Facebook, TipJoy, the Deal that Didn’t Happen and the Hire that Did

Basically it appears like Facebook made the rational calculation that hiring the developer at retail is a lot cheaper than buying the company wholesale.

That is consistent with what I have argued in HN comments: with the glut of start-ups (50 from YC alone this year?) prices will drop towards replacement value. The replacement value of a start-up amounts to a hiring bonus for its developers. This is likely true even with substantial user traction.

We saw much the same thing in the implied valuation of iLike - after liquidation preference, developers basically get a hiring bonus, if they stick around. And iLike had 10 million monthly users on Facebook.

So unless a start-up has a plausible path to independent profitability, it is going to be subject to the brutal laws of a buyer's market. In other sectors this effect has been well observed: take enterprise software for example. There are public companies with $100+ million revenue that trade for basically not much more than cash on hand.

Yeah, if the startup's sole value is that it looks good on a résumé, that's true. But many startups have added brand value -- if Microsoft wanted to get into micropayments, for example, I think Microsoft TipJoy would have more initial traction than Microsoft Micropayment using the same developer. FB already has a great brand name.

There's no evidence that they didn't.

FaceBook held all the cards here - all they had to do was wait until TipJoy ran out of money, then snatch up one of the founders when he goes looking for a job. Which is what they did. What else would you have the founders do?

Just highlights the importance of bargaining position. Make deals when you don't need them, because you won't be able to when you do.

In my mind, brand value equates to user traction. User traction alone isn't enough for valuation (particularly in sober times), particularly when the acquirers have massive user-bases themselves.

Microsoft's historical acquisitions were of that kind (starting with DOS!): technology/development teams, with little or no premium paid.

As an acquirer this is perfectly rational behavior.

Why make a VC rich? That is the logic that is increasingly being applied and the proliferation of start-ups makes that logic very compelling. Let's say FB next needs a real time video service. Do they really need someone else's brand or audience? They would likely scout for a hot development team with good technology, and there are many to choose from.