More than 50% of today’s S&P500 faces replacement in the next 10 years, while one in three listed companies are at risk of being de-listed in the next five years alone.
20th Century management theories are based on a hierarchical chain of command, a separation of functions and an emphasis on planning, budgeting, efficiency, process, risk mitigation and of crouse, maximising shareholder returns above all else.
This might have made complete sense in a time when the impact of technology change was not as pronounced as it is today and decisions could be made with a little more certainty about the what the near to middle term would look like. Throughout the 1990s, Moore’s Law took the transistor count per chip from one million to over one hundred million, this was representative of an increase of 99 million transistors. Sounds impressive, right?
However, from 2010 to 2016 alone, we’ve added over 10 billion transistors. That’s more than 100 times the growth in transistors we enjoyed in the 90s. And the rate is accelerating.
Moore’s Law is relentlessly surging ahead and bringing us to an inflection point with the convergence of technologies such as artificial intelligence, the internet of things, nanotechnology, robotics, automation, virtual and augmented realities and blockchain, amongst others, together with changing political, economic and social realities across the globe resulting in more uncertainty than ever before and posing a significant threat to every industry and business model.
Large organisations are finding themselves scrambling to stay survive and stay relevant, let alone compete and thrive.
Most large incumbents have developed systems that, not unlike McDonald's, make them adept at efficient delivery but not chaotic discovery, something inherent to breakthrough, disruptive innovation. Incumbents are adept at execution, but not exploration. With growing uncertainty, the ability to make long-term decisions with any degree of conviction or accuracy is perhaps best left to clairvoyants, simply because the rate of change is so fast.
Israeli historian and author Yuval Noah Harari says of AI and exponential technology growth, the scenarios in which AI goes beyond human intelligence are, by definition, the scenarios that we cannot imagine and therefore ill-positioned to plan for. This fact has prompted Elon Musk, Reid Hoffman, Sam Altman and others to establish OpenAI, whose goal is to advance digital intelligence in a way that ultimately benefits humanity.
But to offer a less dystopian and slightly more relatable example to us humble homo sapiens, think of all of the enabling technologies and business models we take for granted today that we would struggle to live without? Most of these didn’t really exist in any meaningful way as recently as 20 years ago (think search, the smartphone and cloud infrastructure for starters). Yet, the breadth and depth of disruption over the next ten years is likely to go far beyond these examples.
Thriving under chaos is something successful startups do well and it’s also something that best-selling author Tim Harford says helped Donald Trump win the election. “He made the primary campaign all about him and sucked the oxygen away from all of his rivals. They just couldn’t make headlines, and couldn’t respond quickly enough to what he was doing.” By the time his opponents had prepared their thoughtful rebuttals Trump was off to the next disorienting announcement and left them scrambling again to make sense of the situation and respond.
For large incumbent organisations, it’s not a case of simply flicking the switch on “the way things have always been done around here”, donning white shirts, red ties and embracing a, dare I say, Trumpian approach to innovation. Culture, mindsets, processes, systems, performance incentives and values at large organisations can often be the very antithesis of innovative thinking and if I’m a senior executive whose success has been pegged to having what appear to be the right answers, mitigating risk and maximising shareholder value and my core business is still, after all, making money today, then the prospect of genuinely moving from delivery to discovery for most large organisations is a grim one.
But it is not without its remedies.
Incumbents can attempt to re-design or create parallel processes and systems internally to support exploration but need to ensure that it doesn’t compromise the delivery of the core business. They can carve out a new business unit to deal with disruptive innovation, create spin-offs or spin-ins or they can invest in, partner with or acquire startups.
The latter approach is indeed the most straightforward and popular one with technology M&A deals in the United States alone totaling US$42.8B across 486 investments in Q1 2017. Globally, corporate venture capital participated in US$24.9B across 1,352 deals in 2016 with seed and Series A investments accounting for almost half of this so clearly large incumbents see startup investment as a significant part of their growth strategy.
However, in the case of acquisitions, the question of independence or integration is one most large incumbents still seem to struggle with.
