I’ve often wondered about this. Looking back at my personal experience, I’ve sold 2 startups and acquired 7 (couple of acquihires in there). Buying was better and more fun than selling. We stumbled onto this approach purely by accident, and reasoning from first-principles. Here’s the story.
Back in 2015, we had just raised a Series A led by Sequoia. Six months after the round, our industry went to shit for regulatory reasons (fantasy sports), getting banned in a majority of US states temporarily. Our revenues went from $1m/mo to nearly $0 overnight. We had $12m+ cash in the bank from our financing. The choices were:
- Wait it out. Regulations and expensive licensing would eventually emerge, but would take 4+ years.
- Pivot. Use this cash to do build something else.
- Something else.
Most startups pick #2. The ability to build something impactful is why founders get into startups, and it is why they get funded. There is strong, systemic bias towards building-it-yourself, and founders are often blind to other options.
You aren’t brilliant. You are a dumb-ass (with a skill or two)
We had spent several years trying to find product-market fit at this point. It was humbling, and made it easier to accept that pivoting/building was not the default choice. It wasn’t even the right choice. We left our ego at the door (the hardest part), and realized that we may just not have the answer. We couldn’t build the solution from scratch.
Having sold a startup before, I always thought that my future startups would get progressively easier. This turned out to be false. Certain things get easier with experience — hiring, scaling, raising capital, selling, marketing etc. But finding product-market fit never gets easier, no matter how much experience or money you have.
First Principles
Have: Extra cash, high-functioning team, growth, experience
Don’t have: product-market fit.
Wouldn’t it be so much easier if we could just buy something that already had product-market fit using all the extra cash we had, and then scale it up using expertise we did have?
Yes, it would. So we did just that. We bought Twitchalerts, Streampro and other tools in the gaming / streaming space. And they eventually turned into Streamlabs.
Scaling up in growth and revenues worked over the next several years. Our team, after having gone through layoffs earlier, scaled up from 15 to nearly a 100. Users and revenues 10X-ed. Over the years, we also acquired Twitchkit, Ankhbot, Bitstream and others to offer even more tools and features to our users.
Streamlabs grew to be the most-used set of Livestreaming tools for Twitch and YouTube streamers. Recently acquired by Logitech.
Let’s look at an example
It’s better / more fun to source deals directly in a space you have interest and expertise in. The next best option is to work with brokers or listing sites such as Flippa, FE international, Microacquire, Quiet Light brokerage or Empire Flippers.
Here is a display ads and affiliate business based around voucher codes, currently listed for sale at $2.23 million. The valuation multiple here caught me eye — lower than the multiples applied to SaaS businesses (often for good reason).
Strong CAGR of 59% between 2017–2020. That’s great.
Highly reliant on SEO and the Google search algorithm. Not so great. Significant platform risk. Explains lower multiples.
Do I have deep SEO expertise to keep growing this at 59%? Or a thesis on how to 10X the business? No, I don’t.
Hence this is a quick pass for me, even though its likely a great business and an excellent fit for someone else out there.
The most important question to ask imho is how can you 10X the business? It forces one to look at deals from a growth lens, and from a place of optimism (“I’ll grow this a ton”), rather than fear (“How do I not screw this up after buying it”).
Why don’t other startups do this too?
I’m not entirely sure. Much has been written about acquisition entrepreneurship, and folks like Andrew Wilkinson, Jonathan Siegel and @agazdecki are much better experts on the topic. Great primer on the topic here and here. Building-by-buying is a tried and battle-tested approach.
Perhaps founders feel they have to build the solution themselves. Or more importantly, they have to build something new and unique. If it’s not new and unique, how can it be adding value? And if they didn’t build it, how can they deserve to be founders? 🤷
Save yourself a few years and get a headstart. My next business will involve some version of this. Yours should too.
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