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Monday, October 20th, 2008

The other reason startups need to tighten their belt

in: Exit strategy, Funding, Startups

By now, you’ve probably heard about the grim tidings from VC meetings this month. If you haven’t, well, let’s just say your investors would like a word.

In the wake of economic collapse, founders and CEOs are being told to reel in spending and prepare for the worst. There are two obvious reasons to do this: Less funding and lower revenues. But it’s the third, less talked-about reason that should really make you worry.

Update: Stacey at GigaOm has a great piece on this, looking at some hard numbers.

Read more…

Monday, May 26th, 2008

Plan B: Five reasons companies merge and acquire

in: Competition, Create, Exit strategy

Every startup dreams of making it big. And some do; but it’s vastly more likely that you’ll get acquired by a bigger fish.

This is one of the reasons VCs look so hard for exit strategies involving other people in your market. It’s a more likely outcome, and it means that if when things go wrong, you have a Plan B. It’s important to understand why companies want to merge and acquire within their space.

When acquisitions happen, particularly by public suitors, the business must be accretive to revenues in the first year, and must not impact margins. This is because the public company’s investor’s will scrutinize revenues and margins, and will expect to see an uptick. So the obvious motivations for acquisition are for getting new stuff to sell to existing customers, or for getting new customers.

When a market consolidates — meaning firms of roughly equal size acquire one another, or the bigger players roll up the smaller ones, different criteria dominate. This tends to happen in “nuclear winters” like the funding shortage many think is upon us.

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Strategic Marketing 101 talks about four kinds of products: Stars, Dogs, Cash Cows, and Question Marks. The classification comes from two dimensions: Whether the product line is profitable (showing things like decent revenues and good margins) and whether it’s growing (showing an increased number of users and buyers, with hopefully an accelerating rate of adoption.)

Everyone wants a star, and that’s what startups are after. Most startups are question marks: No customers, no revenues, and high hopes. If they can get both growth (customers) and profitability (revenues), things are good. But if they manage profits without accelerating growth, it’s a clear sign that mergers are in the cards.

Here are five other motivations behind M&A in consolidating markets. Read more…