Building a Great Product is Not Enough to Get Acquired
WHY TECH ENTREPRENEURS MUST BE MARKET-ORIENTED
“If you build it, they will come” is often the unspoken adage of entrepreneurs who are building innovative products or technologies. Many operate under the belief that by focusing all of their resources on advancing their tech, a larger company will take notice and acquire their business.
But this technology above-all-else approach may be misguided, as shown by a recent study I have co-authored, alongside Helena Yli-Renko and Lien Denoo. Through our research, we uncovered another business fundamental that entrepreneurs should seek to nurture in order to proactively position their companies as attractive acquisition targets. Our study focused on biotechnology companies, who often face an undefined path forward when transitioning from a laboratory team structure to a functioning business.
Specifically, our study looks at how market orientation can affect a young startup's chances of being bought. Being market-oriented, or market-led, can have just as powerful an impact on acquisition prospects as technological factors, like product novelty or patents, and reputational factors, such as investor networks.
But what does it mean to be a market-led business? What are the benefits of allocating resources towards this pursuit? And finally, what practical steps can technology entrepreneurs take to effectively position their companies to earn the attention of acquirers?
Market orientation is achieved through activities that require a company to step outside of its insular world of product development, and includes activities like interacting with potential customers, competitive or regulatory research, industry engagement through events or conferences, data collection, and more. In the startup world, this is often called achieving product-market-fit (PMF). As it relates to the topic of acquisitions, demonstrating PMF not only allows the company to understand its place in the market, but it also allows the market to understand its place as a company. There are many acquisition related benefits to engaging in market-led activities, even though there has not been much research on the subject before now.
The goal of young technology companies, especially those with long R&D cycles or regulatory requirements, is to bring about innovative, differentiated technologies before anyone else. Acutely aware of their limited resources, it may be difficult for founders to imagine spending time or money on anything but this singular goal. After all, the research has previously shown that most acquisitions are motivated by the incumbent acquirer seeking access to the technological assets of the target company.
To appropriate another adage, if a company has the most exciting technology in its pipeline, and no one is around to positively position it, does the company still get acquired? This, we have discovered, is one of the biggest hurdles of tech companies acquisitions — potential acquirers in technology M&A markets are often unaware of the existence of many private targets, notably young and small ones, because those targets are simply not visible to the investment community.
However, our research has shown that the timing of market-led activities is crucial to having a meaningful effect on acquisition prospects, as it will be less beneficial at later product development stages. By communicating an in-depth understanding of end users' current needs, their future preferences, and market conditions early on, entrepreneurs can craft a compelling vision of the commercial potential of the venture, even if concrete product development milestones have not yet been reached.
So what can new entrepreneurs do to improve their chances of acquisition? While we did not test the effectiveness of each individual market-led tactic, the companies who did get acquired participated in the following types of marketing practices:
Gain a deep understanding of current or future customers, and interact directly and regularly with them to learn how to serve their needs better
Meet with opinion leaders (e.g. recognized medical doctors, authors, venture capitalists) to determine the potential future needs of end customers
Circulate and discuss customers’ current and future needs with all company functions, including R&D, and ensure everyone has a sufficient end-to-end knowledge of the product life cycle
Efficiently and effectively observe and respond to changes in the competitor landscape
Lastly, many entrepreneurs in this space may be thinking that patents can serve as market validating substitutes for demonstrating product-market-fit. While patents can serve as a type of currency in the markets for technological knowledge, they do not convey any information about the commercial potential of a technology. By performing a fuzzy-set QCA analysis (fsQCA), we observed only one possible pathway to being acquired, out of a total of eight different pathways in the data, where patents contribute to acquisition achievements when market orientation is not present.
As a founder seeking an eventual acquisition, you will need to be as strategic, methodical, and focused in understanding and cultivating your market-orientation as you are in developing your technology assets. It is not something that should be delayed and doing so will attract the attention of acquirers who will help further grow your business.