I am really delighted to welcome two guest bloggers to join our conversation this morning. They both bring expertise in acquisitions and mergers and very kindly took up my invitation to share their experience of working with different sectors. If this piece prompts any comments or questions do feel free to share them, I’m sure Steve and Jon would be happy to respond.
Charitable mergers are not often discussed, at least outside Dawn and Susan’s recent blogs on the subject, and we were grateful to Dawn for the invitation to share some thoughts on the subject based on our experience.
Steve is responsible for early-stage startup investments at Digital Science, working with founders to help build their products and go-to-market strategies. A founder himself, he has been working in the digital space since 1994.
Jon has worked with startups and supported mergers and acquisitions of varying scales while working in the corporate strategy team at Holtzbrinck, one of the largest media groups in the world. He has worked with a range of not for profits as a consultant, and during his time at KPMG and the Arts Council.
Dawn asked us to offer some thoughts on why acquisitions and mergers are so much more common in commercial environments than in charities and not for profits, and particularly so for early stage companies and those providing digital products and technology-based services.
Commercial entities are thought of in terms that lend themselves to merger or acquisition. The value they provide is tangible in a product or a tool, with an established customer base and other well defined and easily identifiable assets that can be transplanted into a different entity. This is less the case for many charities where the value offered is less palpable (although no less real).
This partly explains the huge industry set up to support mergers and acquisitions of commercial companies. Due diligence is much easier when the focus is figures on a balance sheet rather than impact and change achieved. The presence of this industry is one explanation for mergers and acquisitions being more common in commercial spheres – it is much easier to seek advice and start a process – although clearly there is cause and effect in both directions.
However, most successful commercial entities do resemble not-for-profits by being heavily invested in a mission. Founders of all stripes are motivated to change the world in some way, generally in a field they know well and have developed insight into how change can be achieved. We see this particularly in some early stage investments, where a strategic investor (like Digital Science) can add value because of mission alignment and personal fit between founders and investors. A commercial company combines passion for a mission with a commercial pragmatism and planning. This gives them a flexibility to pivot their business mode to adapt to changes in their market – whether they are reacting to customer preferences, new competitive threats or legislative issues.
Not-for-profit founders tend to have a more intense emotional investment in the mission of the organisation they have founded. The mission generally remains their focus, rather than success of the entity.
These comments are focused on startups and early stage companies, but we believe these distinctions are critical, because of how they affect the development of organisations. With success of an entity as a focus, progress is defined early on through key metrics and KPI’s and scaling is targeted and tracked daily. This leads naturally towards commercial acquisition – revenue growth, customer engagement or strong margins will make an entity attractive to potential buyers.
In charities, scale can be a byproduct of success in achieving the mission. The change desired by the founders is achieved and more change can be achieved with more scale, and so the organisation grows. Progress is defined in terms of impact, not in terms of scale, although one leads to the other.
These distinctions are also evident in how failure is regarded and defined in different cultures.
In our experience, charities tend to be more accepting of failed initiatives and unsuccessful performance within organisations, but less accepting that entire organisations could fail or cease to exist. There is a reluctance that charities have come to the end of their lifecycle, either through the fulfilment of their mission or because they have not achieved the change they set out to bring. There is a reluctance from founders and funders and trustees to allow charities to die.
This is largely reversed in commercial entities. Failure of initiatives or poor performance is not well-regarded and can be harshly dealt with, but the ultimate end of an entity is a routine and natural event and is not in and of itself regarded as a failure. The failure of a previous startup is worn as a badge of pride by founders, and acquisition by or merger with another entity is regarded as a normal and successful exit – something like 15-20% of startups end up being acquired or merged.
There are lots of generalities in this piece, but they are based on our experience of observing companies and charities over a long period of time. We wonder if the differences we emphasise will reduce as more and more charities are technology based, and more companies emphasise their missions more strongly and the changes they can bring about in the world. A central consideration is that more charities will think about mergers and acquisitions as more think in terms of organisational rather than mission success.