When it comes to acquisitions, there are only two things worth buying: products and customers. When you buy either, you’re buying a solid stream of revenue. All you have to do is not fuck it up. That’s harder than you think, but the good news is that there is room for error. Fuck it up a little and only a few will leave. You still have the entrenched rest to make the purchase pay.
Not so with ideas or talent. These are the purchases of aspiration: Imagine if we took that scrappy idea with those underpaid, hungry champions, and we gave them all the resources in the world. They could paint all the colors of the rainbow and still have pixie dust left to spare!
Turns out that good ideas and strong talent is as fickle as it is seducing. As soon as you start making big-company compromises, the good idea turns average, and the average turns into a write-off.
Same goes with strong talent. As soon as they have to deal with three layers of reporting, quarterly budget cycles, and swing-door managers, they turn off the creativity and head for the exit. The latter part might take from three months to two years, but it will happen.
That leaves the acquisition with nothing but a dusty footnote in the P&L, but don’t worry, nothing will have been learned, so the cycle can repeat next year. There’s always a fresh crop of shiny ideas and sassy talent available to try that-which-does-not-work once more.
Pants Fan
on 14 Sep 10Shh, don’t tell!
josie
on 14 Sep 10seriously, that was EXACTLY what I needed to read right now. I just became your lifetime fan. seriously
Sanat Gersappa
on 14 Sep 10You hit the nail on the head.
Dom
on 14 Sep 10*cough
You can hire talent, and steal ideas.
Zenopia
on 14 Sep 10I dont see the point of this post. To me it is equivalent to saying, “don’t buy food as it will go off. It may be in one day or three months but eventually it will go off.” That may be a bit of an exaggeration but if you don’t use the food you buy, then it is useless. You need to use it for what you can get out of it, and it can be used badly or the food itself may be bad to start with. With talent, if you don’t invest in the quality of talent and the treatment you give it – then it’s true that you shouldn’t waste your money on it/them.
Brad Fults
on 14 Sep 10Would you make an exception for a small company acquiring another small (or tiny) company? Or possibly a rapidly growing and desirable company acquiring a small company?
I think there are probably counterexamples in that vein, though I agree with your point with respect to large companies.
Michael Krause
on 14 Sep 10Right on David!
Having survived not one, but two buyouts of two different companies at which I was employed by the same frickin’ private equity investor (Hellman & Friedman) I can say this is exactly how it plays out.
For those not familiar with private equity investors – they are modern day butchers. They will buy a company and then slice it and dice it any way that looks the most attractive to prospective buyers with absolutely no regard for the organism they’ve just dissected.
river
on 14 Sep 10money. this is exactly why our company and product was purchased by an industry giant, and this is exactly what we went through. we have done almost nothing of value for them, and the product we made when we started is dead in the water. now we’re trying to get the minority share that they bought back, so we can again control our own destiny.
Stan
on 14 Sep 10Very good said. I’ve seen the described process with my own eyes…
DHH
on 14 Sep 10Zenopia, I should have been clearer. You can not buy entrepreneurial talent by buying their company. This is related to “talent acquisitions” (close to being an oxymoron in my book), not investing in keeping employees happy at the place of their work.
Amber Shah
on 14 Sep 10While ostensibly about startup “talent” acquisitions, I think this applies to hiring in general. If you have a smart person, but not a smart workplace, nothing good will come of it. And since the workplace is inefficient to begin with, most likely nothing be learned or improved. Thus, so many companies are left wondering why there is high turnover and why it’s so hard to find good programmers or other talent.
Flarg
on 14 Sep 10Hahaha yes, because stealing ideas guarantees success, since you couldn’t come up with it yourself you will be stuck, even if initially successful. with failure to move forward due to lack of ideas, that and no way to diversify since you stole your one good idea. I suppose you could plan on continually stealing ideas, but that seems like a risky strategy since you will, if successful, run afoul of lawsuits/patents/IP issues/etc… Of course you may run afoul of those things if successful with your own ideas as well, but at least your odds of defending your work if it is your own seems higher than if you stole it.
As for hiring talent…well you can get them on payrole sure, but getting optimal performance and creativity generally isn’t achieved via monetary incentives.
Scott Miller
on 14 Sep 10Spot on. The one exception I have witnessed as a board member of a company doing the acquiring, was when we left the company we acquired, alone and separate. Periodically checking in to ask the question “what do you need”, “Is there anything we can help with”. Sadly, this is indeed the exception, not the norm.
Bryan Sebastian
on 14 Sep 10“You cannot buy entrepreneurial talent by buying their company.”
I have witnessed this several times over. Most recently, my college roommate sold his company for several million, but as part of the deal he had to stay on for, at least, 2 years. They wanted him as much as they wanted the company.
