996502

research-article2021
CMRXXX10.1177/0008125621996502CALIFORNIA MANAGEMENT REVIEWAcquisitions of Startups by Incumbents: The 3 Cs of Co-specialization from Startup Inception to Post-Merger Integration

Acquisitions of Startups
California Management Review
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DOI: 10.1177/0008125621996502
https://doi.org/10.1177/0008125621996502

The 3 Cs of Co-Specialization
journals.sagepub.com/home/cmr

from Startup Inception to

Post-Merger Integration
Nir N. Brueller1 and Laurence Capron2

SUMMARY
Facing constant pressures to grow, established firms increasingly harness external
innovation by collaborating with and eventually acquiring startups. To succeed in
their exit through acquisition, startup firms and incumbents have to master three
steps (the “3 Cs”) that enhance the co-specialization with the acquirer: establishing
the Complementarity of offerings, generating Customer endorsement, and attracting
an acquirer executive Champion. Drawing on a multiple-case, inductive study of
seven Israeli startup acquisitions completed by two acquirers from the information
and communications technology (ICT) industry, this article illustrates the different
approaches pursued by the startup firms and their acquirers to succeed in managing
pre- and post-acquisition processes.

Keywords: acquisitions, startup exits, startups, entrepreneurship, exit strategy

A
growing and increasingly important category of merger and acqui-
sition (M&A) activity is the acquiring of technology startups by
technology incumbents that are pursuing new products and tech-
nologies. There have been many such acquisitions in high-tech
industries over the past two decades, allowing incumbents to obtain technologi-
cal know-how or product extensions in response to shorter product life cycles.1
From the startup’s perspective, acquisition by a large incumbent may offer access
to complementary and otherwise unavailable resources that are needed to
expand its business.2

1Tel Aviv University’s Coller School of Management, Tel Aviv, Israel

2INSEAD, Fontainebleau, France

1
2 CALIFORNIA MANAGEMENT REVIEW 00(0)

Yet, acquisitions in general, and technology acquisitions in particular, pose

significant challenges for the acquiring incumbents as well as for the acquired
startups. In seeking to alleviate these problems, prior research has identified two
main mechanisms, both of which encourage early interaction between the
acquirer and the target before the deal is initiated. The first such mechanism is col-
laboration in the form of a strategic alliance,3 since an acquisition that is preceded
by a target-acquirer alliance will probably encounter “reduced organizational,
human resources and related cultural problems.”4 The second mechanism is the
use of corporate venture capital (CVC) investments, which offer the incumbent a
“window” on emerging technologies and markets, and thereby improves its odds
of successfully acquiring a startup.5 Taken together, these mechanisms—which
have been studied mostly by quantitative methods—suggest that incumbent-
startup interaction may facilitate the acquisition process and improve its out-
comes. Strategic alliances and CVC investments are relatively formal and
structured business mechanisms that are usually well documented by secondary
sources.
In contrast, other types of interaction between startups and incumbents
may be more difficult to pin down and thus call for a qualitative grounded
approach. Qualitative research has documented that acquirers can gain better
information on the true value of startups through “ecosystem involvement,”
which implies broader participation in the targeted startup’s ecosystem.6 The
resulting information advantage (over other potential acquirers) may well help
incumbents to identify good targets and not overpay.7 It is also interesting that the
interaction shortly before an acquisition has been shown to resemble a courtship.8
According to this view, startups evaluate potential buyers in terms of “whether
the buyer would ‘fit’ with the organizational ‘family,’ including employees.”9 In
addition, “sellers were more likely to be attracted to buyers with strong combina-
tion potential and to reject buyers without it.”10 Finally, some startups may
develop a clear preference for a particular potential acquirer, which practitioners
then refer to as the “acquirer of choice.”11
The literature has yet to develop a more complete account of the startup-
incumbent interaction’s nature or of the process by which it unfolds and eventu-
ally leads to an effective acquisition process. Of particular interest is the question
of how acquirer and target generate synergistic value through effective co-special-
ization. More specifically, what is the nature and evolution of pre-acquisition
interactions between startups and their eventual acquirers from a startup’s incep-
tion until its acquisition by an incumbent? To what extent does such pre-acquisi-
tion interaction affect the startup’s successful exit via acquisition, including its
effective post-acquisition integration within the acquirer?
To answer these questions, we examined the development process of seven
targeted—and eventually acquired—Israeli startups in the information and com-
munications technology (ICT) industry. We have tracked their patterns of interac-
tion with their incumbent acquirers throughout their history,12 from the startup’s
inception until its acquisition. We identified three distinctive patterns of startup
Acquisitions of Startups by Incumbents 3

incumbent interactions, which in turn impact the three steps (the 3Cs) leading to
effective co-specialization and successful exit through acquisition for the startup
firm. These three are Complementarity of offerings, Customer endorsement, and
Championship by acquirer executive. The first pattern is characterized by a set of
close and critical interactions between the startup and the incumbent. This pat-
tern is observed in acquisitions that are viewed as complementary to the incum-
bents’ offering and before the target makes a solid go-to-market commitment. The
second pattern amounts to broader, more distant, and less exclusive interactions
between startup and acquiring incumbent firms. This pattern occurs when acqui-
sitions are relatively less complementary and/or when the startup pursues an
independent (or even competitive) route vis-à-vis the incumbent, and it proceeds
in parallel with the startup’s go-to-market commitment. A third pattern consists
of startup firms engaging in limited or no interaction with incumbents. Here, the
targets tend to be unaware of their relative standing with respect to incumbents
and to exhibit reduced performance when acquired—especially if the acquisition
occurs at an early stage of startup development.

Method
For confidentiality reasons, we use fictitious names for all firms involved,
startups and acquirers. We studied seven startup firms: two of them (Platinum
and Actinium) exhibited close collaboration with the incumbent, three exhib-
ited moderate interaction with incumbents (Palladium, Osmium, and Silver),
and, finally, two had little or no interaction with the incumbent (Erbium and
Lutetium). Finally, four of the startups were acquired by Columbite, a technology
infrastructure provider, and the other three were acquired by Scandia, an enter-
prise software company. All the acquirers and targets belonged to the ICT industry
and were predominantly product firms and not service firms. See Table 1 for data
on all startups. The selection of startups for the study was driven by the inten-
tion to cover wide variance in the collaboration experiences between startups and
incumbents.13
The two acquirers, which operated in different segments of the ICT indus-
try, each had a market share of about 40% in their respective segments. Whereas
Columbite was the more acquisitive company, Scandia had historically relied on
organic growth and so had less experience with acquisitions. All the sampled
startups were located in the larger Tel Aviv metropolitan area. Israeli startups,
most of which are located in Tel Aviv or in its vicinity, offer a suitable setting to
address our research questions because the country exhibits the combination of
thriving entrepreneurship and an active market for corporate control.14
Our study relies on the “triangulation” of multiple data sources and types:
publicly available data, internal archives obtained locally from the companies in our
sample, interview data, and follow-up interviews with the multinational acquirers’
executives both locally and at the acquirers’ headquarters. As detailed in Table 1, we
accessed both local and international sources in hand-collecting archival descriptive
4
Table 1.  Description of Cases.

