Silicon Valley’s acquisition fever is bad for innovation
washingtonpost.com
washingtonpost.com
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.
I have trouble understanding this paragraph. It seems to argue that acquisitions encourage company formation and execution. So far so good--but what's the definition of innovation in this discussion anyhow?
Perhaps the most confusing idea to me is suggesting that investing in startups does encourage innovation, but not as much as randomly giving out grants would. Is it possible to compare the efficacy of the VC, M&A, IPO ecosystem to those targeted grants or even a guaranteed wage? To me, that is worth exploring.
Instead I fear we get SV press releases heralding innovation in something--anything--other than yet another example of cashing out for the established network of moneyed interests.
You know, the whole point of a venture capitalist was to provide money to companies that would take 5-7 years of profitability to cash out.
The idea that being a venture capitalist is akin to buying lottery tickets is only since the DotBomb.
Now if the culture ever changes and people start hording their money, then I'll agree we have problems.
They're hoarding it within their own closed social network. The new purpose of VC is to make trust-fund kids look legitimate (see: Snapchat, Summly, Clinkle). It's the same effect: the ecosystem doesn't die, but gradually becomes uninspiring.
Buyouts are actually the /engine/ of innovation. They're the fuel. The oil.
You know this yourself. Just take a quick look at Silicon Valley - it's a hotbed of innovation. If you believed this argument, you'd expect to see a dirge of new businesses & a desert of new ideas. That's just not true. We have wearable tech. Quantified self. Bank challengers. News extractors. And things that don't even have names. The place is full of vibrant startups & new ideas. Just compare it to the energy, banking or agriculture sector.
So, why is the argument wrong?
Because buyouts /liberate/ innovative entrepreneurs from their old companies so they can go onto to found new startups - new startups that push the envelope again. San Fran is full of serial entrepreneurs who skip from one place to the next - first, revolutionising auctioning. Then, payment processing. Then, something else.
Just look at the PayPal mafia: http://en.wikipedia.org/wiki/PayPal_Mafia
What if PayPal hadn't been bought out. YouTube might not have existed. Nor LinkedIn. Nor Palantir. SpaceX. Yelp. Yammer.
Buyouts lets these innovative people sell-up - at the right price - and move on. Not only that, but they allow them to move on with additional capital that they can plough into their next venture.
If buyouts didn't happen as often, entrepreneurs would have to wait another 3-5 years - or even longer than that - for an IPO. It would lock in capital, and enterprise would suffer. Plus, an IPO is mighty expensive & just not right for some businesses.
Entrepreneurs would be locked into their first companies.
This 'lock-in effect' is exactly what happens when Governments raise Capital Gains Tax - the tax on the profits of selling a business. If it's harder (or more costly) for an entrepreneur to cash out and move on, they stagnate - and so does innovation. This is a well-known and studied phenomena: http://www.fas.org/sgp/crs/misc/R40411.pdf
Acquisition don't suffocate innovation.
Acquisitions are the oil of the economy.
While there are certainly exceptions the vast majority of startups are not very innovative. Having some slight twist on sharing photos or sending messages or analytics isn't innovation.
Whether its scale, raw idea, business model, speed, quality, or whatever; there has to be something new to get any significant traction. Are all types of innovation equal? Of course not, but all types provide some sort of value. Throw open source into the mix and you start to see the network effect in play where even "useless idea" startups provide value (although the creators may not get much return on it) in the form of assisting more useful ideas come to fruition.
So it's not an uncommon meaning. Delusional, but not uncommon.
"Innovation is a vehicle for the creation of wealth" isn't defining innovation as creation of wealth, it's saying [innovation as defined] is a vehicle...
I don't see how that can be interpreted that way in context.
It's not an interpretation...chromatic suggested Redefine "innovation" as "generate money for VCs" and you apparently agree with that as a possible (though delusional) definition by the user you quoted - I disagree with that quote as attempting to define innovation.
Let's replace the word innovation with chromatic's definition in what you quoted:
"[generating money for VCs] is a vehicle for the creation of wealth. [generating money for VCs] is in and of itself fairly worthless. The only reason the concept of [generating money for VCs] is so popular is because of the value (and the valuations) we put on companies who are seen to be [generating money for VCs]"
I do agree with you defining innovation as generating money for VCs is delusional, I just disagree with what you quoted as an attempt to define innovation.
The the people in Africa or Asia or Europe who can now bypass SMS charges and bypass the monopolies behind them, a messaging app can be innovative.
I didn't say most startups are not innovative at all - I said most startups are "not very innovative"
Innovation is the act of introducing something new...sending SMS messages at a lower cost is not very innovative.
