October 31, 2014

Trend of Tech Company Buyouts Continues

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Venture capitalists are finding themselves being squeezed out by … Google.

Google? Yes, VC firms are in competition with large tech companies like Google. They are in competition to give money to small technology companies.

A recent essay by tech entrepreneur Paul Graham outlines the problem that venture capitalists face:

Largely because of Sarbanes-Oxley, few startups go public now. For all practical purposes, succeeding now equals getting bought. Which means VCs are now in the business of finding promising little 2-3 man startups and pumping them up into companies that cost $100 million to acquire. They didn’t mean to be in this business; it’s just what their business has evolved into.

Hence the fourth problem: the acquirers have begun to realize they can buy wholesale. Why should they wait for VCs to make the startups they want more expensive? Most of what the VCs add, acquirers don’t want anyway. The acquirers already have brand recognition and HR departments. What they really want is the software and the developers, and that’s what the startup is in the early phase: concentrated software and developers.

Google, typically, seems to have been the first to figure this out. “Bring us your startups early,” said Google’s speaker at the Startup School. They’re quite explicit about it: they like to acquire startups at just the point where they would do a Series A round. (The Series A round is the first round of real VC funding; it usually happens in the first year.) It is a brilliant strategy, and one that other big technology companies will no doubt try to duplicate. Unless they want to have still more of their lunch eaten by Google.

Of course, many small startups would prefer to be acquired by a Google or another large tech company, anyway. So this is not a bad thing for the startups. In fact, it eliminates a tremendous amount of the distration involved in seeking and getting venture money, and then managing the VCs, which becomes a significant part of the founders’ jobs.

This phenomenon of large established players acquiring small tech companies was something we noted last year in Big Tech Buying Small Tech Trend. It is interesting to see Graham’s take that the trend is continuing.

Hat tip to Laura Bennett, CEO of Embrace Pet Insurance, for the tip to Graham’s essay.

2 Comments ▼

Anita Campbell - CEO


Anita Campbell Anita Campbell is the Founder and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses, and also serves as CEO of TweakYourBiz.com.

2 Reactions

  1. I have invested in or looked at a number of deals that may very well be acquired before they go public. While part of this is driven by cost of being public, timing, etc; a large part is because with today’s technology stack it just does not take as much money to get to a cash flow positive business. I am not seeing alot of hiring of $10M a year salesforces, spending on $2M for EMC, etc. You just don’t need to do alot of those things. Venture money is not the goal, it never has been. It is a resource to build what we are all trying to build, a profitable business that help customers. I know that http://www.merchantcircle.com could not have been built 10 or even 5 years ago. We could not have gotten customer growth without Google, we could not have provided the value to small merchants without all of the ad networks, and we certainly could not have afforded to build it without raising alot more money. We did take money but not just to spend it, but becuase we were comfortable that Disney, Bank of America, and Rustic Canyon would be able to help us solve customer problems.

  2. I think it’s more than just tech companies. I know of several companies that have been acquired that have nothing to do with the internet or technology. I do think that all these acquisitions is yet another indication of the strong (and strengthening) climate for small business.

    Some of the recent acquisitions that I have been privy to involved a larger established entity acquiring a small competing business. I wonder, does this offer an indication of the affect small businesses are truly having on larger company market share? Something to ponder.

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