Target Price No. of Specialty Acquisition PMI

Target Acquirer Age ($M) Employees Target Informants Acquirer Informants Area Type Status

1. Platinum Columbite 2 118 48 1. Chairman 1. Senior Business Development Infrastructure Product High
2. Board member manager acquisition
3. CEO 2. Business Development
4. Senior R&D manager manager
5. R&D manager
2. Palladium Columbite 5 200 118 1. Chairman 1. Senior Business Development Infrastructure Product High
2. Board member manager acquisition
3. CEO 2. Business Development made after
4. Co-founder manager go-to-market
3. Local executive commitment
3. Silver Columbite 6 97 100 1. VP for marketing 1. Senior Business Development Infrastructure Technology Medium
2. CEO/mentor manager acquisition
3. Senior R&D manager 2. Business Development
4. R&D manager manager
3. Local executive
4. Actinium Columbite 4 82 48 1. Board member 1. Senior Business Development Infrastructure Product High
2. CTO and co-founder manager acquisition
3. R&D manager 2. Business Development
manager
3. Local executive
5. Lutetium Scandia 2 0.5 1 1. CTO and founder 1. Corporate executive for M&A Infrastructure Technology Low
2. CEO 2. Business Development acquisition
3. R&D manager manager
3. Local executive
6. Erbium Scandia 3 1 7 1. CTO and founder 1. Corporate executive for M&A Infrastructure Technology Low
2. R&D manager 2. Business Development manager acquisition
3. Senior local executive
4. Local executive

7. Osmium Scandia 7 15 20 1. CTO and co-founder 1. Corporate executive for M&A Application Product Medium
2. R&D manager 2. Business Development manager acquisition
3. Senior local executive
4. Local executive

Note: PMI = post-merger integration; R&D = research and development; CTO = chief technology officer; M&A = merger and acquisition.
Acquisitions of Startups by Incumbents 5

Figure 1.  Startup-incumbent acquisitions interactions: 3 steps (“3Cs”) leading to co-

specialization.

Note: PMI = post-merger integration.

data on the sample firms from internal and publicly available documents. To achieve
a fine-grained understanding of the issues, we carried out 45 in-depth, semi-struc-
tured interviews—an average of 6.5 interviews per case. Each interview lasted from
one to four hours. Table 1 lists the interviewees in two columns according to
whether they are associated with the startups or the acquirers. In the next stage,
interviews were transcribed by one of the authors and systematically coded.15
Data from each interviewee were compared with data provided by differ-
ent interviewees16 and also with secondary data from a wide range of sources.17
Emerging concepts were then identified, categorized,18 and analyzed,19 eventually
shaping into a conceptual model. The model is depicted in Figure 1.

Initial Startup’s Embeddedness as an Antecedent to the 3Cs

Process of Startup-Incumbent Co-specialization
In essence, the entrepreneurial process consists of spotting viable oppor-
tunities and taking action to exploit them for the purpose of fulfilling social and
economic needs.20 Accurate identification of an opportunity early in a startup’s
life may reduce unnecessary costs and expedite the development process, an
advantage given that “time to market” is paramount in this industry. Most of
the literature on spotting opportunities has been concerned with antecedents
reflecting an entrepreneur’s individual attributes—such as prior knowledge,
experience, and education21—that enable recognition of emergent opportunities.
According to the innovation literature, information about opportunities is imper-
fectly distributed.22
The entrepreneurship literature describes the ramifications of social embed-
dedness in this way: “On the premise that entrepreneurship is the creation and
extraction of value from an environment, being or becoming embedded must
6 CALIFORNIA MANAGEMENT REVIEW 00(0)

impact upon the entrepreneurial process.”23 Thus, embeddedness is defined as the

nature, depth, and extent of an individual’s ties to the environment. This litera-
ture has established that social embeddedness plays a role in passing initial screen-
ing processes with ecosystem partners and also that a poorly embedded
entrepreneur is less likely to engage with such partners—that is, since he fails to
attract them at the outset.24
Our findings provide support to the crucial role of startup’s embeddedness
in spotting entrepreneurial opportunities through increased information gained
by interactions with incumbents at an early stage. Initial embeddedness—which
varied widely across the seven startups—affected startups’ ability to learn how the
incumbent viewed the focal opportunity. Such information advantage in turn
enables the startup to initiate a more informed opportunity-spotting process. The
analysis of our seven cases reveals how incumbents may provide superior infor-
mation for opportunity identification by startups and may even help the startup
refine opportunities via direct interaction. In contrast, weak former ties to the
industry made it difficult to start a candid and open dialogue with an incumbent
concerning an identified opportunity. The key points relating to the startups’ vari-
ous development stages are summarized in Table 2.
Our results also demonstrate why collaboration with incumbents figures so
prominently in a startup’s search for viable market opportunities. First, all the
studied cases are technology startups; so here an important aspect of entrepreneur-
ial opportunity identification is having an intimate knowledge of the state of the
art in both current and emerging technologies. Hence, prior embeddedness in the
industry is useful because it provides knowledge of the preexisting technologies
that underlie an incumbent’s products and technologies as well as, in some cases,
insights into how they might be improved. Second, our findings indicate that—
direct technological insights aside—prior social embeddedness may facilitate con-
tinued close incumbent-startup interaction and may also yield strategic feedback
from the former regarding the business aspects of any opportunities being pur-
sued by the latter.

1st C: Establishing Complementarity of Offerings, Funding, and

Appropriate Capabilities Development
When deeply embedded into the incumbent’s ecosystem, the startup firm
is more capable of assessing the incumbent’s attitude toward the startup and its
innovation. In particular, it is important for the startup to assess whether the
incumbent will consider it a competitor, as a market shaper,25 or, alternatively,
view the startup’s offering as complementary and compatible to its own offer-
ing. The assessment of the degree of complementarity is important for several
reasons. First, this information is vital because it helps guide the startup’s choice
between pursuing an independent strategy and collaborating with the incum-
bent. Second, understanding how the startup is positioned vis-à-vis the relevant
incumbent increases potential investors’ clarity on the chances of a successful
 Table 2.  Key Points of Startup Development..

Discovery of the Post-Merger

Initial Closeness to Entrepreneurial Incumbent Involvement Funding Appropriate Value Degree of Validation of Challenges and
Target Focal Incumbent Opportunity In Funding Outcome Chain Development Startup’s Value Deal Type Outcomes

1. Platinum Co-founder a former The opportunity was One of the major investors Sufficient funding No requirement to build Platinum’s progress was Product Successful
employee of Columbite disclosed by Columbite was Columbite itself raised, mostly from a U.S. presence or a continuously monitored by acquisition integration; high
Columbite large sales force Columbite; within a very short status in Columbite’s
time, Platinum booked significant organization chart
sales

2. Palladium Co-founder a former Discovered while Columbite was presented Sufficient funding Built a sufficiently strong Acquisition after go-to-market Product Successful integration;
employee of Columbite previously working for with the investment raised from VCs marketing capability in commitment; validation through acquisition needed to generate
Columbite opportunity but passed light of anticipated exit referrals by key customers strong sales to attract
via IPO of Columbite, and support the attention of the
provided by an executive sales organization
champion

