I believe that is most businesses, not just startups.
Ask HN: Why do startups get acquired for a cost way more than the revenue made?
11–20 of 26 posts
Re: Ask HN: Why do startups get acquired for a cost way more than the revenue made?
#12The most general answer is "talent acquisition" (you should do a web search on that, also a HN search will be very helpful). In short, the proposed value of the company is based on the value of the engineering team.
If that is common, it is very very bad. It means startups are not doing real innovation mostly. What is even worse is that once this starts to be established way of business, startups will be more and more group of good hackers producing a good product but perhaps not outstanding, waiting for some big acquisition.
In the long term this can completely killed innovation.
What was very good with the model of creating a startup to create things that really users want, in order to earn money, is that people tend to give money to a company only when the product they do is really something worthwhile.
This was what happened to the big startups in 70s and 80s. This drives innovation.
Re: Ask HN: Why do startups get acquired for a cost way more than the revenue made?
#13Earlier quoted context omitted.
That's something strange from my point of view. I mean, imagine some big company opening a BigCompanyName-Seed division, where they do something like Y combinator is doing, but instead of giving a small amount of money for 6% they get 50% of the company for a bigger investment (at least in perspective, so if future investments are needed, there is no dilution up to a given sum). But in the process of course the compa…
"...but instead of giving a small amount of money for 6% they get 50% of the company for a bigger investment..." I think one reason is that most seed investments don't need to be that large, and large investments can actually be detrimental to the progress of a startup.
It's a good point, what I mean is, the big company gets 50% not to provide more money now, but to play the role of the few first next rounds if the company will be worth it, but ensuring the founders less dilution.
Re: Ask HN: Why do startups get acquired for a cost way more than the revenue made?
#14Big companies are using startups as proxy innovation labs. So instead of figuring out themselves what users are doing, they let startups. Then they buy the startups. Much easier to buy an audience and all the possibilities associated with a new brand than try to make it all work in-house. Combine that with raw talent acquisition, and a lot of startups begin to look like highly-rewarded spec R&D work for big companies…
That's something strange from my point of view. I mean, imagine some big company opening a BigCompanyName-Seed division, where they do something like Y combinator is doing, but instead of giving a small amount of money for 6% they get 50% of the company for a bigger investment (at least in perspective, so if future investments are needed, there is no dilution up to a given sum). But in the process of course the compa…
Yahoo!! tried this with Brickhouse. They opened a pseudo-startup innovation lab in SF. I don't know all the details, but iirc, it was 30-100 people for 1-2 years.
This failed utterly.
Why? Once a company is beyond a certain size, employees maximize their expected value by spending time seeking internal resources. Budget, headcount, etc. If the lab is still part of the parent company, these games are still played.
You also have companies like Hulu, that exist at the pleasure of their "investors." This might work a little better, but Hulu can't act fully in self-interest.
Perhaps the best thing I can think of is a spinoff with initial funding, control of its own board, and an irrevocable IP grant. This would potentially be a huge head start. But then what happens if a competitor acquires your spinoff (for the IP grant) right away?
I guess all this seems more fraught with risk than the simple buy a random startup model.
Re: Ask HN: Why do startups get acquired for a cost way more than the revenue made?
#15My first hypothesis is that it's a question of comparative opportunity cost, rather than absolute cost.
When a company gets very large, it usually struggles to keep innovating under inertia. Trying to build in completely new directions becomes both necessary and difficult. Buying a startup is often cheap compared to trying to fork an existing team to build new things. Furthermore, the startup's business model is already partially proven by time of acquisition - so they are buying some certainty compared to assigning a team to generate new ideas.
Another hypothesis is that with the resources of a large company behind it, the startup may grow very fast. Adobe seems to be good at this. Other companies don't seem as good at managing post-acquisition.
I have never been in or acquired by a large company, however, so what I say should come with a grain of salt.
Re: Ask HN: Why do startups get acquired for a cost way more than the revenue made?
#16Earlier quoted context omitted.
"...but instead of giving a small amount of money for 6% they get 50% of the company for a bigger investment..." I think one reason is that most seed investments don't need to be that large, and large investments can actually be detrimental to the progress of a startup.
