Post on 10-Apr-2017
For most established companies, exploring new
disruptive innovations is fraught with
complications because their businesses are
designed to execute upon a repeatable business
model, not to look for a new one.
To catch the next S-curve, most large and
established companies seek to acquire fast moving
and disruptive startups. The challenges and
questions posed however are plentiful.
Large companies often spend millions
acquiring smaller startups after the
startup has delivered most of its
organic growth or paying too much for
it relative to growth prospects.
One of the most devastating plays is
when the acquired
startup is integrated into the new
mothership, inheriting the parent
company's processes and values.
Very quickly, everything that made the acquiree great is destroyed. The
startup can no longer move quickly. The startup can no longer innovate.
The startup's employees no longer enjoy going to work.
Case Study: A financial services institution
paid $5m for a startup and spent $4m
integrating it into the parent's IT
infrastructure. Soon after, the startup
founders and chief dreampushers left as
they could no longer tolerate being
constrained by the corporate bureaucracy.
1 - Acquiring at the Wrong Time
Incumbents end up paying a premium for
companies who haven’t got much growing to do,
taking a hit to their share price in the process for
acquiring at a premium.
Yahoo! paid $3.7 billion to
acquire Geocities in 1999 and
eventually shut down the service
as its users defected to blogs,
Twitter and Tumbler.
Newscorp paid $580m to
acquire Myspace in 2005
and sold it just six years
later for $35m, less than
1/10th it paid for it.
How To Fix This: Adopt a portfolio approach by investing in multiple, diversified companies
at an earlier stage. Venture capitalists know that only 1 or 2 of the 10 companies they invest
in will succeed. This approach should be taken by companies looking to fund startups.
2 - Integrating the Acquired Company
Integrating startups into the mothership often sends
the cost of running the acquired company through
the roof. The values and processes that made the
startup great become replaced with bureaucracy.
Founders and employees
end up leaving and the
incumbent has paid a
premium for a potential
unicorn that quickly turns
into a lemon.
How To Fix This: If a startup is
being acquired for their
processes and values, avoid
integration at all costs. The
benefits of complementing big
company networks with the
speed and culture of a smaller
company are plentiful - keep it
that way.
There are no hard and fast rules when it
comes to knowing who, when or how to
acquire as the relationship between any
two companies is completely unique.
However, we should consider shying away from an inherent fear of failure that permeates
throughout large companies and instead mitigate the risk of paying too much too late.
Identifying startups for investment much earlier in their maturity
curve not only allows us to pay less for them but distribute our
startup investment across a diverse portfolio of companies.