In the last 20 years, the entrepreneurial firm has become an archetype within both popular culture and business folklore. From Academy Award winning movies to comedies to documentaries, the entrepreneurial firm is a frequent object of fascination and study. Though these depictions are often dramatized or overblown, they ultimately demonstrate a fundamental truth of the 21st century entrepreneurial firm: the disruption of business culture by youthful individuals who have the talent and instincts to build promising products  from a few keyboards and servers.

This disruption in business culture manifests through a reversal in long-standing norms of legacy firms. These employees, often on the younger end, are likely to prioritize work-life balance, thus creating a greater urgency for both attracting and maintaining vanguard talent. This results in highly casual environments, high salaries and exceptional benefits, including state-of-the-art offices, new equipment, wellness stipends, etc. These new norms around business will only grow as millennials and Gen Z continue to age into management roles and entrepreneurial firms proliferate around the world.

These norms stand in contrast with the typical legacy company of the 20th century, which are often seeking to replicate the products and more generally, the success of entrepreneurial firms.

These legacy firms find themselves in the position to acquire these entrepreneurial firms, who present immense value proposition not just in their disruptive products but in the cutting-edge talent that legacy firms may find difficult to hire directly.

While these acquisitions present an ideal outcome for both the legacy company and the startup, they present many challenges. Thus begins the process of reconciliation and integration. The institutional legacy firm and the youthful entrepreneurial firm become Parent and Child. The Parent must train the Child the lay of the land while giving them room for growth, and the child must obey to the rules of the Parent as they learn how to function in the firm, and in a business culture that may seem outdated or foreign to them.

This paper focuses on the personal of the personnel: the culture clashes, the emotions, the tensions, and ultimately, the compromises and resolutions that come with an acquisition. Other considerations are also discussed, but primarily through the lens of people and change management.

There are five core value propositions of acquiring an entrepreneurial firm. The innovative offerings, delivery channels, and market capture will not just generate revenue for the acquirer but will offer a unique value proposition for potential employees: mastery of cutting-edge business and technological processes. This generates greater prospects for new hires. Therefore, the acquisition does not just promise talent through “acquihiring”, but through secondary effects of resembling an entrepreneurial firm.

It’s key to consider that many of these value propositions combine to an effect that is larger than its parts. Ultimately, the legacy firm will experience a kind of transformation into a more contemporary workplace as they seek to accommodate the demands and norms of the entrepreneurial firm in order to maintain that very vanguard talent.

This process into adjusting to a more relaxed and contemporary corporate culture, though painful, will ultimately future-proof the legacy firm for attracting and maintaining talent as younger populations become a majority of the workforce. This is especially true in the face of other labor phenomena that have emerged in the last few years, including the work-from-home revolution and the “Great Resignation”, in which white collar workers are more selective about their workplace environments more generally.

The consideration of the key value propositions of an acquisition need to be more broadly contextualized within the changing M&A landscape. The core reasons for acquiring an entrepreneurial firm have resulted in a flurry of new acquisitions. As seen in Exhibit 2, the number of acquisitions (and the values) of venture capital-backed firms has been increasing since 2017. As the 21st century matures into its second quarter, acquisitions will only become even more the norm.

In tandem with the rise in the number of acquisitions, the cultural differences between the acquiring firm and the entrepreneurial firm are growing as well due to differences in priorities between younger and older generations, as seen in Exhibit 3. This is a key issue to consider because millennials are much more likely to leave jobs that they consider undesirable. 21% of millennial employees are likely to leave firms due to a poor culture fit, three times that of members of other generations.2 In order to maintain the vanguard talent from a generally flighty cohort of employees, legacy firms have to resolve the cultural deltas that they encounter in acquisitions of entrepreneurial firms.