Clayton Christensen urged caution in The Innovator’s Solution in which he wrote that if a large incumbent is acquiring a startup for its processes and resources, then the last thing it should do is integrate the targets as this will “vaporize the processes and values of the acquired firm”.
A better strategy, Christensen tells us, is to let the acquired startup stand alone and to infuse the parent’s resources into the acquired company’s processes and values. If and only if the target is being acquired for its resources only then integration makes sense.
Christensen sights IBM’s acquisition of telecommunications company Rolm as a classic case study. Big Blue’s integration of Rolm, whose value resided in developing and finding new markets for PBX products, destroyed the very source of the original deal’s worth.
More recently, I had a conversation with the Head of Digital at a large commercial bank who shall remain unnamed. He revealed that the organisation had spent US$4M acquiring a startup, only to spend an additional US$5M integrating it into the mothership, shrouding it in corporate bureaucracy and IT systems, effectively destroying the startup’s culture and cadence. This culminated with the startup founders leaving the organisation out of frustration. When all was said and done, over US$9M was invested into what fast became a train wreck with dwindling to little value.
Countless research papers and journals estimate that M&A deals fail to deliver on financial expectations up to 90% of the time.
With this in mind, the following guide provides readers with a high level overview of the when, how and who of corporate startup partnerships and acquisitions.
Perhaps more importantly though and to quote Simon Sinek, large incumbents on the investment trail should always start with why.
When deciding to invest in, acquire or partner with a startup, what is this decision really based on? Market sentiment? FOMO? Me too complex? Actual strategic alignment? Diversification?
When to acquire
Timing is another aspect of acquisitions that large incumbents appear to struggling with.
The instance of incumbents paying massive premiums to acquire or invest in later stage startups, who in many cases have already done the majority of their growing, appears to be on the rise. In some cases, this might make perfect sense where there is strategic alignment and where the resources of the acquired firm don’t exist in the parent or where the acquired firm provides other complementary business model improvements.
Quite often though, such acquisitions are ill advised and are driven by not knowing how else to respond.
Yahoo acquiring Geocities in 1999 for US$3.7B and eventually shutting down the service as users defected to blogs, Twitter and Tumbler or Newscorp acquiring Myspace for US$580M in 2005, only to sell it six years later for US$35M are case studies in the wrath of terrible acquisition timing.
Prominent venture capitalist and founder of Foundry Group and Techstars, Brad Feld, reiterates these sentiments, stating that “there are continuous cycles of non-technology companies entering into the world of trying to buy technology companies going back well before I started even my first company (Brad started his first company in 1987). And a small number of those companies extract significant value out of [those deals] because they buy well at the right time on their curve and they’re able to do something with it. And a whole bunch of companies don’t get a whole lot of value for their investment”.
Think of it as the buy high, sell low folly of corporate acquisitions. Something we’re so often told not to do when it comes to our own investment philosophy by the likes of Warren Buffett and Charlie Munger and other prominent investors.
Sadly, the instance of large organisations falling into the same hype cycle as individuals, paying premiums for sentiment driven acquisitions and investments and later suffering the cost shows no apparent signs of slowing down.
When a startup successfully raises investment from an entity or individual that can’t provide any tangible value above and beyond the color green, they’re said to have received “dumb money”.
I recently facilitated a pitch night for a legal-tech accelerator program. One of the budding legaltech startup founders was a former partner at a top-tier law firm. During question time, a senior partner in the audience asked him “why do you need the money?” in response to the $55,000 investment that successful applicants would receive for participating in the accelerator. I couldn’t help but laugh at the naivety of this question - as if money is somehow all that stands in the way between an entrepreneur and realising their vision.
If only it were that easy.
Who to Acquire
What entrepreneurs really need goes far beyond just mere funding but more importantly, extends to networks, mentorship and guidance, education, distribution channels, brand and reputation, resources, access to prospective customers to perform early stage testing and domain expertise. An investor that can support startups in one or preferably many of these areas is far more likely to be a value-adding “smart money” investor (insert quote).
When considering investing in or acquiring a startup, corporates can conduct a simple exercise to assess just how ‘smart’ their money is before signing on any dotted lines.
The business model canvas has become a popular idea development tool in recent years, but it’s utility goes far beyond helping us support prototype development and hone business models.
