Small Business Strategies: Lessons from Instagram's Success
Three paramount things when technology companies look for an acquisition.
April 15, 2012 — -- A billion dollars — that's billion with a "b" — to purchase a company with only 13 employees and absolutely no income.
That's how much Facebook paid to acquire Instagram, a mobile, social photo application. That may sound outrageous, but c'mon, wouldn't you like to know how you can grow your startup company to be the next Instagram?
I live in Silicon Valley, where entrepreneurs' dreams of selling a startup business for millions are more common than visions of winning the lottery and with better odds. After all, just a few years ago, Kevin Systrom, Instagram's co-founder and chief executive who is now worth $400 million, was a barrista at the coffee house I frequent in Palo Alto, Calif.
I'm certain he made me a cappuccino more than once. Remember me, Kevin? Can I get my tips back?
Many of today's millionaires made their fortune by being part of a startup, but going from new, scrappy, small business to multi-million-dollar acquisition is still a long, long shot.
A number of my friends have had their own businesses bought, and I know a few others in charge of mergers and acquisitions for Silicon Valley companies.
I quizzed them on what entrepreneurs can do to position their companies to be acquired by the likes of a Facebook, Google, or just by a big competitor across town.
Remember the question that most acquirers ask when considering a company is build vs. buy. Is it cheaper, and faster, for them to purchase your company and whatever you bring them or to develop the concept themselves.
Many novice entrepreneurs think they have a terrific idea that's worth many millions. But unless your idea is carefully protected, as with strong patents, others can be inspired by your idea, take it and run with it. They don't need to buy. They can build.
Three things are paramount when technology companies go looking for an acquisition:
•People. Great ideas are easy to come by; great people are much harder to find.
Believe it or not, even Silicon Valley has a tremendous shortage of great talent, engineers in particular. Companies always are looking for talent acquisition, and when you have a terrific team, a team that works well together and is capable of building a company, that's an especially appealing target.
If you hope to be acquired one day, don't compromise on the quality of the people you hire now.
If you don't have the type of people that a great company would hire itself, it's hard for those owners to think about buying your company.
•Intellectual property, technology, inventions. If you have managed to create something new and develop it to a point where you have proven the concept, you'll be more interesting to another company.
This is especially true if you have good patent protection. Even without cutting-edge technology, if you've developed something impressive, an acquiring company may want to buy you to get to market sooner.
The officers may say to themselves, "We want this technology. We could build it ourselves and have it in a year, or we could buy it and go to market tomorrow."
•Market. The desire to grab a new or bigger market drives many acquisitions.
That was certainly part (but not all) of the reason Facebook bought Instagram. Instagram has roughly 30 million users. But you don't have to have millions of customers to be attractive to an acquiring company.
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