The normalization of acquisitions obfuscates some of the key issues that can come from acquiring an entrepreneurial firm. Some 70-90% of all acquisitions in 2011 failed4. A decade later, the failure rate likely persists. While every step of the process can contain pitfalls, it’s key to consider that many integrations need to reconcile vast differences. This paper posits that these failures can be traced to culture clash, given that its effects can ripple and manifest in other key integration workstreams.

95% of executives list cultural fit as fundamental to a successful integration5. In fact, while there are many dimensions to the challenges of an integration, the emotional components are often fraught. This is especially true considering that emotional components can prevent individuals from the entrepreneurial firms from understanding the most rational and best outcomes, even when related to something that may seem as objective as data access and compliance.  In order to prevent integration failure, the Parent must be cognizant of the key emotional difficulties that manifest from the core differences of the Parent and Child. The five main challenges are outlined below:

CHALLENGE #1: Difficulty of Integrating Offerings and Brands

Ultimately, most entrepreneurial companies are acquired because of their promising solutions and brand power.

a) For the child firm, individual attachments to products and brands are likely to be stronger due to the greater sense of ownership that employees at an entrepreneurial firm are likely to foster. This can result in tensions when it comes to sunsetting certain product features or brands ,

even if such changes may lead to greater revenue or a better user experience. When compounded with the existing technical difficulties of the integration, these emotional elements add more obstacles to an already thorny path to a better product and brand.

b) For the parent firm, the demands of the entrepreneurial employees when it comes to product or brand requirements may seem outsized compared to the scale that has been achieved by the legacy firm. This can create frustration, as the gatekeepers and developers of the Parent firm likely have more complex products and have much greater brand recognition.

CHALLENGE #2: Conflicting Systems and Limited Data Access

Integrating the Child company into the legacy Parent requires systems reconciliation, which has both technical and emotional difficulties.

a) For the child firm, this process bears great frustration. Firstly, employees will have to learn new systems and operations on top of BAU work. Secondly, they are likely to have been using simpler systems, which creates attachment-forming habits. Employees at the Child firm are also less likely to have faced data access and compliance barriers, creating confusion and frustration with the traditionally long processes it takes to gain data access at a legacy firm.

b) For the parent firm, complex native systems may seem intuitive, creating friction when working through the bureaucratic overhead of integrating the Child firm. The provision of access to tools, determination of which of the Child company’s systems to maintain, which data fields to grant access to, and the scoping of development work on top of BAU operations may seem arduous, particularly when faced with resistance from the Child company.

CHALLENGE #3: Clashing Org Structures

Integrating an entrepreneurial company into a legacy firm poses a unique challenge to personnel management. An integration requires restructuring, but with careful concessions to the Child company in order to maintain the vanguard talent, a value prop of the acquisition.

a) For the child firm, a key challenge lies in the willingness of individuals to cede control and adapt to the new mechanisms required, including but not limited to the new reporting structure. This also includes adapting to cultural nuances such as leadership and communication styles.

b) For the parent firm, individuals will need to exercise patience for when it comes to a delta in leadership, communication norms, and delivery expectations. Furthermore, the Child company employees may be used to a non-hierarchical structure, creating tension when boundaries are overstepped.

CHALLENGE #4: Incompatible Definitions of Success

A key tenet of an integration is the need to prioritize progress over perfection, as well as a consideration of the long-term implications of any stop-gap solution.

a) For the child firm, the objectives are likely to be quite different. For one, they may be more used to a growth-oriented as opposed to a profit-oriented business model. Furthermore, many members of the entrepreneurial firm are likely to have different values when it comes to their products and brand. They’re likely to think more about the user’s happiness and product quality as opposed to the bottom-line, with personal interests and investments attached to the industries that they work with. Furthermore, many decisions regarding integration happen at a very senior level. If there is little to no information communicated to lower-level employees with regards to decisions, planning, or progress, this can make them feel frustrated with a lack of direction.

b) For the parent firm, the ambitions and values of employees of the entrepreneurial firm may feel lofty and unrealistic. This can create tensions if everyone is not aligned around the same principles, goals, roadmaps, and KPIs. Therefore, the Parent company has to consider the setting of clear expectations when launching an integration.

