UK Needs An Acquisition Culture To Have a Sustainable Startup Culture
techcrunch.com
techcrunch.com
Instead of flushing money down the pan on non-sustainable startups, we need people to build viable long-term businesses. Too often we see a hype-cycle in action as people build something with a slight spin on existing tech and/or services, hype it until it seems like its worth something then cash out.
Half the time the acquiring company seems to immediately shelve the service, if not they spend a few years trying to monetise it then give up.
I'm sorry if the Shoreditch crowd aren't attracting as many 'angels' as they'd like. I can only think this is a sign of healthy scepticism on the part of UK investors.
But if you're talking about startups, meaning super fast growing companies like Google, Facebook, etc, what you seem to be claiming implicitly here is that there is a way for the UK to become like Silicon Valley in the sense of becoming a place where such companies are started, without also acquiring other qualities of Silicon Valley that you seem to dislike, like early acquisitions.
That seems pretty unlikely. Any other city that evolves into a big startup hub will have its own personality to some extent (e.g. NYC might be more focused on retail), but it seems unlikely that a new startup hub would be structurally different.
Of course, as you've also pointed out, such "HR exits" are a small fraction of your and other VCs' returns. However, if they predominate numerically - if 80%, say, of YC companies are "acquihired" - this will inevitably affect the character of both YC and its applicants, making it more similar to just another recruiting agency. When our brains assess the character of a place, they weight by "number of people I've talked to", not "market value at exit".
What I suggested in "Hiring is Obsolete" is not that founders build something random to get the attention of acquirers, but that they build the product the acquirer should have built. I'm advocating founders aim for product acquisitions, not HR acquisitions.
And no proportion of HR acquisitions would be enough to affect the character of YC. Not only are we not interested intellectually in funding companies that fail, we probably net lose money on them.
I'm not suggesting there's a way for the UK to become like SV without early aquisitions. I'm not sure that I see the value proposition in the UK growing that sort of scene at all.
You can put this down to cynicism on my part. You can put this down to the British attitude to business. Or just to short sightedness. I'm not going to doubt your investment acumen or experience in this space, I certainly have nothing to compare to that and you clearly have the knowledge to make money out of what you do. And we could argue about what constitutes utility or value until the cows come home. But I'd still rather see tech firms establish themselves traditionally in silicon glen or silicon fen than I would see people get caught up in the hype cycle of silicon roundabout.
However it was the fast sale of Paypal which put enough money in Peter Thiel's pocket to put $500k straight into a young and green Mark Zuckerberg's pocket. It was also the acquisition of Granite Systems after only a year which put $132M in Andy Bechtolsheim's pocket such that he was happy to write a $100k cheque to the Google founders on his doorstep.
Acquisitions are like occasional rainfall in deserts. It may take plants which are focussed on arid survival to make it and you need to be a tough survivor. Without the occasional life-bringing rainfall though everything dies.
There is a growing number of high quality entrepreneurs and engineers starting to bed in in London (and the real ones are not the noisy ones you read about in the UK press) and given the right conditions they can create some substantial, revenue generating companies.
This is a pretty special opportunity. For what is comparatively very little funding indeed, there is the chance to get the brilliant engineers who would otherwise go into banks and getting the money that would otherwise go into property and creating some really interesting high quality new companies and job-creators.
While I think the odds are probably stacked against it happening, one essential ingredient either way is some acquisitions. Bring enough of those and the giants will follow.
They start up to make a profit, not tread water until they are bought by a bigger company.
The majority of the inhabitants of "silicon roundabout" are carbon copies of whats been before. whats more the service they provide is usually free. So there is no hope of long term success without a buyout.
In short, the very definition of a startup is unsustainable.
Several major exchanges (in energy, commodities) are recently ex-startups, and there is an ecosystem of innovative, fast growing companies servicing the city. Because finance is what London does.
Outside Central London, often clustered around universities (Cambridge, Surrey, and the Thames Valley) are interesting non-internet start-ups. Chip design startups, making IP they hope will be acquired by ARM or Qualcom. Startups creating software for the UKs huge, NHS motivated big pharma presence. These are B2B companies that you don't hear about unless you are involved, so I'm sure there are plenty popular niche I'm unaware of.