3. Silver Co-founders former Discovered through Funding by local and national Sufficient funding Weak sales, marketing, No executive sponsor within Technology Lack of leadership and
employees of a earlier employment by (U.S.) VCs with strong raised from VCs and BD teams; later Columbite. Although Silver had acquisition clarity about roadmap
competitor of Columbite Columbite’s competitor industry ties hired strong marketing some customers, they did not (mistakenly
executive attempt to approach Columbite considered
product by
Silver)

4. Actinium Co-founders were Pursued an academic idea, Investment by a fund known Sufficient funding Focused only on Magnesium, a major bank and Product Successful but delayed
ex-academics new to the detached from reality for its intimate collaboration raised starting at a technology development one of Columbite’s larger acquisition further development,
industry with Columbite very early stage until investors changed customers, approached causing Actinium to fall
its priorities Columbite to suggest that it behind its rival (which
acquire Actinium went for IPO)

(continued)

7
8
Table 2. (continued)

Discovery of the Post-Merger

Initial Closeness to Entrepreneurial Incumbent Involvement Funding Appropriate Value Degree of Validation of Challenges and
Target Focal Incumbent Opportunity In Funding Outcome Chain Development Startup’s Value Deal Type Outcomes

5. Lutetium Co-founders new to the Came up with the No incumbent was involved, Very little Devoted most of Beta system tested directly by Distressed Insufficient belief in
industry, no connection idea without industry either directly or indirectly funding from the its scarce resources Scandia, but no sponsor and technology the product; acquirer’s
with Scandia knowledge government; long to developing the no referrals from Scandia’s key acquisition (fire inability to execute
unpaid period technology customers sale)

6. Erbium Co-founders new to the The founders “rolled One angel investor was an Little capital raised, Focused on product Erbium approached Scandia Distressed Insufficient belief in
industry, no (legitimate) over” a technology from executive in Scandia; but did half of it from angels development and raising to validate and sell its product; technology the product; acquirer’s
connection with Scandia a previous startup that not get involved additional financing no referrals from Scandia’s acquisition (fire inability to execute
had failed customers, no executive sale)
champion

7. Osmium One co-founder was Osmium found a Funding by a binational fund Limited funding. Not Did not set up A senior executive champion Product Successful integration
familiar with the target customer relatively early bringing together startups enough to establish international or in Scandia led the relationship acquisition
industry thanks to former and then developed the and large firms—although a sufficient sales otherwise aggressive practically from the first
work as a consultant. No technology around that not one of this study’s effort sales effort. Then went meeting. One of Scandia’s
connection with Scandia customer industry incumbents looking for strategic biggest customers introduced it
partners (American to Osmium and provided very
OEM) positive feedback to Scandia’s
management about the Osmium’s
solution and the fact that Scandia
lacked such an offering

Note: VCs = venture capitalists; IPO = initial public offering; OEM = original equipment manufacturer.
Acquisitions of Startups by Incumbents 9

exit, hence increasing the startups’ likelihood of attracting funding when they
pursue a viable strategy. Third, it allows startups to properly allocate resources to
develop the necessary capabilities along its value chain, contingent on the envis-
aged positioning vis-à-vis incumbents. Taken together, incumbent-startup inter-
actions should yield valuable information on how the parties can enhance their
compatibility and complementarity as a first step toward co-specialization, which
implies endogenizing the synergy between acquirer and target in the case of an
eventual acquisition.26 Finally, in some less-frequent cases, incumbent interac-
tion may even inform the startup about de novo opportunities that align well
strategically with the incumbent’s interests and about which the startup would
not otherwise have known.27
For example, Lutetium—which was founded by two entrepreneurs new to
the market and with no connection with incumbents—lacked prior embedded-
ness and internal knowledge of incumbents’ underlying technologies. Its chief
technology officer (CTO) and co-founder, an industry outsider who himself came
up with the idea around which to build the startup, encountered considerable
skepticism. He commented,

I got feedback that it wasn’t good enough (never mind that Actinium, which was
acquired by Columbite, had the same idea, and it was good enough [for Colum-
bite], and I got the feedback that it wasn’t good enough), and also that I need a
prototype, a patent, and a letter of intent from customers.

Lutetium’s CTO and co-founder had to go it alone for a long period before
he managed to raise any funding: “I started as a self-financed activity for a year
and a half . . . I worked at home.” Eventually, Lutetium managed to get some
limited funding from a governmental program, but it failed to attract follow-on
investments. It devoted most of its scarce resources to developing its technol-
ogy. According to one of the company’s founders, “We were a total of six people:
CEO, CTO, and a research and development (R&D) team of three developers,
and one quality guy.”
Actinium, operating in the same segment as Lutetium but founded by
highly regarded ex-academics from a prestigious engineering university, was
somewhat better socially embedded owing to the founders’ previous academic
affiliation. Yet Actinium’s founders, too, were unsuccessful in their independent
attempts to identify a viable market opportunity. As one founder recalled,

Actinium was initially very theoretical, detached from reality, a little bit prema-
ture from that perspective (we were in academia) . . . It was almost like a solution
looking for a problem . . . And so we built a solution and then realized that, for
various reasons, the problem is either solved by other means or the market is not
there or the market is already taken by similar and good enough products.

Owing to their academic reputation, the co-founders of Actinium raised

capital with relative ease. As one of them revealed, “We raised two million dollars
10 CALIFORNIA MANAGEMENT REVIEW 00(0)

out of slides . . . it was more investing in us than anything else.” Moreover, one of
the investors was a fund known for its intimate collaboration with Columbite.
However, lack of strategic clarity skewed the resource accumulation process
toward the technology side:

It was a very technologic oriented company, and very little business oriented. We
were focused on technology first and then came the productization; less emphasis
on the product envelope than on the core technology than you would really want
if you want to build a long-term company . . . For the first year, we had nothing
but engineers.

This orientation did not change until investors associated with Columbite
demanded that Actinium changes its priorities: “And then we brought a VP [for]
marketing from the U.S. who basically started to put some business framework
around it.”
The founders of Erbium likewise sought a problem for a solution they already
had in mind, one “rolled over” from an unsuccessful startup with which they were
previously involved. These founders were also poorly embedded in the incumbents’
ecosystem, with one notable exception: an “angel” investor who happened to be an
executive working for Scandia. However, that person refrained from assisting
Erbium in order to avoid any perceived conflict of interest with his employer. In the
same vein, the founders of Erbium raised relatively little money: “Half of it from
VCs [venture capitalists], the other half from angels.” The difficulty in raising capital
drove the company to seek revenues. As one of the co-founders described,

We figured out we can no longer live on just raising money, we needed a real
business model, and we made a shift from looking at fundraising and gearing the
company towards fundraising, to gearing the company towards a P&L [profit-and-
loss] structure.

