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.