5 steps to approach the “Build, Partner or Buy” framework

The Blackroom Team
The Blackroom Team

If you are considering an acquisition, you obviously have the good ole “build, partner or buy” model in mind, the one every business leader learns in their MBA classes. Do you want to build the innovation yourself internally? Build a partnership with companies who have the expertise you need? Or Acquire and integrate a business that has developed the product you want?

The theory is quite straightforward.


Step 1 - Understand options

First, you will have to determine the right tradeoff between the amount of time you need to implement each option, their respective costs (free cash flows) and the level of control you are ready to give up. You’re all set, you are ready to decide whether you should build, partner or buy.


Unfortunately, in the real world, it does not really work like that. M&A opportunities often happen at an unexpected moment. A potential target is running a process with a banker and nobody has the time to assess all these options thoroughly. And you are not Cisco or any other big corporate with large corp dev teams with great command and control over their M&A strategy. For most buyers, it’s often too backwards. You may have a clear vision on the innovation roadmap but still not entirely set on how we want to execute it. All of a sudden, you are being pressured to make go, no/go decisions in a very short timeframe to meet the tight selling schedule of startup that is on the market for a sale.


It is therefore very hard to run a fully rational process and get clear and documented answers to the most important questions:

Short of clear answers, decision making can turn irrational quickly. A CEO can get overly excited about the potential of a startup just because they like the founders or because they fear that it gets swallowed by a competitor. They can make fast and gut driven decisions, pushing their teams to agree to a deal that nobody knows how to integrate.


Step 2 - Build: the trial and error first step

The decisions of building or partnering are not definite, you can always hit pause and change strategy if you are not satisfied with the results. But once you have signed a purchase agreement, you have no other option than to make the acquisition work. Why not go through an iterative trial and error period before making any big irreversible commitment?

Building, partnering then buying. It helps you become smarter about a category and cognizant of your own limitations and expertise gap. 


If building did not work out for you, then yes, maybe acquiring a startup would solve your problems. Let’s look at how IBM does it. To enter the BPM (Business Process Management) category, IBM decided to build their own platform from scratch. Unfortunately, in spite of the IBM brand and reputation, their internal tool kept losing deals against a startup called Lombardi software. This well-backed mid-size startup had developed much stronger BPM capabilities and was able to “kick IBM’s ass” on some very large deals according to Olivier Gachot, their former Chief Sales Officer. IBM has no ego, if a competitor does a much better job than them, they can consider acquiring them. This mindset of trial and error and ability to coldly analyze its strengths applies to every company, small and big.


Step 3 - Try partnership, good startups will team up with you

All M&A professionals say that it’s a great way to test the waters and validate a customer use case. Any innovation building has its learning curve and a partner will help you acquire knowledge.

The problem is that many do not even evaluate the option and for the wrong reasons. We are hearing things like “my business is too specific and no partner can answer our needs” It could be true but the response is a bit too simplistic and usually hides a lack of preparation and market analysis. Once you start opening up to the partnership options, you will see, startups will come to you.


Experienced startup founders know the play and learn that exiting their company is a process. Building value-making partnerships with financial and business partners is critical to their expansion.  “It’s not about selling [their] company, it’s about creating opportunities for [the] startup to be sold”, teaches us Rich Rozen in the Magic Box Paradigm. If your business is interesting to them, good startups will come to you ahead of any M&A discussions and try to build partnerships. Founders learn how to position themselves with potential strategic partners and spark interest in commercial agreements that can turn into investments or M&A if successful.

During a Techcrunch MasterClass, Chris Gilbert, former CEO of Ubiquisys (sold to Cisco for more than $300 million) explains how he planned for his exit. “Selling starts on day one and is a leadership-only function —  work out who will be your buyer. Only the CEO can do this. Constantly articulate why a company should buy you. Bring clear messages into the acquiring company so it can be presented upwards: give them the presentation you would like them to show their boss! When the time is right, force decisions through competition. If you know they have to buy you, your starting position is strong.”

Now, let’s say you haven’t found the gem you were looking for. You haven’t wasted your time. You will have gained experience on the vertical / technology you are looking to implement, identified companies that could become your competitors down the road and most importantly fine-tuned your needs. You can start a build option with more confidence.


Step 4 - Then, evaluate a Build option

Building your own product from scratch is the best way to have a strong native integration with your existing products. You get things fully customized to your needs and avoid the troubles and costs of a transaction. It also helps build loyalty within your R&D team (if you have one) who may be excited to take on a new project. It usually costs less money to build from scratch than to acquire an entire business and you don’t need to account for all the integration costs that come with an M&A. Plus, if the build project fails, you can still change your mind and acquire.

Make sure that the decision is not hubris driven. Successful businesses tend to believe they can do everything on their own. Building innovation is not easy and requires expertise. It will take more time to get the innovation in place, and your time to market will be longer. Since you do not acquire a portfolio of customers and an existing technology, you will need to validate your product decisions; test your go-to-market approach; test your product-market fit, and build marketing materials.

 

Step 5 - How about investing, the corporate venture capital case

Corporate Venture Capital is an interesting path. Invest in a startup, let it grow, help them with your industry knowledge, and then if all stars are aligned, purchase it. It is not a new phenomenon at all, in the past, it was just called an "investment" and it was one of the few financing options for SMBs before the era of venture capital funds. 

These times have changed and now good startups have many ways to finance their growth (business angels, venture capital, debt, spac). Why would an entrepreneur get tied up with a corporate fund that could limit their exit options and even their go-to market? 

If you want to go down the Corporate Venture Capital path, you need to learn how to behave like a VC and reassure the startups. This means avoiding conflict of interest and agreeing to not be in the loop of certain strategic conversations. Anything that could block the business from being sold at a fair market value (veto rights, pre-set exit valuations) can scare them away. 

You can on the other hand, structure governance to enable collaboration between both teams. The day the startup is ripe for an exit, if the collaboration went well and both teams trust and respect each other, you will have a serious competitive advantage over other buyers.

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