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Acquisitions: The Cultural Divide

· 5 min read
Roy Russo
Imperator Caesar

TLDR; On startup acquisitions: Your culture will change, intentionally or otherwise. Embrace it. Resistance is Futile

I was recently invited to speak at [McKinsey's Digital and Analytics Summit]( /dnasummit/), where I focused on digital disruption in large corporations, innovation labs, and startup acquisitions. Having experience over the years with startup acquisitions, I've had front-row seats on the good and the bad (mostly bad) ways in how they've taken shape. This short series is meant to be a landmine map for startup employees and founders, of the most common missteps I've witnessed post-acquisition, in contrast to the talk I have, which was focused on what corporate leaders could do differently after a startup is acquired to help preserve and grow their investment.

The Delusion

"Captive Greece captured her rude conqueror" - Horace

It never ceases to amaze me when startup employees believe their culture will be left in tact post-acquisition because MegaCorp keeps stating things like, "We want to adopt your culture!". I can only reason that employees are blinded by the potential of a payout, bonuses, and dreams of conquering the universe. This scenario hasn't played out since Rome conquered Greece, but somehow the acquired fanatically believe they will influence the acquirer to adopt their ways of life.

First, let's clear the air and burst the reality distortion field... the acquirer bought the acquired. So it stands to reason that the acquirer sets the rules and plan going forward. The acquired is no longer in control of it's own destiny, whether it's culture, branding, messaging, or core IP.

Ignorance or Malice?

I don't believe MegCorp sets out to change culture within an acquired startup. I believe a lot of the change begins unintentionally or is reactive. It's easy to blame The Culture Police (HR), but that's only because they're the ones on the front lines of the cultural cleansing campaign and therefore more visible. The actual drivers behind the culture shifts are more subtle to the outsider looking in and encased in concrete blocks that will never yield to any form of pressure or change.

There is a silver lining for those in fear of the coming change... In my experience, expect to be left alone for ~6 months. It takes at least that long for everyone to find their new cubicles, integrate tech/comm/finance/sales, and sniff each other out. That should give you enough time to either look for a new job or ready for change.

Culture is Shaped by Incentives

"Vae victis!" - Brennus

Large corporate culture is just different than startup culture. Not better. Not worse. Just different, and I believe that difference stems from incentive structure. I assume, maybe wrongly, that we have rational actors in most cases...

MegaCorp employee incentive:
I make it to the next yearly bonus. I keep my paycheck.

Startup employee incentive:
We make it to the next funding round. Our exit is a positive one.

To be clear, I'm not saying that one employee's mindset is better than the other. No. Simply, that incentives drive behavior, and if we take the above use of pronouns to be true, we already have a misalignment of incentives on acquisition day one.

Incentives are Shaped by the Company

An ordinary MegaCorp employee has little impact on overall company performance. Because of this, His/Her financial incentives are to hold on to their paycheck until the next yearly bonus. There is no equity event on the horizon... there may be a nice retirement account or pension, so the rational strategy is to hang on until then. Conformity and being risk averse are rewarded as a survival strategy.

An ordinary startup (or small business) employee has a measurable and noticeable impact on company performance. It's empowering. His/Her financial incentive is an equity event. Innovation and risk-taking are viewed as means to a positive end.

In short, on acquisition, a startup employee has lost his/her incentive to innovate, risk-take, speak openly and transparently within MegaCorp, because the equity event is done and there are only negative incentives to continue to do so. Continuing with a (foreign) startup culture and not conforming, risks losing a job and any earn-outs for the startup employee.

Options for the Acquirer

Acquirers have a choice.

First, and the more common approach, there's an attempt to align incentives. This often takes the form of locking in startup employees with golden handcuffs. Because financial incentives modify culture, the goal is that acquired startup employees fall in line and are enticed to adopt the acquirers culture with the hope of a large carrot at the end of X years. I've personally seen mixed results with this strategy, for a variety of reasons. Having a risk-taking/maverick culture conform can lead to embittered employees, but it gives the acquirer enough time to transfer knowledge and integrate the startup, if that's the ultimate goal. Of course, if key employees leave, and over a year later no one can get the software to run, you should question your strategy ¯\_(ツ)_/¯

Second, an acquirer can take a hands-off approach, allowing the startup to function as its own entity and preserve its culture. As it's that very culture that likely had a hand in its success. I was part of the Red Hat/JBoss acquisition where this proved to be a successful strategy, even over a decade later. RHT paid over $300 million for JBoss, and that investment returned multiples over time. This was due, in large part,to the RHT philosophy of investing in the winning formula JBoss had proven with more capital and sale support/channels. To this day, JBoss remains a cash-cow inside of RHT, with many of the original core development team happily employed (We'll see what IBM does...).