Make or Buy: how to solve the dilemma for those who do Open Innovation

Create from scratch or acquire an already established startup? This is the dilemma faced by anyone who wants to engage in Open Innovation within a company. There is no universally valid strategy, as there are many factors to consider when defining effective acquisition strategies and creating dynamic and innovative management models, which vary depending on the characteristics and needs of the company that wants to innovate.  

The three actions to resolve the dilemma 

Designing the vision and defining the right business strategies are complex exercises. 

In particular, in dynamic and less mature markets, in addition to careful assessments of all exogenous and endogenous factors in the initial phases, one must consider the possible evolutions of the competitive context and also be ready for necessary and rapid updates of the scenario. 

Although conceptual exercises are the basis for defining the correct objectives, the ability to implement and the concreteness of action play a fundamental role in making ideas, storytelling, and slides real! 

During my experience, I have identified the three main actions that can help choose the best strategy for engaging in Open Innovation: 

1. Consider the necessary factors for achieving objectives

The first step to take is to understand what the enabling factors for growth are or, in general, which factors are needed to achieve the objectives. After that, one must evaluate whether they are already available within the company or if they need to be acquired. The make-or-buy decision must consider aspects of cost-effectiveness, complexity, and, above all, timing that is consistent with the overall strategy. 

Therefore, it is necessary to evaluate whether a make approach or the acquisition of an already established startup can accelerate the achievement of such factors, for example, by increasing presence in a new or not consolidated geographic area, providing useful skills and know-how to accelerate specific business lines, helping the development of ancillary businesses, new products and/or processes, or even presenting opportunities for aggregation in mature markets or sectors. 

2. Conduct an internal analysis

After defining which factors are missing, a careful internal analysis must be carried out to understand what the times and costs are, but above all, the capabilities and risks of implementing new technologies or developing and evolving the current ones. This is also where external scouting for potential acquisitions begins.

3. Analyze the target company

The acquisition of a new company obviously passes through a full understanding of the target company, its industrial fundamentals, and the synergies that can be realized. The team conducting the acquisitions must be cross-functional and cover all areas of expertise to identify all risks and opportunities.

An opportunistic acquisition style can be costly but, above all, can represent a high risk of subsequent execution. Therefore, a financial discipline and careful preparatory phase for understanding and designing the M&A strategy is required.

Factors to consider during the acquisition phase

When deciding to proceed with the “buy” phase, assessments must be made that heavily depend on the size of the target and the life cycle it is in. 

The main factors to consider during the acquisition phase of the target are: 

• the breadth of the reference market

• the products and services offered and their degree of obsolescence

• the scalability of the solution/product

• the positioning, competitors, and accountability of the business model

• the team responsible for the development and evolution of the offering

• the synergies and the integrability (if that is the strategy) of the new company, especially in the acquisition of a startup within a large Group. 

The importance of training and evaluating human capital

In Italy, even though there seems to be greater enthusiasm and attention in recent years, there is a lack of a structured activity for meeting between Corporates and startups that allows especially a business fabric like ours, characterized by many small and medium-sized companies, to understand the advantage of growth through external lines and that doing it alone doesn’t always mean doing it better! 

It is necessary to create structured meetings but, above all, training for entrepreneurs, managers, and startup founders to highlight how venture building tools, open innovation, and incubators – with their different characteristics for idea generation and development – can represent a lever for the growth of companies and our country. 

Training is the foundation of such awareness and the creation of new open and innovative management styles. 

Moreover, acquisitions, integrations, or partnerships, especially in digital and intangible businesses, where physical components are less predominant, rely on the correct evaluation of human capital. 

Having the right people in the right place and knowing how to motivate them is an exercise that is both complex and central. A common definition of objectives and the sharing of results are effective tools to create involvement, enthusiasm, and transparency. 

Evaluation of human capital, empowerment, sharing, and delegation represent the toolkit for a winning team!

Open Innovation as a response to the need to innovate

When talking about innovation and technology, it is necessary to overcome barriers that physiologically arise concerning the “new” and the capacity for integration. The integrability and capacity to integrate the “new” are closely related to the willingness and ability to integrate of the acquirer. The alignment of interests and the sharing of the acquisition project among all actors therefore concretely enable the realization of the synergies that are the basis of industrial projects and also of the rationales that often drive acquisitions. The value of a target company can vary significantly in one context compared to another.

The acquisition activity can serve to accelerate processes that would take longer if developed internally to create competitive advantages in sectors characterized by high dynamism where arriving first can mean becoming a market leader. 

Open innovation is a concrete response to the need to innovate, to do it quickly, and as much as possible in a customized manner concerning the needs of the acquiring company. This minimizes the risk of execution and integration.

Therefore, to build solid and sustainable competitive advantages and dynamic and innovative business models, M&A opportunities should be considered, with financial discipline, according to well-defined strategies, a clear vision, and effective implementation capacity, remembering that human capital and training, as well as the ability to work in teams and share objectives, represent crucial factors for success.

Startup Bakery is the Italian startup studio specializing in the creation of B2B SaaS companies with Artificial Intelligence. We offer aspiring  Co-Founders the opportunity to develop a business idea. We create investment opportunities for Professional Investors. We help companies in the innovation process.