It's a good point, what I mean is, the big company gets 50% not to provide more money now , but to play the role of the few first next rounds if the company will be worth it, but ensuring the founders less dilution.
Interesting idea. I wonder how the guarantee of future funding without dilution would affect the founders' mindset though.
Re: Ask HN: Why do startups get acquired for a cost way more than the revenue made?
#17I suppose its because the same code serving millions instead of thousands might be worth 1000x as much.
If you invented a process that turns lead into gold, how much has been converted so far really doesn't affect how much the patent is worth.
Re: Ask HN: Why do startups get acquired for a cost way more than the revenue made?
#18Earlier quoted context omitted.
That's something strange from my point of view. I mean, imagine some big company opening a BigCompanyName-Seed division, where they do something like Y combinator is doing, but instead of giving a small amount of money for 6% they get 50% of the company for a bigger investment (at least in perspective, so if future investments are needed, there is no dilution up to a given sum). But in the process of course the compa…
Yahoo!! tried this with Brickhouse. They opened a pseudo-startup innovation lab in SF. I don't know all the details, but iirc, it was 30-100 people for 1-2 years. This failed utterly. Why? Once a company is beyond a certain size, employees maximize their expected value by spending time seeking internal resources. Budget, headcount, etc. If the lab is still part of the parent company, these games are still played. You…
Yes I think the startup branch should be a separated company, with a clear separation of management and so forth. Just the mother company has some specific rights that can use after a given amount of time a given startup was created and under specific terms. So that in the end it's really a lab without the weight of the big company, but the big company can avoid paying a lot of money, especially if the final aim is often to hire.
Re: Ask HN: Why do startups get acquired for a cost way more than the revenue made?
#19Big companies are using startups as proxy innovation labs. So instead of figuring out themselves what users are doing, they let startups. Then they buy the startups. Much easier to buy an audience and all the possibilities associated with a new brand than try to make it all work in-house. Combine that with raw talent acquisition, and a lot of startups begin to look like highly-rewarded spec R&D work for big companies…
That's something strange from my point of view. I mean, imagine some big company opening a BigCompanyName-Seed division, where they do something like Y combinator is doing, but instead of giving a small amount of money for 6% they get 50% of the company for a bigger investment (at least in perspective, so if future investments are needed, there is no dilution up to a given sum). But in the process of course the compa…
Because it's almost strictly better for them to acquire an outside company than it is for them to innovate internally, and it's easy to see why: many startups will vie to succeed with substantially similar ideas, and an acquirer can choose among them to optimize their outcome.
In some cases, the acquirer can win simply by waiting for a company to prove itself in the marketplace. They pay a small premium to instantly become the market leader relative to the risk-adjusted cost they'd have to pay to ensure an internal effort resulted in the same market position.
In other cases, the acquirer knows it's going to dominate the market once it enters with an acquisition. It wants to know whether a product is going to succeed, and what features customers are going to value most highly. So it can sit back, watch the market shake out, and then buy the best also-ran at a major discount to the valuation of the market leader.
These are decision factors that aren't open to companies that innovate internally. That doesn't make internal innovation bad; it just argues in some cases for M&A instead.
Re: Ask HN: Why do startups get acquired for a cost way more than the revenue made?
#20Big companies are using startups as proxy innovation labs. So instead of figuring out themselves what users are doing, they let startups. Then they buy the startups. Much easier to buy an audience and all the possibilities associated with a new brand than try to make it all work in-house. Combine that with raw talent acquisition, and a lot of startups begin to look like highly-rewarded spec R&D work for big companies…
That's something strange from my point of view. I mean, imagine some big company opening a BigCompanyName-Seed division, where they do something like Y combinator is doing, but instead of giving a small amount of money for 6% they get 50% of the company for a bigger investment (at least in perspective, so if future investments are needed, there is no dilution up to a given sum). But in the process of course the compa…
In theory, this is an interesting idea. I'm not sure an entrepreneur who has (or believes they have) a truly big, scalable idea would want to give up 50% of his/her company for a first round of funding, no matter how large.