Except that enormous numbers of these startup ideas are all about undercutting existing businesses and creating a race to the bottom rather than adding value.
WhatsApp removed any profit from SMS. Its revenue is a rounding error to Facebook. Facebook will start running ads on the service, they don't have any choice. Now, even if you want an ad-free SMS service, that won't be an option.
Lyft is directly competing against taxis. They do this by laying the liability for what they do at the feet of "contractors" who now bear the burden (and generally just ignore it) So, the legitimate services that have to pay tax, liability insurance, training, and licensing are now at a disadvantage relative to the newcomers. If Lyft wanted to actually add value, they could set up a taxi fleet and provide the kind of quick, GPS response that people want. But, you see, that's real work and won't have anywhere near the margin for a quick VC exit.
There is innovation in the valley. It's just not in the "social" companies.
They'd still be founded, but by other people. The connections game is zero-sum. If those people didn't have the connections the Paypal Mafia bought them, someone else would.
>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).
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."
Well, for an example you could look at: pretty much all innovation. VC-backed startups that are innovating are pretty rare, unless you mean business-model innovation. A typical startup is monetizing innovation that's already been done, at big companies or in academia or at bootstrapped startups, but that hasn't been effectively monetized yet. VCs don't want to sink money into R&D.
If I get $500M I might work on my good bad idea. Good bad ideas like Space X
Once upon a time a young company needed to devote significant monetary and human capital to building their software and hardware platform. Today, they can use open source frameworks and commodity hardware. Marketing once meant medium to big media buys, which had high entry costs and provided little to no insight into their success. Today you can literally buy attention by the individual customer, and enjoy a deep and detailed understanding of the success of your campaign. In addition the (relative) abundance of early stage investors means if you have an idea, you can bring it into reality with (relative) ease.
Innovation is so cheap that it doesn't have to happen inside a big company anymore. If a team gets bought out and cannot pursue a new opportunity, someone outside the company will step up and go after it.
1. Often acquisitions thrive under their new overlords (think android, youtube, instragram). They might also need the financial resources of the purchaser to aim higher.
2. Acquisitions increase the # of potential angel investors, which leads to more money for startups. Look at what PayPal's acquisition has done for innovation (it's famous "mafia" ended up funding and/or founding Facebook, Tesla, Palantir, Spacex etc.)
3. An acquisition culture leads to more examples of successful founders, which leads to more people wanting to be founders.
AAPL - $158b, GOOG - $58b, CSCO - $48b, ORCL - $37b, INTC - $20b, HPQ - $16b, FB - $11b, EBAY - $9b
$357 billion in cash among just the top eight tech firms (cash wise). Those eight firms are generating roughly $100 billion a year in profit, compiling that cash hoard ever larger.
It's not surprising Silicon Valley has acquisition fever. Cash and equivalent yields almost nothing these days. To top it off, the stock market is at all time highs, so stock-as-acquisition-currency is primed as well.
SV's innovation fever is driven by acquisitions (or the possibility anyway).
People launch companies, iterate like mad, in the hopes of a payout of some kind. willing to go without revenue to prove out a concept quickly. the endless trial-and-error results in a lot of interesting outcomes. the reward is the acquisition.
http://en.wikipedia.org/wiki/List_of_mergers_and_acquisition...
> But any new products he launches will be shaped by Zuckerberg's vision for the web, not his own. And that's a shame.
Innovation is a vehicle for the creation of wealth. Innovation is in and of itself fairly worthless. The only reason the concept of innovation is so popular is because of the value (and the valuations) we put on companies who are seen to be innovating. I don't think it's in question that a lot of wealth is being created right now. Where's the shame in that?
Acquisitions aren't the problem. If the alternative is hard-stop failure, meaning the work and acquired knowledge is effectively thrown away, I think M&A is far better. What is a step down is the replacement of R&D by M&A, but that's the fault of shortsighted executive fuckheads all over the country-- not limited to the Valley.
If you see the Valley as another Wall Street-- with a similar corporate ladder (engineer -> VP/Eng -> CTO -> founder -> investor)-- it will piss you off less. But you will also realize that it's a much crappier Wall Street-- worse pay and bonus structure, less prestige outside of the Bay Area echo chamber, more project-management bullshit (e.g. "iterations" and extreme closed allocation and "story points"), less autonomy, and more age discrimination-- and wonder why the fuck anyone would go into the startup game (unless born into VC connections).
The danger of startups (by the way) is that if you play that game for too long, you end up stuck in it because the "job hopper" stigma makes it hard to move back to hedge funds. This might have been OK when engineering roles at startups had real upside, but now that engineer equity allotments are in the pathetic 0.01-0.1% range, it's a shameful and wasteful trap.