Founder, CEO and CIO of HGM Fund, managing investments in the financial technology, health technology and communications industries.
Founders who want to further develop their startups have the choice of buying an established business or building what they need from scratch.
Both channels can be good for achieving company growth, but I’ve found that entrepreneurs aren’t always sure which route would be ideal for them. The answer broadly depends on whether you are dealing with a product versus service, but smaller factors come into play, too.
Choosing Between Buying And Building
In the past, it typically costs more upfront to buy a business than to build one. The value is based on purchasing an existing book of business. Otherwise, you have to create customers, brand recognition, revenue and profits from the ground up. By acquiring, you can take something already running and add to it. So even though the upfront expense is high, in the long term, it has historically been cheaper than trying to out-market the acquired business over many years.
Of course, a business leader can still do this. But now, the gap between the cost of buying and building is shrinking. If a founder brings in a digital marketing company to do their campaigns, another company to do their HR and so on through all the needs they have, there is a cost to all of those pieces. So, the founder is usually left with a much smaller difference between buying versus building.
I think the bigger consideration should be the DNA of the businesses involved. It’s not always possible for a founder to acquire a company with the same DNA as their business, and if there is a difference in synergy, you will have to modify the acquired company to match your current business. This process can be expensive.
When Building Makes Sense
Getting a company’s digital footprint right from the start makes a huge difference to the cost of entry. And today, newer tools make this easier to do. Take options like Google Workspace or Google Meets. These tools provide a cloud-based infrastructure that lets people work from different cities, states and countries. Documents, contracts—it can all be shared.
The gig economy has also helped remove barriers. Founders can find companies that provide two kinds of services—the ability to hire people and the ability to pay people. Tapping these companies allows entrepreneurs to find good candidates to anchor their businesses wherever they want. Once they have this foundation, you can focus on elements like marketing and compliance, which requires local knowledge and effort.
Because new technologies have evolved and companies are becoming specialists offering services at fairly reasonable costs, it’s often possible for you to build and test before you buy. If you build, test and like what you see, maybe that’s the time to scale rather than acquire and be regretful.
When You Have A Truly Revolutionary Product Or Service
Now consider the uniqueness of the product. In the ’80s, I started a company that built PCs. Because PCs were the new thing back then, the company grew immensely year after year. We didn’t need to do much because it was so obvious that there was a hole in the market and that people were going to buy the new thing we had. Other examples of this might be the iPhone with smartphones or Facebook with social media.
My advice is if you really have something no one else does, consider building from the ground up. Starting new will likely be easier and less costly than trying to completely rework another company to do what you want to do.
Buying To Get Bigger
As already stated, buying a business has a big price tag from the start, and I believe founders who acquire are unlikely to get lucky and buy the next new thing. Building on what already exists isn’t bad compared to starting from scratch. It’s just different. It allows an entrepreneur to capture the momentum and revenue the acquired business already has in the market.
Consider strategic vision here. When you bring something completely new to the market, you must consider that new product. You cannot be distracted by a deviation caused by a purchase. But a founder expanding based on what has already been built will generally have more energy to ensure the acquisition succeeds.
That’s why services almost always make more sense to buy compared to products. It’s expensive to build services because the entrepreneur has to hire people who are already successful. When people are successful, you have to pay them top-dollar salaries based on their historical level of achievement. In the meantime, you face potential losses while holding onto the conviction that you will eventually win over customers who are already tied to other service providers, a process that could span days, months or even years.
Lastly, don’t forget about loans. Banks often see existing companies as being less risky than a startup because they already have customers, a proven track record, and a strong reputation. So, it can be easier to get a loan to buy a business than to start one.
If you don’t have the money to build, you still might be able to enter the market through acquisition. However, you have to be willing to work hard to shape the DNA of the business you buy.
Both Routes Need Great Management
Both buying and building from scratch can help entrepreneurs expand their companies. Regardless of which route a leader takes, I am a firm believe that bringing in specialists is a necessary action.
Hiring strong, talented managers can free up a founder’s intellectual strategic team to run the business and drive the company vision. Once the strategic team can set the everyday operational worries aside, you can develop plans that make the business significantly more agile and competitive.
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