The term “Built-To-Flip” describes a start-up company, typically in the information technology (IT) sector, that is designed to be sold to an acquirer at the earliest opportunity rather than developed into a long-term, sustainable business. Such companies prioritize swift exit strategies, focusing on selling themselves or the underlying ideas instead of developing a product or service to maturity.
Historical Context
The concept of “Built-To-Flip” gained prominence during the dot-com boom of the late 1990s and early 2000s. During this period, numerous start-ups were launched with the explicit goal of being acquired by larger corporations. The frenzy around internet-based businesses, combined with readily available venture capital, encouraged entrepreneurs to prioritize rapid growth and acquisition over long-term business viability.
Types/Categories
1. Tech Start-Ups: These are companies in the technology sector, often in software development, hardware, or internet services, aiming for a rapid sell-off.
2. Biotech Start-Ups: Focusing on new pharmaceuticals or medical technologies, these firms may look to be acquired by larger biotech companies or pharmaceutical giants.
3. Fintech Start-Ups: Companies innovating in financial technologies often target acquisitions by larger financial institutions or tech companies expanding into financial services.
Key Events
- Dot-Com Boom (Late 1990s - Early 2000s): The explosion of internet-based companies encouraged rapid-growth strategies and numerous built-to-flip ventures.
- Acquisition Frenzy (Mid-2000s): Major tech companies like Google, Facebook, and Amazon made numerous acquisitions, many of which were built-to-flip start-ups.
- Investment Climate Changes (2010s): Venture capitalists began emphasizing more sustainable business models, although built-to-flip strategies continued to have a place.
Detailed Explanations
A built-to-flip start-up generally follows these steps:
1. Initial Concept Development: The founders focus on creating a compelling idea that has strong potential for acquisition.
2. Seed Funding: Early-stage investors are sought to fund the initial development, with the promise of a rapid exit strategy.
3. Prototyping and Beta Testing: A working prototype or beta version is developed to attract further investment and potential buyers.
4. Market Positioning: The start-up positions itself strategically to appeal to potential acquirers, often by demonstrating technological superiority, user base potential, or complementary business models.
5. Acquisition: The start-up seeks acquisition by a larger corporation that sees value in the technology or market position.
Importance and Applicability
Importance
- Economic Growth: Built-to-flip strategies can stimulate economic activity by encouraging innovation and investment.
- Exit Strategies: They provide clear exit paths for investors and founders, offering potentially high returns on investment.
Applicability
- Tech Sectors: Particularly relevant in rapidly changing tech environments where innovation can quickly lead to significant market disruptions.
- Mergers and Acquisitions: Useful in industries with frequent M&A activities, providing a pathway for larger companies to acquire innovation without in-house development.
Examples
- Instagram: Acquired by Facebook in 2012 for $1 billion, originally developed with strong acquisition appeal.
- WhatsApp: Also acquired by Facebook, in 2014 for $19 billion, exemplifying a strategic built-to-flip model.
Considerations
- Sustainability: Criticism arises from the often short-term focus, which can lead to unsustainable business practices.
- Economic Bubbles: Overreliance on this model can contribute to economic bubbles, as seen during the dot-com crash.
Related Terms
- Exit Strategy: A plan for the founder’s eventual withdrawal from the business.
- Venture Capital: Financing provided by investors to start-ups and small businesses with perceived long-term growth potential.
- Acquisition: The act of acquiring control of another company by purchase or stock exchange.
Interesting Facts
- Quirky Trends: Built-to-flip companies often become trendy acquisitions, leading to high valuation multiples.
Inspirational Stories
- Kevin Systrom (Instagram): His journey from concept to a billion-dollar acquisition highlights the potential success of a built-to-flip strategy.
Famous Quotes
- Reid Hoffman: “An entrepreneur is someone who will jump off a cliff and assemble an airplane on the way down.”
Proverbs and Clichés
- “Strike while the iron is hot.” This emphasizes the importance of timing in executing a built-to-flip strategy.
Jargon and Slang
- “Exit-rich”: Refers to start-ups making profitable exits through acquisitions.
FAQs
Is built-to-flip a sustainable business model?
What types of investors favor built-to-flip companies?
References
- Blank, Steve. The Four Steps to the Epiphany. Quad/Graphics, 2006.
- Ries, Eric. The Lean Startup. Crown Business, 2011.
Summary
The “Built-To-Flip” strategy focuses on the rapid development and sale of start-ups, especially within the tech sector. While this approach can drive significant economic growth and innovation, it also poses risks related to sustainability and market stability. As an effective exit strategy, it continues to be favored by investors and entrepreneurs looking for quick financial returns.
