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This quote is the gist of the article: "At the moment, there is no one within big companies who gets in trouble when they buy a startup for $200 million that t

This quote is the gist of the article: "At the moment, there is no one within big companies who gets in trouble when they buy a startup for $200 million that they could have bought earlier for $20 million. There should start to be someone who gets in trouble for that." - Paul Graham I think its well understood that there exists a tremendous amount of inefficiency. That large companies should spend some energy identifying what they need so it costs them 20 million instead of 200. I'm know some large companies already try to do this. They will get better at it over time and others will emulate their models. As a result, the investment and startup model/process/vc-lifecycle will shift accordingly. I feel PG thinks that ycombinator is on the leading edge of being able to take advantage of this shift as...he probably is. My attitude for my startup has always been that if I sell early, I get 20 million and get to keep all of it. If I take on lots of VC, I have to sell for 200 million and I still net out at 20. Most stertup founders are happy to take the early 20 and get on with their next big idea. I do think PG is correct that the model is slowly shifting in this direction. And its the right direction for innovation to continue.

notauser 18y ago
Assuming: - It takes two years for a start up to go from $20m to $200m - The two year startup failure rate is greater than 1 in 8. - The performance risks of independance are about equal to the performance risks of being owned (capital scarcity etc vs loss of agility etc). It makes more financial sense to buy at £200m than at £20m, assuming your information is imperfect. Working: $20m + $2.05m inflation (5%) + $4.2m cost of capital (10%) = $26.25m. Cost of risk ~= $200m/$26.25m = 7.6 multiple. (The cost of acquiring better information can be costed, of course, and the new probabilites and expected value calculated - which may be a better strategy, but information is not free, especially if you need to employ $400k/yr+ 'CAOs').
phil_KartMe 18y ago
there is someone in a big company who gets in trouble if they buy a start-up for more than $50M and it doesn't meet forecasts each of the next few of years
- jfischer 18y ago
  I agree that the ROI of the investment is more important than the idea that someone should be punished for passing on a cheaper acquisition - that doesn't take into account the higher risk of the $20m purchase. That being said, I'm not so sure companies really hold people accountable for even ROI and forecasts. For example, I know of a company which made a $200m acquisition, ran the product into the ground, and then paid even more for a second acquisition in the same space. Sure, a few middle/lower managers were moved to less influential positions, but the people with the overall responsibility got promotions.

notauser 18y ago

Assuming: - It takes two years for a start up to go from $20m to $200m - The two year startup failure rate is greater than 1 in 8. - The performance risks of independance are about equal to the performance risks of being owned (capital scarcity etc vs loss of agility etc). It makes more financial sense to buy at £200m than at £20m, assuming your information is imperfect. Working: $20m + $2.05m inflation (5%) + $4.2m cost of capital (10%) = $26.25m. Cost of risk ~= $200m/$26.25m = 7.6 multiple. (The cost of acquiring better information can be costed, of course, and the new probabilites and expected value calculated - which may be a better strategy, but information is not free, especially if you need to employ $400k/yr+ 'CAOs').

phil_KartMe 18y ago

there is someone in a big company who gets in trouble if they buy a start-up for more than $50M and it doesn't meet forecasts each of the next few of years

jfischer 18y ago
I agree that the ROI of the investment is more important than the idea that someone should be punished for passing on a cheaper acquisition - that doesn't take into account the higher risk of the $20m purchase. That being said, I'm not so sure companies really hold people accountable for even ROI and forecasts. For example, I know of a company which made a $200m acquisition, ran the product into the ground, and then paid even more for a second acquisition in the same space. Sure, a few middle/lower managers were moved to less influential positions, but the people with the overall responsibility got promotions.