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Why Big Companies Buy Startups & How To Get Yours Noticed

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|Apr 1|magazine13 min read

Acquisitions of tech startups have always been pricey. Facebook’s acquisition of Whatsapp—a cross-platform mobile messaging app—cost the social media giant $19 billion. As companies grow into corporations, it’s fairly common for them to pick up small startups or startups that have just kicked off business. The one requirement? The startup must have a great idea.

Running a company isn’t always a startup founder’s goal, and funding is often a problem. While I’m not suggesting that startups market themselves as acquisition bait, being acquired by a larger company is not a bad thing and can help eliminate the stress of finding your next round of funding. s

Telstra and Facebook’s Path to Acquisition

Earlier this year, Australia’s own Telstra acquired IdeaObject, an Indian startup that builds software. The company has been present in the Asia Pacific for a few years, focusing on cloud products that allow hospitals to manage their information. So why is Australia’s largest telecommunications and media company snapping up a company focused on helping healthcare?

Telstra Health, that’s why. The healthcare arm of the business—launched in October of 2014—is interested in connecting patients, healthcare workers, hospitals, pharmacies and health funds so there is a more convenient way to manage health. For large companies, it is often cheaper to buy a startup or smaller brand specialising in the field in which it is looking to invest rather than spend the time and energy building something up from scratch.

Acquisitions offer corporations a new way to seek growth, and expand into new regions (like Telstra did with India) where the valuation of a company may be less than it would be on the home front. IdeaObject is Telstra’s first move into owning in the Asia Pacific.

Also, the diversification of Telstra’s offering allows the company to generate higher revenue and better margins than the company would have seen in just the traditional mobile and telephone services. For a company like Telstra, tech startups would most likely be the only thing that would catch its eye.

The social media giant Facebook also made news at the beginning of the year with its acquisition of QuickFire, a video processing and transcoding company. Facebook is now host to more than 1 billion video views per day, so QuickFire will be able to help deliver video more efficiently to social media users. The company can compress videos to lower bit rates—without sacrificing quality—and increase video quality—without increasing file size.

As Facebook’s video offers became greater and more complex, the company needed to expand its staff and innovations to keep up with its’ rampant video consumers. And since the social media platform has come to see view as a major element of its service, increasing quality has become important. A better video experience on Facebook could mean the company could take viewing time (translation: ad dollars) away from the likes of YouTube.

So acquisitions play key parts in major companies’ evolution: the business strategy allows these businesses to expand and acquire growth quickly, fill a need and become more competitive with others in their industries.

How to Attract Potential Buyers

Although there are plenty of people out there who have perfected building businesses to sell them, it isn’t a business skill that can be picked up overnight. And to be honest, you probably shouldn’t build businesses just to sell them: being passionate and engaged in the industry and caring about your product or service should be a business owner’s number one goal.

If you think your business offers something to the likes of the Telstras and Facebooks of the world, however, there are certain ways you can groom the business to make sure it is attractive to interested parties. There’s no new advice here—if you’re interested in starting a company, these are all steps you should follow regardless of whether you are planning on selling your business or not.

Having the right team is incredibly important, for any business of any size, new or old. It might be difficult for new businesses to be able to afford top talent from the get go, but employees should be a major focus of founding discussions, especially the management team. Potential investors look closest at the higher ups as the top factors when they are interested in getting involved with a new business.

Keeping everything documented from the beginning—yes, we mean day one—is also a good rule of thumb. What happens when you’re incredibly innovative startup is acquired for billions of dollars, and suddenly there’s a discrepancy over how shares will be split? Nothing good. Make sure accounting records are in order, a lawyer has looked over any sort of written out agreements and that everything is organised and easily accessible. Once you get the ball rolling with a serious investor, you’ll want to make things as easy on you and your staff as possible.

But to start: pick an industry that has impressive growth prospects and some existing competitors. There’s no way a field that will have future success is completely devoid of competitors. If no one is there, that means potential is probably pretty low. On the other side of the coin, a market with too much competition could be difficult to stand out it.

Building a business is a gigantic balancing act—building a business with the thought that an acquisition might come even more so. Preparation, organisation and a commitment and passion for your market and your company, however, will help you stand out to those investors.

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