However, the firm failed to make this transition—largely because of the

insufficient financial resources at its disposal—and realized that generating
sales would come at a prohibitive cost while possibly failing to generate enough
revenue.
Osmium was better embedded in the target market because one of its co-
founders had once been a consultant in that market and therefore had some
knowledge about incumbents’ existing products. Osmium quickly found a cus-
tomer for its nascent product and then developed the technology around this
customer: “We had a local customer that we built the solution around them, kind
of experimented and verified that this is something that could operate.” Osmium
raised money from a government fund whose mission was to assist startups’ com-
mercialization efforts, but it was unable to attract any investment by venture capi-
talists (VCs). One of its founders explained, “Venture capital—it wasn’t that easy,
I think the market size, the scalability of this business is not as attractive as other
products are.” Osmium managed to generate sales, but it recognized the difficulty
Acquisitions of Startups by Incumbents 11

of funding its growth from internal sources alone. One of the firm’s founders
commented,

It wasn’t that much funding which we got. We managed to get some positive
income and revenue from customers . . . but it didn’t allow us to really grow and
set up a sales organization outside of the country or any kind of more aggressive
sales effort . . . in this business you need very powerful consulting teams which
will actually do the pre-sale and the post-sale implementation. We didn’t have
enough resources for doing it, so we looked at different alternatives . . . So then
we went more to look for strategic partners like this U.S. company that we had
this OEM [original equipment manufacturer] agreement with. We actually had
discussions with a competitor of Scandia.

The founders of Silver enjoyed closer proximity to industry incumbents,

having previously worked for one of Columbite’s rivals. In their prior company,
these entrepreneurs had recognized that the market was offering no scalable solu-
tions and believed that they could develop a technology to overcome this limita-
tion. One of Silver’s R&D managers indicated that

the idea behind the company was a technology idea and not a market need . . .
Everybody understood there is a scaling problem . . . Silver took it to the next level
of actually putting it into a completely different approach. It was a bold move in
the sense that you have to educate the market altogether into that approach.

A senior executive of the company revealed that its founders identified

the technology opportunity while working for their previous employer and
then they left “to do this company and from the onset they wanted to sell it
to Columbite.” However, the firm did not attempt to gauge whether its prod-
uct would complement or compete with the incumbents’ product offering.
The strong background of Silver’s founders allowed it to raise sufficient capital
from local and national venture capital funds with strong ties to the relevant
industry. However, the strong technology orientation of the firm’s founders ini-
tially skewed the resource accumulation process toward the technology side.
The strongest founder was described by one of the firm’s executives as a “bril-
liant technical visionary with absolutely no management skills.” The company
developed the product and then later developed a second generation, practically
redoing the entire R&D. In contrast to its strong technology team, Silver’s sales,
marketing, and business development teams were weak; also, the first VP for
marketing lacked relevant experience:

But she was American, so they figured that her English was good enough and the
rest is a piece of cake . . . Then came a succession of CEOs, but this founder always
found a way to kill them.

Both “Platinum” and “Palladium” were founded by the same team of three
experienced technologists. One of the co-founders, a former employee of
12 CALIFORNIA MANAGEMENT REVIEW 00(0)

Columbite, approached his previous employer to assess its reaction to the oppor-
tunity addressed by the new venture. As he recalled,

The idea was basically an idea that I had for a new component. It’s basically some-
thing that I did at Columbite, my previous employer, just before I left them, and I
thought there is a better way, more optimized way to build it . . . I went with the
idea of the component, and shopped it with some of my old colleagues in Colum-
bite, and they said: “We don’t like this idea, but we like another idea.” So I came
back and said: “I smell blood, and there is room here for two companies. One
[Platinum] is what Columbite wanted as the new thing, and the other one [Pal-
ladium] is the original idea that we had, the component, but we need to evolve it.

This exchange of critical information about entrepreneurial opportunities

worth pursuing was enabled by the embeddedness of one of the Platinum and
Palladium co-founders, who observed: “Because I knew the people from Columbite
at the time, I knew the way that they were thinking, and I knew about the need
in the market.” The openness with which Columbite continued to exchange
information with this co-founder proved to be valuable for both startups, though
in different ways.
First, it informed both firms about the incumbent’s attitude toward the
opportunities they pursued: the collaborative view of Platinum, for which the
idea came from Columbite, and the competitive view of Palladium. Indeed, this
co-founder reported, “They said very clearly and up front that they don’t care
about this [Palladium]. I found out later on that they had other investments that
were conflicting.” The co-founder who previously worked for Columbite
explained,

The most frightening thing related to my meetings with Columbite was something
that I couldn’t see when I was inside, as an employee, but when I got out I realized
that the NIH [not invented here] of the company is so high that they will never
acquire . . . specific technologies from outside. They would develop it themselves
because this is more of a core technology . . . But this is an example of something
that you can only realize when you are outside.

Second, the prolonged interaction provided essential information on the

appropriate products’ definitions. According to the R&D manager of Platinum,
Columbite practically defined the product to be highly compatible and comple-
mentary. Columbite sought to promote a new standard, so it needed a product
that would be compatible with this standard and complementary in the sense that
it would provide the functionality Columbite was missing, thereby enabling it to
provide a complete solution. Hence, Columbite agreed in advance that Platinum
would develop a compatible and complementary product and would do so quickly,
as befitted Columbite’s needs. In contrast, the Palladium product was less comple-
mentary with respect to Columbite’s offering. The early interaction with Columbite
provided guidance on how Palladium should modify the product after Columbite
Acquisitions of Startups by Incumbents 13

decided not to collaborate—in other words, so that it could be sold independently

in the product market. So in this case, the acquirer-startup interaction resulted in
the development of a stand-alone product that could be sold and used
independently.
Third, knowing Columbite, the co-founders decided that they needed to
ascertain that this incumbent was committed to the idea of Platinum, and hence
they took some time to verify that

we can really make significant business progress with Columbite. So we did some
minimal thinking about the idea, but we were mainly interested in testing how
serious Columbite was about that. Once we realized, it took us about a month and
a half.

Both Platinum and Palladium were well funded. One of the major inves-
tors in Platinum was Columbite itself, which maintained contact with Platinum
throughout the latter’s life. In contrast, Columbite had no interest in making an
investment in Palladium. One of this startup’s co-founders stated,

I told them what Palladium was going to do and they looked at it and came back
. . . They didn’t say, “You don’t need this,” they said, “We will never need this.”
That was the quote of Columbite at the time . . . We were fortunate enough to be
able to attract some of the heavyweights on the investment side who got a good
feel for it. I don’t think they completely understood the details of the vision, but
they had a good feel for “We can build something big here.”

For Platinum, the resource allocation process deliberately refrained from

unnecessary downstream investments; the reason is that its founders knew the
exit would be based on M&A. According to one founder,

we didn’t build a big sales and marketing force. We had only two people in the
[United] States at the acquisition time . . . So there was basically no need to build
a huge presence in the States and a huge sales force . . . We didn’t even go to a
[trade] show.

Palladium made sufficient investments along its entire value chain. One of
its founders remarked that “you always have acquisition as an avenue for exit, but
you cannot build on it exclusively, and we were building a real company going for
an IPO [initial public offering].” Another founder commented, “It’s obvious that
you needed more money for Palladium [than for Platinum]. The operation in the
U.S. is always expensive. The overhead is huge, and the cost of employees was
about 2:1 there.” The capacity to interact with customers was crucial for Palladium
being able to define a viable product envelope, as one of its co-founders explained:

We had basically a very sophisticated technology, and we had many, many appli-
cations that could have been served by it. But we couldn’t find anything that
14 CALIFORNIA MANAGEMENT REVIEW 00(0)

would cause the company to go in a very narrow way. It’s a typical marketing
problem. Usually you start very broad, and you are doing something very generic:
you can do this, and you can do that, and one of the problems early on is to make
the right bet that you are on to the right thing. In this case I remember, we met
some customers, and these people told us about problems that they are having,
and for me it was an event because I said, “Wow, the Palladium technology can
solve this problem that the customers are telling me about.”

