COLLECTIVE CAMPUS

Startup Acquisition 101 for Large Organisations

For most established companies, exploring new

disruptive innovations is fraught with

complications because their businesses are

designed to execute upon a repeatable business

model, not to look for a new one.

To catch the next S-curve, most large and

established companies seek to acquire fast moving

and disruptive startups. The challenges and

questions posed however are plentiful.

Who to acquire?

When to acquire?

How much to pay?

Integration or Independence?

Large companies often spend millions

acquiring smaller startups after the

startup has delivered most of its

organic growth or paying too much for

it relative to growth prospects.

One of the most devastating plays is

when the acquired

startup is integrated into the new

mothership, inheriting the parent

company's processes and values.

Very quickly, everything that made the acquiree great is destroyed. The

startup can no longer move quickly. The startup can no longer innovate.

The startup's employees no longer enjoy going to work.

Case Study: A financial services institution

paid $5m for a startup and spent $4m

integrating it into the parent's IT

infrastructure. Soon after, the startup

founders and chief dreampushers left as

they could no longer tolerate being

constrained by the corporate bureaucracy.

Value of this startup today?

Zero. Sound familiar?

WHAT'S BROKEN WITH STARTUP

ACQUISITION AND HOW DO WE FIX IT?

1 - Acquiring at the Wrong Time

Incumbents end up paying a premium for

companies who haven’t got much growing to do,

taking a hit to their share price in the process for

acquiring at a premium.

Yahoo! paid $3.7 billion to

acquire Geocities in 1999 and

eventually shut down the service

as its users defected to blogs,

Twitter and Tumbler.

Newscorp paid $580m to

acquire Myspace in 2005

and sold it just six years

later for $35m, less than

1/10th it paid for it.

How To Fix This: Adopt a portfolio approach by investing in multiple, diversified companies

at an earlier stage. Venture capitalists know that only 1 or 2 of the 10 companies they invest

in will succeed. This approach should be taken by companies looking to fund startups.

2 - Integrating the Acquired Company

Integrating startups into the mothership often sends

the cost of running the acquired company through

the roof. The values and processes that made the

startup great become replaced with bureaucracy.

Founders and employees

end up leaving and the

incumbent has paid a

premium for a potential

unicorn that quickly turns

into a lemon.

How To Fix This: If a startup is

being acquired for their

processes and values, avoid

integration at all costs. The

benefits of complementing big

company networks with the

speed and culture of a smaller

company are plentiful - keep it

that way.

There are no hard and fast rules when it

comes to knowing who, when or how to

acquire as the relationship between any

two companies is completely unique.

However, we should consider shying away from an inherent fear of failure that permeates

throughout large companies and instead mitigate the risk of paying too much too late.

Identifying startups for investment much earlier in their maturity

curve not only allows us to pay less for them but distribute our

startup investment across a diverse portfolio of companies.

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