Acquiring a start-up is becoming a popular way for large corporations to modernize internal practices, bring in technology and connect with younger customers. Integrating a start-up into a large conglomerate, however, needs to be done with care to deliver results. Corporate history is littered with examples of large corporates acquiring fast-growing start-ups, only to see them struggle post-acquisition because of misunderstandings, unrealistic expectations and cultural incompatibility.
To understand how large companies can effectively integrate fast-growing but culturally different start-ups, Mergermarket on behalf of Toppan Vintage spoke with three experts for their insights.
Toppan Vintage question: What are the most important things start-up owners should know about being acquired by a large company? How can they determine whether it will be a good fit? Leading industry experts weigh in...
Dawn Belt, Partner, Fenwick & West says: I’ve worked with a number of start-ups who have been or are looking to be acquired. In evaluating potential sale opportunities, startups need to do their “reverse diligence.” Sellers shouldn’t just be lured by the ‘sexy’ name or big brand of a buyer. When sellers are evaluating potential opportunities, they need to ask themselves a series of key questions: Will the team find a good home? Is the buyer interested in particular assets, IP, customers or something else? Is this an acqui-hire (buying a company for its talent rather than products or services)?
The start-up needs to know if the buyer is going to take the time to develop an existing project and if they are going deploy enough resources. They also need to know if they are going to run the company separately or absorb in into the buyer’s operations.
Jamie Leigh, Partner, Cooley adds: Start-up companies are generally thinking about selling themselves all the time. They're trying to build a distinguished product or a distinguished team in a market. In the tech industry, most large companies have some sort of playbook for how they like to do M&A, so if a startup company is being built with an exit as the goal, it's really good to start thinking about the acquisition phase early. Craft a theory for your company early on and lay out a vision for what the ultimate exit is, both internally and externally.
That process starts with partnering and investor discussions, going to conferences, kicking the tires and meeting people. Listening to what people say in these early conversations is really important because you start to pick up the way that certain acquirers view you or the landscape generally. Often people love to talk about their core development program or their successful acquisitions. They will discuss the partnering arrangements they've made that worked. The feedback the industry ecosystem gives you is readily available, but it is one of the things that is most often overlooked.
With regards to good fit, it is all about people. Assessing a good fit should happen way before any term sheet or price gets put on table. Obviously, price is king, but where a company ends up is becoming more important to investors from a marketing and performance perspective. Entrepreneurs who have exited two or three times already are also really only interested in selling to a company where they think their people will be taken care of. If you are a founder and you know that you never want to sell to a particular buyer, then you have to explain that very clearly and very often to your board of investors. It’s either that or you are going to have to be willing to really put the hammer down if that particular entity comes calling.
Arnaud Leroi, Partner, Bain & Company weighs in: Any founders or start-up investors need to ask whether the large acquirer is able to be a good parent and drive the profitability and vision of the start-up. When attempting to answer that question, a good starting point is to look at it from the other side, and ask why a large company is buying a smaller one.
Large companies recognize that they don’t have a monopoly on intelligence and that start-ups, which are not bound by the same processes and internal governance, are more agile and able to bring products and technology to market significantly faster.
Large corporates have become more attuned to what entrepreneurs want from their owners. There has been a shift in approach from buying and then obliging the start-up to follow the corporate strategy, to corporates asking what they can do to help a start-up grow faster and execute its plans better than if it was still independent. Once the founder of a start-up understands why the corporate is pursuing a deal, the picture on fit becomes clearer. There is visibility on integration. Will the company be left to continue operating independently or will there be a formal integration?
Key team members can ask what their future role with the company is. Is there a chance to run the digital channel of the business or take on a wider executive position? Is the focus to make sure that that the smaller, acquired company becomes a meaningful part of a bigger entity, or is the aim to maximize the earnout and then move on to the next venture.
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Joining Forces: How to Integrate Start-ups Into Large Organizations
Acquiring a start-up is becoming a popular way for large corporations to modernize internal practices, bring in technology and connect with younger customers. Integrating a start-up into a large conglomerate, however, needs to be done with care to deliver results. To understand how large companies can effectively integrate fast-growing but culturally different start-ups, download our full report.