Silicon Valley’s acquisition fever is bad for innovation

http://www.washingtonpost.com/blogs/the-switch/wp/2014/02/20/silicon-valleys-acquisition-fever-is-bad-for-innovation/

by chwolfe • 12 years ago

46 50 12 years ago

trhway4• 12 years ago

and the alternative would be? why would VC invest money with such an ease if there wouldn't be a good chance of a good exit? And how would you have innovation without VC? I mean take any place outside Bay Area - such anyplace would be an exaple of innovation without easy VC.

WhatsApp is the kind of unconventional startup that could have changed the world if it had grown into an independent public company.

future is easy to predict.

It might have been able to attract some of Silicon Valley's most talented engineers and pioneered new business models that don't rely on intrusive ads and pervasive data collection.

and the money to pay these engineers would come where from? I mean if we exclude "intrusive ads and pervasive data collection" as the revenue stream (the stream that glorified in the article Google mostly relies on).

sp3322• 12 years ago

Startups could create products that generate revenue. They would use invested money to scale quickly.

trhway4• 12 years ago

by the time startup reaches 19B valuation i'd say it either have created such product or there is no chance for it to happen.

aetherson• 12 years ago

What we're seeing the social networking space at least -- and this is really interesting -- is a verticalization of the social networking space.

Over in the physical world, if you're a new company and you want to produce, I don't know, refrigerators, obviously you aren't going to start from raw materials and try to recapitulate the industry of forging metal, printing circuits, etc. In fact, you'll probably buy the vast majority of your components in a pretty late stage -- like, unless your special sauce is some new pump design, you'll probably buy your pumps fully formed.

Similarly, if you do think of an awesome pump design, you're more likely to try to sell it to existing fridge makers than also take on the design and creation of the entire refrigerator. And clearly this is all well-understood and unremarkable.

I think that what's happening in the social networking space is that there's a realization that there are (at least) two very difficult stages involved in creating a successful company. First, you have to build a gigantic userbase, fighting entrenched competitors with network effects, etc. Then, just as difficult, you need to monetize those users without driving them all away.

So, just like the pump company builds pumps and sells them to refrigerator company with no aspirations to build an entire fridge, we're seeing companies like Snapchat, Instagram, and WhatsApp tackle just the userbase-building. And then they sell to Facebook or Google, who have a lot of tools to monetize a userbase.

Of course, unlike the pump company, which just sells a product, the userbase companies sell their entire company. But I think it's fundamentally the same thing going on here: you can be great at building userbase without deceiving yourself into thinking that you're also great at monetizing your userbase. So your business model becomes, "Develop a giant userbase, then sell to Facebook or Google."

normloman• 12 years ago

I thought VCs invested in a diverse portfolio of companies, expecting most to fail, and profit drastically off the few that succeed. Since when did they expect all their holdings to get an exit?

binarybits• 12 years ago

My point isn't that startups shouldn't have profitable exits. It's that I'd like to see more of those exits be IPOs that leave the companies independent, rather than acquisitions.

trhway4• 12 years ago

many many "exits" wouldn't make for good IPOs on their own and that would thus put negative pressure on VC.

GFK_of_xmaspast• 12 years ago

The last bubble was lots of IPOs, was that really any better?

_delirium• 12 years ago

And how would you have innovation without VC?

Well, for an example you could look at: pretty much all innovation. VC-backed startups that are innovating are pretty rare, unless you mean business-model innovation. A typical startup is monetizing innovation that's already been done, at big companies or in academia or at bootstrapped startups, but that hasn't been effectively monetized yet. VCs don't want to sink money into R&D.

ChuckMcM• 12 years ago

Sigh, survivor bias taints this analysis so hard it hurts. There are lots and lots and lots of innovative startups that don't get acquired and go through the whole process without all that much press. You don't see them, it's boring to read "Startup that changes the ways machine tools are stocked at machine shops turns in another year." The really crazy ones (either crazy funding like Color, or crazy exits like WhatsApp) get lots of press, and so one things "oh they are all like that."

