Why do Corporate Companies buy “unsuccessful” Startups?

Many entrepreneurs believe that if their startup doesn’t “exit” and make them rich, it has actually failed. But is that really the case?!

In my previous post, I suggested ways to sell those startups in what I call the “Tactical Exit” model. But looking at the other side of the coin, the startup which failed to exit may in fact be highly appealing from a merger and acquisition (M&A) standpoint.

So, why would a corporate company want to merge with or acquire such a startup, which even some of its own founders consider unsuccessful?

The short answer is the 3 T’s: Talent, Tech, Time.

What is the reasoning behind it?

Statistics shows that 9 out of 10 Startups are doomed to fail.

1. Talent — Each “ failed” startup probably had a team who really believed in the idea, studied it (sometimes to expert levels), developed a tech for it based on user feedback, and even had initial customers for it. But, like most startups, it got stuck. It couldn’t accelerate, most of the time due to lack of money.

Not having money for the startup, and still trying to make it work, can only indicate that it has a very dedicated team. Motivation and dedication are needed in any corporate company.

The term “acqui-hire” indicates the desire of a corporate company to build a strong team, and “make them stay”. In the acqui-hire process, the startup team agrees to stay for 2–3 years to allow time for the company to recoup the investment.

2. Tech — It is commonly believed that many corporate companies have the teams to develop whatever solution they want. So why should they buy one?

a- Developing something costs money (due to high salaries of the existing team) sometimes it is cheaper to buy readymade tech.

b- Startups usually use the “newest” tech and do not have corporate constraints, which means they better match the end users’ needs and requirements.

c- Each new developed tech needs QA (quality assurance) tests. Readymade tech already did that and is up and running.

d- Major corporate companies who buy startups are not tech organizations at their base, so getting readymade tech is a practical option for them.

3. Time — In the current market, timing is everything. Sometimes, after developing a solution, the market does not need it anymore, or has new and cheaper ways to get it. A working solution saves the company lots of time, and sometimes only needs corporate backing to accelerate it.

To conclude, by investing in M&A’s corporate companies can better match their target audience and keep up with the changing needs of the market. Those changing needs are usually the reason startups exist in the first place. Buying Startups keeps the corporate company in the market and gives them a footing in markets they had not targeted before. Otherwise, why would those companies have M&A managers placed?

Entrepreneurs, remember! When it is dark in one part of the world, it is light in the other. What you may consider as a failure may be a real opportunity for someone else.

So next time, before you close your startup, try to sell it. After all, why not give it a try?

As the old saying goes “If you pass next to a closed door it will not open. If you knock on it, it might”….