Let’s talk technology acquisitions!
I’ll be honest — technology acquisition may be my definition. I define it as an acquihire where you also buy a piece of technology, not intended for monetization. That means, you do not intend to (or it is unclear how) you make money from the technology directly.
If you only buy the technology, i.e. the team does not come along, it’s called an asset purchase.
How do companies acquire technology?
There are three ways for a company to acquire technology. They can either build it, pay a third party to provide it, or through a technology acquisition. Let’s explore more in detail.
1) Build the technology
It is expensive to build technology. Not only do you need to invest engineering time to build it but also to maintain it. On top of that, it’s in general slow to build. That said, you have full control to customize and change as you need.
A company aims to build unique technology that gives them an advantage over competitors.
2) Partner with a third party
For technology that’s not unique it’s usually advisable to pay a third party to provide it. Note that, technology that’s available to buy from a third party is, by definition, not unique since all competitors can buy it as well.You need to invest time to negotiate and integrate but this option is faster and cheaper than building, otherwise you are doing something wrong. Of course, you lose control to customize the technology.
3) Buy a company with the technology
When you buy a company with the technology the upfront investment in engineering time is skipped. You will, however, still pay for maintenance, integration, and of course the cost of negotiating the deal. You could expect to perhaps complete the deal in ~3 months and then invest, at least, ~3 months to onboard the team and integrate the technology.
Why acquire a company for technology?
If you read last weeks post you might remember that talent acquisitions are opportunistic in nature. The same is true for technology acquisitions. A company with a great business is too expensive to buy for the technology only (since we don’t intend to monetize it).
When to acquire a company for technology then? I think the question can be approached from three scenarios:
- You have already built the technology, do not acquire the company if their tech. is not significantly better.
- You don’t have the technology but it’s on the roadmap, this could be a great opportunity to accelerate your roadmap and also add talent needed in the organization. Consider acquisition.
- You don’t have the technology and it’s not/was never on the roadmap, you should probably not acquire. Why was it never on the roadmap? If no strong drive for people on your team to build the technology do you really think the right amount of resources will be staffed on the project once acquired?
Based on above, it seems like acquiring a company for technology does not often make sense. You are correct Madame.
Logically, most companies have built their technology in a vacuum from your business and therefore it will not be a great fit most of the time. (What is the odds they happened to build something on your roadmap?)
As with acquihires, technology acquisitions tends to happen through your own network of partners. Often, you already worked with the company or are in talks with to let them provide technology as a third party. For example, a company is providing a technology to you as a third part. They are still small and you see a potential in differentiating your business with their technology. Consider exploring the potential to acquire them if you also think the team is great.
How to evaluate?
Technology acquisitions are in general at least as much about the team as the technology. They are the ones who will drive it forward once in your company. Typically you want evaluate four areas before acquiring.
The most important asset. You need to ensure the team can be successful in your organization. I wrote deeper on this in my last pst.
You need to understand the quality of the technology and assess how it would fit into your current solution landscape. You need to get dedicated time from an engineering team to conduct this analysis. If possible, try to estimate expected time to integrate the technology but don’t get lost in the details. Is is about understanding, on a high level, the cost of engineering time once the company is acquired.
Since we are assessing a technology acquisition, i.e., we don’t expect to generate revenue directly from it, we need to approach the price from a cost perspective. What would it cost to get a similar team and technology without an acquisition? To understand this, you need to calculate the baseline for what it would cost to build the team and technology yourself and then also subtract integration costs if you proceed with acquisition.
[baseline price] = [cost of team] + [cost to build] – [cost to integrate]
Cost of team is what it would cost to recruit a similar team through an external recruiter. Easy to estimate with same method as for acuihires.
Cost to build is what it would cost you to build a good enough solution internally. Try to get an estimate by asking your engineers for estimated number of hours to build a good enought solution and multiple by cost of engineers. You can also estimate how much time the other company have invested into building their technology by estimating how many engineers they have and assume the worked full time on the technology. That number should be higher than what it would cost you to build a good enough solution (since they probably build things you don’t need) but it’s a good benchmark to test your assumptions against.
Cost to integrate is the cost to integrate the acquired technology. Try to get at least a guess from your own engineers how much time it will take. Remember, we are trying to get a ballpark number here.
Of course you may be willing to pay a premium for speed but without at least thinking through above you will not even know what that premium is.
4) Internal priority
Great acquisition dies in internal politics. Ensure there is interest in investing into the technology independently of the acquisition. You need to understand where in your organization the team will go. Talk with the leader and understand what their roadmap is. Ensure they are willing to invest.
Could you repeat all that in 10 seconds?
Look among your smaller technology providers if any of them could provide a competitive advantage to acquire.
Understand the soft dimensions, is the team great and would they be prioritized internally?
Get a baseline understanding for price to build internally. Use this when assessing if it makes financial sense.
Thanks for reading, if you have any questions feel free to send them over and I would be happy to explore.