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.

February Issue

Show More
1 2 Page 2
Page 2 of 2

To build a great case, a CIO must first understand the returns on other investments the company makes. At Red Robin, for example, the point at which opening a new restaurant starts to generate profit is an internal rate of return of 12 percent. If Laping can show that acquiring a company and using its technology can generate returns of, say, 30 percent, why wouldn't Red Robin consider it? Investors expect Red Robin to do the smartest thing it can with money on hand. "What's important for the CIO is to put a [forecast] on the table that dwarfs the typical return the company gets for a typical use of its cash," he says.

Fight the Failure Odds

Once an acquisition closes, integration work begins. Beware: Some entrepreneurs view getting bought as selling out. A big bonus may keep people in the fold, but it won't keep them excited, Sullivan says. The peer pressure, along with an itch to create a new company, can be hard to manage. "You feel like an outcast. Your friends won't talk to you," he says.

Enterprise IT has a bad reputation for bureaucracy, with lots of rules for processes that, at a startup, are pretty fluid, such as who can touch which code when and how to requisition a new server. As a young coder used to working all night on open source or in the cloud, "it frustrates you and blows your innovation," Sullivan says. "'Run fast and break things' used to be Facebook's slogan," he notes. "I can't imagine a bank saying that."

As Raskino observes, "it's easy for a company to buy something and crush it."

CIOs can help avoid smothering the creativity that made the acquisition attractive. There's financial and moral support to bestow. PetSmart spent $130 million to buy Pet360 and expects to spend another $30 million in "performance-based payments" to Pet360 staff by the end of 2016.

Keep teams together and treat the leader--and the staff--well, advises Sullivan. For example, Wal-Mart's practice when it buys a tech startup is to install the new team in its @WalmartLabs office in Silicon Valley, where they are charged with building the future of e-commerce and work alongside others from previous acquisitions. Many of the founders of the 15 companies Wal-Mart has bought in the past five years remain with @WalmartLabs as software engineers or senior executives.

Most non-IT companies won't do tons of deals but can learn from IT vendors that have, Sullivan says.

For example, Cisco, which has bought 36 companies since 2010, is "scientific" about M&A activity, he says. The networking vendor has formalized its acquisition processes and teaches it to other companies. One rule of thumb: If the CEO of the new company doesn't stay at least a year, the acquisition won't bear fruit because the team will feel adrift, says Sullivan, who has studied Cisco's processes. Also, the acquiree's office should be no more than 100 miles from its new parent's headquarters, to foster integration without hovering. Communication matters, too. Cisco runs a secure website where newly acquired employees can learn about the company and see updates about how their particular integration is going.

One helpful technique is to keep acquired companies in separate offices, retain their existing leadership and set special performance goals. Aetna has done this with Bswift, which sells technology for building online health insurance exchanges. Capital One also did it with its user experience acquisition, Adaptive Path.

In 2012, Home Depot bought BlackLocus, a small pricing analytics company started by three Carnegie Mellon graduate students in 2009. The BlackLocus team has become Home Depot's official innovation lab in Austin, Texas, providing analysis that the retailer uses in merchandising decisions.

Startup employees want to know their inventions are being used and they want to continue contributing, says Thurston of MapMyFitness. Under Armour, he says, has done it right.

MapMyFitness was founded with a mission to build a social network of fitness enthusiasts through mobile apps that track progress in running and other activities. Thurston met Under Armour CEO Kevin Plank in early 2013, just as MapMyFitness was evaluating whether to raise more capital through venture funding or to find another kind of investment partner. Plank was a user of the MapMyRun app and saw potential in a partnership. The $150 million acquisition closed in late 2013.

Had the two met a year earlier or a year later, the deal probably wouldn't have happened, Thurston says. Earlier, he was too focused on independent growth, and later he might have been on track to go public. "We were at a pivotal moment," he says.

While Under Armour had focused on the top echelon of athletes, such as Olympians and other elite performers, MapMyFitness focused on regular people trying to get healthier and feel better, 20 million of whom used its apps to track their progress and connect with one another. "The core mission of UA is to make athletes better," Thurston says, "but they recognized that you have to make more athletes."

Members of Thurston's team wondered where they would fit in and what it would mean to go from having equity in a private company to being an employee of a big public company. Thurs­ton, too, was wary. He had worked in a research group at Reuters for several years, where he was involved in a dozen acquisitions. From a people perspective, "none went well," with unclear roles and lots of acquired professionals let go, he says. "It was incredibly painful."

The Under Armour deal, however, went well. There was little staff overlap because Under Armour didn't have much consumer-facing digital technology at the time. "That helped our team feel that UA was truly investing in us," rather than taking their technology and maybe planning to disregard the people, he says. "We were allowed to continue our vision on a bigger stage."

Under Armour also assigned an internal IT staff member to the MapMyFitness staff, to make sure the newcomers had the technology they wanted, quickly. That's an effective technique for avoiding alienation, Viglasky says. Otherwise, people coming from an agile, fast-moving startup to a bigger place with established processes can easily feel stymied, she says.

When the deal was completed, Under Armour valued MapMyFitness technology at $12 million and its customer relationships at $3.6 million. On top of that, it expects that further technology development and cultivation of a community of athletes is worth more than $122 million. The idea is to compete with Nike and Adidas, which have built their own apps and wearable devices. The roster of MapMyFitness users has since grown to 31 million.

Nearly all of the original staff members remain. They recently moved to a brand new Austin office, with spin bikes in the conference rooms and a bank of treadmills that overlook Lake Austin. "The change is exciting," Thurston says.

Don't Expect Immediate Results

On the flip side, a corporate CIO should watch for a drop in morale among existing IT staff members after acquiring a startup, Raskino says. They might grumble that they could have come up with that cool algorithm or that innovative idea if they had been given the time and money to experiment. But buying startups can eventually infuse the acquirer with entrepreneurial drive, as Wal-Mart CIO Karen Terrell noted at a Silicon Valley conference in 2012: "It changes companies over time. It's changed Wal-Mart an awful lot." (Terrell didn't respond to requests for an interview for this story.)

Of course, a payoff isn't guaranteed. Even IT vendors with long track records of dozens of acquisitions don't get it right a significant portion of the time, Raskino says. CIOs know too well that when a big vendor gobbles up a smaller player, sometimes it disappears completely and customers are left wondering whatever happened to that technology, he says.

Sometimes, it takes years to see results. Wal-Mart has been at it since 2010 and is still in test mode with many ideas. In 2011, Home Depot bought Redbeacon, an online service founded by three former Google employees that helps consumers find local contractors. Redbeacon has grown since, but it's no powerhouse. Pet360 accounts for less than 6 percent of PetSmart's overall revenue, and it remains to be seen how much it will contribute.

But Laping, for one, is convinced that payback will come, with creativity and fortitude--and a strong relationship with the CEO. "He's willing to listen to every idea that comes to mind. I'm good for 30 ideas a week and maybe one will pop," Laping says. "I don't have fear about approaching him with a wild idea."

Copyright © 2015 IDG Communications, Inc.

1 2 Page 2
Page 2 of 2
Download CIO's Winter 2021 digital issue: Supercharging IT innovation