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Comment by Apocryphon | Hacker News Reader

Very curious to see what people think about O'Reilly's supposition that many, if not most, startups are just another financial instrument that don't actually create wealth:

"When a startup doesn’t have an underlying business model that will eventually produce real revenues and profits, and the only way for its founders to get rich is to sell to another company or to investors, you have to ask yourself whether that startup is really just a financial instrument, not that dissimilar to the CDOs of the 2008 financial crisis — a way of extracting value from the economy without actually creating it."

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I found it to be an interesting claim. We'd have to look at what one buys when they get a startup. Focusing on tech, they typically get the team behind it, the tech itself, the userbase, the patents, and then anything else created. I think the team, users, and I.P. are most valuable components. Then, they tend to fold that into their other offerings or sometimes shelve it if it was for anti-competitive reasons.

So, it seems to me it's not a financial instrument. I mean, my understanding of finance is pretty basic. There could be instruments that represent what I'm describing. What I'm seeing, though, is that they're buying a market (users) w/ cross-selling opportunities, reduced liabilities if patents, and proven tech if they want it. It's more like investing in themselves through a third party they're bringing in for the enhancements they'll provide.

Something that I haven't seen discussed much is the possibility that when a startup (i.e. Whatsapp) achieves billion-ish scale adoption in a space that overlaps with an incumbent (Facebook), it has already destroyed some value (monetizable user attention-time) in the incumbent, so the incumbent has to obtain the upstart (pun-intended) in order to regain that lost value, and simultaneously grow into the areas that they don't overlap.

In that case, any premium paid that isn't reclaimed by future value created as a result of the acquisition is destroyed wealth. Unfortunately, without a crystal ball, it's hard to say what that premium is, if it exists at all.

If someone buys a start-up, obviously it has value to them.

The question is if that value is at the right valuation.

The 'value' can be as simple as a payout. If I could go back, I'd love to invest in Snapchat. I don't think Snapchat will ever have a strong revenue stream but that doesn't matter to me - what matters to me is the buyout.

Hell, I invest in options often. There's no real value to me... only a potential investment payout.

I think it's the same with most investors of technology.

The value comes from the people buying the company then.

Maybe snapchat is going to be a crucial marketing channel for them, which makes it worth it to purchase them. They transfer some of this value, to the original investors of the company who got it off the ground.

There is value, or perceived value at some point in the chain.

The acquihire maybe...

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