Startup Acquisition — Integration
Integration is often considered to be a separate activity from actually “doing the deal.” I’ve always thought this was strange, as integration is also generally acknowledged as the activity that has the most significant impact on any acquisition’s overall success or failure.
This is a crucial stage for both sides, and as such, integration warrants careful thought and planning. In fact, I would go as far as to recommend that startup founders should not complete any acquisition without first having a clear integration plan in place.
Having a structured plan is vital, because most of the integration activities require the involvement of the same core group at the startup, typically a combination of the founders plus technical or operational leaders — and we’re not talking about a trivial amount of work here.
Immediately after closing, this core group needs to actively manage the:
Item 1 on this list used to occupy 100% of this group’s time on its own, so it is unrealistic to think that the same team can complete all these activities simultaneously, especially a team that has been fatigued by working through the deal process to get to this point. So, we need a clear plan. All these activities can be completed, and completed in a way that isn’t punishing to the team, provided they are prioritized and spread out over time.
The key to successful integration is ruthless prioritization.
One way the size imbalance between the startup and the company manifests is through a specialization imbalance. For example, the company will likely have dedicated positions like Head of Tax, Head of HR, Head of Finance, etc. Whereas in the startup, these responsibilities are usually attributes of other multi-tasking roles. For example, the startup COO may be responsible for all workspace, security, infrastructure, and HR issues.
This inevitably means the individual on the startup side with multiple responsibilities will be pulled in multiple different directions all at once as each department head demands attention for their own particular specialist activity. As a result, some quarterbacking is required; otherwise, the founders will end up trying to juggle ten different “Number 1” priorities at the same time.
When everything is the highest priority, then nothing is.
The good news for the startup founders is that the “bad cop” in this process, by necessity, needs to be someone from the company side. The startup team members will not know the organizational hierarchy at the new company, so they need a “gatekeeper” who understands the local landscape — one who knows which requests can be postponed and who has the authority to actually postpone them.
It should also be evident that as soon as the deal closes, it is of the utmost importance to know who will report to whom. Do the team and existing structures remain intact, or will various groups be broken up? If so, when does this need to happen?
All of these questions are answerable. They just need to be thought through, an approach needs to be agreed on, and then actions must be scheduled. Importantly, this project plan needs to be developed with and blessed by senior management on the company side. This will help ensure that everyone is singing from the same song sheet as the process unfolds.
Something to be particularly wary of during the planning phase is a reluctance to make hard decisions. This might relate to questions about what to do with team members who don’t have an apparent role in the new organization or decisions around new responsibilities for the startup team.
Time can be used to your advantage, but be on the lookout for situations where problems are just kicked down the road.
Founders should also avoid having too many dotted lines of reporting after the deal closes, i.e., de facto reporting to more than one person. This process can be stressful, so founders should avoid situations where team members can get conflicting messages about what needs to be done.
The goal is to find balance during the integration. Depending on the deal, there can be a fine line between doing things too quickly and overwhelming the startup team, and doing things too slowly and inhibiting the startup’s eventual assimilation into the wider company.
For the most part, I’ve found that it is best to take a “pulling-the-band-aid-off” approach where possible. The merging of the two companies is going to cause some disruption. It can be best just to get it over with and make the most of all the goodwill the honeymoon period will bring.
The importance of having a shared strategic goal is critical during the integration phase. It is also in everyone’s interest to have some very clear milestones defined outlining how to reach this goal. It is very helpful if the entire startup team knows what is expected of them. It is even better if they can see their progress toward this goal in a tangible way over time.
The focus will change over time during the integration. The initial activities will all be practical. Who is responsible for activating new user accounts? Do we need to order new laptops or desks? Over time, the focus will be more strategic. How do we align the startup capabilities and goals with the company’s broader mission?
Startup founders shouldn’t underestimate how important preparing for this process is. If the integration is bungled, it will lead to big headaches on both the startup and the company side.
For the company, this will not just result in a failure to capitalize on the benefits of acquiring the startup, but result in a continued drag in operational attention as these issues continue to demand attention.
For the startup, a failure to capitalize on the initial goodwill can result in a constant feeling of not “fitting.” Continual firefighting efforts will grind the team down. This is incredibly draining. No matter how good the deal’s financial aspects are, many members of the startup team will not endure circumstances like this for long.
An integration plan, if composed and executed correctly, can avoid much of this stress.
While two companies never quite dovetail together without friction, the jostling can definitely be kept to a tolerable minimum.
Click here to see the previous blog in this series, intended to bring some much-needed transparency to the M&A process for startup founders.
If an acquisition is a potential exit for your company, you should check out my book — “How to stick the landing: The M&A handbook for startups.”