The canvas effectively breaks a business into building blocks such as distribution channels, customer segments, customer relationships, key partners, value propositions, resources, activities, costs and revenue models. It’s often used by startups in the early stages of building a business in place of a traditional business plan in order to get moving quickly and start testing assumptions. The canvas has also been gaining more prominence amongst corporate innovation teams.
However, it has applications beyond simply mapping out a starting point for a proposed business - it can help us identify how large corporates and their spinoff entities and even startups can best work together.
How to Identify Synergies
Step 1 - The spin-off or startup completes a business model canvas. Easy and familiar enough.
Step 2 - The large company or a business unit therein completes a business model canvas (or multiple canvases for different business units).
Step 3 - Map the spin-off or startup’s canvas over the corporate’s business model canvas and identify any overlaps (no dissimilar to a good old fashioned venn diagram, below).
By taking this approach, not only will incumbents help to identify strategic fit, but they will also have a roadmap to start helping from day one.
That bit in the middle - that’s where a corporate can help a spin-off or a startup.
A hypothetical case study
Suppose it’s 2008 and Southwest Airlines wants to diversify by exploring emerging business models in the travel industry and decides to partner with an up and coming startup from SF called Airbnb.
Their respective business model canvases at the time might look a little something like this (at a very high level for simplicity’s sake).
Very quickly we’ve identified a number of potential synergies.
Students and budget conscious travelers: First and foremost, the target market of a budget airline and Airbnb, at least in Airbnb’s early years was shared making for strong synergies to share audiences in a very complementary space
Travel agents: Southwest could introduce Airbnb to its network of trusted travel agents to explore an affiliate program
Marketing: Airbnb might be able to leverage Southwest’s marketing resources, for example its email marketing database, to get in front of its database of what would no doubt be hundreds of thousands of target customers
Online bookings: As a startup, it’s IT infrastructure may be ill equipped to scale and support growing traffic and demand. There may be scope to share or leverage some of Southwest’s infrastructure in this space.
24/7 support: Notwithstanding its budget model, Southwest may or may not be able to provide some level of customer support to aid the development of Airbnb’s brand, one of its key Customer Relationship strategies.
By identifying where the overlap is we can identify who in the large corporate we need to be working with to help us accelerate customer testing, leverage partnerships, increase reach and ultimately increase our chances of finding product market fit, today.
Mind over matter
Strategic fit alone isn’t enough. Things might look good on paper but how can we assure ourselves of the execution? After all, ideas are a commodity as Michael Dell famously said.
Venture capitalists invest in people first so ensure that you have a process in place to evaluate the people behind the idea as building a startup is one of the most difficult things one can do. On the topic of character, Paul Graham, founder of Y-Combinator, recounts what one startup founder told him, “the emotional ups and downs were the biggest surprise for me. One day, we'd think of ourselves as the next Google and dream of buying islands; the next, we'd be pondering how to let our loved ones know of our utter failure; and on and on”.
Building a startup requires mental resilience and fortitude above all else to ride the emotional highs and lows that come with defying in most cases, parents, teachers, your bank manager and societal conventions in order to do something fraught with risk. As an entrepreneur and somebody who has mentored countless startups, I am no stranger to lingering in the ‘trough of despair’ and it is not without clarity of thought and emotional intelligence that one successfully navigates their way out of this trough without making irrational decisions.
Aside from resilience and tenacity, look for startup founders to have broad business and life experiences, broad interests, strong networks, tolerance of ambiguity, vision, self-belief, flexibility. Curiosity is fundamental to exploration so look for your investment prospects to demonstrate that they’re interested in something a little more obscure than mainstream reality TV shows and pop-stars on their social media profiles.
Yes, startup investment goes far beyond just hypothetical numbers on a page.
How to work with startups
Corporate startup partnerships represent a massive clash of cultures. If there was an equivalent of author’s name’s Women are from Venus, Men are from Mars to support corporate-startup relationship development, I’d be amongst the first to buy it.
There are countless platforms that corporates can leverage to connect with startups such as Crunchbase, Angellist, Startup List and Gust. Add to this meet-ups, pitch nights, conferences, blogs and social media all making it easier than ever to identify and connect with startups doing compelling things in your industry or adjacent industries.
