Every time a young, promising start-up is bought out by a stodgy, old incumbent, the world is flush with congratulations. Congratulations to the team, island mojitos now await them. Congratulations to the venture capitalist, their past nine flops can fade in the background for a week. Congratulations to the acquisition team, who can celebrate the win on their lawyer’s expense account.
But all the hoopla and excitement quickly dies down and the fresh-for-a-moment old incumbent goes back to doing what old incumbents do best: thwart new ideas.
As soon as Monday rolls around, it’ll be time for another management rotation, and the new guy surely has no interest in playing with the old guy’s toys. That’s not how you make a name for yourself and move up the ladder. Oh no.
Take Dopplr, for example. Nokia picked them up in 2009 for the going price of Web 2.0 vanity purchases without a business model: $20,000,000. The Guardian is running a rare where-are-they-now story on how predictably that turned out: “We have decided to bring it into a maintenance mode… but will not develop it further at this stage”.
Or what about Bloglines. IAC picked them up in 2005, did little to advance the application, and then dragged out the inevitable. It’s being shut down on October 1st.
The acquisition graveyard is full of tombstones for the wasted efforts of bright minds. Minds that could have gone into building lasting companies with a shot at significance.
Next time a vanity purchase is announced, maybe we shouldn’t be so quick with the champagne.
Aaron M
on 13 Sep 10Well put. We can say successful businesses get acquired though too. Slicehost was acquired by rackspace, and both seem to be doing well.
Andrew McKinney
on 13 Sep 10I’m still holding out for Mint.com. From all outward appearances they seem to want Mint to be more in a leadership position within Intuit’s organization. I still use and enjoy the service and holding out for a successful future. We will see.
Richard Conroy
on 13 Sep 10Trying to figure out what the logic of these acquisitions are. Perhaps a big flash of PR prior to a weak quarter to put a bit of botox into the old incumbents.
But still the owners sold.
Would like to see a good breakdown of these vanity acquisitions, where there is no serious attempt made by the acquirer to do anything with the business.
On a final note, it is nice to see blogger.com finally getting a bit of love from the google boys. They have been doing some (long overdue) feature love over the last few months.
chriskalani
on 13 Sep 10So true. So good. This is the type of post I wish I could print out and nail to certain people’s thick skulls.
haikuty
on 13 Sep 10makes me think of 280North and cappuccino now rumored to be in the belly of Motorola which doesn’t have a great rack record of treating purchased entities well… Hope it turns out well because cappuccino looks really good.
Spicer Matthews
on 13 Sep 10I agree with view to a degree. There are some entrepreneurs that love being entrepreneurs and the type of business does not matter. They just have it in their blood and can build a business over and over again. Some entrepreneurs are out to change the world, so their one business needs to succeed. This entrepreneur can not think of any other type of business they would like to run. In the case of the “I want to change the world” entrepreneur this post is dead on and very sad when they sell too early or at all.
But in the case of the first entrepreneur it is not so bad. One of the hardest parts about building a business is keeping the cashflow under control. The stresses of making sure you can make pay roll is a big pain. If you are able to sell your company and earn life changing amounts of money you are now free to go build your next business from the ground up in complete control without any VC funding and without the worries of a cash flow shortage.
I think the VC vs. No-VC is about the entrepreneur(s) and his/their personal goals and drives.
till
on 13 Sep 10Not defending Nokia or whatever, but I think they didn’t buy Dopplr for the product, but probably for the people in engineering or whoever came up with the idea hoping that these people would do well on other projects.
And speaking of Nokia, a lot of startups in the location space were bought and then nothing happened to them.
Well, nothing good for the user – so they all die a slow death. That of course sucks for people who liked the service.
On the other hand, don’t get too attached. 99% of them provided a free service and they are replacements – think TripIt. And even if you paid for it, just stop paying and move on.
You can’t really be mad that people mad some buck and now work on something else. Instead it should be the other way around, kudos to them for milking Nokia. Yay!
Hank
on 13 Sep 10@DHH
This begs the questions, how does Bezos currently (or plans too) make money with 37signals after his investment?
