4 ms·

"All these companies will keep getting bought up, but the acquirers are not going to see great returns." This struck me as the thing we don't talk about here--

by asdflkj 19y ago

"All these companies will keep getting bought up, but the acquirers are not going to see great returns." This struck me as the thing we don't talk about here--not unlike certain topics you don't talk about with old German people. Is there data on how much revenue startups bring to companies that buy them? Another way to approach this issue: if startups are capable of revenues that justify the enormous amounts that BigCos are paying for them these days, why is there such focus on having an exit? If startups are so much better at solving problems than BigCos, why can't they solve the problem of pulling in revenue better, too? This is not meant to refute the antecedent. It's an actual question that I'd be glad to hear someone answer. Some startups do end up with healthy revenue, but you'll notice that their expected source of revenue was obvious from the start. Not so with most YC startups.

nostrademons 19y ago
Risk mitigation. Most large tech companies don't purchase startups for the revenue they bring in. They purchase them because they are deathly afraid that some startup will become the next big thing that renders their revenue stream obsolete. It's happened often enough that big companies have reason to be concerned: think of how the computer world would look different if IBM had bought Microsoft instead of licensing their software, or if Yahoo had bought Google when it was an early-stage startup. If you look at the > $1B acquisitions, almost all (except Skype) have been for companies that fundamentally threaten a large company's business model. If Google hadn't bought YouTube, Viacom's lawsuit against it might have set a precedent that literally puts Google out of business. If EBay hadn't bought PayPal, it would've opened the door to a payment service that wasn't controlled by Ebay yet was frequented by all of EBay's customers; it's not a huge leap for Paypal to start offering its own listings then. Startup founders have the opposite risk profile: their wealth is all tied up in one company, so if they don't take over the big company's market, they get nothing. Most founders would rather take their $40M payout and diversify. So basically it comes down to risk aversion. Say that a startup has a 1% chance of displacing the big company (worth $100B for the sake of argumentation), and a 99% chance of eventually failing. For a big company, 1% is far too large a chance of losing everything, particularly when they have the cash & stock to avert the possibility entirely. For a founder, $1B is a helluva lot of money, and far better than a 1% chance at being the richest man in the world yet a 99% chance of nothing. There's also a moral hazard issue, in that the people actually responsible for footing the bill are stockholders, yet the company executives have a far stronger incentive to not look bad by botching an acquisition than to save $1B. Many money managers hate acquisitions, because it's by far the favorite way to destroy shareholder value. But few CEOs will be replaced for making too many acquisitions, while it's almost guaranteed that they will be replaced if they fail to make the acquisition that becomes a major competitor. A pithy way to put it might be "Big companies are driven by fear, yet startups are driven by greed." That gives both of them incentives to agree on an acquisition price higher than fair market value.
- asdflkj 19y ago
  Let's assume you're right. Then essentially, startups are primarily making money by exploiting the irrationality and inefficiency of modern corporate decision making? That's not very nice. I wouldn't call it stealing, but it's a far cry from PG's squeaky-clean ideal of "creating wealth". But I don't think you're exactly right, either (though most of your points are well taken). First of all, >$B acquisitions account for a small percentage of all acquisitions, and using them as a model isn't instructive. Do you think Google was afraid that Zenter would displace it? Second of all, when assessing the average startup's risk profile, success shouldn't be defined as displacing the BigCo. It should be defined as making some money (say, a few million). If there is a 99% chance that nobody will want to pay for it, are you really making something people want?
  - nostrademons 19y ago
    > Do you think Google was afraid that Zenter would displace it? No, but I think Google was afraid that it would displace Presently, its presentation software. Since Google wants to play in the "online office software" market, they're afraid of someone else becoming a market leader in one of the sub-markets for that and fragmenting that market before they can dominate it. They also bought one of Zenter's competitors. > If there is a 99% chance that nobody will want to pay for it, are you really making something people want? It's not enough just to make something people want. You have to make it better than everyone else. This is implicit in startup advice, but it applies here because we're talking about mature markets. With startups, it's assumed that you're not going to build something someone else is already doing better, because then you're not really making something people want (they want your competitors instead). And you don't generally worry about someone coming along with a better product later, because if you have a head-start and work your ass off, they'll want to buy you rather than spend the time, money, and risk of developing it themself. However, if you then spurn their acquisition offer, they have no choice but to try and beat you, and there's a good chance that they will, because they have more resources. You've still made something people want, but then you force BigCo to waste money duplicating it (and possibly duplicating it better) instead of buying you.
    - 19y ago

