To build or to buy (or partner)? Companies faced with the proposition of expanding their existing business model through innovation are often faced with these choices. Increasingly though, companies should consider building and buying simultaneously as a strategic choice in its own right.
There are different ways to categorise innovation. I like Doblin’s ten types of innovation which looks at innovation on the configuration of the business (e.g how it makes money, the network, structure and process), the offering (e.g the product and product system) and the experience (e.g service, channel, brand, customer engagement). Large companies wanting to innovate often look at enhancing all or some of these levers in an effort to extend their products and services, defend their position in a market or indeed create new markets.
Much has been written about large corporations flocking to Silicon Valley to find and acquire these innovations. In recent times, venture capital firms like Sequoia, have jumped on this trend adding new roles to their firms whose job it is to match start ups to Fortune 500 companies. These VCs are interested in these acquisitions as much as a lucrative IPO, as it can justify paying large multiples over the current valuation of the start up. For the company buying the start up they are hoping that integration into the existing business will justify the amount they pay. Given the high, very lofty valuations of these start ups (many of the high profile ones are greater than $1bn), integration is extremely important, which history shows has had varying levels of success.
But what are they actually buying and could they make it themselves? Take an example like Whatsapp? purchased by Facebook for US$19bn. It gives Facebook more presence in mobile, a large user base (arguably largely overlapping with their current member base), access to teams, intellectual property and a new product line in text messaging. Whilst users can be difficult to obtain particularly if they are ‘sticky’ on an existing platform, I believe Facebook could have built its own Whatsapp? team, intellectual property and product line in text messaging, tested it, learnt from it and then acquired (if the build was not successful or to bolster their homemade offering).
Why does this matter? Many innovation strategies go to a ‘buy’ decision too soon, which can lead to corporations paying too much for a failed integration. With access to cloud technology, platforms and web channels many companies could build (the product line, intellectual property and teams which make up innovation of their business model) or at least build in parallel to buying the target. The knowledge gained in researching the buy target whilst simultaneously building a similar innovation from scratch could be shared to better understand the market, user experience, scalability options and importantly the integration points to the main business…not to mention a better valuation of the target. Large corporations often pay consultants to provide an opinion of these valuation factors for a price, however I would argue that this is not the same as building, testing and learning for yourself.
So next time a ‘build or buy’ decision arises, consider a ‘build and buy’ strategy…If at the end of the day you acquire the target, the experience of building it in parallel may at the very least save a few hundred million dollars off a multi-billion dollar corporate shopping docket… and at the same time bring you closer to a successful integration of innovation.