But Silicon Roundabout, or UK web service companies? I've looked at the companies there, hoping for one that looks interesting enough to grow, interesting enough to join. Nothing caught my eye. Datasift maybe.
I guess my comment was a bit negative. I wish good luck to anyone trying to make it. You'll have the last laugh when you cash out.
VCs routinely reject startups because they worry that the founders are only interested in selling the company. We tell founders who are about to present to VCs never even to use the word "exit."
+1 to what anovikov and KaiserPro have said already -- If these founders are building things they love, to solve real problems, they should be building sustainable businesses and doing what they set out to do, not waiting on a VC to buy them out.
And also, if they need the capital to enable/manage growth, a reasonable business model should get them SOMEWHERE close to sustainability. What I mean to say is that if people are falling themselves to use your creation (so much so that you must expand infrastructure significantly -- keep this in mind that many of the open source software that is available these days "scales" to thousands if not millions of users without much more than one guy sitting behind a computer) it should not be difficult to get some portion of people to PAY for the service.
Now, of course, this is very different when it comes to something like a manufacturing-based startup, in which someone is looking to achieve mass-production from the get go (which I don't even think is a reasonable approach) -- or break into some sort of heavily "regulated" area and needs money for patents/licenses/whatever. But even to that, I'd say more introspection is needed -- VCs are not just looking to hand out money without prototypes, and if you have prototypes that are good, and work, and show that you know what you're doing, even regular banks can give loans with a good enough business plan (especially with all that internet money everyone's been trying to get a hold of recently.
Also, I think that maybe this ultra-transient mentality to startups might be wrong, unless you are in the business of incubating. You don't often enter relationships with the mindset of gathering experience for the next one right? Most people would like to think that people enter relationships with the intention to make them successful. I think startups are the same way, especially given how people think about them on sites like these and others.
Also, keep in mind that building something you love and making money from it instead of taking VC cash doesn't mean you'll be poor by a long shot, it's very possible (and I'd like to say probable, but I don't have a link to an article posted on here last week about non-VC exits being generally worth more to the founder). If your idea really is good, then it will make you a LOT of cash, even if you collect $10 from 1000 people on a yearly basis, you'd only need 3000 people to think your app is useful to make somewhere close to min wage in the US (which is higher than many around the world are paid)
But anyway, that's just my opinion
[EDIT] - Also, another point worth thinking about here -- what about your users? These are the people that subscribed to you, your methodology, your culture. I think there's more than enough proof out there to show that users don't get quite treated the same after acquisitions (to put it mildly)
The point I wanted to make in the article is that most startups are a high-risk experiment. A side effect of that is that most of them will fail and you need a lot of liquidity to fund that failure-level.
I wish more developers would just create 1-5 man businesses that make $100k-$2M/year. It's exactly the right thing to do as an individual but it doesn't sustain a startup culture it just sustains a set of solid, long-term businesses.
Who is that a bad thing for? Small, solid businesses sounds like a better option for customers and the country as a whole than frenetically building new things knowing most of them will fold. It doesn't give the founders the same chance at celebrity, but they get to do something reliable and potentially fulfilling.
I guess I'm not convinced that the UK wants a 'startup culture' at all. I'd like to think people could focus on building stuff that's useful or entertaining, rather than what sounds like desperate attempts to become a millionaire.
The improvements in early stage investment in recent years may just wind up throwing other parts of the system out of balance.
What about the other path - why don't successful UK startups go public on the AIM? In the UK, companies can go public for much smaller market caps than they ever would in the US.
The UK is not burdened with the bureaucracy of Sarbanes–Oxley, so the UK doesn't necessarily need to adopt the US' cultural shift to stay private as long as possible.
In 2006, class (a) was working on Wall Street; but the pool of get-rich opportunities has dwindled. In 1975, class (b) was working in R&D labs on basic research. However, those options have dwindled too. As the few buttresses preventing the corporate world from falling under the weight of its own mediocrity give way, it's forcing a lot of the best people into one narrowly-defined class of entrepreneurship: VC-funded turn-the-crank franchise bids with a bit (ok, a lot) of random risk thrown in. It ends up requiring long hours, alternating unhealthfully between being over- and under-funded (relative to one's scope) and is generally unsustainable. Many of these people can't hack it for more than a couple years; that's why the acq-hires are so necessary-- turn the business over to something that can use it prophylactically before the founders burn out.