Ask HN: Why do startups get acquired for a cost way more than the revenue made? • Hacker News Board

Re: Ask HN: Why do startups get acquired for a cost way more than the revenue made?

#21

Post by asanwal » Sun, Jan 09, 2011, 1:41 AM UTC

antirez wrote: post #18

fizx wrote: post #14

Earlier quoted context omitted.

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 o…

From an entrepreneur's perspective, being in bed with one corporation to this extent significantly reduces your options and flexibility. Sounds more like you'd be an employee in a skunk-works than a real entrepreneur in this type of setup.

Re: Ask HN: Why do startups get acquired for a cost way more than the revenue made?

#22

Post by asanwal » Sun, Jan 09, 2011, 1:47 AM UTC

jeremymims wrote: post #5

1. Brand and scale. If a company buys a startup with a promising product that they can quickly sell to a large portion of their customers, they're willing to give up a portion of that future revenue. It may not be at all tied to past performance. 2. Talent Facebook payed a premium for FriendFeed because they wanted their team to work on the Facebook platform. This team has developed more than $50 million in new value…

The above are spot on.

However, acquisitions are not always so rational. The other reason is hype. If you're in the hot area of today (cloud, location-based whatever, social gaming, photo sharing) and a corporation is hearing a lot about this, even if they don't know what it's all about, their desire to be part of this "thing that will be big" can motivate them and cause them to pay more than it may be worth.

Re: Ask HN: Why do startups get acquired for a cost way more than the revenue made?

#23

Post by mattlong » Sun, Jan 09, 2011, 2:05 AM UTC

antirez wrote: post #8

DanielBMarkham wrote: post #6

Big 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…

I believe what you are describing is more or less what Microsoft is trying to do with their New England R&D Center (NERD center as they like to call it) located in Cambridge, MA. They recruit big time out of MIT, host tech conferences (2009 jQuery conference among others), and let their "startup teams" work on pretty much whatever they want (I think).

Would be interesting if anyone has any more insider info about it to share.

Re: Ask HN: Why do startups get acquired for a cost way more than the revenue made?

#24

Post by jcr » Sun, Jan 09, 2011, 2:18 AM UTC

antirez wrote: post #12

jcr wrote: post #2

The 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…

It is common, in fact, painfully common. As for whether or not it is "bad" that depends on who you are. If you need a bunch of innovative engineers and you are the current darling of the technical world (i.e. great people applying to your company), then your only solution is to buy out companies who have proven innovative engineering acumen.

If you are Microsoft, or even Google for that matter, talent acquisitions might be your best avenue for getting great people working for you.

There were some posts to HN about the estimated value of an engineer during an acquisition. I believe one of the folks from PowerSet or FareCast (both acquired by Microsoft) was talking about it in a blog post. The effect on valuation was roughly 1 million USD per engineer at the startup.

hmmm... my meatware memory is failing and I can't find a link, but I'm pretty sure it was PowerSet.

Re: Ask HN: Why do startups get acquired for a cost way more than the revenue made?

#25

Post by smeatish » Sun, Jan 09, 2011, 2:20 AM UTC

antirez wrote: post #8

DanielBMarkham wrote: post #6

Big 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…

Intel has a VC arm: http://www.intel.com/about/companyinfo/capital/index.htm

Re: Ask HN: Why do startups get acquired for a cost way more than the revenue made?

#26

Post by AndyParkinson » Sun, Jan 09, 2011, 9:06 AM UTC

Generally its because people who run/operate companies are terrible at allocating capital. Operating a business and effectively allocating capital are two very different skills, but smart operators seem to believe their intelligence carries over to capital allocation.

The fact is that most companies destroy shareholder value when they buy other companies. A recent example is the whole yahoo/delicious debacle but anyone reading this can think of a handful of other equally terrible examples off the top of their head. A far more difficult exercise would be to name the acquisitions that actually added long-term value. For example, Apple is generally great at only buying companies that add real value. They are an exception.

The fact that operators are terrible at capital allocation is great for founders and VCs. Its terrible for shareholders of the acquiring company!