Entrepreneurship Innovation Jan 4, 2016
Should You Skip the Startup?
The case for entrepreneurship through acquisition.
Thomas Hawk via Creative Commons license. Image has been altered.
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.
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.”
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