The startup journey: Navigating the build or buy decision
By Megan Cornell
A startup is newly flush with investor funds and a need to deliver on product development and growth. The decision about whether to grow the product organically or to seek out an acquisition target is one that is always evolving and may initially go in one or both directions, before experience chooses a path.
Marketplace conditions where talent availability is tight and where “deals” may be found in the acquisition market might favour acquisition. On the other hand, if talent is readily available and company valuations high, building organically may be the better approach.
Some of the key factors at play in the decision are as follows.
Availability of talent
In an “employer’s market,” where experienced talent is relatively easy to source, the decision to grow organically might be the favoured growth route. As clarity of the required skill set emerges, team members can be onboarded and the team can grow relatively quickly.
As important as new hires are, it is also important to understand how sticky your workforce is and how much attrition you are likely to see. In a highly mobile workforce, acquisition of specialized workers may be out paced by the movement of other employees to new positions to advance their careers. Betting on organic growth needs to take into consideration the particular market, location of workers (if building an in-office or hybrid team), skill set and company workforce competitive advantage or disadvantage.
Time to productivity
Related to talent availability is the question of the timeline to productivity. Ensuring that your company can not only source the right skill sets to grow your product, but that it can be accomplished on the timeline needed, is key. If investment interests are driving that timeline, it is important to have a very realistic expectation of time to productivity layered on top of a realistic development pathway, to ensure that delivery timelines and product rollout will be on track.
In addition to time to productivity, if you are relying on more junior team hires, you may have to also build in consideration for time to proficiency and also factor in your management and leadership structure and how well positioned they are to bring the junior team members to proficiency.
Having a strong hiring strategy and working with a recruiter who understands these objectives and timelines can help the company keep on track for building and using the runway you have to ensure success.
Integration of team and technology
In considering the acquisition option, the integration of both the team and technology platform is a key factor. How quickly and effectively the technology can be integrated into your company technology and provide the solution you are hoping for will help measure against building the tech organically. Integration of the team and time to productivity is also important to weigh on the acquisition side. Is the workforce at the acquisition target likely to stick around to help you deliver on the technology integration and growth? Is the corporate culture at your company likely to be a fit for the target workforce and are they likely to want to grow their careers with you? What can you do to ensure that happens? How long before the team integrates and is productive?
It can be helpful to do at least a preliminary analysis of the likely patent landscape, if any, when deciding whether to build your product in a certain space, or acquire to address that growth. If the solution you are looking to build has a strong and active patent landscape, more attention may need to be paid to the development plan and acquisition could be an attractive option with a strong patent portfolio.
Certainty of tech and time to deliver
A key consideration in this decision-making process is how much certainty there is for the development of the technology. If the path is clear, does your existing team have the skill set, supplemented by growth, to achieve the goals? If the path is less clear, does your team have the creativity and research and development skills to explore potential development options and guide the decision successfully? The answers to these questions may favour either organic growth or acquisition of both technology and skill set developed elsewhere.
The time to deliver on growth is also an important consideration. Your existing development team may have provided a timeline for product development, but whether that timeline is actually realistic and will work within the confines of the runway that the company has needs to be assessed. If an acquisition target has already been working on the development problem, they will have identified some of the unexpected issues and acquisition may significantly advance the delivery of your product enhancements.
Metrics and objectives
The decision to build or buy will also take into consideration what the success metrics are for the product growth and what the objectives are for the build or acquisition. Is the growth part of a product enhancement or is it part of the development of core product? If an enhancement, it is possible that an acquisition target may have complimentary sales channels in place which can be attractive for the core product. The enhancement may produce quick new revenue streams which will help justify the acquisition investment.
Due diligence and closing the deal
If acquisition is favoured on first analysis, rigorous due diligence on any acquisition prospects still needs to be completed. Assessing the technology, team, IP, any corporate or ownership issues, contractual relationships and other assets will all be key. This process can take time, particularly with multiple candidates for acquisition. If there are multiple bidders for acquisition targets or a deal can’t be reached, there can be further delays.
Build or buy: Making the decision
This general and non-exhaustive list of “build or buy” considerations simplifies how the real world decision-making plays out. There may be market-specific or industry-specific considerations which will weigh heavily on any particular decision at any point in time. Many companies in a growth stage pursue both options, knowing that there is uncertainty in both routes. Initial investment may seek to fuel immediate organic growth, with the objective of acquisition planning to run alongside with additional investment injections once growth clarifies.
For more information on this topic, please reach out to the author, Megan Cornell.