Soon as his 2 year (sentence – as he called it) was over, he quit. He said he underestimated what autonomy was worth. Before the sale, if he wanted to hire someone, he hired someone. After the sale, he had to run it “up the ladder”. He could not stand reporting to someone.
He is going to start another company that (he says) he will never sell.
urssur
on 14 Sep 10Necessity is the mother of invention , whilst may be a cliche is something I try and live by.
There is tremendous talent and a shit tone of ideas out there, they have to be allowed to develop organically otherwise the market will not sustain them.
thrnad
on 14 Sep 10Make that 2 month, then telling the investors to fuck off. Of course now it looks like it’s lawyer time. Trying to get the shares back their damage claims ballon by the day. So be careful, consult a layer before you leave, and expect them to do their worst. The thugs with the money don’t like being told they are dinosaurs on their way out as a species.
Paul Thrasher
on 14 Sep 10I’ll probably get the troll hat for this but, exactly how many companies have you guys bought? I imagine it’d be hard to have a solid take on this without backing it up with loads of experience.
Tiffany
on 14 Sep 10I appreciate the article and the emphasis, but I, for one, would appreciate it if you toned down the profanity in the future.
I know a blog is a place to express yourself, but this isn’t your personal blog, and as your customer, I don’t really appreciate that kind of language.
Doug Martin
on 14 Sep 10Aquisitions are not about buying ideas or talent. They are about buying decisions. Decisions are some of the most expensive thing a large company can make in terms of time. A large company aquiring a startup is purchasing a set of decisions, both internally and in their customer’s mind, that has moved that startup to the point they are at aquisition. If the acquisition is made when the startup is moving into a repeatable business model then the aquiring company can transition the startup into a mature business using the operational and finance expertice that a large company brings. If the startup has not yet found a model then the startup’s normal pace of decision making will hit the corporate wall and it will fail.
Curt
on 14 Sep 10As a customer, I appreciate the language. For whatever reason it helps convey your passion for what you’re communicating – almost as if you just had the idea and immediately went to post it. I like the spontaneity of that.
Paul Varjak
on 14 Sep 10@Tiffany… Didn’t I have breakfast at your house?
Ed Knittel
on 14 Sep 10@Paul Do you think it would hurt to get shot in the head? It’s a silly question I guess. I mean, you’ve never been shot in the head so how would you possibly be able to give feedback on something you have never personally experienced?
If you see something happen enough times I believe it’s possible to pass judgement on it.
Neil Kelty
on 14 Sep 10Didn’t you guys “purchase” talent when you let Bezos invest in 37signals?
Frederick Cook
on 14 Sep 10How do you retain startup employees long after an acquisition? Rackspace acquired Webmail.us in 2007, and today an astounding nine out of the ten original employees including the founders are still at the company and going strong. Can you believe that?
Frederick Cook
on 14 Sep 10Why was my previous comment truncated?
Here is a great example to the contrary: “How do you retain startup employees long after an acquisition? Rackspace acquired Webmail.us in 2007, and today an astounding nine out of the ten original employees including the founders are still at the company and going strong. Can you believe that?” – Bill Boebel, Rackspace VP-Strategy (http://panelpicker.sxsw.com/ideas/view/6405?return=/ideas/index/7/category:/presenter:boebel/category:)
Andrew de Andrade
on 14 Sep 10I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.
Andrew de Andrade
on 14 Sep 10Hmmmm. my comment got messed up. That quote should have been attributed to Warren Buffett.
The rest of my comment was:
“From the point of view of the acquirer, the general rule of thumb before making any acquisition should be:
1) Would I acquire this company if it were run by idiots?
If the answer is no, then next question should be:
2) Is my company run by idiots?
Andrew de Andrade
on 14 Sep 10@Tiffany
Two F-bombs on a company blog known for its sharp, insightful vitriol is hardly worth getting upset about.
As a customer, you should only care that they make great products without questionable externalities.
The SVN blog has never really been about the products 37Signals makes. It started out as a blog about design and usability and over time began to address the dysfunctions of corporations and “professional” workplaces.
In fact, as far as I can remember it has only ever been about sharing ideas; ideas that reflect the company culture of those who work at 37Signals. It’s written by passionate employers for passionate employees.
The SVN Blog isn’t written with “customers” of 37Signal products in mind. It’s written for a specific tribe of people, some of which are 37Signals customers and some that aren’t.
If offending people that may be customers of their products is a concern of theirs, then this blog wouldn’t exist. Instead it would probably be written in the same sanitized PR drivel that “other” companies put out on their company blog.
I for one find it refreshing that the author focuses his energy on crafting a message with impact, rather than toning it down.
This reminds me of everyone getting all worked up over Carol Bartz dropping the F-bomb at TC Disrupt.
