Lean Case: Neopost


As the lean startup movement spreads internationally, enterprises worldwide are beginning to embrace techniques such as rapid experimentation and innovation accounting to innovate more quickly and efficiently. Take Neopost. Founded in 1924 in the UK and now headquartered in Bagneux, France, the 5,500-person company provides mailroom equipment — postage scales, letter folding machines, postal scanners — to business customers worldwide. CTO Philippe Boulanger manages the transition from analog to digital   delivery through a savvy combination of incubation and acquisition. Boulanger used agile development techniques to pioneer a platform approach to Neopost’s hardware products, saving costs and reducing development cycles. More recently, he has focused on using applying lean startup methods to digitize letter and parcel delivery. Below, he explains his approach to acquiring innovative startups.


How would you describe your philosophy of innovation?


Everyone can have ideas. What makes a difference is execution. People will tell you, “Oh yes, I had an idea, but somebody else did it.” The difference is that somebody did it.
What I like about the Lean Startup Machine approach is you innovate by doing things. That is different from just working on a theory and making a business plan that takes ages to unfold. You are experimenting and getting feedback from users.


How is Neopost’s innovation operation organized?


We have 20 R&D sites from Seattle in the US to Vietnam, which employ something like 800 people. All of them were acquisitions. If you want to keep people, it’s important not to say, “We will save a little cost by moving you from Seattle to Connecticut.” You are going to lose people by doing that. If you value people and their knowledge, you need to organize yourself so you can keep people where they are and let them continue their work.


Do acquired companies keep their own brand names, or do they fall under the Neopost brand?


The keep their brand names and add, “a Neopost company.” So they keep their identity, but they become part of the Neopost galaxy. The need to safeguard the brand is a difficulty in big companies. When you do innovation that could be disruptive to the corporation, you are putting the brand image of the company at risk. You are starting something that you might decide to cancel three months later. It can create an image of chaos if you start too many things, present them to customers, then withdraw them from the   market soon after. When you are a startup, you have nothing to lose and everything to gain. If you fail, you shut down the company and it is over. If you’re in a big company and you propose new services to your customers, you are creating a legacy, and you can not stop. You have a duty to pursue these services for the customers. Most companies I have seen have a hard time stopping activities once they’ve started. This is most likely slowing down initiatives in big companies.


Does this cause a problem with shareholders or the CEO, who may want the value created by acquisitions to accrue to the corporate brand?


This is not a problem. It is known that these companies are part of the Neopost group.


What’s the benefit of acquiring startups in an innovation context?


Acquisition is a way to innovate while managing risk and budget at the same time.
When you are making an acquisition, you are purchasing time to market, because people have already done some research and have some products. They have shown some signs of growth or market interest, so you are purchasing credibility as well. All of that has value.


What priorities drive acquisitions at Neopost?


Considering the potential software and services we could provide to our customers, the span is huge. We can not work in every direction at the same time. Within the R&D organization, we’re working on existing products, maintaining them, making new revisions.
If we are to grow, we need to do more, but the challenge is to find what. We apply lean startup techniques because we know we’ll fail multiple times and we’ll find something. Alternatively, we can look at what is happening elsewhere and piggyback on that. Usually doing an acquisition means we’re taking fewer risks because the target has been already through risky steps in the evolution of their business. And for this reason, we are willing to pay a little bit more.


The older a company is when you acquire it, the less risk you take on. The younger it is, the more bang for the buck you’ll get. How early do you tend to acquire?


That is a question of tradeoff. Acquiring at the very earliest stage is not necessary for us. Usually, we like to see companies that are already profitable and that will be even more profitable as a result of becoming part of Neopost, or companies that will increase their gross significantly due to working with us.


Does your strategy differ if you’re looking for acqui-hires?


This is not something we have done in the past. By definition, when we make an acquisition, the team is critical. We are very sensitive to make sure the team stays onboard. That team built the startup. It has critical knowledge. We have made some mistakes in the past.
We succeeded in killing a few of our first acquisitions, and now we want to make sure they blossom in all possible ways.


What were the mistakes and how did you address them?


We looked too much at synergies based on consolidation instead of synergies that would develop the business. Specifically, we tried to unify the acquisition’s sales force with our sales force. We made this mistake at least twice. Also, our earnout plan was too EBITdriven.
The incentive was to continue with the existing product rather than investing in the evolution of the product, which brought the product to an end very quickly. Now earnouts are based, not only on EBIT but also on growing the business, the top line as well as the bottom line.


How do you incentivize the team to stay?


Typically through bonuses. The founders have lockup schemes, and they have a earnout if they direct the business in the right way. Usually that works well, from what I have seen.


How do you find acquisition opportunities? How do you find acquisition targets?


Everyone is aware that we’re looking, and every opportunity we see is taken into account.
We have two processes. First, we identify key strategic directions. We have a number of directions that we already know very well. Once we have decided on that, we scout for companies that are in this direction. Once we have identified a pool of companies in that direction, we dig a bit more to see if one of them is a good fit for us. Some are already way too developed, and we can not afford them. Some are in the early stage of development, but we have reasons to believe that they will be okay. We get help from marketing and we get help on technical analysis from R&D.


Do you have the power to approve acquisitions?


Once we believe we have identified a target, it goes before the staff of the CEO to explain why it is an opportunity and asking to go into due diligence. R&D spending includes R&D intensity, which is a ratio of R&D spending over sales. That is around 4 percent in our industry. I have to stay with in this budget whatever I am doing. I have the capacity to choose a little bit inside the budget between the existing business and innovation. From time to time, the opportunity is such that I am allowed to spend more than my    committed budget. Every year we have cases where it is worth spending more than what we initially budgeted, and of course I request approval for that because the CEO is a financial guy.
My commitment is to have my R&D budget under control, but if an opportunity arises that I can not fit in my budget, I need to go and explain it.


Do you have a special approach to due diligence?


I think every company has a special way to do it. Basically, we assess risks and opportunities.
The basics are financial, looking at every important variable; technical, looking at the processes and technologies being used; and intellectual property: is it protected, do they have patents, is there a risk of infringing existing patents owned by others.


Do you use innovation accounting to evaluate potential acquisitions?


The ones we are interested in are already profitable, so they are past the phase where innovation accounting is critical. The conventional accounting scheme works for them.


How do you think about pricing? Are there rules of thumb about what an acquisition should cost?


We are buying companies that are already profitable, so the expectations are realistic.
Usually companies are cheaper to acquire in Europe than in the US. Certainly cheaper than in Silicon Valley. There is still a high premium for high tech, software and so on, but it’s less in Europe.


What are the biggest pitfalls in acquiring, and how do you avoid them?


Your initial expectations about a company are based on the first meetings. Then you have to make up your mind about the reality. If the founders want to sell the company, they present it in a nice way. In France, we would say, the bride is beautiful. The bride may be too beautiful to be true if she has a lot of makeup. So the biggest risk is not going into enough depth in the due diligence process to discover the truth about the bride. We have done due diligence on companies that we didn’t acquire in the end. What we learned was not in line with our initial expectations, and this was already a bad sign. I think  we are doing well. All of our acquisitions in the last two years have double-digit growth.


Philippe Boulanger, CTO

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