Software Company: Build Compliance Reporting or Acquire a Startup
A 40-person software company must decide how to add a compliance-reporting feature that enterprise customers have requested. Option A would build in-house with six engineers over nine months; estimated cost is $2.1 million in salaries and $300,000 in tooling, and two engineers would be pulled from a security update that is already three weeks behind. Option B would acquire a seven-person startup whose product does 80% of what customers need, for $4.8 million in cash and stock; the startup's technology requires integration that its CTO estimates at six months, and two of its engineers have indicated they may leave after the acquisition. The company has $5.5 million in cash and a 14-month runway. Churn among enterprise customers has risen from 7% to 11% in the past year, and three of the five lost accounts cited missing compliance features.
1. Recommend one option, taking into account the 14-month runway.
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I would recommend Option A, building in-house, because the acquisition price would consume most of the company's cash and leave too little margin for integration failure. Option B costs $4.8 million against $5.5 million in cash, leaving $700,000, or about five weeks of runway at current burn if no new revenue arrives. The company would be buying a product that covers 80% of customer needs, not 100%, and the startup's CTO estimates six months of integration, which is longer than the nine-month build only if everything goes right. Option A costs $2.4 million and keeps $3.1 million in reserve. The security-update delay is serious, but it is a known, bounded risk; the acquisition introduces retention risk, integration risk, and near-zero cash buffer at once. Churn is urgent, but a company that runs out of cash cannot serve the customers it is trying to retain.
2. How should the company weigh the risk of engineer departures in Option B against the security-update delay in Option A?
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The two risks are not symmetric. Option A's security-update delay is an internal scheduling problem: two engineers can be replaced, contractors can be hired, or the update can be phased. The delay is already three weeks and may grow, but the company controls the response. Option B's engineer departures are external and may be irreversible: if two of seven engineers leave, the acquiring company loses not only labor but the tacit knowledge needed to integrate the product. The startup's CTO estimate of six months assumes those engineers stay. The company should weigh the probability of departure against the cost of the security delay. If the two engineers are central to the product, Option B's effective integration time could exceed Option A's nine months. If they are replaceable, the acquisition becomes more attractive, but the cash runway still argues for A.
3. What is the strongest argument against your recommendation?
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The strongest argument against my recommendation is that Option A treats churn as a scheduling problem when it is an existential one. Three of five lost enterprise accounts cited missing compliance features, and churn has risen from 7% to 11% in a year. If that trend continues, the company may not have nine months of runway regardless of cash. A nine-month build with six engineers, two pulled from security, could slip to twelve months, and enterprise customers may not wait. Option B, for all its risk, delivers a working product that covers 80% of needs and signals to customers that the company is serious. If the startup's engineers can be retained with earn-outs and the integration is scoped to the 20% gap, the acquisition could stop churn faster than a build. My recommendation depends on the churn rate staying stable, which is not guaranteed.