These cases highlight the key role of embeddedness and its impact on
resource funding and development. When deeply embedded into the incumbent’s
ecosystem, the startup firm not only has the opportunity to gain deeper informa-
tion and be more effective in spotting relevant opportunities, it also increases the
odds of receiving funding from incumbents through greater visibility and interest
alignments. Startups that were weakly embedded in the acquirer’s ecosystem met
challenges to find funding. In contrast, startups that were embedded in the indus-
try received adequate funding. Furthermore, we find that incumbents’ involve-
ment in the funding process enhances a startup’s ability to raise additional funding
from other investors and thus increase its odds of properly developing the neces-
sary value chain activities. For most technological startups, the resource accumu-
lation process is skewed toward the technology side for a host of reasons such as
a lack of marketing experience, a shortage of financial resources, or the techno-
logical focus of the entrepreneurs. Most of the startups in our sample were much
more focused on upstream, product-related activities than they were on such
downstream activities as sales and marketing. The cases we examined revealed
that startups lacking connections to industry incumbents were even more likely
to underinvest in marketing and sales.

2nd C: Generating Customer Endorsement and Acquisition

Type
Investing in sales and customers’ relationships is key for making prog-
ress in the acquisition process, and startup firms can benefit from the incum-
bent’s close ties with some of its key customers. Referrals made to the incumbent
by such customers, especially when made at their own initiative, amount to a
credible signal that increases an incumbent’s confidence in the startup’s value.
However, a startup can benefit from this mechanism only if it has a working
product that could be tested in the market. Failure to demonstrate the product
to key customers compromises the startup’s ability to signal its value in this way
and has a negative effect on how it is viewed by the incumbent.
In the absence of any referrals from Scandia’s strategic customers, Lutetium
started collaborating directly with Scandia on the technology side and deployed
one of its Beta systems there. Scandia ultimately acquired Lutetium after the for-
mer’s first evaluation of the technology. However, without a product envelope
endorsement by key customers, Scandia planned to integrate the technology by
itself, after the acquisition. Scandia thus demanded that, prior to the acquisition,
Acquisitions of Startups by Incumbents 15

Lutetium discontinue all its marketing efforts with potential customers. One of
Lutetium’s founders recalled,

We had to shut down the customer activities. It was a barrier. We had to collect all
the pilots, and we had to bring from the customers a letter that they had no claims
from us. Without that, we could not have closed the deal . . . The business activity
was addressed as a liability [that] we need to completely resolve before the deal.

Erbium was also unable to demonstrate its value by working with Scandia’s
key customers. Much as Lutetium had, Erbium attempted to validate its products
directly with Scandia. One of its executives recalled,

We came to them and understood the needs, pitched something, and they said,
“Hey, we’re not so interested.” After a few months, we met again. After about
half a year, there was some initial interest. After an additional three months, a
lot more interest . . . it started as a discussion of being a customer, and then very
quickly moved into an acquisition. They came at a point where we already were
looking for a buyer, and they were looking . . . And then we said, “Hey, you know,
since we are waiting for a term sheet from another company, just be aware.” And
then it kind of escalated.

Scandia’s first in-country acquisition, that of Osmium, occurred at a later

stage of startup development (i.e., the product stage, not the technology stage)
and at a higher price. Unlike Lutetium and Erbium, Osmium did enjoy having one
of Scandia’s biggest customers make a glowing referral to Scandia. One of
Osmium’s co-founders commented,

Neon [a large consumer goods company that was Osmium’s, and one of Scandia’s,
biggest customers] helped us: they actually introduced us to Scandia, and they also
gave a lot of positive feedback to the management of Scandia about the solution
and the fact that Scandia is lacking such a component in their portfolio, and that
was really what made Scandia acquire us.

The acquisition of Actinium also evolved from the interest of a potential

customer, “Magnesium,” which was a top-tier bank and a major customer of
Columbite. One of Actinium’s founders recalled,

Magnesium came to us and said: “We like your technology [but] where are you
going to be two years from now? Who are your customers? You’re not estab-
lished.” And they called Columbite and told them they like this technology, and
then Columbite called us, and they started to do a survey among other customers,
so they said: “Wow, that’s very interesting.” That’s how it evolved.

The acquisition of Silver was more problematic because its technology

required intimate and widespread integration into Columbite’s products, and
hence there were differences in how the respective parties viewed this
16 CALIFORNIA MANAGEMENT REVIEW 00(0)

acquisition. Columbite just wanted the technology, but Silver believed it had a
complete product. An R&D manager at Silver recalled, “Silver didn’t look at itself
as an infrastructure company . . . when they talked about the valuation, we said
that a comparable company was sold for $300 million.” A senior executive at
Silver commented that Columbite reached the proper valuation after talking to
customers:

Part of the due diligence was who are your customers, come to talk to them, what
did they write . . . We had to have products sold, working, happy customers, cus-
tomers Columbite could talk to, ask for a reference figuring out what our future
sales were going to be . . . When they calculated the price we calculated how
much sales are we going to generate based on our product.

The acquisition of Palladium involved strong customer endorsement, as

described by its CEO:

We managed to get a strong relationship with some of the world’s key customers.
What we did made a lot of sense to them. So all those big customers go through
executive briefings with Columbite on a regular basis, and more and more of
them kept telling Columbite “this is a capability you’ve got to have.” We’re look-
ing at Palladium to do this for us. But you guys are being left behind. So this is
where we got the first call to say, can we talk about . . . and honestly, when they
called us to say can we talk, they looked at a very narrow aspect of what we did
at the time; we had a much broader vision. So when we came in, we educated
them that this is why customers want us, but this is where we’re going. And
suddenly it became a very intensive discussion. And again, we tried to say, how
about we partner? We tried to say, can we OEM the products through you, all of
which they said it doesn’t work, which now I know is true. But since our sales
weren’t high enough, we didn’t think this would be an interesting time to go, and
we felt that we were getting engaged with the right customers. So we . . . and the
process came up and went away and came up and went away for almost a year.
But it was the customers driving the field driving the business unit who were
approaching us.

As our cases illustrate, the nature of the interaction in the triangle of the
startup, the incumbent, and shared key customers serves to signal the startup’s
quality and helps the incumbent assess its true value. Interaction between the
acquirer and the startup will impact the target’s ability to invest in go-to-market
capabilities and to secure customers’ endorsement, both being crucial pre-acqui-
sition activities for the startup.

3rd C: Championship by Acquirer Executive and Successful

Acquisition Implementation and Post-Merger Integration (PMI)
Acquirers of technology startups are threatened by uncertainty and infor-
mation asymmetry.28 Incumbents therefore depend on their superior ability to
Acquisitions of Startups by Incumbents 17

assess the quality of a startup’s technology and the market potential of a fully
developed product. Our data reveal that the support of an executive champion
or sponsor at the incumbent firm increases an incumbent’s ability to create syn-
ergies with the potential target.
The support of an executive champion29 or sponsor30 at the incumbent
acquiring firm is essential for validating the quality of a technology startup before
its product gains market validation. These roles are well known (e.g., in the tech-
nology management literature) but not in the context of acquisitions. Our data
show that the commitment of a prominent executive, one who takes responsibil-
ity for sponsoring the startup and the acquisition integration, is critical for the
successful absorption of an acquired target. Similar roles have also been discussed
in the literature on “intrapreneurship”31—as one might expect given that, after a
technology acquisition, the acquiring firm still bears considerable risks in bringing
the product to market.32 Executive champions are important for intrapreneurs,
who must rely on a higher level person in the firm to serve as lead advocate for
any new initiative and to provide it with support and protection.
Without a committed sponsor, Lutetium founders felt demoted and frus-
trated following the acquisition. One of them commented,

They were very, very poor in the integration. There was a “not invented here”
culture, arrogance, and it took four years to be accepted. It’s an anti-acquisition
culture.