Are you guys paying him a monthly/yearly dividend for his investment in 37signals … much like a loan payment back to him. Or do you plan to flip 37signals and that’s when he’ll get to cash-out his investment.
I’m not trying to be snarky, I’m just genuinely interested in how that deal was structured. Obviously, you don’t have to share specifics but if you could educate the rest of us on how to take Angel/VC money without the pressure of having to flip our business, that would be a great lesson to learn.
DHH
on 13 Sep 10Hank, dividends. Flipping was never on the table.
Dennis Eusebio
on 13 Sep 10Kind of agree with @spicer . We don’t know what the founder’s original intentions were, so it’s hard to say whether we should be celebrating or mourning this event.
Josh
on 13 Sep 10Wait… Dopplr had no business model and cashed out for $20m and we’re supposed to feel bad for them?
It sounds rather arrogant to fault other entrepreneurs for finding a way to make money on their business—in this case, by selling it. Further, many of those “wasted efforts” inspire those “bright young minds” to create something better the second go around. Think Dennis Crowley, thing Matt Galligan, etc. (Heck, some of these bright people might sell just so that they can become unencumbered to work on idea 2, while making some cash on idea 1.)
Fault the buyers for squandering an opportunity (though not all acquisitions are dead ends… Flickr and Writely come to mind… I also doubt Paul Buchheit is sitting on his ass, twiddling his thumbs at Facebook), sure. Blame IAC for never doing anything with Bloglines. Blame Nokia for wasting money on Dopplr. Feel free to be a frustrated user who has to watch a beloved product sink.
Don’t fault the entrepreneurs or the VCs for making a return on their investments of time, effort and money. Don’t fault an entrepreneur for saying, “You know, being an engineer at Google/Microsoft/Apple/Etc. sounds like a better idea at this point in my life than the risk an uncertainty of doing this startup.”
Hank
on 13 Sep 10@DHH
That’s great to hear. Thanks for the input. I’m currently in negotiations with an angel investor and I’ll try this approach.
Any other tips you might have so that I don’t mistakenly set myself up into a position where I have to sell (because I don’t want too)
Colin8ch
on 13 Sep 10I wonder how often these acquisitions are strongly “encouraged” by VC’s and Investors looking to achieve their big ROI multiples. Are successful startups that took investment to grow their company doomed to be victims of acquisition-itous due to these pressures at the board level?
I think true entrepreneurs start their companies for reasons other than retiring to Mojito Island… So how does a young company seeking funding avoid this falling into this future situation?
BoxDown
on 13 Sep 10IAC is a graveyard for innovation and talent. Somewhat akin to Yahoo!’s dumber sibling and that’s being kind.
Chris Hopf
on 13 Sep 10Must be in the air . . . I recently tweeted a similar thought. Hopefully your post will reach those who haven’t been clued in yet or simply need to be reminded :
http://twitter.com/pricing/status/24357860299
G
on 13 Sep 10I am an entrepreneur who has gone this route—founded a successful startup, cashed out on acquisition by a megacorp, seen bloatcorp squander my creation, and moved up and out to mojito island after the golden handcuffs came off.
It’s hard to explain the experience.
I made plenty of money. I’m not rich from it, but I am damn well off, and after a career’s worth of painful ventures crashing and burning the money is very important. I have a really nice house, a pretty wife, a baby on the way, a great car. Good food, top shelf booze, notoriety and respect. I am a made man.
My heart was really in my startup. It was and is painful to see what happened to it. I hate BloatCorp. Really hate it. Really loathe the fat stupid seals there who killed my company.
But I have done so well off the outcome that complaining is ridiculous. I’d have to be truly spoiled to complain.
Lance Jones
on 13 Sep 10Sometimes an acquisition is more about the team than the technology. Now, depending on the size and skill of the Dopplr team, $20M may or may not have been a good deal for Nokia. :-)
Bradly Feeley
on 14 Sep 10What is so wrong about somebody cashing out and relaxing? Not everyone wants to get into a pissing match to see who can build the best, most profitable business. Some people are happy as hell to be able to spend the next few years enjoying life with their families Try and realize that everyone is not like you, and that is okay.
DHH
on 14 Sep 10My beef is only very little with the guy cashing out. It’s much more with the guy buying and squandering.