What’s really lacking is a roadmap on how to work with startups.
As the often-heralded Godfather of Silicon Valley, Steve Blank likes to say, a startup is not a smaller version of a large company.
A startup is a temporary institution looking to find product market fit, whereas a large company has already found product market fit and a compelling, repeatable business model. It’s merely looking to execute, maintain and incrementally improve upon this money-maker.
A typical startup founder might label a large corporate as a slow, time-wasting, monolithic organisation whose employees are laggards and care too much about mitigating risk, watching the clock and therefore spending all of their time in pointless meetings.
A corporate executive might label a startup as a band of cowboys (and cowgirls) moving quickly, breaking things and throwing caution to the wind insofar as risk management and due diligence is concerned. They might think that a startup is in the habit of releasing half baked products to market, with no methodical process being followed and figuring stuff out as they go.
There might be some semblance of truth in both of these assumptions, but therein lies the mutual benefit and if a large incumbent is serious about deriving value from startup partnerships, it needs to learn how to speak the language and align its processes.
Startups that learn the fastest win
Eric Ries’ statement is truer today than it was when The Lean Startup was released in 2011.
Startups rely on speed so much so that entire industries have popped up, seemingly overnight, to support the optimisation of almost everything.
From food consumed, calories burnt, ketone and blood oxygen levels, sleep patterns, moods, brainwaves, fitness levels, productivity, distance jogged and more, the desire to measure and manage is perhaps highest amongst startup founders and employees.
This extends to the use of automation and outsourcing tools which help startups play on 11, to quote the delightful Nigel Tufnel from mock rockers Spinal Tap.
If you’ve gone to college, scored a gig for a large investment bank and then quit to follow your dreams and work for a fraction of what you were making at a large firm and your business only got 6 months of lifeblood left before it begins its quick fade into oblivion then you’ll do whatever it takes to make things work. If you’ve only got five employees, you’ll monitor and optimise so that five operate as if they were 10, 15 or even 20 equivalent full-time employees at a large organisation.
This is what the entire growth hacking movement which is gaining serious traction in Silicon Valley and beyond was born out of. Necessity.
If you don’t have bags of cash to throw on expensive above the line, (and often underperforming) advertising and public relations campaigns, you’ll find other ways of getting the word out such as leveraging the audiences of influencers for free by providing some form of value.
To reiterate this point, Google Ventures’ Jake Knapp and John Zeratsky who co-authored the best-selling book Sprint, run a Medium blog called Time Dorks, all about making good use of time.
You’ll be far more diligent with every dollar and every minute spent.
Proceed with caution
With this in mind, anything that slows down a startup radically compromises its chances of success.
If you’re a corporate executive who likes to take meetings with startup founders because you feel you’re doing them a favour or simply want some light entertainment to get a break from your day job, stop. You just might be getting in the way of the next Elon Musk, Jeff Bezos or Mark Zuckerberg changing the world, or failing that, you just might be getting in the way of a budding young entrepreneur realising their own dreams and making life better for a niche set of consumers.
If you’re the type to lead a startup on insofar as investment, partnering or purchasing goes, and chew up their resources by asking them to “submit a proposal” that you have no serious interest in or budget for - please, just stop. Startups can’t wait for important decisions to go before steering committee meetings that might take months to coordinate.
Ensure you align on communication and expectations. Setting up a process or unit internally to move in lock step with a startup is key if you seriously plan to work with them.
Having said that, startup founders who have never spent any time in the corporate world would be well advised to educate themselves on how corporates work as well.
With that in mind, here’s a simple do and don’t chart for both corporates and startups working together.
The world is indeed moving faster than ever towards uncharted territories and large incumbents can learn and benefit a lot from startups that thrive on being adaptable and navigating uncertainty is par for the course.
Partnering, investing and acquiring startups all makes a world of sense in what is often a nonsensical world but only by taking the time to diligently navigate the when, who and how of corporate startup partnerships are large incumbents likely to derive any value above and beyond press clippings that the startup ecosystem is so damn good at generating.