Erbium also lacked the support of an executive champion. Of Erbium’s 20

employees at the time of the deal, only six joined Scandia—and they were tasked
with translating their software from one platform to another. A co-founder who
stayed commented on the period following the acquisition:

You had to every day sell your company from the beginning each time to a new
person. So why did they buy your company? How much money did you make?
Everybody was trying to prove you . . . there was a lot of NIH syndrome.

Scandia’s first in-country acquisition, that of Osmium, occurred at a later

stage of startup development (i.e., the product stage, not the technology stage)
and at a higher price. The result was a different PMI process. Unlike Lutetium and
Erbium, the successful acquisition of Osmium owes much to a senior individual
within Scandia who championed further relationships between the companies as
early as the first meeting at Scandia’s headquarters:

We presented the product and we started discussing some kind of a cooperation

and this guy was very excited and actually this guy—I was with him kind of since
then until he left, and he was kind of my mentor and sponsor inside the company.
So he was actually the one that was pushing it and we were really surprised that
he said, “let’s meet in Israel in two weeks,” and actually they did come to Israel
two weeks after with like 4-5 people, got into additional discussion and then the
18 CALIFORNIA MANAGEMENT REVIEW 00(0)

first agreement was signed to start doing some kind of interfacing between Scan-
dia and our solution . . . [and they have paid] up front for this kind of integration,
assuming that the next step they will go into acquiring it, and this really hap-
pened.

This acquisition was successful despite Scandia’s relative lack of experience:

Scandia was completely not organized for really getting a new company in . . . I
think we kind of integrated together with Scandia’s existing team. We managed
very quickly to bring new ideas and new directions into the team, but it wasn’t
like given, and that’s a Scandia style . . . It’s not a very hierarchical company
where everything flows from the top and cascades down. Things really happen
at the bottom . . . It wasn’t clear that they owned the roadmap or we owned the
roadmap. We kind of worked together. We had some ideas about how we could
really boost the positioning and the functionality of the existing solution, which
we managed to convince them of and actually execute it. In a relatively short
time, we really changed the perception about this part of Scandia’s solution and
significantly increased the number of customers that they had. So this was very
successful, but it could have failed if the people on the other side were not that
willing or accepting and we were not that pushy, because it was like: “Okay, try to
do your best.” They were not really giving us a clear guidance about this.

The acquisition of Silver was more problematic. As one of Silver’s R&D

managers explained,

There were people who wanted to close Silver immediately, there were people
who were looking for visionary things, but there was no one to think about the
execution problem of taking this evolutionary path of what was there and turn-
ing that into something new, and put it through a reality check. I think it’s poor
execution, not only strategically, but also engineering wise.

The acquisition of Palladium involved a strong executive champion within

Columbite. The CEO of Palladium commented,

Now there’s always an internal champion in processes like this. Without some-
body inside who has the passion, who gets it and knows that this is something
that has to happen, it’s important for the business, and [who] is willing to spend a
lot of time evangelizing internally because out of pure belief, it’s hard to get those
deals done. So there were some key people within Columbite, not very senior, but
smart enough to understand what we were doing and what the customers were
looking for, who kept hounding to say we’ve got to do this, we’ve got to look at
this. And they looked at . . . once they decided to look at the space, they looked at
the space, not just us. We had a very good interaction with them, and we had, I
think, a key position in the field, which is important for them.

Platinum also enjoyed the support of a senior executive. As one of its co-
founders described his role: “He had to sign in blood, that he owned this, and he
Acquisitions of Startups by Incumbents 19

is responsible for making it profitable and justified that he had the budget to sus-
tain it above and beyond the acquiring price.”
The outcome of Platinum and Palladium’s acquisitions was different, as one
of the co-founders of both firms observed: “In the case of Palladium, it was a big-
ger acquisition, and Palladium was, at least initially, a business unit by itself. In the
case of Platinum, it was a smaller acquisition—we joined another business unit.”
It is interesting that the main post-merger challenges were related less to integra-
tion than to how well they could compete against other products:

In the case of Platinum, the biggest difficulty was to push a new vision into the
market [on behalf of Columbite] . . . There was more than one way to solve the
problem to the customer . . . In the case of Palladium, very similar—there were
other products or other technologies that could have competed.

Following the acquisition, the challenge for Palladium was to transition

its sales channels to those of Columbite. Palladium’s engineers were sent to train
the sales organization on the newly acquired products. The CEO of Palladium
noted that sales still took some time to ramp up: “first quarter was pretty bad,
after acquisition. Second quarter was [still slow], and then it started picking up,
sales guys really liked it. But it took almost two years to feel good.”
The R&D manager of Platinum said this about his development team: “we
were kept as an organic group, and after a year we started dissolving.” For
Palladium, the integration process was much slower because the company was a
few years older and more complex with “groups in the company, ties to other
companies, partnerships. You have more sales, your sales are more complex, ties
to the industry that you need to actually re-do.”
The startup’s ability to validate its value—which is a function of the start-
up’s stage of development and of its congruence with the incumbent’s strategic
focus (i.e., if the incumbent is interested in the technology alone or in the product
as currently configured)—determined the acquisition outcomes: its type and price
as well as the subsequent PMI process.
Although our findings relate to different stages of the startup development
process, they are connected as by a fil rouge.33 In each stage, achieving a requisite
capability milestone is a necessary but not sufficient condition for reaching the
next milestone.34 Throughout this process, collaboration with the incumbent has
a positive effect on rendering the next milestone more achievable.

Three Patterns of Startup and Incumbent Relationships and

Impact on the 3 Cs
Three patterns emerge from the various observed characteristics of our
focal acquisitions: Pattern 1 (co-specialization), Pattern 2 (some interaction),
and Pattern 3 (minimal interaction). We find that the most successful acquisi-
tions of startups by incumbents followed either the first or the second pattern
20 CALIFORNIA MANAGEMENT REVIEW 00(0)

of interaction. Through close and frequent interactions with incumbents that

reflected an intended co-specialization pattern (Pattern 1), Platinum and
Actinium managed to

•• strategically align their product offerings (complementarity of offerings);

•• increase the likelihood of the startup offering’s endorsement by a customer,
thereby reducing acquirer uncertainty about the startup’s value (customer
endorsement); and
•• alleviate PMI challenges through the efforts of the acquirer’s executives who
voluntarily championed the targeted startup not only during early interac-
tions but also during the entire PMI process.

