February Issue

Bellwether Companies Are Buying Startups to Grab Tech and Talent

Using emerging tech from startups is old news. The more powerful move now is to acquire a startup to capture its talent and creative spirit. 
Aetna, Capital One, Home Depot, Wal-Mart Stores and other non-IT companies have made such acquisitions recently.

cover instant innovation
Credit: Richard Mia

Maybe it's time to buy a startup. You have a mandate to innovate as you transform your company to a digital enterprise, whatever that entails. Yet 74 percent of CIOs find it challenging to balance business innovation and operational excellence, according to our 2015 State of the CIO research. Maybe an injection of entrepreneurs and their inventive new technology can help.

You may also be having trouble finding talent in analytics, mobile development and social media. This year will bring shortages of those key skills, our research finds. Buy a startup, though, and you get a whole team instantly. Even some of those brilliant "data scientists" you've read about. Problem solved, perhaps.

Aetna, Capital One, Home Depot, Wal-Mart Stores and several other non-IT companies have made such acquisitions recently, pursuing startups for their technology and talent. That type of activity has been especially brisk for the past two years. And there's no slowdown in sight. In the insurance industry, for example, 59 percent of companies are expected to buy digital startups in the next three years, according to a survey by Accenture.

Chris Laping, CIO and senior vice president of business transformation at Red Robin Gourmet Burgers, keeps up with new technology and says he is always open to the idea of buying a startup. "You look at ideas they have and think, 'Man, it would be great to have this exclusively ours; we would get such competitive advantage if we were to buy that,'" he says.

However, Laping is in the minority. Not many CIOs are involved in these transactions. Finding, vetting, acquiring and integrating a small company of out-of-the-box thinkers is harder than you know. You probably can't do it, at least not without upending many of the expectations your C-level peers have about the CIO. And about half of startup acquisition deals fail, says John Sullivan, a management professor at San Francisco State University who studies innovation and people management. Often key talent leaves or the technology goes nowhere. "It's hard for a large nontechnology company to recruit tech talent," he says. "Doing this is even harder."

And yet, if you pull it off, you could catapult your company ahead of competitors and boost your own credibility as a digital strategist. Ready for the risk?

Build Cred

There are many ways to tap into the startup world for an infusion of innovation. Options include holding competitions for great ideas, investing seed money, forming partnerships and creating incubators. In 2013, the giant U.K. supermarket Tesco set up an investment unit, Dunnhumby Ventures, to incubate fledgling tech companies. Tesco benefits by, for example, getting to try out new wearable technology to make warehouses more efficient. Other Dunnhumby clients include Coca-Cola, Pepsico, Kraft, T-Mobile and L'Oreal. BNY Mellon recently opened a Silicon Valley office to focus on innovation. So did AstraZeneca. By making such moves, non-IT companies gain access to brand new technology and entrepreneurial talent while stopping short of buying startups outright.

Typical IT budget models--with little unallocated capital and even less capacity for risk--don't allow CIOs to wheel and deal to acquire companies on their own, says Mark Raskino, an analyst at Gartner. Even buying a tiny one- or two-person company is out of the question. Marketing groups and business units usually have more play in their budgets and can more easily fund acquisitions, he says.

For IT to initiate a deal, the CIO must bring the idea to the CFO, COO or CEO. Perhaps even to the chief digital officer. But fellow executives might be cool to a proposal from someone inexperienced in M&A, Raskino says. Some CIOs lack business savvy. Some are viewed as better service providers than business partners. "Not many CIOs are that externally facing," he says.

Some, such as Land O'Lakes CIO Mike Macrie, do have extensive experience with mergers and acquisitions. Macrie even hired an IT executive to help with such deals, including the purchase of an analytics company in 2012. But M&A know-how isn't as widespread in the CIO profession as it is in others.

Politically, it's shrewd for a CIO to get involved. One reason: Boards of directors may come to expect it, Raskino says. In the past few years, corporate boards have awakened to the importance of IT, he says, and are now more open to technology acquisitions, especially if the company lags in online or mobile capabilities.

