Should You Skip the Startup?
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Entrepreneurship Innovation Jan 4, 2016

Should You Skip the Startup?

The case for entre­pre­neur­ship through acquisition.

The case for entrepreneurship through acquisition

Thomas Hawk via Creative Commons license. Image has been altered.

Based on insights from

Brad Morehead

In the mid-2000s, Brad More­head had a win­dow of opportunity.

He want­ed to apply his direct mar­ket­ing knowl­edge to build a nation­al con­sumer brand. He also want­ed a busi­ness with recur­ring rev­enue. And he saw poten­tial in the bur­geon­ing home-secu­ri­ty-alarm indus­try, which was in a state of flux due to advances in wire­less tech­nol­o­gy. Costs to devel­op and deploy those sys­tems were drop­ping. The eco­nom­ic cri­sis offered small­er com­pa­nies an oppor­tu­ni­ty to adver­tise more cost effec­tive­ly while estab­lished com­pa­nies were retrenching.

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But More­head also had a wife and fam­i­ly. The start­up life, with its uncer­tain timeta­bles and even less cer­tain out­comes, did not appeal to him. He also lacked the exper­tise required to cre­ate the prod­ucts him­self, as well as the indus­try con­tacts to build a client base.

So instead, More­head turned to a dif­fer­ent strat­e­gy: acquisition.

There are lots of ways to be an entre­pre­neur,” says More­head, an adjunct lec­tur­er of inno­va­tion and entre­pre­neur­ship at the Kel­logg School and own­er of the home-secu­ri­ty com­pa­ny Live­Watch. You can be an entre­pre­neur with an idea to change an indus­try, but you don’t have to start from scratch if that doesn’t fit your risk pro­file. Know­ing your­self can help direct you in the right path that makes sense.”

His expe­ri­ence with entre­pre­neur­ship through acqui­si­tion taught More­head sev­er­al valu­able lessons.

Pick the Right Tar­get for Entre­pre­neur­ship through Acquisition

Entre­pre­neurs who choose to buy and grow com­pa­nies have dif­fer­ent con­sid­er­a­tions than those who start from scratch. For one, they are faced with iden­ti­fy­ing the right target.

As an entre­pre­neur look­ing to buy an exist­ing busi­ness, you may not want to lay out your entire strat­e­gy to any­one who will lis­ten, but the free­dom to get feed­back about the prod­uct from trust­ed advi­sors — and to buy and test it your­self — can help for­mu­late that strat­e­gy. There is a huge advan­tage to being able to kick the tires.

A lot of star­tups are so con­cerned about demand risk that they keep what they’re doing secret,” More­head says. What’s nice about entre­pre­neur­ship through acqui­si­tion is that there’s no rea­son not to talk to peo­ple about what you’re think­ing about buy­ing. You can get real feed­back faster to accu­rate­ly assess demand risk. Then you know whether peo­ple want the actu­al prod­ucts or ser­vice you’re providing.”

Entre­pre­neurs also have to decide how quick­ly they want to scale and how quick­ly they want to exit. Morehead’s goal was to grow the busi­ness as quick­ly as pos­si­ble, so he pri­or­i­tized com­pa­nies that had teams in place that were com­mit­ted to stay­ing on and run­ning the day-to-day oper­a­tions. Had he want­ed to exit the com­pa­ny with­in a few years, he may have had dif­fer­ent criteria.

In the end, More­head bought two com­pa­nies: a more estab­lished one in Wis­con­sin and a rel­a­tive­ly young com­pa­ny in Kansas. The deci­sion came down to iden­ti­fy­ing com­pa­nies with the right mix of sta­bil­i­ty and growth poten­tial. As much as he want­ed growth to come fast, he also knew that the indus­try was still com­ing into its own.

The strat­e­gy that we were exe­cut­ing on was fair­ly self-evi­dent,” More­head says. You could see the trends in the indus­try — it wasn’t rock­et sci­ence. The key was on the exe­cu­tion side.”

