Ask HN: Why do companies buy startups? | Hacker News Reader

Ask HN: Why do companies buy startups?

10 pointsbarrydahlberg11 comments

There is always a lot of talk on HN about how and why to get bought. I am also interested in the other side of the equation, why do big companies go around buying startups so often?

Is this how they handle innovation once all the baggage of being a big company gets in the way?

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There are many reasons companies by start-ups, and start-ups need to be aware of what they are offering or could offer to be a good acquisition target.

1) purchasing the team - I'd put friendfeed and summize in this category. Facebook could have built a friendfeed quite easily, and twitter could have built a tool to search their own databases. Both companies decided to acquire an outside company who had already done a great job and got traction in the space. If you look at the structure of Facebook these days, it seems that friendfeed founders are having a huge impact on the company. Also summize was absorbed into twitter, and I'm very surprised to see that FriendFeed still exists independently.

2) Technology/Patents - Apple purchasing PA Semi and HP purchasing Palm are both likely to be considered purchasing of technology which may or may not include patents (though I assume patented technologies increase the valuation of the acquired companies). HP wasn't in the business of developing an operating system from scratch, and Palm had already done that AND had a large number of valuable patents. Likewise, Apple wasn't going to start-designing chips from scratch, so they looked for a company that already had what they needed or had some of the technologies and purchased them. This isn't to say that these companies don't also benefit from the people who are current employees of the acquired company, but as we've seen with some of the departures from Palm since being acquired by HP, there is no guarantee the most valuable employees will stick around.

Cheap innovation - as you say 'being a big company gets in the way'. Yes, start-ups can be a cheaper alternative to home-grown innovation. But the start-up needs to offer something competitive and depending on the market, may need to have market penetration. I'd say this is kinda the Yahoo! model of a few years ago when they were snapping up many start-ups and maintaining many separate brands (flickr, etc.).

Looking at the above methods, I'd suggest that there is likely a bit of each in each good acquisition. Take Mint as an example. Intuit purchased Mint.com for $170 million, and instantly got a great and innovative product (#3), that likely has very good technology (#2 I'm not sure of their patents or technology, so I could be wrong), and put the Mint founder Aaron Patzer as the VP and GM of Personal Finance at Intuit.

I'm sure there are other reasons, but those are the top 3 that I think of.

...start-ups need to be aware of what they are offering or could offer...

That's exactly why I was thinking about it, thanks for your thoughts.

You might be interested in http://www.early-exits.com/. I haven't read it, but meat Basil and I've heard him refer to it a few times. It seems to be targeted at what you're thinking about.

Big companies are immobile. It's very very hard for them to make decisions, especially ones that would require a dramatic shift in strategy.

They are stagnant, and believe that they cannot give up their existing business. So instead of shifting focus and 'pivoting,' they purchase a startup.

There's a great explanation of this in this recently popular post: http://steveblank.com/2010/06/07/when-big-companies-are-dead...

Big companies buy startups for several reasons; 1. to get a headstart over the competitors. it take quite a lot of talents, cost, etc to kick start a new innovation and technology. by acquiring a startup, it shorten the process a lot. 2. to create a monopoly. if the startup is a niche biz or something revolutionary, by acquiring the startup, they just create a monopoly, what's left is just to milk it.. $$$. Being a big company, what do you think they really care more? innovation or p/l?

If a business is profitable, a publicly listed company can "arbitrage" the deal. As some rough numbers, a private sale nets 2-4 times profit as value. A public company is valued at 10-12, sometimes as high as 20 times.

If they buy a company making $500,000 at 4 times (for $2 million) the publicly listed companies value goes up, at a 10 times multiple, by $5 million.

Spend 2, and increase own value by 5, for a net of 3 million. Seems like a nobrainer really.

It is a lot like buying a house that's already been remodeled. Someone else has already gone through the stress and taken all the risk (e.g. going over budget, not finishing, etc). Rather than doing R&D in house and pouring money and effort into projects that may never see the light of day, you can buy companies that are already seeing some success.

It's also core competency. If the startup does something way better than what the big company is trying to gain market share to, why not buy it than trying to figure it out from scratch. It can be more cost-effective that way.

I assume part of it is eliminating competition. Suddenly, their marketshare is your marketshare!

1. Talent/People

2. Technology/Innovation

3. Competition

Along with the other answers, there is often the case that the startup is, you know, actually profitable. My company buys them and grows the company in order to make more money. Their principals sell in order to achieve liquidity. Win Win.

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