Acquisitions are a way that investors get their money back, so they encourage investors to invest in startups, and by its nature that encourages innovation. Perhaps not as much as random $100K grants given out on the street corner would, but it does encourage company formation and execution. IPOs do the same thing.

What investors don't like is a company they invest in, own a big chunk of the equity and it never goes anywhere. So called "zombies", companies that are nominally profitable, but not not enough cash flow to support M&A, too much cash flow to just roll them up. Those companies need an innovative way to 'cash out' their investor over time so that they can get on with their lives.

chromatic5• 12 years ago

Acquisitions are a way that investors get their money back, so they encourage investors to invest in startups, and by its nature that encourages innovation. Perhaps not as much as random $100K grants given out on the street corner would, but it does encourage company formation and execution. IPOs do the same thing.

I have trouble understanding this paragraph. It seems to argue that acquisitions encourage company formation and execution. So far so good--but what's the definition of innovation in this discussion anyhow?

Perhaps the most confusing idea to me is suggesting that investing in startups does encourage innovation, but not as much as randomly giving out grants would. Is it possible to compare the efficacy of the VC, M&A, IPO ecosystem to those targeted grants or even a guaranteed wage? To me, that is worth exploring.

Instead I fear we get SV press releases heralding innovation in something--anything--other than yet another example of cashing out for the established network of moneyed interests.

bsder2• 12 years ago

What investors don't like is a company they invest in, own a big chunk of the equity and it never goes anywhere. So called "zombies", companies that are nominally profitable, but not not enough cash flow to support M&A, too much cash flow to just roll them up. Those companies need an innovative way to 'cash out' their investor over time so that they can get on with their lives.

You know, the whole point of a venture capitalist was to provide money to companies that would take 5-7 years of profitability to cash out.

The idea that being a venture capitalist is akin to buying lottery tickets is only since the DotBomb.

lmg643• 12 years ago

this is a silly article. re-write the headline and it is an explanation of reality:

SV's innovation fever is driven by acquisitions (or the possibility anyway).

People launch companies, iterate like mad, in the hopes of a payout of some kind. willing to go without revenue to prove out a concept quickly. the endless trial-and-error results in a lot of interesting outcomes. the reward is the acquisition.

jfasi• 12 years ago

Acquisition fever is certainly a force pushing innovation downward, and I think the argument this article puts forward is sound. On the whole, however, I think innovation in the technology sector is driven by other factors. In particular, the barriers to entry for a new company in the technology space are extremely low.

Once upon a time a young company needed to devote significant monetary and human capital to building their software and hardware platform. Today, they can use open source frameworks and commodity hardware. Marketing once meant medium to big media buys, which had high entry costs and provided little to no insight into their success. Today you can literally buy attention by the individual customer, and enjoy a deep and detailed understanding of the success of your campaign. In addition the (relative) abundance of early stage investors means if you have an idea, you can bring it into reality with (relative) ease.

Innovation is so cheap that it doesn't have to happen inside a big company anymore. If a team gets bought out and cannot pursue a new opportunity, someone outside the company will step up and go after it.

myzerox• 12 years ago

It's bad for innovation at Whatsapp but great for innovation in Silicon Valley as capital flows back into the cycle.

AznHisoka2• 12 years ago

Yes, it flows back again, so the founders of Whatsapp can go fund another photo sharing or messaging app with another twist.

Aloisius• 12 years ago

As long as these newly minted millionaires & billionaires continue the Silicon Valley tradition of reinvesting their money back into new startups then I think we'll more than offset the potential innovation we lose by them being locked away and their own companies merged/shuttered.

Now if the culture ever changes and people start hording their money, then I'll agree we have problems.

michaelochurch3• 12 years ago

Now if the culture ever changes and people start hording their money, then I'll agree we have problems.

They're hoarding it within their own closed social network. The new purpose of VC is to make trust-fund kids look legitimate (see: Snapchat, Summly, Clinkle). It's the same effect: the ecosystem doesn't die, but gradually becomes uninspiring.

