How to properly buy a startup if you are a corporation
Since 2001 Google has acquired more than 240 technology companies, and only last year the corporation “absorbed“ about 20 startups. Another heavyweight, GE company, for 17 years has signed about 15 agreements. Russian large-scale business so far lags far behind in the production of innovations primarily due to ignorance of M&A mechanisms and failure fear. Dmitry Maslennikov, a technology entrepreneur and consultant on corporate innovations, tells how to keep up with the market, what innovative methods and tools to use for buying startups.
People who constantly read about mergers, acquisitions and business purchases, but are not connected with these processes, it is not easy to imagine the complexity of the situation for companies in this transaction. Buying even a small startup is not simple in terms of accounting and psychological comfort. But if large Western corporations got used to buy lots of startups and have already set up all the relevant processes inside, the Russian economy giants have much more to learn. The inconsistency of actions within the company-buyer very often becomes a stumbling stone in the Russian startup economy development. Due to the complexity of the procedures, some companies even refuse to buy startups in the future.
Why do companies buy a startup
Any large company in the market, sooner or later faces a need to look for innovation in order to continue further growth, rather than slip into technological stagnation. This can be done in different ways, including by creating innovations inside with the help of its own employees, but very often it is simply incompatible with the very notion of corporate culture. To innovate, we need an entrepreneurial spirit rather than well-established business processes and a clear hierarchy of decision-making. Therefore, companies often prefer to either attract interesting startups to their accelerator to get accustomed to it, or buy some ready solution, technology or the entire company. The latter is often easier, cheaper and more efficient.
There are many reasons for companies to buy startups. For example, the company wants to enter a new market or create technology in an unknown area; the acquisition of a start-up from the outside will work very well here. The purchase of a ready technology will also shorten the time to enter the market and will allow to press out existing companies with innovative potential. Sometimes it happens that the company and the startup fall in love at first sight: when the company understands exactly how this technology can be used in its business processes, and it makes no sense to waste time developing their own solution — it’s easier to buy the developed one. And sometimes it happens that the company has large sales channels, but lacks cool, market-relevant products and services; here, buying a startup or innovation will come in handy too. This will stir the market, press competitors and give their consumer the product that meets his needs.
There are lots of ways for companies to interact with a startup, from a purely financial point of view. You can buy an entire startup, together with employees, technology, products and customers. You can invest in a startup at early stage to be able to influence the company’s development strategy and the preferential right to use its products. You can buy only the startup technology (or a license to use it), implement it into the company, and the team and the startup will not be touched. Well, you can still wait until the startup does not go very well and lure the team into your company, without spending too much time searching for talented people.
Quite often, the companies choose the format of buying the entire startup, because it seems to them less risky, although this is not always true. The good news is that most of the risks can be prevented, it is necessary to properly build communication with the founders and the entire transaction.
In fact, you don’t have to reinvent the wheel to buy a startup. It is enough to follow simple recommendations before, during and some time after the agreement.
Before signing the agreement
First, prepare the inside processes of the company for such acquirement, especially if you are going to do it systematically. It is important that the company has a unified vision of interaction with startups, or even better, a confirmed and written strategy approved at all levels. Sometimes it turns out that management plans are broken because of some absolutely ridiculous reason.
For an adequate perception by startups, it would be better to think in advance of entering the startup community, so that you can be one of them. Here the key value is the correct PR. It is important to work well on your company’s image for the startups founders. Otherwise, it may turn out that the you can’t buy a startup you want, because the founder will consider you a boring company that will ruin any fresh idea.
The person you choose to interact with startups plays an important role too. It is he or she who should become the mediator between the innovations that are born in the market and your company. He or she will also be responsible for searching, evaluating effectiveness, negotiating with startups and launching pilots in the company. Distribute roles within the “search for innovation team“, agree who will help the startup to integrate and evaluate the effectiveness.
Having chosen a startup, decide on the form of cooperation. Will you buy only technology or entire startup? What is the most convenient and fastest way to launch the technology? If you buy a startup without a team, then will you negotiate with the founders about the integration support?
Understand where the money will legally go and how you will reflect the collaboration with the startup in the documents. The important point here is to remember that the terms of cooperation should be comfortable not only for you, but also for the startup: the founder can refuse the deal if he feels that your lawyers are trying to suffocate the startup.
While signing the agreement
Make a detailed plan on how to hold due diligence: who can evaluate the potential of the company’s collaboration with this particular start-up; and on what knowledge, parameters and evaluation methods it will be based.
While negotiating, when mutual interest in the agreement is already clear, determine the quickest and cheapest way for all participants to integrate the innovation (or start-up) into the company. Describe the patterns of all the necessary integrations: into business processes, marketing integration, technological and legal integration of the startup. If you buy a startup, technology or a license to use technology without a team, then discuss whether the team can participate in the initial integration of the project (usually 2–3 months) and on what conditions it is possible.
Determine the key success metrics, elaborate a methodology for assessing the effectiveness of the startup activities within the company. Agree within the company and with the bought startup on how you will consider the effectiveness of the acquirement and evaluate its all-round impact on the corporation’s business. Besides, try to take into consideration not only the obvious business metrics, but also indirect influence on the company’s image, corporate culture and other subtle matters.
It may seem that after buying a startup you only have to be happy about the signed agreement. But it’s not true. If buying a license and investing in a startup does not involve strong organisational changes within the corporation itself, then after it, there is a great risk of killing it inside the corporation. At this stage it is very important to make sure that the startup has successfully integrated into the business processes of the company and has taken its position.
Make sure that all the conditions that were spoken with the startup in the negotiations were met. It may seem obvious, but sometimes it happens that due to the linear management and internal bureaucracy, the conditions change and in practice have nothing to do with the inicial agreements. If you do not want the startup to run away at the beginning, it is better fulfil the deal.
If you bought a startup with its team, then work hard to create a comfortable environment for the entrepreneur within the company. Many companies now make so-called “innovation sandbox“ so that even in a large and deeply bureaucratic corporation there is an oasis where standards, rules and procedures do not work. But do not forget to leave an entrance to the company for the startup, so its representatives can seek help, advice or proposal at any time.
Agree with the startup on control and reporting that will be acceptable for both parties. This system should allow you to fit the startup activity in the company’s general activities and allow the startup to avoid processing documents and complex data collection.
If you have plans for further startup and fresh ideas hunting, then keep being active in the market and participate in startup events. When you have an agreement with one startup, the interest to your company as promising for collaboration will skyrocket. Use this time to find those technologies, innovations and teams that may be interesting for you in short or long term.
And another very important point. Do not be silent. Share your experience, talk about your know-how and the problems that you have had; this will increase your confidence and help to find a possible solution.