I’m not going to blame someone who takes a $20M very much. But I am going to blame a share-holder backed corporation that makes vanity purchases and then leaves them to rot.
It’s a travesty for the users and for the share-holders who are watching usefulness and wealth being destroyed in sort order.
Maureen
on 14 Sep 10Damn! And I thought every time a promising start-up got bought an angel got her wings!
EH
on 14 Sep 10Lance: It’s rare to see an acquired company where a majority of the acquired employees are still working at the acquring company even two years later.
newobj
on 14 Sep 10An angle to consider – whatever degree of freedom the development team retains, these acquisitions must inevitably be bolted at an organizational level. One or more people are injected into the host company at a high-up level; director, VP, SVP, whatever. People who are already in place have turf, power, clout at stake to the newcomer. Politics happen. There’s stymying, fighting, flanking, etc. I’m curious how many of the situations where a company appears to have just been left on the vine or without a strategy for integration etc are really just a reflection on that incoming person or people losing at the power reshuffle. If you think this is implausible, spend some time inside a billion dollar company; you’ll see it happen, maybe every day.
Ricardo Sanchez
on 14 Sep 10I disagree. The people selling the company and the people buying it are both smart… most of the times.
I believe most companies acquire successful startups to gain access to one or more of the following, their user base, IP, and developers. It might look like they let projects die, however, most of the times they just get what they need from it and then implement it into their own companies or services.
People work for different things, you guys enjoy developing apps and helping your clients, other people love creating companies and selling them to investors and large corporations, nothing wrong with that.
Steve Williams
on 14 Sep 10it’s true David. Take the Zimbra case. Yahoo bought them for $350 million cash in 2007. Then when management changed, Yahoo offloaded Zimbra to VMWare & the terms were not disclosed. The loss is for Yahoo share-holder.
Jouni Osmala
on 14 Sep 10When paying 20 million of ex-presidents son’s corporation we must not assume that the entire story is the technology. It could be extra influence to goverment, not that they already have it. Some kickbacks where they think they could use it. Or PR move to get some social democrats on their side. Or just purchase of engineering talent. Or little bit of everything mentioned.
Scott
on 14 Sep 10I couldn’t even estimate the number of doomed projects that I have done excellent work on. Not a single one was unviable or useless. On the contrary. But corporate mentality is to destroy useful work and be jealous of anything that is clearly awesome or cool.
I finally struck out on my own. Took ten years to really get going and now I am doing extremely well and have a dozen employees. Accept venture capital? Are you kidding me? As if I want to lose control of my work and trash the last 10 years down the drain, while betraying my loyal customers. No freaking way. VC is a losers game. How many of these VC-tard backed companies have amounted to anything? Very few.
Bill
on 14 Sep 10I must say I am getting this information second hand, but I work with a handful of former AOL employees. While the merger of AOL and Time Warner was not a small time deal, it ended with similar results. The extremely conservative management at Time Warner killed one great idea after another at AOL. They milked the cash flow generated form AOLs online business for years and never developed anything to replace that business line.
AOL missed out on opportunities such as VOIP and Video On Demand services that are now making companies like NetFlix and Skype household names.
After further research it was interesting to find that AOL actually purchased Time Warner. The wikipedia article on Time Warner is one disastrous buyout after another including Atari among many others.
Don Schenck
on 14 Sep 10I feel no sorrow. These start-ups have ZERO income, a huge argument against using “FREE” applications. Yeah, it’s all fun and games until someone loses an … application.
I did not know Bloglines was closing; I’ve been using it for years. Thanks for the heads up … I’ll now look for a better solution. Hmmmm … would folks pay, say, $10 a year for online blog reading? Or are blogs dying in light of Facebook and Twitter?
Don Schenck
on 14 Sep 10Full disclosure: I’d sell my website for a million bucks and retire tomorrow. Then again, I’m 51 years old and have been around the block many, many times.
Dylan
on 14 Sep 10I read the Guardian story on Dopplr. In it the Guardian reports ” that the Dopplr deal was a straightforward talent acquisition”.
$20 million seems like a lot to pay for talent. Does anyone else agree?
