#AFS

Why Startups can’t succeed without Acquisitions

February 28, 2020

Acquisitions are a crucial metric of thriving startup ecosystems that deserve more recognition. In a successful exit there are many winners. Acquisitions have immediate positive effects for a given startup and entrepreneurs. But it is the broader economic perspective that underlines why having more acquisitions pays dividends for society, the economy and innovation-at-large. Current policy debates should build on the important role acquisitions play and not undercut startup ecosystems that are just getting going!

Startups are different, so are their financial needs

Taking a step back, startups are fundamentally different to traditional companies. As a rule of thumb, startup entrepreneurs are usually using technology to break new grounds in an innovative way. They are more agile and flexible than established players, they have high growth ambitions and a capital structure that reflects this. 

To be successful, startups require different inputs. A clear and straightforward regulatory framework is one of them. Access to finance is another. While there have been improvements with access to capital in early growth stages, Europe still only catching up when it comes to bigger financing rounds. Acquisitions are an integral part for startups.   

Growth enablers

Founders should continue to be able to consider all paths for their startups. This includes mergers and acquisitions, also in the case that viable parts of a business can move forward in a struggling startup. Exits, IPOs as well as the entire suite of M&A activity is an integral part of a competitive and thriving ecosystem. An acquisition can also empower a startup, providing it with access to more data or networks. Think about Spotify’s acquisition of Niland. A forward-looking regulatory framework takes into account that there are many shades between failing and an IPO.  

Startups operate in fast-changing markets. Not every startup wants to fit in a traditional concept of companies. Entrepreneurs ultimately will do what is best for their product, the talent that built it, their communities and for themselves. Yet, if potentially a startup could not be sold, then the value of investing in it diminishes, as it will only pay off if the startup becomes a unicorn. This would have a chilling effect on the entire market, which is currently fulfilling so much of Europe’s innovative potential.

Injection of talent & capital

Fundamentally, acquisitions have proven to be a kickstarter for startup communities in multiple ways. Not only do they feed capital back into the ecosystem, but they also unleash high-skill talent and knowledgeable entrepreneurs back onto a more mature market. Contrary to the stereotypical image of a handful of founders jetting off to the Bahamas, the reality is closer to that of hundreds of entrepreneurs turned investors looking for the next big thing. 

Founding a startup is not a binary choice between becoming a unicorn or failing. Startup exits create jobs, increase investment and benefit the community.  How Skype inspired Estonian Mafia is a prime example. Another famous example of this is the Criteo mafia. In both cases, after a large acquisition an experienced group of entrepreneurs returned to the ecosystem and played a critical role in the launch of a host of new startups. It underlines that acquisitions are part of the startup lifecycle but also that they play a key role in terms of growing ecosystems.

Understand the startup lifecycle

Primarily, there needs to be a better understanding of the startup lifecycle. Acquisitions per se are a good thing for startup ecosystems. They are a sign that the ecosystem is healthy and working! Discussions on killer acquisitions and the implications for policy-making should not cast a shadow over thriving startup ecosystems. Commission Executive Vice-President Margarete Vestager is driving a broad competition reform for the European Union. A blanket demonisation of acquisitions would pull the rug out from under European startup communities.

This means not casting general suspicion over startup ecosystems whenever there is an acquisition. Doing so, for instance by adding an oversight step which could last half a year, would fundamentally disturb the attractiveness of startups for investors and take Europe several steps back in terms of access to capital for startups. Startup entrepreneurs think in terms of days or weeks. Their product or market might look entirely different within six months. A waiting period of several months can be the real killer for the acquisition. 

Legislators can be more supportive of a thriving startup ecosystem, also in terms of acquisitions. A start would be taking a generally positive disposition towards acquisitions. This can be coupled with an evidence-based approach when looking closer at whether there are really systemic problems with startup acquisitions. This analysis would be incomplete if it does not take into account the startup lifecycle, which has been fundamental to the growth of many startup hubs in Europe.