Embracing Inorganic Growth
Many businesses with high valuations grow through a blend of organic growth and inorganic growth. The key is to find the right balance for your business and the markets that you serve and the right synergies with your acquisition targets.
The approach you use for organic growth can also apply to inorganic growth. Start with the market problem and market definition, which are the same regardless of growth type. Make sure to gain a clear definition of market segmentation and an understanding of buyer personas, including the business value these buyer personas will achieve by solving their problems.
It’s also important to understand the distinctive competencies of your company and those of your acquisition target. This information will be crucial in determining how to address post-close business integration.
The acquisition will bring customers, products, intellectual property and talent. You’ll need to evaluate each of these competencies separately.
You need a good sense of your cost to acquire a customer (CAC) and then compare the acquisition cost to the cost of winning and retaining these customers in the market. The target company’s relationship with its customers is also critical (and tends to reflect the level of talent too).
It’s important to assess how well the products solve market problems. Many target companies are not aware of the Pragmatic Institute model and don’t have anything like marketecture, which maps up problems to features. But if you plan to continue selling a product, you’ll need to quickly build out the marketecture as a prerequisite for marketing and sales planning.
Intellectual property acquisition—such as patents, copyrights and access to relationships that facilitate sales—tends to be pretty straightforward, but you’ll want to be clear about what you’re getting and the implications.
Talent is the acquisition wild card. People do business with people, and key industry and customer relationships are often dependent on individuals. Assessing the right people to retain is a combination of science and art that needs its own book.
But it is essential to retain industry, domain, customer and product knowledge.
While all acquisitions at their core involve one business taking over another, there are often distinctly different strategic reasons behind the transition.
Complementary extensions are a fertile field for companies just starting out with inorganic growth. These acquisitions allow you to leverage the knowledge of your current market and buyer personas by looking for companies that sell products to buyer personas in your market. From a product management perspective, this is similar to the plan and business case you would make to build a new product.
You will get a good sense of which other companies address your buyers’ problems simply by asking them. Another way to identify targets is to look at your integration partners or your backlog of requests to integrate with other solution providers.
Also, to leverage your current investments, look for products that fit your existing go-to-market strategy. A comparable technology stack is another important consideration. And you cannot overestimate the importance of company culture, because compatible cultures provide the foundation for successful acquisitions.
You will want to prioritize potential acquisition targets using the same criteria you use to prioritize your product roadmap to determine the best fit to solve the market problems. Once you have identified your target, calculate the total addressable market (TAM) using a method that’s consistent with your primary product. Because the diligence and negotiation process can take as much effort in smaller acquisitions as in larger ones, look for businesses with TAMs that materially increase your company’s overall TAM.
With roll-ups, you remove capacity from a market by acquiring a competitor that sells similar solutions to yours in that market. In addition to the items in the complementary extension category, roll-ups have several interesting implications to consider. A roll-up implies that you plan to migrate your acquired company’s customers onto your product. In effect, this is like a big sale. (Doing an acquisition where you intend to continue selling the acquired company’s products is treated like a complementary extension.)
From a product management perspective, this is similar to the plan and business case you make to implement a rapid-growth strategy for a current product. However, there are some additional factors. You need to balance the acquisition cost against the cost of competing for—and winning—the business from the competitor, along with the time-value of money.
It is important to understand how many of the target’s customers are already in your sales pipeline, particularly if the deals are in your financial forecast. This may result in reworking not only your forecasts, but your sales quotas. Be sure to look at individual sales territories, because companies tend to have regional strengths, and the impact may be disproportionate.
The migration strategy is critical for these acquisitions. You need to have a plan that discourages these customers from being poached by competitors while you transition them onto your products. Speed of migration and any seasonality of the business are factors here. A reasonable plan gets a customer migrated in less time and effort than if you implemented that customer from a regular sales win; otherwise, it may not be a good deal.
New area acquisitions are some of the most challenging because you are entering markets where you have little or no presence. These might include new markets or geographies with similar buyer personas or new product areas with new buyer personas within your current market and geography. For example, a new market could be a software company that is expanding from a historical focus on higher education into water and gas billing for public utilities. A new geography might entail expanding from the United States into the European Union. And a new product area could involve expanding from human resources into payroll.
In each of these, talent retention is critical. You don’t know what you don’t know, and you need the acquired company’s team to be successful to ensure that you reach your growth targets.
Of these scenarios, the easiest to implement is the new buyer persona within your current market and geography. Look for businesses that are adjacent to yours and where your existing buyer persona could be a key influencer on the buyer persona of the acquired company. (Keep in mind that new markets and new geographies are advanced acquisition approaches that should be attempted only after you refine your process with a couple of more straightforward acquisitions.)
Implementing successful acquisitions requires a comprehensive, well-thought-out plan. As part of our onboarding and acculturation process, whenever my companies lead acquisitions, we ensure that key management personnel and all product management employees attend Pragmatic Institute’s Foundations and Focus classes. We do this within the first 90 days; it’s one of the initial steps we take to introduce new employees to our common language and processes. And it ensures that we are better aligned for strategy and growth. It’s a tangible statement about the value we place on investing in people and the importance of the Pragmatic Institute model in our business.
Remember, acquisitions are measured in years. They begin with the targeting process and continue for several years after the close, until the acquired company is thoroughly blended into your operations. When you execute on the fundamentals laid out in the Pragmatic Institute Framework, you will lay the foundation for the success of your organic and inorganic growth.
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