The old "buy or build" debate still rages on, but there's little debate on needing both approaches in the right circumstances. Jonathan Clark, EVP of Technology of Elsevier, laid out the need for being able to keep your ears open. For a highly popular title on pathology they interviewed the users of the book to understand that they were really doing with their time and in what circumstances they were using the book. Most of the times they can make a diagnosis without using references, but when the do, it's time to hit the books. It's especially dicey when they have to do differential diagnosis and try to distinguish between similar tissue samples. Jonathan showed some photos of a typical work environment, in which the book is perched right next to the microscope at which they do the pathology evaluations - with a PC in the background not too far away, but not in the loop. From the field studies they began to do iterative development of workable, shippable software to get week-by-week feedback from users on new features. Jonathan's slide showed at least five iteration cycles, followed by ellipses (...) then going out to deployment and release. This implies significant iteration.
Customers were directly involved in workshops with product managers and developers to get to the bottom of what needed to be productized. The effort moved quickly from a product focus to a client focus to understand exactly what was the problem that clients needed to solve. Diagnosis being key, they went to software that made it far easier to view diagnostic information with various potential matches side-by-side to enable pathologists to choose more easily between possible diagnoses. The final product, PathConsult, was not so different from the paper mockup, which displayed side-by-side photos of tissue samples and "diagnostic pearls" text beneath them to understand quickly what may the right choice. It's an impressive process with impressive results, especially because the result was fairly sparse in fancy features but rich in the exact content in the most valuable context. Listening carefully to clients doesn't always mean big and ornery solutions.
Renny Ponvert, President of Hemscott, Inc., a VSS-backed company, detailed the keys to the rapid, Silicon Valley-like growth that his financial content company is enjoying in the middle of giant competitors such as Reuters, Bloomberg and Thomson. In their instance being able to make careful acquisitions of highly specialized financial software and outsourcing providers to help them lower costs for producing financial content. This is a key factor in the financial space, where small new entrepreneurial companies are able to take new ideas that they've learned in major banks and market them to other institutions.
Renny put up a slide comparing the returns and risk for organic, joint ventures and roll-ups. While roll-ups have high risk, they also have the highest and largest returns. Renny advises making roll-ups standard operating procedure, but it requires focusing on companies with sales of less than $20 million and sales growth in excess of ten percent, with EBITDA of less than 9x and TTM sales of less than 3x. In other words, "Buy straw hats in winter," Renny advises - that is, have capital that's ready to move at the right point in the business cycle. Joint ventures can be profitable also, if the right "prenups" are in place, and gives you a chance to try out the fit before moving to acquisition, but be prepared for surprises. Whichever the technique, Renny reminds us to "Buy the steak, not the sizzle," and to make sure that the troops in the middle management layers making things work are willing to stick out the transition to new ownership. Other key road hazard on the way to success: beware legacy I.T. systems.
Key profiles of firms: founder-lead firms that are running out of liquidity and are in the market for planning, companies with strong middle management, and companies with strong products and already a legacy of success. Before you do the deal make sure to think things through, get the large stake-holders signed on to making the post-deal environment a success, and then move quickly to give people a sense that things have moved on into a fairly certain environment.
Both approaches are valid for a wide variety of sectors, but in spite of what both panelists were laying out there are still some significant differences in how these lessons are applied sector to sector. In finance there is a strong legacy of young companies coming along with new ideas that make their way into the marketplace fairly rapidly based on relationships in a very small and oftentimes geographically compressed community. In the sciences the legacy of renegade content solutions providers is fairly limited to date, so the need to leverage existing legacy products more efficiently is more acute. Buy or build? Whichever the choice, be willing to do your homework thoroughly.
