Silicon Valley’s acquisition fever is bad for innovation

and the alternative would be? why would VC invest money with such an ease if there wouldn't be a good chance of a good exit? And how would you have innovation without VC? I mean take any place outside Bay Area - such anyplace would be an exaple of innovation without easy VC.

>WhatsApp is the kind of unconventional startup that could have changed the world if it had grown into an independent public company.

future is easy to predict.

>It might have been able to attract some of Silicon Valley's most talented engineers and pioneered new business models that don't rely on intrusive ads and pervasive data collection.

and the money to pay these engineers would come where from? I mean if we exclude "intrusive ads and pervasive data collection" as the revenue stream (the stream that glorified in the article Google mostly relies on).

I thought VCs invested in a diverse portfolio of companies, expecting most to fail, and profit drastically off the few that succeed. Since when did they expect all their holdings to get an exit?

Sigh, survivor bias taints this analysis so hard it hurts. There are lots and lots and lots of innovative startups that don't get acquired and go through the whole process without all that much press. You don't see them, it's boring to read "Startup that changes the ways machine tools are stocked at machine shops turns in another year." The really crazy ones (either crazy funding like Color, or crazy exits like WhatsApp) get lots of press, and so one things "oh they are all like that."

Acquisitions are a way that investors get their money back, so they encourage investors to invest in startups, and by its nature that encourages innovation. Perhaps not as much as random $100K grants given out on the street corner would, but it does encourage company formation and execution. IPOs do the same thing.

What investors don't like is a company they invest in, own a big chunk of the equity and it never goes anywhere. So called "zombies", companies that are nominally profitable, but not not enough cash flow to support M&A, too much cash flow to just roll them up. Those companies need an innovative way to 'cash out' their investor over time so that they can get on with their lives.

My point isn't that startups shouldn't have profitable exits. It's that I'd like to see more of those exits be IPOs that leave the companies independent, rather than acquisitions.

What we're seeing the social networking space at least -- and this is really interesting -- is a verticalization of the social networking space.

Over in the physical world, if you're a new company and you want to produce, I don't know, refrigerators, obviously you aren't going to start from raw materials and try to recapitulate the industry of forging metal, printing circuits, etc. In fact, you'll probably buy the vast majority of your components in a pretty late stage -- like, unless your special sauce is some new pump design, you'll probably buy your pumps fully formed.

Similarly, if you do think of an awesome pump design, you're more likely to try to sell it to existing fridge makers than also take on the design and creation of the entire refrigerator. And clearly this is all well-understood and unremarkable.

I think that what's happening in the social networking space is that there's a realization that there are (at least) two very difficult stages involved in creating a successful company. First, you have to build a gigantic userbase, fighting entrenched competitors with network effects, etc. Then, just as difficult, you need to monetize those users without driving them all away.

So, just like the pump company builds pumps and sells them to refrigerator company with no aspirations to build an entire fridge, we're seeing companies like Snapchat, Instagram, and WhatsApp tackle just the userbase-building. And then they sell to Facebook or Google, who have a lot of tools to monetize a userbase.

Of course, unlike the pump company, which just sells a product, the userbase companies sell their entire company. But I think it's fundamentally the same thing going on here: you can be great at building userbase without deceiving yourself into thinking that you're also great at monetizing your userbase. So your business model becomes, "Develop a giant userbase, then sell to Facebook or Google."