AznHisoka2• 12 years ago

Where does it end though? At some point (god damn it) someone has to innovate and give us flying cars!

ericflo• 12 years ago

He says "Suppose that Yahoo had pledged to allow Google to operate independently...Chrome and Android likely would never have gotten off the ground." But Android was...an acquisition.

oori• 12 years ago

"..but it just wouldn't have occurred to the people running Yahoo's search subsidiary to branch out into web browsers and mobile OSes" - That's probably true, regardless if via acquisition or in-house development.

ekpyrotic• 12 years ago

Not only is this argument wrong, the /opposite/ is true.

Buyouts are actually the /engine/ of innovation. They're the fuel. The oil.

You know this yourself. Just take a quick look at Silicon Valley - it's a hotbed of innovation. If you believed this argument, you'd expect to see a dirge of new businesses & a desert of new ideas. That's just not true. We have wearable tech. Quantified self. Bank challengers. News extractors. And things that don't even have names. The place is full of vibrant startups & new ideas. Just compare it to the energy, banking or agriculture sector.

So, why is the argument wrong?

Because buyouts /liberate/ innovative entrepreneurs from their old companies so they can go onto to found new startups - new startups that push the envelope again. San Fran is full of serial entrepreneurs who skip from one place to the next - first, revolutionising auctioning. Then, payment processing. Then, something else.

Just look at the PayPal mafia: http://en.wikipedia.org/wiki/PayPal_Mafia

What if PayPal hadn't been bought out. YouTube might not have existed. Nor LinkedIn. Nor Palantir. SpaceX. Yelp. Yammer.

Buyouts lets these innovative people sell-up - at the right price - and move on. Not only that, but they allow them to move on with additional capital that they can plough into their next venture.

If buyouts didn't happen as often, entrepreneurs would have to wait another 3-5 years - or even longer than that - for an IPO. It would lock in capital, and enterprise would suffer. Plus, an IPO is mighty expensive & just not right for some businesses.

Entrepreneurs would be locked into their first companies.

This 'lock-in effect' is exactly what happens when Governments raise Capital Gains Tax - the tax on the profits of selling a business. If it's harder (or more costly) for an entrepreneur to cash out and move on, they stagnate - and so does innovation. This is a well-known and studied phenomena: http://www.fas.org/sgp/crs/misc/R40411.pdf‎

Acquisition don't suffocate innovation.

Acquisitions are the oil of the economy.

frostmatthew4• 12 years ago

The place is full of vibrant startups & new ideas.

While there are certainly exceptions the vast majority of startups are not very innovative. Having some slight twist on sharing photos or sending messages or analytics isn't innovation.

chromatic5• 12 years ago

Redefine "innovation" as "generate money for VCs". Then anything which lets you sell eyeballs to advertisers (or metadata about eyeballs to advertisers) becomes innovative, if you do it at the right scale.

argonaut• 12 years ago

While there are certainly exceptions the vast majority of startups are not very innovative as far as you are concerned.

The the people in Africa or Asia or Europe who can now bypass SMS charges and bypass the monopolies behind them, a messaging app can be innovative.

michaelochurch3• 12 years ago

What if PayPal hadn't been bought out. YouTube might not have existed. Nor LinkedIn. Nor Palantir. SpaceX. Yelp. Yammer.

They'd still be founded, but by other people. The connections game is zero-sum. If those people didn't have the connections the Paypal Mafia bought them, someone else would.

bsder2• 12 years ago

The place is full of vibrant startups & new ideas.

Except that enormous numbers of these startup ideas are all about undercutting existing businesses and creating a race to the bottom rather than adding value.

WhatsApp removed any profit from SMS. Its revenue is a rounding error to Facebook. Facebook will start running ads on the service, they don't have any choice. Now, even if you want an ad-free SMS service, that won't be an option.

Lyft is directly competing against taxis. They do this by laying the liability for what they do at the feet of "contractors" who now bear the burden (and generally just ignore it) So, the legitimate services that have to pay tax, liability insurance, training, and licensing are now at a disadvantage relative to the newcomers. If Lyft wanted to actually add value, they could set up a taxi fleet and provide the kind of quick, GPS response that people want. But, you see, that's real work and won't have anywhere near the margin for a quick VC exit.

