Fred Wilson has a post today where he notices two trends. First that large internet companies that acquire small startups tend to unintentionally destroy them…
We have seen again and again that when a large company acquires a startup, they most often let it wither and die (myspace, delicious, etc). We have also seen that if that web services can be spun out (skype, stumbleupon), they can often be resuscitated.
Second that large companies that can’t acquire the small startup they want set out to intentionally destroy them…
But acquiring innovating emerging web services is not the only thing that big companies do that can be detrimental to the web. Worse is competing head on with them. Look at Facebook. They have ripped off Twitter, Foursquare, Quora, and many more small innovative startups. They haven't "killed" any of these companies but they have muddled the market and caused users to have to make choices that may turn out to be the wrong choices for them.
Which leads him to this conclusion…
What I would like to see (and obviously Albert too) is the emergence of a cooperative attitude on the web and mobile web where the big Internet companies and the innovative emerging web services work together to "succeed by making others succeed."
It’s a nice idea but I don’t see it happening and I’ll explain why.
In my experience acquisitions fail because the senior management in the acquiring company lose interest. It tends to go like this:
- They see a new concept that excites them.
- They have a bunch of action packed acquisition meetings where they discuss all the great “synergies” the merger will produce.
- They close the deal and realize the exciting theoretical talk is about to become a boring discussion on pragmatic execution.
- And they move on to new exciting things.
Which leaves the startup alone and sinking into the bureaucratic quicksand that dominates most big companies.
The thing to note is everyone in that scenario is working against their rational best interest in order to achieve short term gains. The executives get the excitement of an acquisition, the investors get to cash out and the founders get to believe they’ll have more resources at their disposal. But in the end the executives lose money for the company, the investors make less than they could have if the company had succeeded on its own and the founders get driven out by bureaucracy.
Yet, as Mr. Wilson points out, big companies continue to acquire small startups and startups continue to go along with it because they’re acting on emotion. That’s the issue. Mr. Wilson’s idea requires emotional participants to act rationally and realize their exciting deal will probably end in disaster.
The one solution I can see to this situation is for people like Fred Wilson to push for a different kind of acquisition strategy. If it were me I’d encourage the following steps...
1. Encourage large companies to acquire small startups but leave them independent.
2. Give a small amount of equity to current investors via a profit sharing arrangement and lessen the initial buy out amount.
3. Use the financial resources from step #2 and form an external division that will work as an intermediary between the startup and the larger company to pursue “synergies” between the two entities without disrupting the startup’s normal operation.
This would require a lot of sacrifice on everyone’s part. The Founders and investors get less money while the large company has to give up some control. But fundamentally it still allows each side of the equation to act on their somewhat irrational exuberance while keeping the startup independent.
To me that seems like a good deal.