Skip to main content

For most people, making a bundle from a start-up business – such as the $1-billion (U.S.) that the entrepreneurs behind two-year-old photo-sharing service Instagram are getting in cash and shares from Facebook – seems like a dream come true.

But for those who conceive and grow a business, selling control is often anything but a dream, said Daniel Debow. In December, he and co-CEO David Stein sold Rypple, their 50-employee Toronto-based computer applications company, in a multimillion-dollar deal. He's now a vice-president of the acquirer, Inc., which has more than 5,000 employees.

"Anyone who works in a high-growth start-up knows you put your heart and soul into it. If it's sold, it can work really well or not so well," said Mr. Debow, who had previously been on the management team that, in 2007, sold Workbrain Corp. for more than $200-million. "It all depends on how the acquirer thinks about what they're buying and how they treat the people they acquire. You want to ensure that the special environment you created is going to keep happening."

Story continues below advertisement

There are a number of ways something that appears to be a good match can go very wrong, experts say.

A big buyout can be like a lottery win by an office group, with some sharing the pot while others who aren't in the pool get left out. "That can be very divisive and people who don't share in the deal will tend to leave in short order," said Carmine Domanico, president and CEO of Cristal International, a human resources consultancy in Toronto that specializes in mergers and acquisitions.

Companies that buy start-ups are always at risk of losing the people that helped build the organization. "Typically when you have a small organization with only a handful of people, they're all pulling their weight, all doing something that the others can't do. So giving incentives in terms of money or perks to keep people on board is very important," Mr. Domanico said.

But money alone can't buy loyalty. When a feisty small operation merges with a large one, "even if they say they'll leave them alone, the reality often becomes different. Things can become bogged down in conflicting objectives, meetings and stifling bureaucracy, and that entrepreneurial spirit that gave everyone a buzz can fade. And that can make people think about moving to develop that thrill of fast growth and independence again."

Entrepreneurial types who love the thrill of growth and being on the edge will get the urge to move on if they can't get that rush in the bigger organization, said Becky Reuber, professor of strategic management at the University of Toronto's Rotman School of Management.

"They're used to calling the shots, making decisions practically at light speed and have developed very flexible ways of making decisions. They don't have to answer to anyone and they felt free to experiment because there was little to lose."

That generally becomes harder when a buyer has put up a huge amount of capital and expects a return on its investment, Prof. Reuber has found in case studies she has developed. "Even though the buyer claims that they won't be involved in daily operations, the freedom and discretion of the fast-track founders is almost invariably curtailed."

Story continues below advertisement

Staying top of mind in a bigger organization can become a problem. "The management of the acquirer has more to deal with and they are going to be less accessible," Prof. Reuber said. "Often it can end up having the founder reporting to a middle manager who has limited discretion as well. Bureaucracy creeps in and the speed of decision making can become frustrating."

In fact, the whole advantage of fast growth and innovation can be lost in the process of combining a small entrepreneurial culture with a big one, said Brian Anderson, assistant professor of entrepreneurship at the University of Western Ontario's Ivey School of Business, who's researched acquisitions by bigger companies of small entrepreneur-led businesses.

"The research literature shows that most acquisitions fail to develop the kind of value the buyer hoped to create, and in fact most acquisitions fail to create any meaningful value for shareholders," Prof. Anderson said.

One reason is hubris: thinking you can do a better job of managing and extracting value from the assets, Prof. Anderson added. The Daimler Chrysler or AOL-Time Warner mergers are good examples, not because their products were dissimilar but that management overestimated its own abilities.

A second reason is cost structures: the belief that the two firms can gain economies of scale by integrating costs and eliminating redundancies. That's often harder to do than management assumes, according to Prof. Anderson.

The third and biggest issue is culture clashes: Once the deal goes through, many organizations expect the newcomers to adapt to their way of doing things and the old entrepreneurial start-up disappears. For example, some tech giants, including Google, have made acquisitions in Canada and moved the operations to California. And there's a big risk that entrepreneurs who go from being the CEO and top manager to being just another manager in a huge organization can become frustrated.

Story continues below advertisement

The staff of the company that's acquired may want to maintain its identify as a team, "but the more you try to build firewalls to separate the group from the bigger operation, the less able you are to extract value from the relationship," Prof Anderson explained.

"And that's where having congruence in culture and having an entrepreneur founder who is willing to step up and embrace the culture of the acquiring company becomes really critical. Those taken over need to really want to work for the much bigger company to make it work."

A focus on culture compatibility has made the Rypple acquisition go smoothly, Mr. Debow said.

"It's incumbent on the leaders of the company that is being acquired to make sure they know who they're being acquired by and to know what the leadership and culture is like. I know that in other acquisitions I've seen, bureaucracy creeps in, but we did our homework on this one and it's playing out as we hoped – even better actually."

To give people incentives to stay, virtually everyone from Rypple got raises in the move to, with many employees also eligible for equity or stock options. They were welcomed on their move to Salesforce's offices after the purchase and they were given desks together to keep their team feel.

"The key thing in cultural fit is helping people feel their previous organization is not being subsumed but is getting better," Mr. Debow said. "Other things included letting employees continue to wear the casual clothes they're used to wearing to work and have the kind of flexibility in work hours they've been used to. Even more subtle things included continuing traditional ways the team would have fun together, like week-ending beer parties.

"The Rypple team hosted a beer bash with Salesforce staff as a get-acquainted event. If they had said 'we don't do things like that here' we would have felt less than great."

Report an error Editorial code of conduct Licensing Options
As of December 20, 2017, we have temporarily removed commenting from our articles. We hope to have this resolved by the end of January 2018. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to If you want to write a letter to the editor, please forward to