Startups and Corporates- Part 7: How can a corporate make a successful startup buyout?
By Elia Pradel - 30 January 2018
Corporate investing has been on the rise. In 2017, corporates invested around €6.2bn into European tech companies, equal to 32% of European VC. For corporates, such investments allow them to get the right tech and sometimes the talent from the growing start-up ecosystem, as well as keep up with the pace of disruption. Zappos (bought by Amazon), Whatsapp (Facebook), and Beats (Apple) are examples for successful startup acquisition. Yet, not all buyout turns out to work. So what makes a successful corporate acquisition?
There are various reasons why corporate acquisitions fail; they are mainly linked to conducting an incorrect analysis of the corporate’s needs and not understanding start-up innovation cycles.
Process and product innovation vs disruptive innovation
When a large company is contemplating purchasing a start-up there are three types of innovation they can buy into: process, product or disruptive innovation.
Process and product innovation will make existing corporate products incrementally better. A corporate can buy a startup’s services or products, but it may eventually be less costly to buy the venture altogether.
Truly disruptive innovation is harder to come by, and also harder to integrate, as it means the development of a completely new product or service. When buying into this type of innovation, the corporate should first establish whether it is truly innovative, and secondly, if the nature of the technology will make it easy or hard to integrate.
MVP stage vs execution stage
Start-ups usually go past two phases:
- Development, where a minimum viable product is developed and market-fit tested through early adopters.
- Execution, where the MVP is turned into a sellable product, processes and team are in place, and the venture is capturing market shares.
When a corporate initiates a relationship with a start-up in the development phase, it’s taking a high risk as the product is not yet finalised. Therefore, most corporates would ideally acquire a startup in the execution phase. However, issues arise when a corporate buys a startup thought to be in phase 2, while it is in fact still in development phase. For instance, a startup may have built an innovative technology, but may not have built a sales team and other functions strong enough to support its development.
For an acquisition to be successful, corporates should, therefore, make sure due diligence is properly carried out, the startup stage is assessed, and the investment team in charge of the acquisition is well advised by the team that will be in charge of the next steps.
Integration vs Stand-Alone
Finally, for an acquisition to be successful, the corporate needs to decide between integration and standalone: integration works well for IP, as well as the team if the members can adapt to the corporate culture. If the value of the newly bought asset lies in the user pools or the revenues, the corporate should consider a standalone strategy; the start-up benefits from the corporate backing to expand, but keeps a level of autonomy in the way it pursues its business.
Between 2010 and 2011, Google established itself as the most prolific technology buyer, with more than one venture acquired per week. It has since integrated and/or used services from more than 120 ventures, turning startup acquisition into an art.