Entering the software economy | MIT Technology Review

Jeff: Well, if you’re six, 12 months out, the things I’m looking for… Now let’s say you have a non-tech company acquiring a tech company or even a large tech company acquiring a small tech company. When you enter the software economy, there are a lot of things that are different. One of them is the talent, the way people think, the types of people you hire, the culture of these software economy companies. And the big sign is how many key people are staying and, more importantly, what their roles are in the business.

So when you see acquired companies and the leaders of the acquired companies start to be promoted and take on bigger roles in the acquiring organization, it’s a huge sign that the cultures are aligning. The things the acquired company brings to the table are valued by the acquirer, the cultures fit together. Benefits, while taking longer due to product, technology, channel and market integration, might take a little longer. But if you see the talent integrating that way, I’d say that’s a pretty good sign. Because software is intangible intellectual property and is very much tied to the people who build and maintain it. If you have talent drains due to culture, compensation, or other things after an acquisition, that’s usually the main indicator that the thesis is going to go up in smoke. So that’s the first thing I’m looking for.

Now, in a private equity deal, you don’t quite see that, because the business is pretty much the business. In some cases the only thing that changes is the board of directors, especially if a company was well run and a private equity firm wants it to stay that way, there might not be much of change and that things continue as usual. . The only thing that changes are the shareholders. But when it comes to an operating company being acquired, talent is a good place to look for leading indicators.

Laurel: With a growing number of companies being attracted to the tech landscape you described, it seems like a crowded market. So how can a company differentiate itself to remain competitive and to be discerning in the search for investments?

Jeff: Yeah. I therefore believe that these theses are correct. Just being a holding company and buying something probably isn’t the best approach, although there are holding company models. Dubbing strategy and mergers and acquisitions, some might call it a mergers and acquisitions thesis or the integration thesis. So let’s take some examples. Vertical integration: if you are thinking of vertically integrating or acquiring a supplier, it could have a significant synergy, could have a significant differentiation. And if you take the time to put that strategy in place, find the right companies to acquire that fit the thesis, and make sure you fund the integration. Onboarding isn’t just a bunch of lines on spreadsheets, but it’s actually getting out in the field, in the weeds, figuring out operating models, people, business processes, tools necessary for successful integration and successful completion of your thesis. These can be differentiating and game-changing for companies, both in the market and in the P&L.

Laurel: And you mentioned earlier, which is the unknown risk, high reward aspect of acquiring tech companies, but new capabilities and talent is something a new company can offer. So what are the most common hurdles businesses face?

Jeff: I’ve talked about this before, it’ll be a bit redundant, but I would say the first is that you’re entering the software economy, it’s new to you. Businesses can go from zero to 100 pretty quickly, but they can go from 100 to zero. The landscape is littered with companies that used to be high-flying, leaders in their field, that have now disappeared and gone out of business. Were basically acquired in fire sales and someone is running out of long term maintenance on some of these businesses. So you’ve seen this in old-school desktop publishing, you’ve seen this in old-school CRM and ERP, you’ve seen this in various vertical applications serving vertical businesses. All of these sectors had once-dominant players who didn’t innovate, maybe lost their key talent, maybe had a messed up balance sheet, got over-leveraged, and all but disappeared and disappeared from the market. map as fast as they appeared.

Again, you can go from non-corporate to high-flying leader in five, six, seven years and just as quickly, maybe faster, to zero. It is therefore very important that the acquirers of these companies invest in them, understand this risk and realize that sometimes drastic things must be done in order for these companies to continue to grow and fly high, even after you think they have reached their peak.