I often get asked by start-ups planning for a future sale if it is better to invest in the business' infrastructure or should they just put all money back into R&D?
In just about every case I err on the side of R&D; however, I do promote infrastructure spending around people (and processes) in three areas: (i) your CFO (finance & accounting); (ii) your HR manager (people & culture); and (iii) your CTO (IP development & management). You should plow everything else aggressively into R&D.
Now many are probably wondering what about sales & marketing, facilities, integration or customer support? Those are important, but I wouldn't invest heavily in them and certainly outsource them if possible. My thesis is this: don't make long-term infrastructure investments in assets that an acquirer already has, instead invest in assets they don't have and need your product, IP, customers and market share. Let me give you some examples of how this works.
I recently did some consulting for a young software as a service (SaaS) company providing cost-management solutions to the health care industry. Instead of building an installation and integration consulting group internally, they created partnerships with several leading VARs and SIs in their industry. They received a percentage of the outside integrators' revenue for work the company brought to them and reciprocated on new deals sourced by the integrators.
By contrast I once worked with a start-up providing software solutions for patient and document management in the health care industry as well. The difference here was that this company did invest heavily on creating a internal consulting group for installation and integration. The consulting group worked virtual with clients and partnered with the company's sales force to complete its projects.
Here is why the first company would be (and is based upon current overtures) more valuable to me as a corporate acquirer.
- The VARs and SIs working with the first company are specifically in the business of installing and integrating. They are extremely efficient at it, are highly trained and can scale to respond quickly to customer's needs. But the three most important things are that they work at the customer's sight and charge for every second they are there, customer's tend to be more satisfied with the install and they can create customer applications on top of your solution.
- The other company spent a lot of money and time recruiting, hiring and training its integration team. Since the team worked virtual, its integrations tended to take much longer. They also had a billing problem, as their consultants were not as efficient and billed for only a portion of their time. Also, customers tended to use their consultant for ongoing support, instead of the much lower cost support team. In addition, they didn't work as well with their sales brethren compared to the outside integrators, due to lack of experience and internal conflicts.
In the long-run it was probably much more economical to build the integration team internally. But as an acquirer I am looking for a fast run-rate on revenue and more money put into R&D. The first company was able to do this - they were able to get a lot of smaller chunks of revenue very quickly and put a substantial amount of capital behind product improvements. They got market penetration and traction a lot quicker in addition to being the industry's leading innovator. Besides, as a larger company I may already have an integration team, so the management and the processes you've built are a waste to me, they're redundant, as I will just install my own.
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