Buy Your Disruptor — and Turn a Threat into an Opportunity

In the corporate world, a disruptor typically is a start-up company whose business model is built on upending the status quo. A disruptor’s success can potentially make an industry’s established players yesterday’s news. If your company is being rocked by new, disruptive competition, you might want to consider an increasingly common strategy: Buy your disruptor.

Identify the threat

What do disruptors look like? Cloud computing service providers, for example, currently represent a serious challenge to many traditional database hardware providers. Ride-share companies like Uber and Lyft threaten taxicab and limousine providers. Online-only clothing retailers are, in many cases, undermining apparel retailers anchored to costly storefront-based business models.

If these threats sound familiar (not to mention scary), you may want to take action and buy a disruptor. However, it’s important to know that, to succeed, such acquisitions must be more than defensive moves. After all, if your company is out of touch with its customers or suffers from other fundamental problems, an acquisition alone won’t save you. What purchasing potentially threatening competition can provide is the resources to adapt to changing market conditions.

Take notes

One aggressive buyer of potential disruptors is Google, which looks for young companies that could challenge its dominance in any area and snaps them up. Google’s practice is successful because it incorporates the acquired start-ups’ strongest talents into its own operations. According to TIME magazine, Google has employed more than 220 start-up founders from acquisitions it made between 2006 and 2014.

Here’s another example. Many traditional insurance companies run the risk of losing customers to businesses with fully automated recordkeeping and client management services. So they’ve tried to boost their digitization efforts by buying start-ups. Nearly half the insurance company respondents to a 2017 survey by Willis Towers Watson said they plan to make a purchase in the next three years to gain access to digital technologies.

Look for advantages

It’s clear what your company might want from buying a disruptor. But what might a disruptor want from you? One major motivation is capital. Given the aggressive expansion and promotion that their business models require, start-ups tend to be undercapitalized and their expenses often outpace their revenues. Uber, for example, reportedly lost roughly $3 billion in 2016. If your company has substantial reserves, a disruptor could leap at the chance to be acquired. In fact, many disruptors set out with the explicit intention of selling to market leaders.

But even if you find an eager seller, plenty of pitfalls await — starting with cultural discrepancies. Employees from entrepreneurial start-ups are notorious for resisting the established culture of their company’s new owner. Lack of flexibility also hurts buyers that fail to adopt their acquisitions’ successful business practices. (See “Managing the personalities.”)

To improve the odds that your disruptor deal succeeds, consider these models:

Keep the company separate. Here, you make your acquisition a stand-alone subsidiary and provide it with capital and strategic guidance but minimize interference in its day-to-day decision-making and operations.

Make it first among equals. You might turn the disruptor into a division “competing” with established divisions — with the expectation that it will eventually surpass them. For example, a database company might run its new cloud-computing unit under the same overarching management structure as its older hardware sales division.

Integrate it completely. This model is easier to adopt if you’re Google or a similar market giant. But if your company is using outdated technology and following R&D, marketing and other practices that no longer seem relevant, you probably need to consider a complete overhaul. New talent working within your organization and generating fresh ideas can help you do that.

Expect change

If you’ve been running a business for any length of time, you know that nothing’s more permanent than change. Sector leaders can’t assume they’ll stay on top forever — or even for very long. Buying a disruptor is one way to address this challenge.

Managing the personalities

Incorporating a start-up into an established business can be perilous from a cultural standpoint. It’s very common for some employees to think their counterparts are stodgy and out of touch or, conversely, arrogant and untried.

Start-ups tend to attract assertive, ambitious people who may feel stifled in a more traditional work setting. The risk is that these people will jump ship before the M&A deal closes and perhaps even start their own businesses to compete with your company. However, there’s also some danger in keeping such employees on with little oversight. Start-up staffers may be accustomed to constant growth (which can lead to cutting corners) and aggressive sales tactics (which can backfire badly). So, though you don’t want to hinder creativity, you may need to rein in potentially risky behaviors and practices.

Establish liaison teams from your company and the seller’s early in your deal’s integration process, with regular input from both management groups. The more conversations employees have with each other, the better their chances of finding common ground and staying there.

© 2017