A trend in the past year around startups has been to lament the “aquihire” activity, where a large corporation (Google being the archetype, but hardly the only one that practices this) buys up small companies. The purported goal is the technology, but often the real goal is to get the team. On occasion, the aquihirer is explicit about their objective: get the team. Google did this recently with their purchase of Sparrow, where Google wanted the team and not the technology. Some lament this trend because they claim it “harms innovation” and the blame generally gets put squarely on the shoulders of Google and others. Here’s the thing: this isn’t new, it doesn’t harm innovation, and the acquirer isn’t the only, or even the most, culpable party in these transactions.
Big Companies and Startups
First, some not-so-new news: big companies have been buying small companies going back as far as there have been small companies to buy. This isn’t new. Buying small companies to get the team, and not their business/product/technology is also not entirely new. What’s different is that a) people are paying more attention to it and b) companies like Google have been on bigger buying sprees than have historically occurred. Google has slowed some, but they have bought an enormous number of small companies and startups in the past few years.
Google isn’t alone. Facebook, Microsoft, IBM, HP and others have bought many companies over the years. Each have different objectives. IBM typically buys companies for their technologies, but even they aren’t necessarily as discriminating in their purchases as it would seem. IBM has bought plenty of companies whose technologies have never really been incorporated into the product catalog.
It would be easy to blame the “big companies” for this, and to overestimate the impact on innovation. And yes, these large organizations do need to accept some of the “blame”. But to make them the primary focus of this is wrong, in my opinion. I’m also not convinced it harms innovation, and in fact I think it spurs more people to try something because the opportunity for an exit from a questionable product or business plan exists.
Aquihire Actually Spurs Innovation…
Inventing is easy. New ideas are abundant. Innovation, and building a business around it, that’s hard. It’s risky. It takes time and effort, but it also takes money. People who invest in a startup want to have some possibility of getting their money back, plus some sort of profit or increase in value. This is the purview of the angels, the venture capital companies and investment bankers. Each are willing to take a certain amount of risk. The lines have blurred some (mainly because the VC’s have moved down the foodchain), but traditionally, you start with an angel, then bring on a VC and (if you’ve survived long enough and made some numbers) eventually bring in the investment banks as you head toward a merger, acquisition or IPO. Each goes in with some expectation of return and tolerance for risk. Angels usually take the most risk, VC’s somewhat less and investment banks the least. One metric I’ve seen for VC’s is that for every 10 investments, they expect 5-7 failures, 2-4 break-evens and 1 home-run. The numbers vary, depending on who you talk to, but the general magnitude doesn’t change.
So how does aquihiring spur innovation? Because it presents a higher-probability exit where the company buying isn’t looking at the business, they either want the technology, the team or both. Building a business to be acquired for “traditional reasons” means you need a company that is profitable, growing and has an established catalog of products and a position in the market. This can take years, even decades, to happen. Angels and VC’s won’t wait that long. Any business plan that says “traction in 5 years, profitability in 7 years” is one that will rarely be funded. But one that says “possible acquisition in 24-36 months after launch” can get people’s attention.
The result is more investors willing to take a chance because they know that a profitable exit through acquisition is possible, even probable. No having to waiting for a “strategic sale” 5+ years down the road. No hoping for a good IPO in a decade. Instead, the distinct possibility for good return in 36 months after launch attracts money to startups that would not otherwise be available.
…And It Doesn’t Hurt Innovation
Let’s face it, most product or business ideas are failures. Sure, they may sound “cool” or “interesting” or “compelling” to the inventor. But vast quantities of these ideas have no real chance at commercial success. Most of the acquisitions by guys like Google are doing 2 things: they are making it possible to take a risk on a questionable product idea, and it gives talented people (with no talent for business) a bit of a safety net. There are a lot of very, very bright people who are commercially inept when it comes to making a business work. You need more than a good idea. You need execution, and you need “infrastructure” such as marketing and branding to make it work. Lots of people try it. Few succeed.
The acquihire means that people who would otherwise never get their seed round can now “give it a go”, knowing that this safety net is out there. It means that smart people can at least have a chance at a “good job” at a larger and more stable company. Obviously there are no guarantees that an acquihire will occur. It isn’t 100% certainty. But the odds are higher than those for success for the idea.
Who Do We Blame?
It is easy to blame the Googles and Facebooks of the world for taking all of these small companies out. And they do share some because they are encouraging the behaviour. But they aren’t the most culpable in this situation.
Blame The Investors
The investors in these small companies deserve a healthy portion of the “blame”. Their motivation isn’t to create the Next Big Thing. Their motivation is to make money. And when a significant amount of money is put on the table, they are likely to take it. It’s the time value of money: cash now is worth more than “maybe” more cash later. Sure, a company could return even more to investor if they are willing to hang in there and tough it out. But few investors, particularly VC’s and Angels, are in these things for the long haul. They aren’t exactly day traders, but they aren’t buy-and-hold investors like Warren Buffett either.
The result is that, when offered a significant sum of cash (or stock) that gets them an early and profitable exit, the investors are going to take it. If they have majority control of the company, they can compel it to occur. It isn’t the fault of the acquirer. It is the fault of the investor for wanting a return on their investment. And I can’t blame them, because that is why the invested in the first place. They didn’t put their money into a venture because “it deserved it”. They did it because they wanted to turn their investment into more money.
Blame The Founders
In cases where the founders still hold majority control, they have a choice when an offer is made: take it or leave it. And many founders will take it, because the temptation is simply too great. It is more than just the money. It is the prospect of a steady (and healthy) paycheque coupled with access to more and better resources than they would have on their own.
It bears repeating: building a company is hard. Very hard. It takes a lot of work, and it means that you have to do more than just “your job”. Sure, I’d like to spend all of my time building cool stuff. But building companies also means working on budgets, staffing, figuring out office space and leases, picking furniture, participating in brand-building and identify-building. It means getting involved in a host of other activities that don’t have anything directly to do with writing code and wiring hardware, but are necessary to make the coding and wiring possible.
Beyond the “extra activities” are the worries and headaches: did we get the budget right? Will we be able to pay our employees, let alone ourselves, in 6 months? How do we get more customers faster? How do we respond to a competitor, or a negative comment by a prominent blogger or media outlet? There is a lot of stress involved in a small company.
Few people have the patience or the stomach for it. The stress adds up. For many, the prospect of a reliable paycheque looks pretty compelling after months (or years) of uncertainty. The prospect of steady income plus a “signing bonus” in the form of stock that is actually worth something looks even more appealing to some.
Exits Are Reality
The fact is that some kind of exit is a goal when starting a new company. It isn’t necessarily the only goal, and may not be the primary goal. But some kind of “exit” is desired. For founders, the exit could simply be building a nestegg for future retirement, and get to do something interesting (and possibly significant) while doing it. For investors, the “exit” could be an early sale, or it could be a steady dividend income stream before eventually selling (through acquisition, management buy-out or IPO). For founders, the exit shouldn’t be your primary goal. But it also isn’t something to ignore, because your investors (if you have any) will want something.
The desire for companies like Google and Facebook to buy companies for more than just their technology or business value gives an extra incentive for startups. It provides a ‘safety net’ for the founders, albeit one without a guaranteed outcome. And the “blame” is more about the investors and founders than Google or Facebook. The investors and founders didn’t have to sell.