Disruptive innovation is hard to incubate via organic efforts or via acquisitions. Either organic or acquired innovation is often at a different stage than the rest of the business, which creates natural gaps that are not easy to bridge. Acquired companies or internal projects that were successfully piloted and reached a minimum critical mass are suddenly subject to the complexity of a larger organization that is at a different stage in their lifecycle. These acquisitions often result in failure and only 20-30% of the over $5b spent in corporate acquisitions are ever successful[1]
Big companies face challenges either taking to market or monetizing innovation. It is hard to move fast enough due to the legacy constraints they face, while that legacy adds complexity to integrating new organic or acquired IP. Given this dynamic innovation has become rather hard.
Acquisitions is core to Corporate growth strategy and given the complexities of integrating new IP, new people or a fresh user base, when they buy, the asset needs to be big enough to matter and then the price will reflect that. If the asset is too small, seldom are integrations successful as there is no framework for applying stage appropriate resources to the acquired assets. The dynamics of high performance teams, business dashboards, development cycles, go to market and business development are different at the $1M to $10M, $10M to $50M and +$50M stages. No $100M business is born that way. All businesses start out as ideas that gradually mature to realize their potential.
In most cases, corporate mergers and acquisitions are managed following a financial framework where a P&L or cash balance does not tell the whole story. In most cases, people evaluating those deals have had no experience running a business through the different stages mentioned above and that causes them to underestimate the nuances of execution post acquisition.
As Jeff Raikes often said in our operational reviews at Microsoft, “we often overestimate what can be done in the short term and underestimate the long term impact”. In my experience with corporate M&A and venture capital or even early stage investments, P&Ls and cash flow projections are usually short term focused and the execution elements that will define the long-term impact are overlooked.
To address these issues Corporate leaders need exposure to companies that are going through the $1-$5m, $5 to $10M, $10 to $50M and +$50M stages. The nuances are very real and if one tries to do things too fast, too deep, too shallow… things will crumble.
Many young entrepreneurs seek executives as advisors for their ventures. I think both parties benefit from those relationships and large Corporations such as Microsoft, Amazon, Facebook and Google in the Seattle area should actually encourage their execs to be part of the local tech entrepreneurship movement. Corporate Monetization of Innovation would benefit tremendously just by having a front row seat to witness the process of early-stage company entrepreneurship and stage appropriate business processes, performance dashboards, go to market execution and high performance team dynamics.
[1] Harvard 1987, Mercer Management Consulting 1995, McKinsey 2003, Boston Consulting 2007
[1] Harvard 1987, Mercer Management Consulting 1995, McKinsey 2003, Boston Consulting 2007
1 comments:
Great thoughts on post-honeymoon blues of acquisitions. I have witnessed companies choke the acquisition by forcing standard scale customer segmentation on acquired companies. The customer segmentation for a B2B company with average ASP of $60 - $100 is much different than that with average ASP of $5. This results in choking of acquired companies and the founders usually leave.
But there is merit in acquiring companies arguments as well. Most entrepreneurs are directive focused, they figure out what needs to get done and get it done. It is difficult to scale directives. And to scale you need process focus which moves people from daily fire fighting to operational mode. In a bid to get into that mode, most corporations end up killing the acquisition.
But by having corporations have front row seat in entrepreneurial companies, they might force that scale thinking in advance and might make the marriage work later on.
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