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Should a new start-up aim for acquisition or niche?

My co-founder and I are getting ready to disrupt the beauty salon industry ($400bn+ globally) through a new on-demand platform. It will be a spin-off of my co-founders $50m online service business. I originally wanted to focus in on a niche segment of the market, where no one else has gone yet.

But my co-founder is thinking broad land grab for acquisition. We have partners in four countries, and while some markets are consolidating, the space is open in many markets. I like to think big too, but with early exit as your goal, developing a unique value proposition doesn't seem to make sense.

How do you choose the right strategy (e.g. two phases)? And what is driving the focus on early exit?

20 Replies

Tim Kilroy
6
0
Tim Kilroy Entrepreneur • Advisor
Analytics - LTV - Boosting Profits - Digital Marketing
I don't think that you start something with a goal of early acquisition. If you build for that, you will make choices that will honor the sense that this is a short term endeavor. You need to focus on making a business that is a success - and if you get acquired along the way, then hooray, but you can't start with that as a short term goal. And I am not sure how you can build any business without a USP. If you are "ready to disrupt" the industry, you already think you have a unique value...
Barak Cohen
3
0
Barak Cohen Advisor
Co-founder at tribe.one
Becoming a monopoly in a niche market is the way to start an get momentum and build value.

Chris Hoffmann
2
0
Chris Hoffmann Advisor
Chief Executive Officer/ Entrepreneur/ Vehicle Design
Focus on creating some small pilot program to test customer engagement. Do it in a way that will scale. Then talk to investors about how many customers there are and how your pilot can reach them. Sent while riding on one wheel.
Rob Gropper
3
0
Rob Gropper Entrepreneur
Director at PetHero, SPC - Member at Eastside Incubator - Principal at Tuxedo Technologies Group
pretty broad question and I'm not sure there's one right answer, but in general my preference is to focus narrowly first, build expertise in 1 narrow market so i can minimize the inertia and break/fix/pivot quickly then expand to the broader market. this assumes the narrow market is a subset and reasonable facsimile of the broader market such that phase 2 is focused primarily on scaling issues (people, tech, marketing/sales budget, etc.) rather than feature/function or product/market fit issues. I think the deciding factor is what is the shortest path to traction/revenue? The shorter the path to revenue the more options you have. Options are a good thing and increase valuation, the converse is also true. It sounds like you are predicating your 'attractiveness' to an acquirer on the size of your footprint. If you know your potential acquirers well then i'd look at their acquisition history to see if any patterns appear. One could certainly argue that an acquirer that already has a broad footprint doesn't need to acquire another company with a similar broad footprint. Their preference may be to acquire new, niche capabilities/markets that they can then leverage with their existing footprint or, more importantly, prevent a competitor from making the acquisition and doing the same. In general, i tend to think as a young company you are more vulnerable (to getting run over) if your footprint is broad and shallow than you are if your footprint is narrow and deep. Another benefit of starting narrow is that your CAC can be substantially lower due to word of mouth and reference marketing - it's just more cost effective to market to a narrow market than a broad one. You may also run into localization issues such as taxation, regulation, language, personnel, etc. in the broader market. you may also be able to fly under the radar of larger competitors/acquirers longer with a narrow and deep footprint.
Ema Chuku
4
2
Ema Chuku Entrepreneur
Designer. Product Developer. Founder @ NuPad
I want to understand this correctly, your goal is to create something (startup in this case) with a goal of early exit? Perhaps that explains the uniqueness of this/your startup? That's the problem right there with the startup industry..
And I think you should reconsider what is it you really want to do.

Joe Barrett
7
0
Joe Barrett Advisor
President & Co-Founder at OMNI Retail Group
I agree wholeheartedly with Ema and Tim. Having a goal of early exit will almost certainly derail your business, and if outside funding is required likely come through as your goal and deter investors as well.
Dean Harris
2
0
Dean Harris Entrepreneur
Chief Marketing Officer- Fractional CMO-
The short answer has to do with your capitalization as well as your success with the current business. If you have the track record or the capital to go big that will help inform that strategy. If not, you will have to raise capital that will be impacted on how you have done to date as well as the size and profitability of the larger, global market. Dean
Oliver Mitchell
1
0
Oliver Mitchell Advisor
Member Board of Advisors
Depends on the exit. You can always negotiate a payment schedule that allows for cash and ongoing interest in the backend. Obviously, these are interchangeable variables depending on belief in the future upside. To me Cash is always king, so I would try to to get the most upfront for you and your shareholders and then some royalty in the growth plan.
Rene Joergensen
0
0
Rene Joergensen Advisor
Board Member

Some good answers, thanks. Having acquisition as the goal also seems counter intuitive to me. But I see the word "exit strategy" everywhere and also on the first pages of funding proposals.

To Barak's point: how do you prevent getting stuck in the niche? E.g. if you want to go broad in phase two?

Rob: thanks, that's a really in depth answer. I like the focus on rapid traction, which seems to connect to Dean's excellent point about how the funding (or lack thereof) will make the choice for you. To Rob's point: my co-founder is looking at the acquisition history and patterns of market leaders, but this is also what I feel takes the focus away from going deep vertically. How do you balance this?

To Oliver's point: how important are exit strategies to VCs?

Oliver Mitchell
1
0
Oliver Mitchell Advisor
Member Board of Advisors
Being a professional investor is about exiting. This is not to say there are not good businesses created everyday that provide people (and families) with livelihoods, but the minute you take outside capital in the form of equity is the minute that you need to think about making your shareholders the maximum return on their investment. An IRR (Internal Rate of Return) is calculated by the net present value of cash, therefore if you have a short term exit opportunity that could be lower in dollars than the estimated long term potential, it could be significantly better for your shareholders (outside of tax considerations).
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