Companies in both the tech and non-tech arena are gradually shifting their mindset with regards to facilitating growth. Instead of building tech departments and putting effort to grow companies, there is a rising trend of buying tech startups.
In the past, the trend was previously limited to tech giants such as Microsoft, Google and IBM. But more recently, corporate giants such as Volkswagen, CVS and even Macy’s are getting onboard as well. Though it’s a major deviation from convention for non-tech companies to incorporate technology into their operations, it comes with its own sets of benefits. By acquiring tech startups, big companies are able to remain competitive, retain their market share and even have a talent advantage over other legacy tech firms. Despite of the fact that this has come as a surprise, it is now on the process of becoming a fully-fledged trend.
What is the reason behind this developing trend? We can sum it up in a single word — acquihiring.
Acquihiring is a process that involves buying up a company with the objective of gaining from its talent base and technological prowess. With the advent of the digital era, innovation today is key to running successful business operations. Oftentimes though, legacy companies lack the workforce required to develop, operate and maintain tech products. Building tech departments from scratch is, however, a highly demanding and at times counterproductive exercise.
A more viable alternative in such cases is to acquihire. This approach allows them to leverage associated benefits from already existing startups with talented workforces. Getting the relevant tech talent means faster turnaround for solutions and innovations. By doing so, they can create a much-needed synergy and add value to the acquiring company.
For example, in the case of Walmart’s acquisition of e-commerce retail platform Jet.com, the key motivating factor was to benefit from its leadership. Jet.com founder Marc Lore was formerly an Amazon executive. So in a bid to compete with Amazon in market domination, Walmart bought Lore’s talent. In view of the success of this strategy, Walmart went on to buy up Moosejaw and ShoeBuy. With a similar objective in mind, the company has empowered the former startup leaders to run their categories across the entire company.
Co-head of technology mergers and acquisitions at Morgan Stanley, Anthony Armstrong captured the essence of this approach by saying:
Killing the Competition — By buying up potential competitors, a company gets the opportunity to retain dominance in its field. A great illustration of this was Expedia’s acquisition of Trivago, Hotels.com, Orbitz, Travelocity, CarRentals.com and Hotwire among other travel sites. This strategic move greatly reduced the chances of having a strong market competitor.
Opening New Markets — Companies looking to access new demographics could benefit from an opportunity to target these markets by acquiring a company in that niche. For instance, Facebook was able to venture into Virtual Reality (VR) business by acquiring Oculus.
Driving Growth and Profitability — Acquiring smaller tech startups has also allowed bigger companies to expand their product and service offering as well as drive up their profits. Dell Computers made such a move in 2016 when it bought EMC. As a result, Dell reported an upsurge in demand for computers, servers and networking equipment. Within a year, the company had also expanded its customer base by 10,000 people.
Among the key benefits of acquihiring is the fact that it is a win-win situation for all parties involved. Corporates get a pre-trained workforce of people who are already accustomed to working together. Founders get an opportunity to cash in on their brainchild while continuing to earn from the employment opportunity. Moreover, the entrepreneurs benefit since they will be working with a bigger employer, hence higher chances of job stability.
Overall, both traditional and technology companies have a lot to gain from acquiring tech startups rather than building desired solutions from scratch. In view of the successful outcomes of the examples highlighted above, it is clear that such deals hold massive potential in helping big companies to scale and retain a competitive edge.