriately to handle them. Don't underestimate just how time-consuming and resource-intensive acquisitions can be.
Ensure the company is the right fit for you.
If your startup is equipped to make an acquisition, the next step is to figure out what type of company to acquire. At Chime, we went through a mental thought process where we broke down our biggest channels of growth and opportunity, as well as what our shortfalls were. We also analyzed how long it would take us to build the products and features we were missing, which would enable us to speed up and hit that growth curve. It boils down to a time-to-market threshold. If you build in-house, how long will it take you to get competitive with other players in market? And do you have capacity internally to build something that is differentiated enough to get market share?
As I mentioned above, Chime recognized that seller-side features were a weak point for us and it wasn't feasible for us to funnel the internal energy and resources needed to build similar technology ourselves. Meanwhile, there were companies out there leveraging technology to create direct mail, telemarketing and online tools to recruit sellers. GeographicFarming was one of those companies and its product perfectly complemented our own. By acquiring GeographicFarming, we were able to get a best-in-class seller suite we could leverage to our advantage and integrate to make our products even better.
Treat your acquisition like a marriage.
Of course, to acquire a company, it has to be acquirable, meaning open to a buyer and within your price range. Once we identified the seller suite as a target, we went out and met with different companies in the space. The technology itself and cost were priorities, but so were "softer" considerations like culture, values, roadmap and vision. An acquisition is like a marriage, and just because a deal makes sense on paper doesn't mean it will actually work out. Acquisitions are never clean and simple -- they are complex transactions with countless facets to consider. If the two companies have radically different leadership styles, it could be hard for the employees on one team to adjust to life under such different management.
We met with a handful of companies during the acquisition process, including the leadership teams and the teams below, and we visited offices. We really tried to figure out what made a company tick and why it was successful, as well as where the points of weakness and points of opportunity were. Ideally during diligence, theirs match with your own. Go down a laundry list of diligence questions and don't take shortcuts.
Make sure it feels "natural."
Ease of integration is another consideration. It should feel like a natural fit. There are plenty of examples of companies that acquire startups and never end up doing much with their technology. That may be fine in an acqui-hire situation, but if you actually want to leverage the product, then the integration is where the magic happens. What will be required to integrate the companies? Will it be prohibitively difficult? Once the acquisition has gone through, there's going to be pressure to unlock value, but you don't want to diminish the value of what you've purchased. This is why a roadmap is so key. Take your time to outline the right roadmap from an integration perspective, and don't rush it.
Get everyone on the same page.
Finally, communication is key, internally and externally. You have to have a good communication plan in place. There are always sensitivities during acquisitions and things you want to be in front of -- what you are going to say, how you are going to say it and when. You don't want anyone to feel blindsided.
Of course, the flipside of acquiring the right companies is knowing when to sell your own. If you have been doing something for a while and the revenue has peaked or is starting to diminish, and you can't turn that around despite trying different strategies and tactics, it may be time to look to sell. Integrating your product into another company could unlock more value with a big customer base and open up access to more resources. Maybe you aren't a good fundraiser or the market is too small. Maybe you've just achieved all you can on your own, and joining forces with a bigger play could change the game.