These outcomes are the 3 Cs of co-specialization: complementarity, cus-

tomers, and championship.
Palladium and Osmium followed the second successful pattern of interac-
tion (Pattern 2). Given their prior knowledge of the industry and early engage-
ments—predominantly with customers and in a nonexclusive manner with
incumbents—these startups followed a pattern of distant interaction with a parallel
process of building up stand-alone capabilities in the service of an intended route
to independence. Both Palladium and Osmium benefited from the second and
third Cs listed above (customer endorsement and championship by acquirer execu-
tive), which facilitated the acquisition and led to a favorable PMI experience.
Silver followed a more hybrid path; its founders had previously worked
with an incumbent, learning about the market. Yet, when attempting to engage
incumbents, Silver found that its product was not complementary enough (since
it aimed to replace an existing technology); at the same time, the firm failed to
build any stand-alone capabilities (especially those related to marketing). Hence,
customers did not give unsolicited endorsements to the incumbent, and both the
acquisition and subsequent integration were less successful than in the case of
startups that closely followed Pattern 1 or Pattern 2.
Among our seven cases, the least successful startup acquisitions were those
of Lutetium and Erbium. These cases followed Pattern 3 (little or no interaction
with the incumbent), which resulted in poor strategic alignment with incumbent
offerings and in the failure to build broader capabilities alongside the technology
development. These two startups were acquired at an earlier stage of develop-
ment, which usually corresponds to a lower price and to a reduced probability of
enjoying high post-merger status. Unlike the targeted startups that interacted
more with incumbents, these firms fared poorly at managing technological, orga-
nizational, and strategic tensions—throughout the development process, their
eventual acquisition, and PMI.
Finally, as the development patterns of the different startups reveal, incum-
bent interaction and collaboration throughout a target’s development process
improved its alignment with incumbents: either to complement them (Pattern 1)
or to pursue a viable independent path (Pattern 2). Successful product-oriented,
Acquisitions of Startups by Incumbents 21

complementary acquisitions that transpired before the startup making a true go-
to-market commitment (Pattern 1) were preceded by a focused collaboration with
the incumbent. In contrast, acquisitions exhibiting less target-incumbent comple-
mentarity (Pattern 2) were consummated after the startup had established itself in
the product market; hence, they were characterized by (and benefited from) a
broader, more superficial, and nonexclusive process of engagement.

Discussion and Conclusion

Opening the “black box” of startups’ collaboration with incumbents prior
to their acquisition sheds light on some of the critical stages of the entrepreneur-
ial process.35 Such collaboration is more likely when the startup’s founders enjoy
strong social embeddedness in proximity to incumbents, but it can also be formed
throughout the startup’s independent life. Either way, early target-acquirer inter-
action may result in better positioning vis-à-vis incumbents by clarifying whether
the startup is likely to be perceived by the incumbent as a complement or as a
competitor. In the former case, collaboration can continue to develop, initiat-
ing a chain reaction that drives even closer collaboration and co-specialization.
Conversely, in the absence of any such interaction, startups might find themselves
ill-positioned to complement incumbents and, at the same time, poorly positioned
to challenge them in the product market by pursuing an independent trajectory.
In summary, we identify three co-specialization mechanisms that operate
prior to an acquisition. The first entails establishing the degree to which the startup
is complementary to the incumbent. Incumbents are generally defensive in those
areas they consider their core. In contrast, in areas perceived as adjacent, incum-
bents often see potential in complementarity vis-à-vis startups. Early collabora-
tion focused around establishing that the startup presents opportunity rather than
threat to the incumbent provides important insights for both parties. The second
mechanism involves leveraging the incumbent’s key customers to validate the
startup’s value. When the incumbent’s key customers provide an unsolicited
endorsement to a startup, it often serves as a strong signal attesting to the startup’s
quality. Third and finally, relying on executive champions to sponsor and “evange-
lize” the acquisition is an important mechanism for aligning expectations at both
the incumbent and the startup prior to the acquisition, and taking managerial
responsibility and providing executive support to the startup during the PMI
stage. The prevalence of these mechanisms across many of the studied cases led us
to coin the phrase, “3 Cs of pre-acquisition co-specialization.”
This study bears several important points for practitioners. First, many of the
interviewees did not expect interaction with incumbents to bear such significance
for the startup’s strategy and development trajectory. Second, even former employ-
ees of incumbents benefit from further interaction with incumbents—for instance,
because they were unable to recognize from within in which areas the incumbent
may be open for outside innovation and in which cases not. Third, even those start-
ups that aspired to be acquired had better developed the necessary downstream
capabilities to be able to provide incumbents with a credible signal of their quality—
that is, by enjoying unsolicited referrals by some of their customers, which are also
22 CALIFORNIA MANAGEMENT REVIEW 00(0)

key customers of the incumbent. Fourth, successful startups that sought an acquirer
refrained from making their interest explicit, instead disguising their interest as a
business collaborating initiative. Finally, the studied incumbents held a “configura-
tional” approach involving clear acquisition categories36 and internal guidelines on
the range of reasonable prices to pay for acquisitions in each category.
In sum, collaboration between startups and incumbents can create value
long before the acquisition occurs, and it can also reveal the stages through which a
collaboration process unfolds. The market for M&As between incumbents and tech-
nology startups can be of a collaborative nature—not only during the deal process
itself but also from the startup’s inception through the PMI. The combinative value
created from this collaborative process benefited startups and incumbents alike.

Acknowledgment
We wish to thank the Editors and anonymous reviewers for their construc-
tive feedback and helpful comments. We acknowledge the financial support of
INSEAD and The Henry Crown Institute of Business Research in Israel at Tel
Aviv University. The first author acknowledges that part of this work was done
during his affiliation with INSEAD.

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the
research, authorship, and/or publication of this article.

Funding
The author(s) received no financial support for the research, authorship, and/or
publication of this article.

Author Biographies
Nir N. Brueller is a visiting scholar at Tel Aviv University’s Coller School of
Management (email: nir.brueller@insead.edu).
Laurence Capron is Professor of Strategy at INSEAD (email: laurence.capron@
insead.edu).

Notes
 1. G. Ahuja and R. Katila, “Technological Acquisitions and the Innovation Performance of
Acquiring Firms: A Longitudinal Study,” Strategic Management Journal, 22/3 (March 2001):
197-220; N. N. Brueller, A. Segev, S. Ellis, and A. Carmeli, “Knowing When to Acquire:
The Case of Multinational Technology Firms,” International Business Review, 24/1 (February
2015): 1-10; M. E. Graebner, “Momentum and Serendipity: How Acquired Leaders Create
Value in the Integration of Technology Firms,” Strategic Management Journal, 25/8-9 (August/
September 2004): 751-777; P. Puranam, H. Singh, and S. Chaudhuri, “Integrating Acquired
Capabilities: When Structural Integration Is (Un)necessary,” Organization Science, 20/2
(March/April 2009): 313-328.
Acquisitions of Startups by Incumbents 23

