Lots of news lately about startups buying startups: Strands acquires Expensr,  Zyb bought Immity, BuzzLogic acquires ActiveWeave, yada, yada.

Why do it?  Why would a startup want to be acquired by another startup?  Where’s the liquidity in that?  Why would a startup want to acquire a startup?  Isn’t that eye off ball?

Increasingly, one hears about these transactions, and the VC’s are quite interested in talking too.  And why not?  Startups are companies too, and they can use acquisitions to gain most of the same advantages big companies gain through buying other companies.  Let’s look at just a few of the reasons it might make sense:

Liquidity

Let’s dispatch this issue up front.  Immediate Liquidity is usually not on the agenda for a startup acquiring another start up, but it may be greatly accelerated and it may beat the alternative.  If a struggling startup is having a hard time getting to the next stage, it may be easier to merge with a stronger startup than to keep going it alone.  This is particularly true in this age when many companies are building products that are more like features or modules of a larger suite.  If their market is hot, they can make it all the way to buiding their own larger suite.  If it isn’t, or if they’re too late to the party, they may have to join someone else’s game.

From the acquiree’s perspective, it’s all about it being better to have a smaller slice of a much bigger pie.

Talent and Technology

When I was working for Borland back in its heyday, this was the number one reason we acquired so many little startups.  Our ideal profile was to identify a team of brilliant technologists who had built a wonderful product but just couldn’t manage to develop the sales and marketing chops needed to hit it big.

Finding great talent was hard, and building out a great product even harder.  Acquiring a little startup that had already gotten critical acclaim from customers was a way to shortcut the need to start from nothing. 

Often such acquisitions make it possible to tackle new markets that weren’t in the original plans, or they may simply make it possible to accelerate the plan of record by not having to build everything from scratch.

Market Share / Critical Mass

This is another motivation for acquisitions that I’ve seen taking shape.  Momentum is everything, and if a couple of strategic applications can rapidly pyramid the momentum, it’s well worth it. 

Filling Out the Story

Very often customers are telling the larger firm they’re missing an important piece of the puzzle, and some smaller entity may already have the piece in hand.  It takes a lot of work to build out a big vision and all of its pieces.  If a smaller firm is available that answers a question your customers are asking that you can’t currently answer, why not do a deal so you can give it to them?

Expect More Startups Acquiring Startups

Expect to see more startups acquiring startups, it makes sense for many of the same reasons bigger transactions have made sense.  The real issue will be getting all the parties aligned on the transaction.  The critical issue in every acquisition is valuation.  Nobody wants to acquire a company that everyone agrees is worthless.  But, will the acquirer have an over-inflated sense of its own worth relative to the acquiree?  Can the respective Boards of the two companies grasp the vision for synergy and figure out how to do a deal that makes sense for everyone?

That’s the real challenge, and those who are good at it will have a powerful new tool to grow startups faster at their disposal.