Some businesses are founded with the intention of being sold for big money in five, six or seven years’ time. How can you spot them?
This isn’t a post about a specific brewery – though clearly Cloudwater has been on our minds this week. Perhaps our observations don’t apply generally. And maybe they don’t apply in brewing at all. But let’s have them out anyway.
We’ve both ended up with day jobs where we’ve been working with or on behalf of a number of startups recently. They’ve been across a range of businesses including food production, professional services and technology.
What we’ve noticed is that, despite the range of sectors and business models, they all have certain characteristics in common.
Six tell-tale signs
First, they tend to have a c.5-year business plan which acknowledges the business may not make a profit for several years, if ever.
Secondly, they have external funding from private sources – either founders and family, or venture capitalists. Funding from the latter is usually raised in multiple stages with late funding being dependent on hitting certain targets relating to sales, number of customers, market share and so on.
When late-stage startups make surprising decisions, this may well be what’s driving it.
Thirdly, they put sales to the fore. While it’s nice for them to be able to show that eventually the business will be profitable, the sales-growth trajectory is more important.
Consequently (item four) marketing will be conspicuously important to the business early on. There will be highly sophisticated marketing collateral from an early point in the business’s life, such as a cutting-edge website, a full suite of professionally-designed brand assets and a strong social media presence. It’s not unusual for these companies to have permanent marketing staff before they have an in-house finance team, or even their own manufacturing capability.
Underlying all that there will be (five) a remarkably clear brand position and proposition, often focusing on an exaggerated difference between their product and established competitors. This is the essence of ‘disruption’ – at last someone is going to do this properly, cut through the bullshit and show the complacent dinosaurs what’s what!
This isn’t to say the product isn’t important. You certainly have to believe in it and be able to talk about it with convincing passion for several years. So, six, there will probably be a focus on new product development and heavy investment in it, at least in the early years.
What’s the endgame?
The final goal for this type of startup is usually a buyout of some description, in a set period of time – often five years.
Even if the founders want to stay in the business after that, they need to repay capital to early investors, so there’s always a ticking clock built in.
In the final stretch, you’ll often see a flurry of activity as they seek to maximise the value of the brand and of the company, which is what we were getting at when we last tackled this topic back in 2018:
There might be surprising partnerships with ‘evil’ companies; there may be contracts to supply supermarkets; or plans to have beer produced under contract, with more or less transparency… This kind of thing usually comes with a rush of blurb explaining how, actually, this way is even crafter because it widens access to the product, challenges the status quo, and so on, and so forth… The tying off of loose ends is another thing to watch out for, e.g. the sudden settling of legal disputes… The emergence of a dominant beer in the portfolio might be the biggest red flag of all.
The thing is, these companies will rarely, if ever, admit to their customers that the endgame is to sell it. After all, it’s a bit awkward when your marketing messages are all about what makes you distinct, different and superior.
That, we think, is why buyouts always seem to land as a massive surprise to customers and suppliers.
Contrary to what you might hear, people get just as narky about independence in other sectors as they do in beer. For example, we’ve both observed surprise and fury among boutique software users when products they love are bought out by a much bigger competitor. “I chose Quirple specifically because I liked their different approach and didn’t want to work with X-Corp,” they say, “and now I’m an X-Corp customer whether I like it or not? Quentin has betrayed me!”
It’s also worth saying that many businesses of this type never make it past the early stages. There is a high rate of failure with startups and even industry experts may never have heard of the ones that didn’t work out, or will forget them quickly.
What’s the alternative?
What does a growing business look like if it wasn’t built with that planned five-year-on payday in mind? Well, these businesses can still be successful, and still sell for big money, but their growth will tend to be organic, showing…
- Lumpy sales growth and production – growing in fits and starts instead of on a smooth curve.
- A reluctance to invest in slightly intangible things like marketing because it all hits the bottom line.
- A tendency to be behind the curve with new technology and production methods – they want to see it works before they invest hard-earned cash reserves.
As we said at the start, this isn’t really a post about breweries. We don’t work with breweries and it’s possible that not a single brewery has ever been founded as a startup with the aim of eventually selling to a larger competitor.
Perhaps every single one of those success stories (“Wow, great work guys, and well deserved!”) is a genuine surprise to the founders.
But it seems pretty unlikely, doesn’t it?