The problem from the other side is harder. Given that Google finds a talented startup team, how do they know that the startup is in a business that Google should be doing? Should Google ever turn down a good startup team? Most of what Google does is opaque to me. They are becoming the GE of the internet.
What is the purpose of a firm? Is it a collection of synergistic business ventures? A source of capital? Does it make sense to continually expand it's scope of activities? Would investors be better off if Google kept the equity it needed to run its search business and paid the rest out in a dividend to shareholders?
We think of the big boys as a black box - a black box full of money. I'd like to understand them, how they operate and how they could be better. I don't understand their purpose in pursuing many of these acquisitions, besides making sure their rivals don't buy the target first.
Acquisitions only really make sense if a company is creeping horizontally. Otherwise not that man opportunities make sense.
Say Apple decide to concentrate on what their exisitng lines (they've pretty much said so), how many startups would they find to buy? Probably not enough for a CAO.
I think one line of thinking in acquisitions is not just to get control of a product, but rather to take that startup team under the Google wing.
I am a firm believer in the idea that the most important asset that a company can have is its employees - even Google. Granted - acquiring a company and forcing the employees to work within the Google system is a piss-poor way of getting someone to work for you, but ultimately, how else can you get those crazy entrepreneaurs to work for you?
This acquire-to-hire plan backfires all the time - under performance, stagnation of the acquired product, etc etc, but I can see the appeal to it. At least, in theory.
"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.
- 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').
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
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.
I think acquirers may eventually have chief acquisition officers who will both identify good acquisitions and make the deals happen….Maybe in the future big companies will have both a VP of Engineering responsible for technology developed in-house, and a CAO responsible for bringing technology in from outside.
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.
Isn't he talking about the VP/BizDev here? I know, for instance, that Cisco has an entire group dedicated to evaluating and executing acquisitions.
I always feel guilty quoting others because I want to be my own thinker. That said...
There's really no reason for this blog post, and especially no reason to post it on HN. It's just a repost of an essay, with absolutely no additional analysis. The HN link should just go directly to the essay.
It will only happen when $200 million is "nothing" to a company. Pharmaceutical companies have an equivalent of "chief aquisition officer" who deals with finding partners and aquiring companies, but they only do that because the cost of developing a succesful drug is ~ $1 billion (no exageration). Drug companies often partner with someone and will aquire them if the partnership proves fruitful.
It is often much quicker, and ultimately cheaper, to aquire someone than to develop the software themselves. When software development costs reach the dizzy heights of drug development costs, then there will be the necessity for a cheif aquisition/partnership officier.
I see starting to get standardized is acquisitions. As the volume of startups increases, big companies will start to develop standardized procedures that make acquisitions little more work than hiring someone.
I might agree with that statement if it wasn't so obviously self-serving (given pg's role in YC) and if it were a little more qualified.
If acquisitions go the way of existing standardized hiring practices then it's more likely that they will become burdened with the very kind of bureaucratic and institutional nonsense that has traditionally prevented big companies from hiring high quality hackers.
I've been travelling all fall, but I'm flying home tomorrow. Lots of new ideas, but I have to read YC applications as soon as I get home, so not sure when I'll get to write something.
This is a take on acquisition that I had not previously considered. The idea of a CAO seems almost tongue-in-cheek at first glance, but I would not be at all surprised to see this a reality in coming years. It is a clearly evolving process as PG illustrates, and some do it better than others.
"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"
this comment is amusing although i do believe he is being facetious.
i am of the opinion that everyone in a company should have an eye out for innovation that is relevant to the company and should call it upon themself to escalate an emerging "acquisition worthy" startup to the attention of the powers that be. and of course let it fall upon their heads if they fail to take action.
it would show how well communication flows in your company as to how agile you are in making these kinds of acquisitions. a company that did it well would be fearfully predatorial indeed
I suppose it's the flip side for no one getting the blame when a big company spends a few mil buying a startup which turns out to have no value. (Did anyone at Conde Nast get fired for acquiring Reddit?)
Actually Reddit is probably in the minority of internet acquisitions that have worked. It was relatively cheap and it wasn't for "talent". Its traffic has been awesome since the acq.
What is the purpose of a firm? Is it a collection of synergistic business ventures? A source of capital? Does it make sense to continually expand it's scope of activities? Would investors be better off if Google kept the equity it needed to run its search business and paid the rest out in a dividend to shareholders?
We think of the big boys as a black box - a black box full of money. I'd like to understand them, how they operate and how they could be better. I don't understand their purpose in pursuing many of these acquisitions, besides making sure their rivals don't buy the target first.