For example, PetSmart last year bought Pet360, an online pet supply store and social network, for its e-commerce and digital capabilities. PetSmart ran its own e-commerce site but it has been small potatoes, accounting for just 1 percent of the retailer's $1.7 billion in sales for the most recent quarter. Pet360, meanwhile, runs two e-commerce sites and six content sites that cater to different types of consumers.

As CEO David Lenhardt told financial analysts last summer, "This transaction is a smart and efficient way to immediately position PetSmart as a leading online pet specialty retailer of food and supply." Pet360, he said, brings "significant online and technology experience."

Robin Thurston, Under Armour's Senior Vice President of Digital Wyatt McSpadden

When Under Armour acquired mobile app developer MapMyFitness, the startup's founder, Robin Thurston, became the parent company's senior vice president of digital.

The CEOs of these acquired businesses frequently gain influential positions at the parent company. For example, Pet360's CEO became PetSmart's chief digital officer and now oversees all of the company's online and mobile marketing and products. Also last year, $2.3 billion athletic clothing company Under Armour bought MapMyFitness, a mobile app vendor, and immediately appointed the startup's founder, Robin Thurs­ton, to be the parent company's senior vice president, connected fitness and digital.

Under Armour had a CIO, but the IT team was focused mainly on internal operations, according to Thurston. "There was a gap in what the needs were in the leadership of digital," he says.

Under Armour CIO Chris Gates says his group focuses on consumer experience through point-of-sale and e-commerce systems. The acquisition of MapMyFitness "now opens up career paths," Gates says. "Both of our teams are excited."

Wise Up

To tune in to the startup world, CIOs will need to change their habits and get involved in conversations that could lead to transactions, says Karla Viglasky, CIO-in-residence at Stafford and Associates, a consulting firm that connects CIOs with emerging technology providers.

Staying ahead of your rivals is just the start. Better still is to develop a point of view about not only where your industry is going, but also where you can push it, says Viglasky, who is also a former CIO of ITT. As companies tackle digital transformation, CIOs will be expected to scout the future this way, she says.

But sifting through thousands of startups is time-consuming, she says, remembering her attempts when she was at ITT. "When I reached out, some were ready and some were not," she recalls. "I didn't have the time to waste finding that needle."

Karla Viglassky, CIO in-residence at Stafford and Associates.

CIOs need to tune in to the world of startups and venture capital, but it can be overwhelming, says Karla Viglassky, CIO in-residence at Stafford and Associates.

CIOs have to mix in different circles. You should get to know venture capitalists, for example, or attend conferences and speed-dating sessions with startups. And make sure you're listed on the corporate website, so startups and VCs can find you, Viglasky says.

Laping, the CIO at Red Robin, enlists help. He works with a consultancy, Trace3, which introduces him to young companies looking for customers and investors. Red Robin hasn't bought any startups yet, but Laping would make an internal pitch if it made financial and technological sense, he says. Meanwhile, he's using the cloud and social technologies of several new ventures.

Two years ago, Laping informally proposed a buying a stake in an international retail point-of-sale software company whose analytics and integration capabilities he loved. He and Red Robin's president and COO approached the vendor's founders and were turned down. But Laping isn't deterred. "I'm always pitching our CEO," he says.

Making the right business case is critical. You're buying a small, young company without a big market share and often without much of a customer base. You won't see financial results immediately. Still, saying simply that the target will be useful won't cut it either. You license useful technology all the time. It's got to be a killer case where taking the target off the market might, for example, prevent competitors from getting access to strategic technology, Raskino advises. Or where buying the company blasts your own way ahead or into a dazzling new business. Right time, right technology, right people.

"When you can prove the tech is going to do something amazing for customers or in differentiating your [corporate] performance, you have to tell that story," Laping says. Sometimes the payback period might be five or 10 years and the CEO must be convinced, he says.

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