Corporate / Startup : check the “cultural fit” before executing an M&A deal
Companies or large groups often consider acquiring a startup with the ambition to activate synergies very quickly. However, a large number of acquirers face difficulties in the effective implementation of post-acquisition synergies or integration. These difficulties may challenge the interest of the deal.
Before starting the process of acquiring the startup, it is of course to check the intrinsic qualities of the startup : its products, its team, its metrics (comparing them with those of its competitors), its technological assets, its scalability, etc. But the level of cultural fit between startup and corporate also seems important to us to evaluate upstream, in order to guarantee good synergies after the acquisition.
It seems to us therefore useful that the purchaser checks some fundamentals.
Does the startup address the same market as the corporate ?
When a group (or a Corporate Venture fund) purchases a startup to strengthen its positions on its core business, synergies are often quickly identified and activated.
They are however longer to implement – and more hypothetical – when the deal is made in a goal of up-selling or cross-selling. Joint projects will be prioritized by the corporate at the beginning, but may also be victims of corporate arbitrations on its projects and resources. The startup, if already mature enough in its market, will also have its ability to arbitrate internally. Suffice to say that synergies will have to be well quantified and will have to demonstrate that they will generate sufficient value to be sustained over time. and justify the mobilization of resources on both sides, without being experienced as a constraint.
Some startups had to struggle with team and organization changes within a group during the integration phase. If the value added expected by the synergies is strong, the risk of them being de-prioritized is lower.
What is the difference between the corporate culture and that of the startup ?
Both entities necessarily have their own culture, and at first the cultural gap is often considered very important. This is the whole point of the startup/large group partnerships. But in trying to estimate the gap between the two cultures, a group can better evaluate the chances of success when integrating the startup and the ability to quickly activate synergies. A few questions to ask about this:
- Does the group already have an entrepreneurial culture ?
- What is the weight of the procedures on the organization ?
- Does Startup and large group have an international approach ?
- Do they have the same working language ?
- Do they have the same business ethics ?
For example, in a highly regulated sector such as the financial market, the acquisition of a startup will be facilitated if it already has a good sensitivity to regulatory and internal control issues, including by having obtained a first licence. After the acquisition, employees will also have to be trained on a subject such as fighting money laundering and financing terrorism. On the startup side, you might be prepared as well.
Are the managers of the startup ready to make some concessions ?
Joining a large company is not a simple approach for startup executives, focused on their decision autonomy and speed of execution. We will therefore have to make concessions and accept longer decision-making processes and a higher level of formalism. We will also have to be prepared to devote time to the leaders or employees of the group they join.
For entrepreneurs, beyond the financial stakes, these new constraints, coupled with their new status as employees, can be difficult to manage on a daily basis. And this, even if ther is a good cultural fit. The choice to join a group must be realized in consciousness.
For the group, the integration of a startup can really contribute to accelerate its own tranformation. Entrepreneurs can bring a large group to simplify processes and transform its organization.
Finally, interesting the managers of the startup in the results of the company that buys them (via an exchange of securities or a financial incentive based on the results of the new ensemble) is a simple and effective way to promote synergies. In addition, some corporates actually involve the managers of startups in their organization and in their governance. They entrust them with strategic projects and/or reserve them a place in the Steering Committee, which seems to us to be extremely virtuous.
See also our our post related on anticipating post-acquisition synergies.