How enterprises can acquire a startup in a meaningful way

Corporate marriages have always been plagued with difficulties, especially alliances between unequals. Nothing can be more asymmetric than an enterprise setting its eyes on a startup. The nature of engagement could range from benign equity investment and preferential partnership to outright acquisition.

With just about 25 percent of acquisitions succeeding, the odds of a large company productively assimilating a fledgling startup are relatively thin, especially amid the rapidly changing technological landscape and customer preferences.

Startups in emerging technologies, such as Artificial Intelligence, Machine Learning, Augmented Reality/Virtual Reality, and Analytics, are particularly ripe targets for acquisitions. Since 2010, Apple, Google, and Microsoft, combined, have acquired more than 44 startups in AI alone, and this is for some of the highest spenders on R&D, globally, and with armies of engineers and scientists working on AI and other advanced technologies.

For the traditional industries, buying out a startup seems to be the only way to bridge the yawning gap between market realities and the firm’s competencies, as seen by Walmart’s acquisition spree in the AI space and Ford’s purchase of AI and robotics startups.

It’s a different question altogether as to how well such large companies derive value from startups in a meaningful manner. Is there a better approach towards the requisite marriage between the unequal? Here are three recommendations to gain the most from your next startup acquisition.

Adopt a clear portfolio strategy

According to research by McKinsey, an acquisition could fulfil broadly six strategic objectives: 1) improving the performance of the target company, 2) removing excess capacity from an industry, 3) creating market access for products, 4) acquiring skills or technologies more quickly or at a lower cost than they could be built in-house, 5) exploiting a business’s industry-specific scalability, and 6) picking winners early and helping them develop their businesses.

Most startup acquisitions are aimed at acquiring skills and technologies, and picking winners early. Think of what Google made out of the $50 million acquisition of Android in 2005.

Clarity on the right objective could lead to strategic alternatives, which might include partnerships, co-creation, equity investment, or a purchase.

A master of acquiring tech startups and assimilating those is Cisco Systems. Since 1993, Cisco has made over 230 acquisitions. Almost all purchases have helped the company plug an important competence gap, on technology or resources or markets, and has helped the company remain at the forefront of technological advancement in a rather unforgiving marketplace. Cisco broadly adopts these five strategic routes: build, buy, partner, invest, and co-develop.

As for an outright acquisition, Rob Salvagno, vice president of Cisco Corporate Development and Cisco Investments states, “Focusing on strategy first is what allows us to move at such speed once we do zone in on a specific acquisition target.”

In another industry, Disney has scripted a remarkable story of managing acquisitions. On the strategic logic of a buy-out, Robert Iger, Disney’s CEO, shares, “We do not feel the need to acquire assets just to get bigger or simply to wade into new space. We are prepared to move wisely and quickly in order to respond to rapid changes in the marketplace.” The company was able to create tremendous value from the acquired entities by adopting a clear strategy, quick decision making, and slow cultural integration. A case in point is the BAMTech, a direct-to-consumer streaming technology leader, where Disney ramped up its holding since 2016 to successfully launch Disney+.

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Exercise loose coupling

The very fact that there was an outfit that became attractive as an acquisition target is because it was managed well, and weathered difficult economic conditions better than the acquirer.

While acquiring niche firms, caution must be practised to not kill the soul of the target. As Robert Iger notes, “it doesn’t make sense for us to buy you for what you are and then turn you into something else.”

While acquiring innovation powerhouses, such as Pixar, Marvel and Lucasfilm, Iger ensured that each of these entities retains their creative independence while assimilating into Disney’s culture. The so-called ‘loose coupling’ in terms of office locations, routines, compensation structure, vocabulary, and other matters of culture led to much of the talent staying back with Disney.

Even the careful placement of logos at the opening credits of a movie, in this case placing Pixar before Disney, reassures that the incoming talent doesn’t feel short-changed and is given credit for a work well done. Disney even kept John Lasseter as the head of the joint studio, to ensure that Disney animation draws on Pixar’s competencies.

Cisco offers valuable insights on how to keep the incoming organisation and its talent largely independent through loose coupling. The acquired talent is not rushed into being one with Cisco’s culture, they are allowed their autonomy and unique practices.

As a result, as many as 80 percent of acquired team members continue to be part of the Cisco team three years after joining. Not just that, as high as 87 percent of key resources at the acquired company, including the founders and critical leaders, stay back after two years of acquisition.

This is a remarkable feat, considering the rapid pace of acquisition and the market opportunities that exist for incoming employees, and that the serial entrepreneurs would want to exit and start all over again, independently. Cisco offers the entrepreneurs sufficient autonomy to function under the umbrella of Cisco.

Expose the larger organisation to the incoming startup

Often when a startup is acquired, only a very small portion of the acquiree organisation gets impacted. It is typically the tech function, and that too specific groups within the function. The larger organisation remains immune to the incoming knowledge, work ethics, ideas, and intellectual capital.

Unless some of the ethos of startups get diffused far and wide across the incumbent, the acquisition would serve a very narrow function, and would rather help the acquired more than the acquiree. The non-tech functions, such as human resources, procurement, operations, logistics, IT and systems must get to imbibe best practices from the incoming entity.

On the delicate balance between keeping the target autonomous and at the same time learning from it, Don Harrison, Google’s vice president of corporate development, notes, “Acquisitions succeed or fail based on integration, particularly when we are trying to do something tricky, like making sure the team stays autonomous--syncing to get the advantage of Google’s resources and yet being kept separate.” At Google, there is earnest attention given to the retention matrix – how many of the incoming people stay back and get into new roles at Google?

Microsoft has learned just that. On becoming the third CEO of Microsoft, Satya Nadella brought one radical change after another, without losing the soul of Microsoft. One of the most remarkable changes was bringing in the outside-in voice across functions.

Once a year, Microsoft’s top 150 leaders come together for an offsite where they conduct product demos, share product plans, and reconnect with each other. Satya would invite founders of the companies Microsoft had acquired in recent years to share their struggles, triumphs and insights on building great products and enterprises. That is one way of keeping Microsoft nimble and diffuse the startup mentality in such a large setup.

A testimony comes from LinkedIn CEO Jeff Weiner, whose company Microsoft acquired in 2016. Jeff notes, “The Microsoft that has evolved under Satya’s leadership is a more agile, innovative, open and purpose-driven company.” And Microsoft has managed to keep LinkedIn reasonably independent.

Cisco ensures that the incoming employees do not remain in the periphery for long. At the company, as many as 20 percent of employees come from acquired entities, and such employees could be found across functions. By exposing the larger organisation and its myriad functions to the incoming talent, Cisco stands to gain more holistically from a target, and in turn, the company’s processes and routines evolve rapidly.

With the pace and size of acquisitions intensifying, and startups looking for more exit options beyond IPOs, corporates will have to be more careful on how they get the best from a purchase.

Reducing the engagement to picking up technology or some talent would be too narrow a focus.

The intent must be to look at bringing in the intensity of the startup culture into the firm, and which calls for laying out a clear strategy, avoiding a perfect alignment or a tight coupling, and exposing a larger part of the organisation to the essence of the new.