January 29, 2023

When Buying An Existing Business Is Smarter Than Starting Up A New One

Kristaps Ronka cofounded and exited his first startup in 2011. He now advises and backs companies, and runs NameSilo, a top Domain Registrar.

Launching a startup is a gamble. It may succeed beyond all expectation, but maybe not. The early days are especially nerve-wracking. Trying to establish proof of concept. Hustling for seed money or those first sales or clients. There’s a reason why only one percent of sea turtle babies survive to maturity – early days are minefields of vulnerabilities.

Even when you’ve successfully exited from a startup and you’re looking for the next opportunity, there are no guarantees of success on your new venture. However, if you’ve exited from one startup and done well, you have options. You don’t have to start a new business from scratch. You can step over that early-day pain and buy a growing business that’s already operating.

There are plenty of startups that have passed the initial startup stage that may be ready for their exit, and it’s rich ground to find new opportunities to acquire and grow existing operations.

While there are many factors to consider when deciding whether a target company is “right,” here are two threshold criteria it must meet.

Stick With What You Know

If your plan is to run the company, your background should align with its core business function. You will always need to bring on the right people with different expertise to grow the company, but that’s no substitute for your own knowledge and experience in the field. You need to be one of the company leaders with the knowledge of what the business is and how to run it.

The target company doesn’t need to be in the exact same space as your prior company. I co-founded a digital ad platform company as the CTO. When we sold that company, I had built C-suite experience in and knowledge about e-commerce, marketing and software development. That put a digital services company, like a domain registrar, right into my wheelhouse. It was a tech company where I could use my marketing and dev background to add value and accelerate its growth. 

You See Specific Opportunities Where You Can Add Value

Lifting a startup up a level or two from its current growth path requires major changes. When you assess a target company, its untapped potential should be obvious to you. 

If you can’t see where your added value opportunities are, you can’t be certain they exist. That makes the target a bigger risk. The company may not have untapped potential. In that case, move on or consider investing while letting a different management team takeover. The other possibility is that you can’t see the opportunities, which means it may not be the company for you to run.

Here are five areas to search for hidden value:

1. Needs to modernize operations. A generic case study for today would be a company that’s not utilizing technology well or at all.

2. Provides a poor customer experience that results in low customer lifetime value.

3. Limited company offerings that don’t include lucrative and logically related services or products.

4. Overlooked or underperforming marketing and sales channels, leaving the company ignoring key markets.

5. Inefficient operations limits capacity, leaving it unable to meet existing demand.

A case in point is the domain registrar business I was looking at in 2018, NameSilo.com. It offered domain registration, a reseller platform, a marketplace and a lot of tools for the domain investor. However, it didn’t have 24/7 online customer and sales support, or the add-on services that would complete a web services business. It also made only a limited investment in marketing. Even with all of that, the company still had strong, steady sales numbers. I knew there was a ton of unrealized value there.

Your Expertise Uncovers The Opportunities

Each business has a different path to becoming highly valued. You can only see where you can make a difference to get it there when you can take a 40,000-foot view. This eagle eye perspective is the first test whether your business experience can uncover a startup’s latent value. 

Without this view, you can’t reliably make an accurate determination of whether a startup is a good fit for you. If your goal is to earn high reward, play the odds and go with a startup that won’t force you onto a new learning curve.

Of course, nobody has the full scope of expertise and experience to grow the business on their own. You need to bring on the right crew of people quickly, people who collectively cover both the 40,000-foot view and can get deep in the weeds. Because you have the right industry experience, you already have a wide network to find the people to put into other leadership roles. Your first challenge of taking on the new business will be how exactly to find the specific people and induce them to join your adventure.

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