Start-ups: Sell out

Do you have a grand vision of selling out to an incumbent? The type of deal that makes the front page of the daily business section?

 

The reason you heard so much about Google buying YouTube is that it doesn’t happen very often. We all need this sense of reality before we commence. But it doesn’t hurt to dream, or to build a business model with a buyout squarely in mind.

 

Having a successful business doesn’t mean someone (read here big conglomerate with large cheque book) will want to buy you. Especially if you’re another (slightly more innovative) version of them. They will think they can just beat you with a better version of your innovation later, or some flimsy brand extension. They may or may not be able to achieve this, dependant largely on the cost to consumers changing supplier once the innovation is entrenched. If the switching costs are low, then success might just be fleeting. So even if consumers want to give you money for what you provide, financial success doesn’t automatically give you a ‘sell out’ exit strategy.

 

To put things in your favour for a ‘sell out’ to occur, your objectives and strategy need to be considered before you start. You need to have something they haven’t got and can’t build. Often, it is something they viewed as too niche to contemplate – something that would take up a lot of human resources, rather than financial resources. This thing is rarely technology-based.

 

Generally speaking, incumbents only ever buy two things:

 

 

Everything else can be done. Widgets can be made and reverse engineered. New technology can be gazumped by the next version, even if patent protected. The truth is, patents aren’t nearly as valuable as distribution systems and brands, because once these are entrenched, the competitor has a very hard time replicating them.

 

Pepsi bought Gatorade – Not because they didn’t know how to make a sports drink. They bought the brand. They already have developed distribution networks for this category. What they didn’t have was a reputable brand in the sports drink segment.

 

Google bought YouTube – Not because they don’t know how to build a video-sharing website; they bought the eyeballs and traffic the brand gives them and a vehicle to use more tailored Google AdWords within a video sharing community.

 

Coke bought Neverfail Water – Not because they don’t know how to put water in a water cooler, but because Neverfail secured the distribution channel to offices. Neverfail also focused on a channel with a natural ‘lock out’ device – there’s only room for one water cooler provider in any given office. So once a critical mass of distribution was established and secured, they we’re well positioned for a sell out.

 

As entrepreneurs, we need to focus on building brands and distribution systems that lock out ‘me too’ rivals. Find a niche where there is only space for one player, either with the consumer or the distribution point.

 

If Coke’s attempts to crack the energy drink segment are any indication, they ought to just buy Redbull or V. Coke’s current failures in the energy segment include Lift plus, Sprite recharge, Burn, and it would appear that Mother is headed in the same direction. This is because, in the long run, most categories end up a two-horse race. Energy is done as a category in Australia. It’s game, set, match.

 

Coke believes it can seize a share of this burgeoning energy drink market by leveraging its unrivalled beverage distribution network. But the only way Coke can compete is to study its own lesson in office water. But instead of buying a distribution system, this time they need to buy a brand.

 

Nestle bought Musashi – Not because they couldn’t find any food technologists to make them a protein bar. They bought distribution in the health food channels, and a brand with health food ‘cred’ – something the Nestle brand could never gain by itself. They now have a real reason to leverage Musashi in traditional grocery channels, while opening up health channels.

 

You can only sell something an incumbent hasn’t got and can’t build. Contrary to entrepreneurial instinct, this is never about the product.

 

If you want to ‘sell out’ to a large incumbent, build a brand that means something they don’t. Focus on a distribution channel that they forgot.