Build, buy or partner, and the rule of 40

There are various ways to look at build vs. buy vs partnering decisions for new products.  Each comes with its own pros and cons.

The most conventional wisdom on pros and cons is:

• Build: If you build the new product/capability in-house, you own the IP and you can maximize the margin opportunity. However, it will also take longer to bring a new product to market and it increases your risk, esp. if the domain is relatively new to your organization.
• Buy: Acquiring a company gives you speed to market, revenue, and technology, and you own the IP.  However, there are significant risks as well – you may end up paying more for the acquisition, or the integration may not go well, affecting your ability to extract the planned value and retain key talent from the acquisition.
• Partner: This approach gives you speed to market in terms of revenue and technology and allows you to leverage your distribution channels to build deeper customer relationships or enter new markets. However, you don’t own the IP, your integration costs may be higher than planned, and you have to share margins with the partner. 

There is also another filter when you evaluate build/buy/partner. Build and buy must be accretive to your business, while partnering can be incremental to your business. For example, if you are a rule of 40 company (i.e. sum of your organic growth rate plus your EBITDA rate are at least 40), then all new build or buy must enable you to maintain or exceed your rule of 40. Partnering allows you to fill the gaps without violating this rule.  But don’t discount partnering.  It is also a good way to get to know a potential acquisition target by partnering with them first and learning the space firsthand, while simultaneously evaluating them for product/culture/technology/vision alignment fit.