CHALLENGE #5: Lack of Neutrality

Ultimately, both parties are almost unproductively invested in the integration. While they would like the integration to succeed, they feel as though it needs to happen on their terms, resulting in a heavy bias when making business and product decisions.

a) For the child firm, they are likely to think that the employees of the parent firm have outdated mindsets and perspectives. They often perceive a lack of forward, innovative thinking, which can create a dismissive or rebellious attitude towards the legacy firm.

b) For the parent firm, they may think that the individuals of the child firm lack expertise, whether it’s in firm-specific or industry-specific knowledge. This means that they are likely to take the concerns or ideas of the child firm less seriously. This is compounded by the fact that the members of the legacy firm are likely to feel more entitled given that it is technically their company that acquired the child firm.

Recommendation 1: Build on Common Ground

A key focus of the integration is the benefit of the end-user, which can serve as a guiding north star. This is a key first step to unlocking all other integrations, as it considers external and market impact, not just internal effects and systems. Creating unity through maintaining this definition of success will solve some of the emotional deadlocks and provide clear next steps for roadmap formation.

To start with, firms should run a comparative analysis of all functionalities, with special attention to the product cores. This is a key step not just because it outlines all that is possible, but because it will create a prioritization framework that exists outside of emotional entanglements. For example, some features are fundamental, and therefore they cannot be altered or removed. Others are value-added accessories that may be deprioritized on the roadmap, especially if the technical work is cumbersome. This analysis is best conducted by a detached party, in order to ensure true objectivity.

This feature comparison determines the workstreams and timelines. An iterative approach is best-suited to start this integration: starting with a minimum viable product, the solutions then expand to accommodate certain design desires or requirements from the entrepreneurial firm.

A key element of this approach is compromise. By positioning the product as user-driven, the product teams must set aside personal attachments to their solutions to drive a product that is best suited to their users. In other words, some features may be kept while others deprecated, and the product teams need to be ready to cede some control.

RECOMMENDATION #2: Upfront Planning and Communication

The key to solving issues regarding data is not technical, but rather backed by a business case. The process for unlocking systems and data needs to be transparent and clearly communicated to the child company in order to prevent tensions and frustrations. While the technical facilitation (e.g., through API development or algorithmic matching of data points) is a key component of the integration, the strategic approach to providing access is most important.

Thus stands the question of governance. Typically, Child firms are enabled to move quickly due to the absence of extensive overhead or hefty security measures and clearance regulations typical of a legacy firm. The Parent firm must think critically to present the Child with a path for data, technology, and tools access, starting with basic elements, and moving forward in complexity as time passes. This approach needs to be customizable to adjust to the evolving needs of the Child company.

At a base level, the Child company likely must migrate to using the Parent company’s systems. While the change management may have some pain points, the integration will not only smooth out administrative issues, but also provide both companies with new tech stacks to leverage. This is especially true for the Child company, which likely does not have the same extensive (and often costly) suite of tools as the Parent, whether for the facilitation marketing campaigns or data maintenance. The integration enables synergies that lead to more effective and efficient sales campaigns, administrative management, and overall cohesion as a unit.

Given that the systems integration will chart a path for other functions, it is key to consider which systems to integrate, in which order, and to what extent. Thinking critically upfront to enable the right access to the right teams at the right time will prevent blockers and frustration by enabling the Child firm to continue operating in their entrepreneurial mindset.

For example, stop-gap solutions may be prioritized over long-term integrations for the sake of moving quickly. In other cases, long-term integrations may be prioritized in areas that are not fundamental to operations for either firm. This prioritization is especially true considering that the integration must be completed on top of BAU tasks that require resource balancing for simultaneous execution.

