Preserving the secret sauce of a tech startup through integration

Posted by Eileen Fernandes, Kevin Knowles, and Britney Sussman on January 31, 2019.

The “arms race” for more capable talent has led many companies to acquire startups in order to fill emerging needs. This trend of “acqui-hiring” is becoming more popular than ever, and it’s not just larger tech companies buying smaller ones. Increasingly, companies across all industries and sectors are buying tech startups to close the talent and innovation gap. But while an acqui-hire can offer a more expedient path to the right talent mix, the workforce integration is far from simple.

An acqui-hire deal might make sense on paper, but when cultures quickly begin to clash, deal value gets eroded—so much so that one-third of companies say cultural integration is a primary reason M&A transactions fail to meet their stated transaction objectives.1

There are several distinct cultural attributes or ways of operating—the “secret sauce”—that typically characterize a startup. Common behaviors include quicker decision-making, a higher risk tolerance, agility, the ability to fail fast, extraordinary innovation, and a laser focus on results. The startup culture, or how the work gets done, often looks very different from the culture of a larger company, which may have more rigid processes, compliance requirements, conflicting incentives, and/or additional layers of buy-in required to move an idea forward. If culture is overlooked as a critical aspect of integration, one of two things can happen:

  1. The startup culture gets subsumed into the more traditional way things work at the larger organization.
  2. The Buyer leaves the Target as a stand-alone, in an effort to preserve the secret sauce—but fails to establish ways to work together, and the knowledge sharing is missed.

Tactics for effective integration
Preserving the secret sauce of a startup after an acquisition requires an intentional strategy to protect or integrate its culture and engage its employees. This was a hot topic during the second annual Human Capital DealMakers Workshop held at Deloitte University, where over 30 M&A HR professionals gathered to share best practices and lessons learned. Coming out of that conversation, here is a short list of tactics to consider:

Retain the founder to retain the employees—In most startups, the founder or select members of the C-suite are largely responsible for attracting key talent. A founder’s je ne sais quoi, those intangible qualities that make it easy for the organization to give unrestricted effort in pursuit of the mission, is a key ingredient of the secret sauce. Find out what motivates the founder (maybe it’s money, flexibility, or the ability to pursue the mission undisturbed), and make it easy for him or her to stay.

Make a plan for the brand, both external and internal—Often the business case driving the acqui-hire is a pure talent play, meaning the actual product or service the Target company has built is secondary. If this is the case, the Buyer must be transparent about the future product vision and roadmap. Same with the Target brand. Should open job requisitions be closed and reopened under the new Parent company? Will the Buyer’s employer brand drive more applicants than previously received by the startup? Product vision and brand need to be stated and socialized early in integration planning with Target employees and fully endorsed by the founder. Nothing erodes trust quicker among newly-acquired employees than being told the day after close that their product will be discontinued, their brand dissolved, and they’ll be deployed to other projects.

Prepare the Target for the integration road ahead—Given the size of most startups, it’s likely that many of the Target’s employees will have a role in integration planning. Unless they’ve been through an acquisition before, they won’t fully understand what they’re in for during the months leading up to close and beyond, including endless data requests, urgent timelines, and lots of change. Providing some sort of progress bar can convey that headway is being made without stifling the entrepreneurial spirit of startup talent through “death by milestones.” Startups are extremely mission driven, staying focused on the top five mission-critical objectives; but during an integration, it may feel like there are 100 things to focus on, all with same urgency.

The Buyer should focus on “two in a box” rather than the frequent 20:1. For example, the one Finance lead from the Target will show up to a meeting only to be greeted by 10+ representatives from the Buyer and an onslaught of questions. All of this can be overwhelming, exhausting, and drain the energy right out of the incoming organization, so establishing cross-functional buffers with the integration management office (IMO) and change management will help.

Mix it up—A typical approach to integrating two similar businesses is to consolidate: settling on one set of tools, consistent work processes, one R&D stream. But two media companies took the opposite approach to an entertainment integration: The curtains were pulled back, each was free to look at the tools the other was using and decide for itself which tools it would use. Similarly, each retained an R&D group that could continue developing its own ideas; because of this, both groups were more willing to share ideas and consult with one another, which helped both of them develop their ideas faster.

Startups are flat, easy-to-navigate organizations, so when faced with a larger, complex Buyer, it helps to deliberately introduce the Target to the right people, especially within the product organization. Take it one step further and match your Target key talent with buddies from other companies who were previously acquired. Embed subject matter experts (SMEs) and provide the resources the Target has been lacking to speed up product timeline.

Don’t be shy about development—Many startups have a strong culture of organizational learning, and their employees are pushed and challenged by wearing many hats and having a diverse set of responsibilities. But what they offer in stretch roles, startups often lack in formal development opportunities. This is where a Buyer with a more robust suite of learning and development programs can excite acqui-hire talent. Learning & Development programs coupled with clearly defined (but not unnecessarily rigid) career paths can provide intrinsic staying power, including for the Target founder or CEO. If he or she can see how to grow and have continued impact in the long term, it will smooth the transition from entrepreneur to employee.

Grab quick wins by listening for the little things—Even small changes in how the work gets done can have tremendous impact on satisfaction, productivity, and engagement. Sometimes the “secret sauce” is reinforced by the team’s ability to choose any type of laptop or to have a second monitor. Maybe their free-lunch Fridays aren’t just about food, but rather about the company coming together before the weekend starts. Certain Buyer company policies may need slight exceptions for a period of time beyond close.

In the end, even if the two cultures are 95 percent aligned, they will always be different, simply due to size and what happens to a company after it grows beyond a startup. But by anticipating and addressing these differences and being intentional about the culture shaping strategy, the secret sauce can live on long beyond deal close.

Eileen FernandesEileen Fernandes, is a principal in Deloitte Consulting LLP’s Human Capital practice and the Consulting Bay Area Managing Partner. She focuses on serving clients in the Technology, Media & Telecommunications (TMT) industry.
2013-Knowles_04-hgh CROP   Kevin Knowles principal, Deloitte Consulting LLP, is the National Operations Leader for Deloitte’s Human Capital M&A practice and a specialist in HR Integration and Divestiture.
Britney SussmanBritney Sussman, is a senior consultant in the Human Capital practice of Deloitte Consulting LLP with a focus on advising organizations on culture integration and activation through M&A deals.

1 Cox, J. (2018). Executive Summary: Mitigating Culture Risk to Drive Deal Value. Mercer’s M&A Readiness Research 3.0. 12.

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