Anyways, this isn’t meant to be an attack on you and your point is as valid as mine, but as a product manager myself, whether you are offended by the F-bomb or whether I support it usage is no more relevant to the company or its products just because we are customers.
Yada
on 14 Sep 10David is smart but also lucky. He’ll probably find a lot of his posts cringeworthy 25 years from now.
Gabe da Silveira
on 14 Sep 10@Ed Your comment is a ridiculous response to a legitimate point. You’re basically saying that buying a company where the employees will probably not be as enthusiastic working for you as they were working for themselves is just as obviously bad as getting shot in the head.
I know the audience here mostly hates the idea of working for a megacorp, and values the startup and small independent company—that’s certainly where my calling is—but at the same time, people who run megacorps are not stupid or less talented than scrappy entrepreneurs. They wouldn’t keep buying small companies if it was as obviously wrong a choice as David paints it in this article.
Another point is that the possibility of flipping a company allows tech startups to pursue cool ideas that don’t have much market potential per se. I know that David would probably say such ideas aren’t worth pursuing, but I disagree. Even if something is a “feature not a company” it still may be very innovative, and it may do well as a loss leader or brand play for a larger business, and people may love it. It’s nice to think that anyone can follow the 37signals business model of building software that people want to pay for, but it’s easier said than done. I mean consider the fact that at the time David joined 37signals they already had massive mindshare penetration into the web / interactive design community. This would not have been possible without years of (paid) consulting work allowing them time to build up their reputation as a thought leader. For startups living on ramen with a more dispersed target market this just won’t work, putting a product out for free and then getting a single company take interest may well be more feasible than trying to get 10,000 people to shell out for it with no marketing budget and no foothold.
Ferran
on 14 Sep 10The story about Doppler gets better when you knowledge this: Martín Varsavsky was the business Angel / vc investor in Doppler AND later was special advisor for Nokia’s OVI (a poor iPhone App Store wanna be).
One day just happpened: Nokia bought Doppler making his investor Marting Varsavsky happy.
skillguru
on 14 Sep 10Not exactly. Facebook and google are on acquisition spree not for the products but for team and talent. It all depends how you can challenge the team who has earned a decent amount of money from exit and would like to be part of next big thing!! They have tasted blood. How will you stop them from leaving ?
brian d foy
on 14 Sep 10An interesting study in this is From Those Wonderful Folks Who Gave You Pearl Harbor. You might not have heard about the book, but you’ve probably heard of the TV show loosely based on it: Mad Men
Jeff G
on 14 Sep 10Perfect example of a wasted attempt: Google’s acquisition of Dodgeball.
Concerned
on 15 Sep 10Why is 37S - and David in particular - so angry about acquisitions? Show me on the doll where the VC touched you.
Andre
on 15 Sep 10I think David’s point is that until talent or ideas have interacted with the marketplace, there’s no concrete data to justify an acquisition-it’s a leap of faith. 10 years ago I worked for a dot-com that went through two years and two rounds of VC funding-$14 million—only to cancel operations after the fifth week of running live.
Let’s put it in lemonade stand terms. Would you rather pay $1800 to acquire a blog that sold $100 of ebooks a month (using an 18-month revenue standard), or pay $400 for a blog that made no revenue at all? Even if both sites had identical traffic, one has proven itself in the marketplace, the other hasn’t.
David
on 15 Sep 10Great post David. For a guy who is like the coding Dalia Lama you have pretty solid business advise.
I have to believe you guys are starting to see subtle changes at 37signals from being a bigger company. Things will naturally change. 37signals with 30 people?? What will that feel like.
Don Schenck
on 15 Sep 10@Gabe, I have yet to meet someone who works for a mega corporation that is smart. At least at the higher levels. I’ve meet some really, really, really idiotic CEOs in my 51 years, believe me.
Or, if they’re not Just Plain Stupid, they’re so out of touch with reality that they’re of no value.
Otherwise, I have no opinion about this matter. :)
Paul
on 15 Sep 10Seen this happen a lot. Once a consulting company brought our “product” company for the “talent”. They scrapped our product and made us all consultants. We all promptly left, within 12 months they had a $8million corporate shell.
Brennan
on 16 Sep 10Great point and never really thought of it in those terms. You see a lot of acquisitions these days where someone tries to buy up talent or a company that has a face put to it that adds value. I think many people have gotten away from value and bought many companies on hype alone.
Jagannath joshi
on 16 Sep 10Bullseye…. Am experiened too.. well said
jDesai
on 21 Sep 10Google does precisely that. But looking from a different (or rather wicked) perspective, companies acquire talent not for the sole purpose of squeezing out juice from them… They just don’t want them to be acquired by their competitors or let them grow to the point that they come off as their direct competitors. Better to use a 3 step process. 1) Use what all they’ve got. 2) Throw them away. 3) Repeat.
This discussion is closed.