They don’t know you from Adam. The best thing to do when you come in is under­stand before being understood.”

Be Ready to Reassure

Mak­ing changes to an exist­ing com­pa­ny — from changes in staffing to prod­uct mix to strate­gic focus — nec­es­sar­i­ly comes with some risk. An entre­pre­neur must be pre­pared to reas­sure ner­vous employ­ees that both par­ties are work­ing toward the same goals. Under­stand­ing their con­cerns is the first step in reas­sur­ing them that your con­cerns are aligned.

They don’t know you from Adam. The best thing to do when you come in is under­stand before being under­stood,” More­head says. They’re going to lis­ten to you because it helps them make more mon­ey; it helps them spend less time at the office; it helps them achieve their life goals for them­selves and their fam­i­ly. Help­ing them with those things helps you build rela­tion­ships and helps them build trust in you.”

Part of this reas­sur­ance includes being ready to han­dle fears that you may not have even con­sid­ered. In the case of the Kansas acqui­si­tion, uncer­tain­ty around the sale of the com­pa­ny made the local paper.

There was all this fear about the jobs mov­ing,” he says. Depend­ing on the town you’re going into, that can have a real eco­nom­ic impact. But that just wasn#8217;t some­thing I’d thought about. My whole goal in acquir­ing this busi­ness was continuity.”

More­head showed his com­mit­ment to the town by adver­tis­ing new jobs in the same local news­pa­per. Because he felt the need to put rumors about the future of the com­pa­ny to bed, some of those first hires local­ly were way more impor­tant than I would have real­ized going into the deal.”

Trust Your People

When he bought the two com­pa­nies, More­head kept both pres­i­dents in place. Their deci­sion to stay showed that they trust­ed our com­bined vision for what the busi­ness could become. It also helped con­vince me that I could trust them — and what they were sell­ing — to become a part of that vision.”

This shared vision came into play when Chris John­son, the pres­i­dent who stayed on to run the Kansas com­pa­ny, had to part­ner with More­head in ways More­head had not considered.

I was run­ning a meet­ing ear­ly on and I must not have been doing a ter­ri­bly effec­tive job,” More­head says. Chris came to me after the meet­ing and said, Brad, I was run­ning these meet­ings for eight years before you got here. I can prob­a­bly still help run these meetings.’”

Johnson’s offer remind­ed More­head that there were areas where employ­ees did not need Morehead’s help to keep the busi­ness oper­at­ing at a high lev­el. Get­ting out of the way was the most effec­tive lead­er­ship deci­sion he could make at that point.

That was a tough les­son in some ways to learn, but it was a real turn­ing point in my rela­tion­ship with Chris,” More­head says. He pushed back and showed me that there are a lot of oth­er ways to do this, and the peo­ple there were pas­sion­ate about mak­ing this a suc­cess, too.”

Wear Your Pas­sion on Your Sleeve

Peo­ple talk to me about star­tups and they say, I want to start this busi­ness because I’m pas­sion­ate about it,’” More­head says. They often don’t think about entre­pre­neur­ship through acqui­si­tion that same way.”

Fig­ur­ing out what style of entre­pre­neur­ship is the right fit for your per­son­al­i­ty is crit­i­cal to the suc­cess of a ven­ture. So while most peo­ple may not asso­ciate acqui­si­tion and pas­sion, being jazzed about your new ven­ture is not just the province of the start­up entrepreneur.

Almost every­body I’ve talked to who has acquired busi­ness­es still has pas­sion for what they are doing,” More­head says. It might grow in a dif­fer­ent way, at a dif­fer­ent speed, over a dif­fer­ent amount of time, but you still become extreme­ly pas­sion­ate about the brands and the teams that you’re now growing.”

Featured Faculty

Brad Morehead

Adjunct Lecturer of Innovation & Entrepreneurship

About the Writer

Fred Schmalz is the business editor of Kellogg Insight.

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