Healthcare Technology Blog

The official healthcare technology blog written by the secret agents of MI7.

It is cheaper to wait and pay more later

Posted by Richard Bagdonas on Sep 2, 2016 12:00:00 AM Austin entrepreneur with 4 acquisitions and 2 exits to the public markets. Proud father, husband, and philanthropist. @richardbagdonas

Oftentimes I hear people wonder out loud why a company would buy another company for much more than it would cost to build it themselves. For example we recently saw Uber pay $680,000,000.00 for a 3-month old company named Otto.

First up is risk

Large companies stay away from the risk that was once affordable during their young, nimble, and risk-tolerant days. Executives at major corporations typically fear innovation until it is proven out by someone else at which time they can afford to put their reputation on the line.

This leads us to find significant value generation built by young companies doing innovative things in industries filled with well-established players.

An example of building a market and showing a dominant player where it exists was most recently brought to us by the fine folks at Patient IO. This 3 year old company found 30 customers for their patient care coordination product before athenahealth pulled out their checkbook and scooped them up.

Athena most certainly had the talent to build a mobile app and integrate it into the athena API’s for care coordination. The key was waiting to see what Jason, Colin, and Brian did for their customers. Athena had a great vantage point given they invested in their latest round of funding.

A good friend of mine used to buy small shipping companies in regional markets by the dozen for his employer — a national logistics company. The reason he gave for spending $200MM on a company that was in a market they could build for under $100MM was they “de-risked” it for them and allowed for my friend’s company to use their distribution muscle to take it to a whole other level. There was too much risk to go into these regional markets.

Next is focus

Companies are focused on their core business and oftentimes forget to look outside. It isn’t until growth issues at the top of their product’s scaling hit hard that they search for additional lines of revenue. By then it is too late to build and so they buy other product lines.

Investors like the story of one company buying another. It has “winning” written all over it.

Lastly it is hard to get past the one-hit wonder

Many companies become one-hit wonders due to the time it takes to build and own a category. They have a distinct need for the infusion of younger talent to drive them where they need to go. This is why we often see the technical leadership at the acquired company going into an innovation or research and development arm of their newly-found parent company, or the CEO becoming the lead of the new product category.

These large companies are looking for magic and have trouble finding the Harry Potters within their own organization.

Innovate regularly

I feel the key to mitigate risk, maintain focus, and find secondary products is with innovation days. Several companies I have been close to spend a few days each quarter where entire groups of employees try to innovate around their current product.

My friend Bob Lee built Square Cash during one of these innovation days while he was the CTO at Square. Now he finds himself CEO of the Bubble Group where they manage innovation programs for other companies.

The message here is “always be thinking about innovation” to the point where you are looking to build your category killer. Just because “it has always been done this way” doesn’t mean it should, or it will.

Many companies come to MI7 saying they don’t understand why we got rid of virtual private networks (VPNs) when performing electronic medical record integration.

“Everyone uses VPNs” they say.

Well yes, most every company still uses them and it still takes 6–12 months to get an integration project completed using this archaic methodology. Security teams still have to meet and still spend months talking about it.

Our solution Q eliminates the need for VPNs and is more secure which completely blows people’s minds. I always enjoy waiting for the “deep breath” during the calls where the technical folks on the other end exhale and question why they ever used VPNs to begin with.

Stale and outdated software will run its course and most companies get replaced by younger companies with great products, unless these large companies acquire them first.

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Topics: Startup, Innovation, Mergers And Acquisitions