I think there are plenty of talented developers, etc… out there that Nokia could have “acquired” for a lot less.
Joe S
on 14 Sep 10@DHH
I agree that many of these mergers and acquisitions of startups go sour insofar as the creativity and ingenuity gets extenguished – in the software / web market space.
However, look outside of your industry for some examples of how its done well, and how large companies swallow smaller companies and maintain the sense of spirit successfully. There are many examples, just not in your industry.
Mark MacLeod
on 14 Sep 10You’re right, the hit rate on M & A is low. But more and more, this is how big incumbents are innovating. I wonder what the long-term implications on startup funding would be if all companies took your path (which I think is a great one, don’t get me wrong).
Would love to see a large part of the funding ecosystem built around getting businesses to cashflow positive and settling in for a long term dividend stream or management buyback. Pretty sure that it could generate sufficient IRR (Internal Rate of Return) to compete with the median on traditional VC. And it would give entrepreneurs a viable and palatable alternative to what they have now.
Adam Jusko
on 14 Sep 10This post assumes that the startup founders always care what happens to their creations after selling. Some do, some don’t, some made their creations specifically with the hope of cashing out, the money being the point of the effort. Yes, it’s no fun to see your efforts completely squandered, but the money was the reason they gave up the business in the first place. It’s like someone buying your house and then tearing out the new kitchen you put in two years ago; you might feel a little bad, but it’s no longer yours to argue about.
Not every startup is the founder’s “baby”, sometimes it’s just a preferable way to make a living versus working a corporate job.
Robert
on 14 Sep 10And we were like this team of three people is great, let’s build out the team how we want to build it out and go from there. So I don’t think VC is bad. I mean, I would consider taking it in the future if I did another company. But hopefully I can just stick with GitHub until I die or something like that. I want it to be a really great company and I think we’re heading towards that.
Joshua Pinter
on 14 Sep 10Thanks for posting. Was being shmoozed just last night by an interested party and this was on my mind the whole time.
Forwarding to business partner…
James
on 15 Sep 10The argument seems pretty reasonable, but only two examples are given (Dopplr, Bloglines) so it’s hard to know how general the truth is.
cmi
on 15 Sep 10Congratulations to the team, island mojitos now await them.
cmi
on 15 Sep 10What the heck, where did the rest of my entry go? I wrote way more then the line above.
JPM
on 15 Sep 10@DHH – just curious as to whether your VC bashing is also targeted at Private Equity players?
Business are basically run by people. Take away the key people, and then see if the business can live on. If it does, its a franchise, with a good system built around it. If doesn’t, then you’re in trouble.
Having an exit with the right VC fit is more important than cash… i.e. if the entrepreneur wants to cash out, but isnt bothered to find the right VC to take the company to the next level, that really tells a lot about his interest.
I can talk from a Private Equity perspective, there are some great companies which have grown (yes, perhaps ur against growing big) – they’ve provided good employment for many, so they’re doing more economic benefit for the countries they’re working in and not to mention good returns for their shareholders through both dividends, and exit opportunities via IPO/listing.
DHH
on 15 Sep 10JPM, here’s the cycle that insults me. VC invests untold millions in Social Idea With No Revenues Possible, entrepreneurs spend those millions pursuing their non-business, old incumbent company blows millions that could have gone to dividends, investment is written off 2 years later.
The economic impact of this is the destruction of wealth and the waste of human potential. In the end, you have nothing left to show for the whole cycle. Yet it’s deemed a success because the VC’s made out, the entrepreneurs made out, and who gives a shit about some old company wasting money? Sad.
Aaron
on 15 Sep 10Part of the reason for these “vanity” acquisitions is to reward innovation. If you make a mobile app that is cool (even if not that popular, useful, or profitable) it increases the value of mobile devices disproportionately.
Nokia wants the next Dopplr creator to be incented to develop, because it sells phones. Just like Apple wants cool proof of concept apps that they can mention in their commercials, even though the reality is that most people will end up buying iBling and some games that are the equivalent of 1980s Radio Shack toys with an accelerometer.
Even when an app is bought to be killed (anti-competitive) it accomplishes the same incentivising.
This discussion is closed.