Why do Corporations Acquire Startups?
First, I want to clarify what I imagine and understand from the acquisition and why it exists. For corporate and large enough businesses, there are several strategic growth options which are market development, product development, diversification, innovation, internationalization, etc. There are two main strategy methods for these players in order to realize these options:
- Organic Development: brings strategic independence and knowledge-learning but it is a slow, expensive, and risky investment since it relies on internal resources and capabilities.
- Acquisitions: In order to have a market expansion, increase its domination with consolidation, acquire capabilities, or achieve financial-operational efficiency and take immediate action, large companies purchase a majority shares of a target company.
As I mentioned in the first blog post in detail, startups disrupt the habitual ways of doing business and innovate the existing products, services, and value propositions. This is why their starting point is the problem in the existing market and their fundamental task is creating a comprehensive solution that meets the needs of the whole problem.
Since they focus on a narrow subject and specialize in it, startups find the opportunity to develop unique capabilities. In order for large companies to develop these capabilities, they are going to have to both make an investment with a low success rate and finance these R&D studies without any expectation for a significant period of time. Buying an initiative that has already created value in the market in order to take quick action will minimize the allocated time and the failure risk.
Until now, Microsoft has acquired more than 250 companies while Facebook has 80 and the number of M&A deals in the previous year exceeds 63,000. This frequency shows that it is more common and intensive than we estimate.
What kind of corporations may acquire a startup?: First of all, acquisition directly enables customers to accomplish backward integration while enabling suppliers to realize forward integration. Also, indirect competitors can acquire a startup in order to expand their target market and they have an opportunity to achieve horizontal integration. Lastly, direct white-shoe competitors are the main potential acquirer for a startup since they suddenly start to lose market shares due to being disrupted. Customers start to quit their products and services since the startup has a solution designed for the specific needs of the audience. Therefore, the acquisition is the most precise way in order to staunch the blood since they have limited time to stop the market share & profit pool decrease.
I would also like to mention a value that increases the attractiveness of startups in the eyes of large companies as much as their unique capabilities and reputable customer portfolios: “Unique Corporate Culture”. The most feasible example that can explain the importance level of corporate culture is the story of Amazon’s acquisition of Zappos. Zappos is an online retailer that focuses on shoes and boots and was founded by Tony Hsieh in 1999. Their differentiation point was happy employees and happy customers. Employees get training regardless of the job title and they can leave and take $2000 without any reason. Customers can return their shoes in 1 year and even, customer service tells where customers can find them if Zappos does not have the demanded shoes. All these services are all about making employees & customers happy. Amazon acquired its disruptive competitor for $1.2 billion and there was a contract that includes “formally recognizes the uniqueness of Zappos’s culture and Amazon’s duty to protect it”. My implication from overvaluation and this unusual contract is
“Amazon paid not for only profitable business, also for happy employees, happy customers, organically developed, sedimented, and take for granted attitudes and behaviors within the corporate culture of Zappos.”
In short, white-shoe corporations acquire startups in order to take agile actions. Especially acquiring the focused and core capabilities is the key reason behind such frequent acquisition news. Unique culture also enables startups to create value beyond these critically important capabilities and takes on a task as the berry of the cake that adds another flavor.