 

RECOMMENDATION #3: Unifying Reporting, Org and Work

Leaders from the Child company must be presented with a value proposition for why they should be excited about the acquisition. Leaders in the entrepreneurial firms must realize the career benefits of possessing a leadership title in a legacy firm, even if it can seem like ‘demotion’ (e.g., CMO at a small firm vs. Marketing Lead at a corporation). Furthermore, the leaders from the entrepreneurial firm can often execute larger campaigns or drive greater results with the resources present at the Parent company. This motivates the Child company to let go of their attachments.

The Parent company should clearly outline the expectation of the Child company to adopt the communication and leadership techniques in order to succeed. This includes communication of aspects leaders at small firms may not be aware of or accustomed to, such as shared resources (e.g., horizontal sales teams, marketing services) that are now available to the entrepreneurial firm and can help them succeed at scale.

As the firms become more integrated, the most impactful leaders are those that can motivate and collaborate with the Parent company. This depends on individuals from the Child company’s ability to communicate effectively and in a manner the Parent company is accustomed to.

This may be as simple as hosting more meetings and sending fewer emails to accommodate the Parent company’s executives. However, this also necessitates the Parent company’s ability to clearly outline accountability and propel the decision-making process given conflicting interests between the integration and BAU work. The Parent firm must not be afraid to outline intangible norms to adapt to, such as understanding one’s role in a large stakeholder meeting or appropriate hours and mode of contact.

RECOMMENDATION #4: Rallying Around Milestones & KPIs

To combat confusion and frustration around progress, the Parent company must clearly define what success looks like for the integration, usually in the form of milestones for key integration activities, or KPIs to ensure alignment of how success is measured.

Above all, the Parent firm must communicate to the Child firm that moving slowly is acceptable and to value progress over perfection. The most effective way to do this is to set clear milestones with definitive timelines; reaching these milestones will help convey a sense of progress to the Child, assuaging doubts and anxiety.

 

RECOMMENDATION #5: Dedicating a Neutral IMO

Though an integration can seem like a minor task in comparison to BAU work, there are many functional dependencies on other processes that require an integration management office.

A neutral party makes for the optimal integration management office, because they do not have the emotional attachments that so often come with integrations. However, the office should be led by someone from the legacy firm with the entrepreneurial firm’s trust. Hiring externally for an integration office will likely result in the most detached party, thus increasing the likelihood of a successful integration.

Beyond understanding the five key challenges of a successful integration, foundationally, the Parent company must embody and encourage an ethos of compromise and mutual respect when tackling the integration of the Child company. Only by building a foundation of trust can the Parent company begin to tackle the higher-level challenges specific to a given integration.

It is critical for the parent company members to be amenable by making compromises, creating unity, and providing freedom to the child company when applicable. The legacy firm must also be organized and transparent when approaching the integration, which will build greater trust between the parent and child companies. Finally, the legacy company needs to be prescriptive by preserving management power through organized reporting lines, and clear elucidation of cultural expectations regarding ways of work, whether that be communication styles (e.g., emails vs meetings), expectations for in-office vs remote attendance, and delivery timelines and expectations.

While the acquisition of an entrepreneurial firm can help legacy firms boost performance; expand product and service offerings; and modernize antiquated business models, success hinges on how well the Parent can integrate the Child post-acquisition.

Beyond the challenges of tactical integration of technology and data processes and systems, the Parent must also view the integration through an emotional lens, recognizing the attachments of the Child to branding and firm identity. This includes extending compassion and comprehension to the frustrations felt, and to validate the emotions of the entrepreneurial firm in order to make them feel heard.

The Parent must prioritize needs over desires and hold progress over perfection as a central tenet to the integration. Above all, the Parent must be willing to compromise and listen to the Child firm. Legacy firms that understand the importance of integration will set themselves up for a future of success and innovation; in contrast, those who fail to understand the importance of iterating and compromising with entrepreneurial firms may find themselves unable to unlock the true value of the firms they have acquired.