Product announcement

Why Acquihires Almost Never Work

Why Acquihires Almost Never Work, XLIO

(Or, Why You're Yelling at Your Refrigerator)

After almost 20 years in corporate and business development I have seen more acquihires than I want to admit, either as a founder in the companies being acquired or as a big tech company acquiror. And the sad reality is that acquihires almost never work.

Let’s imagine a product executive that just launched a smart refrigerator. She’s received customer feedback that it’s having difficulty hearing instructions in noisy kitchen environments.

Human: “Hey Refrigerator, remind me when we are running low on beer.”

Refrigerator: “I’m sorry, what would you like to be reminded about?”

Is the Solution Out There?

For the next release, the company needs better AI-based language recognition. However, the internal engineering team has been unable to deliver this. So, to stay on track, the product executive asks their corporate development department to purchase a small company that would give them the team and technology they need.

Corporate development scouts the available graduates from incubators and early-stage VC portfolio companies, and finds a startup with voice recognition technology that works in noisy kitchens. They negotiate a deal and buy it.

Problem solved, right? Sadly, wrong – for three reasons.

The Tech Doesn't Fit

It is virtually impossible for a free-range startup to have serendipitously developed code that snaps into the proprietary (and often non-public) architectures of their acquirors. In fact, everyone is telling developers to innovate, differentiate and build ‘moats’: all of which create major integration gaps. The startup’s developers find they must rewrite most, if not all, of their code in order to make it work with their acquiror’s systems.

The product executive is left waiting for the solution to be integrated. She misses her shipping window, and loses ground to competitors.

The Terms Become Complex

For a startup, time is money, and smart startups raise the maximum amount in order to reach launch velocity. That money comes with entanglements like liquidation preferences. Let’s say the startup had previously raised $12M, and corporate development offers a purchase price of $18M. A 1X liquidation preference means that the original investors get all of their money, while the founders split what remains. Furthermore, as the valuation of the business has declined since the funding round, common shareholders now have worthless stock options.

To make the deal happen, the acquiring company has to come up with extra money, so that the founders and employees don’t quit. Negotiation and complex diligence slows the process down, and the cost of the acquisition balloons. The product executive can only hope that when the dust settles, enough value can be realised on time. Which leads us to the last problem.

The Team Loses Motivation

When talented entrepreneurs take the leap to found a startup, they hope for large financial returns, career advancement, and to see their code in production. When they are acquihired, most end up not achieving any of these goals.

The deal we are discussing will not make them billionaires, and other than some of the founders, not even millionaires. Their career path descends from the C-suite to mid-level development in a big company. And all of their code is scrapped. It’s not surprising that several talented founders (with vested shares) left before the acquisition closed, while those that survive the transaction leave too, once their lock up is over. The company never realises long-term value from the deal.

As a result, the pace of innovation within the company did not greatly increase, and soon decelerates once more. The improved speech recognition module is eventually delivered, but two years after the product executive needed it. By this point, the company’s customers and the market have moved on.

Human: “Hey Refrigerator, order us more beer.”

Refrigerator: “I’ve set a reminder to order more beer.”

Human: “No, order more beer NOW!”

Refrigerator: “Reminder to order more beer cancelled.”

The Made-to-Order Startup™

Acquihires almost never work because companies will never find a perfect-fit startup – it doesn’t exist. Hidden in the tech, terms or team will be issues that decrease value while increasing time and cost.

But XLIO can deliver the perfect-fit startup – because we create it on demand for the acquiror. We start with the acquiror’s technology problem, then build a startup from the ground up to solve it, drawing on a global network that lets us access entrepreneurial-level coding talent. We take on the risk and cost, and the buyer acquires 100% of the team, technology and IP on attainment of the specification at a pre-agreed price.

Because our startups are made to order:

  1. The technology is pre-integrated into the company and ready to deliver value from Day 1.

  2. The terms are simple, the cap table is clean, diligence is minimal, and cost is reduced.

  3. The team has known the end goal from the start. They understand their incentives, they’ve looked forward to joining the company, and their code will actually be used.

In short, we make acquihiring work by reverse-engineering the process.

The end result is that product executives achieve their roadmap, corporate development close better deals faster, and customers finally get their beer.

More announcements from XLIO

Other announcement

AMAZON 101: NOTHING GROWS YOUR COMPANY LIKE DELIGHTING CUSTOMERS

AMAZON 101: NOTHING GROWS YOUR COMPANY LIKE DELIGHTING CUSTOMERS

I’ve been thinking about customer delight. In part because I just spent 52 minutes on hold with my broadband provider, during which I was told at least 26 times that my call was important and that I was their “highest priority”. I can only imagine my experience with them if they held me in lower esteem. It seems that while most companies will assure you that “you are #1”, very few actually make the investments to make this happen. At Amazon, where I delivered some of its largest partnerships and alliances over nearly nine years, we were obsessed with the customer. One of the aspects of my job that I enjoyed the most was helping to facilitate New Hire Orientation classes. My role was to communicate the Amazon Leadership Principles to new employees. The first, and most important of these, was Customer Obsession. So, during these intensive sessions, I would always start by asking for a show of hands. “Who here is working on Alexa? Who’s on AWS? Who’s in Operations?” and so on. Lastly, I would ask, “Who’s in Customer Service?” No one ever raised their hands, because the Customer Service group is oriented separately. But it was a trick question. “Everyone at Amazon is in customer service.” That principle is key to Amazon’s success. Every process, investment, and initiative is focused on delighting customers. Customer obsession means analyzing every aspect of their experience, with a commitment to making it positive. Every product or service actually starts with a press release, outlining the customer benefits. Then the team works backwards, arriving last at product development, and how that promise will be delivered. You might think that as Amazon’s ‘deal guy’ I wasn’t involved in customer delight, but that was the impetus behind every deal. Either for technology that would deliver something delightful for our customers, or to reduce our costs so that we could give our customers more. To focus on the customer is to position yourself for success. Delighted customers invite others, positively mention your company on social media, forgive when you don’t meet their needs, and spend more when you do. All companies can make their customers #1 if they orient themselves to customer delight as their primary focus. DELIVERING DELIGHT At XLIO, we build made-to-order startups that give you a shortcut to customer delight. Like at Amazon, my aim is to enhance your customers’ experience through technology solutions. Some example projects: Reducing wait and handling times for broadband providers, using virtual voice/IVR tech Enhanced onboarding for fintech businesses, using AI Making customer self-support work, using smarter chatbots that offer downloadable customized resources Early detection of adverse events in electronic records and social media Improving first-time/on-time delivery success, using smart last-mile technologies Smart acquisitions in customer experience have exponential benefits in revenue retention, brand enhancement, cost reduction, and even your own employees’ satisfaction. But the typical approach to achieving this – small company acquihiring – can be slow, complex, expensive and inefficient. All too often, the original goals are never achieved. The XLIO model allows you to purchase only the technology and team you really need to augment your current infrastructure and human resources. It’s faster and more efficient, because the solutions we deliver are tailored to your business, and start working on Day 1. So, just like Amazon, our model is customer-centric: working backward from what it takes to delight your customers. Our goal is a win-win: to delight your customers and to delight you too, by delivering a perfect-fit startup with unparalleled economics. Ron Kornfeld Chief Executive Officer, XLIO https://www.xl.io/team

By clicking "Continue" or continuing to use our site, you acknowledge that you accept our Privacy Policy and Terms of Use. We also use cookies to provide you with the best possible experience on our website.