by asdflkj 19y ago

nostrademons 19y ago

Risk mitigation. Most large tech companies don't purchase startups for the revenue they bring in. They purchase them because they are deathly afraid that some startup will become the next big thing that renders their revenue stream obsolete. It's happened often enough that big companies have reason to be concerned: think of how the computer world would look different if IBM had bought Microsoft instead of licensing their software, or if Yahoo had bought Google when it was an early-stage startup. If you look at the > $1B acquisitions, almost all (except Skype) have been for companies that fundamentally threaten a large company's business model. If Google hadn't bought YouTube, Viacom's lawsuit against it might have set a precedent that literally puts Google out of business. If EBay hadn't bought PayPal, it would've opened the door to a payment service that wasn't controlled by Ebay yet was frequented by all of EBay's customers; it's not a huge leap for Paypal to start offering its own listings then. Startup founders have the opposite risk profile: their wealth is all tied up in one company, so if they don't take over the big company's market, they get nothing. Most founders would rather take their $40M payout and diversify. So basically it comes down to risk aversion. Say that a startup has a 1% chance of displacing the big company (worth $100B for the sake of argumentation), and a 99% chance of eventually failing. For a big company, 1% is far too large a chance of losing everything, particularly when they have the cash & stock to avert the possibility entirely. For a founder, $1B is a helluva lot of money, and far better than a 1% chance at being the richest man in the world yet a 99% chance of nothing. There's also a moral hazard issue, in that the people actually responsible for footing the bill are stockholders, yet the company executives have a far stronger incentive to not look bad by botching an acquisition than to save $1B. Many money managers hate acquisitions, because it's by far the favorite way to destroy shareholder value. But few CEOs will be replaced for making too many acquisitions, while it's almost guaranteed that they will be replaced if they fail to make the acquisition that becomes a major competitor. A pithy way to put it might be "Big companies are driven by fear, yet startups are driven by greed." That gives both of them incentives to agree on an acquisition price higher than fair market value.

asdflkj 19y ago
Let's assume you're right. Then essentially, startups are primarily making money by exploiting the irrationality and inefficiency of modern corporate decision making? That's not very nice. I wouldn't call it stealing, but it's a far cry from PG's squeaky-clean ideal of "creating wealth". But I don't think you're exactly right, either (though most of your points are well taken). First of all, >$B acquisitions account for a small percentage of all acquisitions, and using them as a model isn't instructive. Do you think Google was afraid that Zenter would displace it? Second of all, when assessing the average startup's risk profile, success shouldn't be defined as displacing the BigCo. It should be defined as making some money (say, a few million). If there is a 99% chance that nobody will want to pay for it, are you really making something people want?
- nostrademons 19y ago
  > Do you think Google was afraid that Zenter would displace it? No, but I think Google was afraid that it would displace Presently, its presentation software. Since Google wants to play in the "online office software" market, they're afraid of someone else becoming a market leader in one of the sub-markets for that and fragmenting that market before they can dominate it. They also bought one of Zenter's competitors. > If there is a 99% chance that nobody will want to pay for it, are you really making something people want? It's not enough just to make something people want. You have to make it better than everyone else. This is implicit in startup advice, but it applies here because we're talking about mature markets. With startups, it's assumed that you're not going to build something someone else is already doing better, because then you're not really making something people want (they want your competitors instead). And you don't generally worry about someone coming along with a better product later, because if you have a head-start and work your ass off, they'll want to buy you rather than spend the time, money, and risk of developing it themself. However, if you then spurn their acquisition offer, they have no choice but to try and beat you, and there's a good chance that they will, because they have more resources. You've still made something people want, but then you force BigCo to waste money duplicating it (and possibly duplicating it better) instead of buying you.
  - 19y ago