It is common for big companies to buy startups. Why, actually? If they are so big, why don’t they develop the new business’ proposition themselves? Below I will describe the reasons that I encounter in my day-to-day work.

Large companies can innovate in different ways. In another entry on this blog, I discussed possibilities such as forming a growth team, but corporations can achieve the same goal by acquiring startups. In this way, they stay close to emerging trends or establish a funnel for corporate venture capital investments.

"Why Don't They Build the Startup's Proposition from the Ground up?"

This is not the whole story, though. Often, the question is asked: “Hey, if these corporations are so big, and have so many resources, why don’t they build the startup‘s proposition from the ground up?”

Though the question is sensible, there are good reasons why companies decide to acquire a startup. Below I will describe the main reasons that I have encountered when asking C-level executives about this topic.

1. It's Too Late

A new proposition will create a new market. Take, for example, MySpace. Before its immense success, there was no social media market to speak of. But after MySpace became a household name, it was very hard for newcomers (including media companies with other specializations) to cut out a niche in this market.

This is the reason why in 2005 Rupert Murdoch thought it was feasible to buy MySpace for $580 million instead of building his own platform. Of course, now we know that at that time, one-year-old Facebook would have been a better acquisition, but hindsight is 20/20. (That is another lesson to be learned: you are never sure what the future will bring for an acquired startup.)

2. They Kill Their Competition

Students of both Machiavelli and movie fans know that you have to keep your friends close, and your enemies closer. Translated to the world of business, the acquisition of a promising new business can be killing two birds with one stone: corporations supplement their portfolio with a great new product, and they take their competition out of the market at the same time.

3. They Want the Team

One of the most valuable factors of a company is its staff. A legacy company can attempt to “buy” the best people of an emerging business, but that can cost a lot of time and money (and they may say, “No!”). Furthermore, chances are that these employees work perfectly together, so it can be risky to disrupt the equilibrium that they have established among themselves.

Hence, buying the whole startup in one fell swoop may be the most inexpensive and efficient method to get great talent on board, as C-level managers have assured me.

4. It’s All About the Client List

Though customer loyalty is declining somewhat, 65 percent of a company’s business still comes from existing customers. Especially when we are talking about niche markets, acquiring a startup can be the most cost-efficient method for a big company to get their hands on a high-end customer list.

5. Why Not?

Sometimes it is very simple: the big player has the money, the small startup has the talent and the ideas. By teaming up, both parties gain something. It is the same reason why you don’t grow your own food, but you go to the grocery. It is just how the economy functions in the most efficient and elegant way.

Next Step!

Now you understand why RevelX takes minority stakes in companies we believe in, either with our own capital or we arrange larger stakes through our extensive network of Private Equity, VCs, and Angel investors.

We like to become part of the businesses we invest in. Investing for us is both sharing risk and rewards. You can count on us to take responsibility and accelerate the growth process of your company. And, our commitment is long term. Please feel free to contact me if you are interested in working with us. Both startups and investors can apply!