There is innovation in the valley. It's just not in the "social" companies.

joesmo• 12 years ago

It's worthless to speculate about what would have been if this or that. There is no way to know. It is sad, however, when the aquisition happens simply to remove competition like some of the buyouts that are immediately followed by startups removing their product offerings.

mbesto• 12 years ago

This is a very poor conclusion, but arguably will sit very well with the audience of the general populace who will feel smug that "they had the idea of whatsapp and facebook first":

But any new products he launches will be shaped by Zuckerberg's vision for the web, not his own. And that's a shame.

Innovation is a vehicle for the creation of wealth. Innovation is in and of itself fairly worthless. The only reason the concept of innovation is so popular is because of the value (and the valuations) we put on companies who are seen to be innovating. I don't think it's in question that a lot of wealth is being created right now. Where's the shame in that?

michaelochurch3• 12 years ago

As a place for innovation, Silicon Valley is dead. It's now a cross between Hollywood for ugly people and Wall Street for people who can't hack winter.

Acquisitions aren't the problem. If the alternative is hard-stop failure, meaning the work and acquired knowledge is effectively thrown away, I think M&A is far better. What is a step down is the replacement of R&D by M&A, but that's the fault of shortsighted executive fuckheads all over the country-- not limited to the Valley.

If you see the Valley as another Wall Street-- with a similar corporate ladder (engineer -> VP/Eng -> CTO -> founder -> investor)-- it will piss you off less. But you will also realize that it's a much crappier Wall Street-- worse pay and bonus structure, less prestige outside of the Bay Area echo chamber, more project-management bullshit (e.g. "iterations" and extreme closed allocation and "story points"), less autonomy, and more age discrimination-- and wonder why the fuck anyone would go into the startup game (unless born into VC connections).

The danger of startups (by the way) is that if you play that game for too long, you end up stuck in it because the "job hopper" stigma makes it hard to move back to hedge funds. This might have been OK when engineering roles at startups had real upside, but now that engineer equity allotments are in the pathetic 0.01-0.1% range, it's a shameful and wasteful trap.

hiroaki• 12 years ago

Acquisitions provide liquidity for startups that hope to realize value only in the long-term. This is actually a good thing because it can actively encourage more ambitious startups.

msoad• 12 years ago

He forgot that those big acquisitions give employees enough money to start their startups independently and be crazily innovative.

If I get $500M I might work on my good bad idea. Good bad ideas like Space X

nl• 12 years ago

Meanwhile, in the rest of the world: "What I would give to have problems like that"...

salem• 12 years ago

Google maps was based on an acquisition, as were many of Google's marquee products:

http://en.wikipedia.org/wiki/List_of_mergers_and_acquisition...

adventured• 12 years ago

Silicon Valley has a cash 'problem.'

AAPL - $158b, GOOG - $58b, CSCO - $48b, ORCL - $37b, INTC - $20b, HPQ - $16b, FB - $11b, EBAY - $9b

$357 billion in cash among just the top eight tech firms (cash wise). Those eight firms are generating roughly $100 billion a year in profit, compiling that cash hoard ever larger.

It's not surprising Silicon Valley has acquisition fever. Cash and equivalent yields almost nothing these days. To top it off, the stock market is at all time highs, so stock-as-acquisition-currency is primed as well.

argumentum• 12 years ago

The (bad) article discounts at least the following:

1. Often acquisitions thrive under their new overlords (think android, youtube, instragram). They might also need the financial resources of the purchaser to aim higher.

2. Acquisitions increase the # of potential angel investors, which leads to more money for startups. Look at what PayPal's acquisition has done for innovation (it's famous "mafia" ended up funding and/or founding Facebook, Tesla, Palantir, Spacex etc.)

3. An acquisition culture leads to more examples of successful founders, which leads to more people wanting to be founders.

Silicon Valley’s acquisition fever is bad for innovation

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