Innovation restrained : unlocking the innovation of acquired software startups

The ability to exploit disruptive innovation is the main factor in a company’s continued success. The ability to significantly advance a field or create a new field is paramount not only to a venture’s ability to generate revenue, but it is key to our nation’s economic vitality. Yet today’s business environment is dominated by funding options and exit strategies focused on near-term results and unreasonable profit expectations (Estrin, 2008b).

Given these constraints, software startups must focus on incremental innovation to obtain initial funding. The result is an industry focused on short-term strategies that limit the likelihood of developing disruptive innovations and companies with long-term focuses. Current business models do not adequately address a key factor in preventing the loss of innovations and stagnancy in industries and their markets. New business frameworks and models are required that focus on preserving the core teams found in software startups and to provide them with the runway they require to develop disruptive innovations.

Nowhere is innovation more crucial than in the startup environment where the abilities to invent, adapt, outwit, and outlast on a shoestring budget predict success. This paper evaluates today’s business models to determine how they help overcome roadblocks faced by software startups in today’s acquisition environment, identifies related research, and recommends new models and adaptations to existing models to overcome these roadblocks.

“It is estimated that 70-95 percent of acquisitions fail. A significant percentage is due to the friction that is created by trying to integrate the startup with the large company's financials, HR department, product, market and business model. Most startups when they are acquired are uncertain on many of these dimensions, and forcing them to conform on any one of these dimensions to the large company can stunt their growth and often kill them.” – (Herrmann, September 2011)

This paper investigates how to preserve innovation within a startup and within an acquiring company, how innovation is interwoven in team members, the leadership characteristics that inspire innovation, and the importance of balancing the value of innovation against process. The recommended guidance and frameworks focus on preserving the core team and their innovations, as well as generating a strong return on investment, when an established business acquires a startup. The perspectives presented are based on the author’s experiences as a key team member in two startups in the mid 1990s, multiple failed internal incubation groups within a fortune 100 company, and in considering a new startup in today’s environment.