Connecting The Dots: Mergers Of Early-Stage Startups

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Connecting The Dots: Mergers Of Early-Stage Startups

 

The following is a guest post by Ken Smith.  Ken is a startup marketing & strategy professional with leadership, consulting, and advisory experience in thirteen high-tech ventures with 10 successful results/exits.  You can find him on LinkedIn at  http://www.linkedin.com/in/kennethhsmith or follow him on twitter: @CareerEntrepnr

The explosion of co-working space has created an parallel explosion of would-be entrepreneurs. This is good for both the nation and innovation economy. But as any seasoned entrepreneur or investor will tell you, if you have a good idea for a business, it’s very likely that 100 other people have the same or very similar idea. And if you have a great idea perhaps 1,000 people are working on the same idea too. Lower cost office space (coworking, innovation center, etc.), cloud hosted everything, WYSIWYG tools and rapid prototyping applications, easy access to global networks of potential users and customers – well, let’s just say it’s a lot easier and cheaper to get a product concept to market today than it has ever been.merger arrow

 

Those same seasoned entrepreneurs and investors will also agree that the key to entrepreneurship is not having the best idea, it’s execution. I have been involved in more than a dozen startups and reviewed plans or advised dozens more. Often times when I see two teams going after a very similar market opportunity I look at the founders and can easily envision a great combined team. One start up has been founded by a marketing professional with ten years experience in a major consumer technology company, another by a tech whiz with a newly minted Masters from MIT, and a third by a born saleswoman who already built a small network of beta testers for her nascent product. But each continue to struggle to reach the critical mass or momentum required to break away from the pack because they are often working alone. Once the CEO hat goes on, it’s hard to take it off, especially willingly. Yet many an entrepreneur would do their fledgling company and their wallet good if they pooled resources with another entrepreneur – money, talent, and especially time – rather than seeing another startup operating in the same space as competitive.

 

Pooling technical resources can deliver a product with a more complete feature-set because of the different perspectives brought to the design and development process by team members with a slightly different but equally valid view point. Pooling capital can mean delivering a more complete product, or if minimal viable product (MVP) is attainable without additional capital then money can be focused on capturing beta testers and/or early users. Pooling talent increases your chances of attracting outside investors and shows with action that all team members are professionals dedicated to making the company successful rather than being CEO of their own startup. And pooling time means that by dividing up critical tasks and responsibilities more gets done faster and with less effort because team members can focus what time they have on doing what they do best.

If all of the potential merger partners are very early stage, especially if no company has any market traction or revenue, the best approach to a merger is a simple equitable split – 50/50, 25x4, etc. If one person gets greedy, arguing their contribution holds greater value than the rest, then you don’t want them for a partner now or at any stage - championships are rarely won by a single player. If one company has revenue and the other potential partners do not, then some small concession should be made for the entity bringing in the most important resource to continued success.

At the end of the day, the best early mergers are teams of professionals who have all seen the same market opportunity and have dedicated this segment of their careers to it. As you sit at your desk in a co-working space or innovation center and engage with other clever people at the coffee shop, consider the notion of joining forces, talk about it openly – you may find a willing partner, a kindred spirit, and greater success than working alone.

 

Posted by Dharmesh Shah on Thu, Aug 16, 2012

COMMENTS

Great article! Forming great "combined" teams is what we're all about here at CoFoundersLab, http://www.cofounderslab.com/. Our mission is to help as many entrepreneurs as possible find the right co-founder(s) and form lasting relationships. Ideas are one thing, but statistics show that team, execution, timing, and a little bit of luck are the real keys to the success of any startup venture.  
 
We couldn't agree more that a combined team of smart, dedicated, passionate people is often better than going it alone!

posted on Thursday, August 16, 2012 at 6:02 PM by Michael


Ken, 
 
this networking/pooling approach makes sense, now we all know that founders have their vision of the world, typically you can/should accomodate 2 or 3 co-founders at one company with complementary skills; I see it a big challenge to 'merge' more co-founders of more comps, especially at the early days of their businesses.  
Thierry

posted on Saturday, August 18, 2012 at 3:26 PM by Thierry Bodiot


The great thing about teaming up with people with the same careers is that you all have the same passion for the industry but have unique ideas to make it better.

posted on Monday, August 20, 2012 at 1:45 PM by ADI


Would a limited liability partnership structure work then? All in equal shares and decisions to be made unanimously. Or a joint venture structure in equal shares. Mergers involve assimilating cultures and in early start-ups, cultures of leadership egos are obstacles.

posted on Monday, August 20, 2012 at 6:44 PM by Gwyneth Tan


The idea is really great. The only issue to be tackled is the amalgamation of different visions and varied perceptions on marketing need. A good counsellor like you will be the real answer. 
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posted on Wednesday, August 22, 2012 at 2:37 AM by asish mukherjee


I agree, it's amazing how many persons are working on startups, and it's natural that A LOT of people is having the same idea at the same time. Unfortunately, even if many of them are open-minded to cooperate with the others, this is often hard to do, simply because they don't know about the existence of the others. Usually you discover that your product is not so "new" only when your production stage is advanced, and your potential cofounder is now a competitor.

posted on Wednesday, August 22, 2012 at 6:53 PM by Riccardo Raneri


Hi Ken Smith, 
This is really a well written post..

posted on Saturday, August 25, 2012 at 2:03 AM by Latest Technology


The best piece of advice would be to form an llc first, then change if you have to. In most states the filing fees are less than $500.

posted on Tuesday, August 28, 2012 at 9:42 PM by ADI Videos


Combining forces is a great idea, though it introduces some amount of difficulty based not only on the things you've identified here--roles (who will lead--ego can be a huge roadblock), rewards (equity is always a tough conversation). But culture and founder thinking preferences are also difficult hurdles to cross (e.g., what are the company values? how do we communicate to each other? what kinds of data are important?). 
 
For mindful entrepreneurs who are open and capable of having these conversations in productive ways, joining forces can be an exponential win. If they aren't capable of having hard conversations and making tough choices, a merger would be doomed to fail. Though, I suppose if they don't have those capabilities they are likely to fail anyway. 
 
Thanks for the post!

posted on Wednesday, August 29, 2012 at 1:05 PM by Joaquin Roca


This is definitely a great article on start-up management. To go one step further, I would recommend reading this other article about a top quality shared by most inspiring leaders. This especially highlights how both CEOs and consultants aknowledge their vulnerability and surround themselves with others who fill their gaps: http://www.consultingcafe.com/articles/the-most-important-leadership-trait-you-shun As Mr Smith underlines in the article: "championships are rarely won by a single player"!

posted on Wednesday, September 05, 2012 at 9:36 AM by Julia Williams


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