 2. D. R. King, R. J. Slotegraaf, and I. Kesner, “Performance Implications of Firm Resource

Interactions in the Acquisition of R&D-Intensive Firms,” Organization Science, 19/2 (March/
April 2008): 327-340; D. J. Teece, “Profiting from Technological Innovation: Implications for
Integration, Collaboration, Licensing, and Public Policy,” Research Policy, 15 (1986): 285-305.
 3. A. Al-Laham, L. Schweizer, and T. L. Amburgey, “Dating before Marriage? Analyzing the
Influence of Pre-acquisition Experience and Target Familiarity on Acquisition Success in the
‘M&A as R&D’ Type of Acquisition,” Scandinavian Journal of Management, 26/1 (March 2010):
25-37; H. Hoang and F. Rothaermel, “The Effect of General and Partner-Specific Alliance
Experience on Joint R&D Project Performance,” Academy of Management Journal, 48/2 (April
2005): 332-345; P. Porrini, “Can a Previous Alliance between an Acquirer and a Target Affect
Acquisition Performance?” Journal of Management, 30/4 (August 2004): 545-562.
  4. Al-Laham et al., op. cit., p. 30.
  5. D. Benson and R. H. Ziedonis, “Corporate Venture Capital as a Window on New Technologies:
Implications for the Performance of Corporate Investors When Acquiring Startups,”
Organization Science, 20/2 (March/April 2009): 329-351; D. Benson and R. H. Ziedonis,
“Corporate Venture Capital and the Returns in Acquiring Portfolio Companies,” Journal of
Financial Economics, 98/3 (December 2010): 478-499; G. Dushnitsky and M. J. Lenox, “When
Do Firms Undertake R&D by Investing in New Ventures?” Strategic Management Journal,
26/10 (October 2005): 947-965.
 6. D. Mayer and M. Kenney, “Economic Action Does Not Take Place in a Vacuum:
Understanding Cisco’s Acquisition and Development Strategy,” Industry and Innovation, 11/4
(2004): 299-325.
  7. S. Chatterjee and N. N. Brueller, “A New M&A Methodology: Five Lessons in Anticipating
Post-Merger Resource Interactions and Challenges,” Strategy & Leadership, 43/4 (2015):
26-37.‫‏‬
 8. M. E. Graebner and K. M. Eisenhardt, “The Seller’s Side of the Story: Acquisition as
Courtship and Governance as Syndicate in Entrepreneurial Firms,” Administrative Science
Quarterly, 49/3 (September 2004): 366-403.
  9. Graebner and Eisenhardt, op. cit., p. 390.
10. Graebner and Eisenhardt, op. cit., p. 384.
11. S. Chatterjee, “The Keys to Successful Acquisition Programmes,” Long Range Planning, 42/2
(April 2009): 137-163.
12. The longest possible time frame was used to ensure that we captured the entire span of col-
laboration. Note that one of the startups in our study was Platinum, which demonstrated
how interaction with incumbents could date back as early as the startup’s inception. We
thank an anonymous reviewer for making this point explicit.
13. This approach for selecting cases, common in inductive research, is known as theoretical
sampling. It implies that each case is (nonrandomly) selected for how much it can contribute
to the development of theory. See B. G. Glaser and A. L. Strauss, The Discovery of Grounded
Theory: Strategies for Qualitative Research (New York, NY: Aldine, 1967).
14. Of the 3,260 tech companies exiting through M&As in 2016 worldwide, 93 (2.85%) were
Israeli.
15. We used the QSR-NVivo 10 computer package for coding, importing, managing, and analyz-
ing the data. The coding process proceeded in three phases: open coding, axial coding, and
selective coding. Open coding involved labeling each sentence with a meaningful code; axial
coding consisted of assigning those codes to the entire data set and then iteratively refin-
ing and clustering the emerging categories; and selective coding amounted to prioritizing the
most central and prevalent categories and then identifying the themes that emerged. See K.
Charmaz, Constructing Grounded Theory: A Practical Guide through Qualitative Analysis (London,
UK: Sage, 2006).
16. K.M. Eisenhardt, “Building theories from case study research,” Academy of Management
Review, 14/4 (1989): 532-550
17. Among the public sources we used was one that listed all investors in the various startups.
When an interviewee was asked about a particular investor that had not been mentioned, he
responded, “I don’t think it’s true. It’s wrong. They didn’t invest in Platinum. They invested
in Palladium.”
18. M. B. Miles and A. M. Huberman, “Drawing Valid Meaning from Qualitative Data: Toward a
Shared Craft,” Educational Researcher, 13/5 (May 1984): 20-30.
24 CALIFORNIA MANAGEMENT REVIEW 00(0)

19. Repeated comparisons of concepts were used to construct “themes” and to identify their
commonalities and differences. Next, the interviews were coded according to these themes,
and the quotes associated with each theme were grouped. The number of informants whose
quotes supported each theme was an indicator of the theme’s prevalence and significance.
Finally, we sought to determine how the themes were associated with each other in ways
that could be shaped into a conceptual model. See Miles and Huberman, op. cit.‫‏‬
20. D. Valliere, “Towards a Schematic Theory of Entrepreneurial Alertness,” Journal of Business
Venturing, 28/3 (2013): 430-442.
21. S. Shane, “Prior Knowledge and the Discovery of Entrepreneurial Opportunities,”
Organization Science, 11/4 (July/August 2000): 448-469; D. Valliere, “Exploring Buddhist
Influence on the Entrepreneurial Decision,” International Journal of Entrepreneurial Behavior &
Research, 14/3 (2008): 172-191.‫‏‬
22. Shane, op. cit.‫‏‬
23. S. L. Jack and A. R. Anderson, “The Effects of Embeddedness on the Entrepreneurial
Process,” Journal of Business Venturing, 17/5 (September 2002): 467-487.‫‏‬
24. Y. Wang, “Bringing the Stages Back in: Social Network Ties and Start-Up Firms’ Access
to Venture Capital in China,” Strategic Entrepreneurship Journal, 10/3 (September 2016):
300-317.‫‏‬
25. We thank an anonymous reviewer for helping us articulate this point.
26. J. A. Adegbesan, “On the Origins of Competitive Advantage: Strategic Factor Markets and
Heterogeneous Resource Complementarity,” Academy of Management Review, 34/3 (July
2009): 463-475.‫‏‬
27. These startups, when run by past employees of the incumbent, were referred to as spin-in
startups. We thank an anonymous reviewer for helping to label this phenomenon.
28. J. Reuer, “Collaborative Strategies: The Logic of Alliances,” in Mastering Strategy (Harlow, UK:
Financial Times/Prentice Hall, 2000).
29. C. Barrow, “Implementing an Executive Information Systems: Seven Steps for Success,”
Journal of Information Systems Management, 7/2 (1990): 41-46.
30. H. J. Watson, G. Houdeshel, and R. K. Rainer Jr., Building Executive Information Systems and
Other Decision Support Applications (New York, NY: Wiley, 1997).
31. R. A. Burgelman and L. Valikangas, “Managing Internal Corporate Venturing Cycles,”
MIT Sloan Management Review, 46/4 (Summer 2005): 26-35; M. S. Tiwari, “A Gateway to
Intrapreneurship Is Indispensable for Sustaining Excellence,” International Journal of Research
in Management, Science & Technology, 2/3 (December 2014): 111-116.
32. N. N. Brueller, A. Carmeli, and I. Drori, “How Do Different Types of Mergers and Acquisitions
Facilitate Strategic Agility?” California Management Review, 56/3 (Spring 2014): 39-57.
33. We thank an anonymous reviewer for helping us to clarify this point.‫‏‬
34. Wang, op. cit.‫‏‬
35. Shane, op. cit.‫‏‬
36. Brueller et al., op. cit.‫‏‬