
Silicon Valley’s acquisition fever is bad for innovation - chwolfe
http://www.washingtonpost.com/blogs/the-switch/wp/2014/02/20/silicon-valleys-acquisition-fever-is-bad-for-innovation/
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ChuckMcM
Sigh, survivor bias taints this analysis so hard it hurts. There are lots and
lots and lots of innovative startups that don't get acquired and go through
the whole process without all that much press. You don't see them, it's boring
to read "Startup that changes the ways machine tools are stocked at machine
shops turns in another year." The really crazy ones (either crazy funding like
Color, or crazy exits like WhatsApp) get _lots_ of press, and so one things
"oh they are all like that."

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.

~~~
chromatic
_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._

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.

------
Aloisius
As long as these newly minted millionaires & billionaires continue the Silicon
Valley tradition of reinvesting their money back into new startups then I
think we'll more than offset the potential innovation we lose by them being
locked away and their own companies merged/shuttered.

Now if the culture ever changes and people start hording their money, then
I'll agree we have problems.

~~~
michaelochurch
_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.

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ericflo
He says "Suppose that Yahoo had pledged to allow Google to operate
independently...Chrome and Android likely would never have gotten off the
ground." But Android was...an acquisition.

~~~
oori
"..but it just wouldn't have occurred to the people running Yahoo's search
subsidiary to branch out into web browsers and mobile OSes" \- That's probably
true, regardless if via acquisition or in-house development.

------
ekpyrotic
Not only is this argument wrong, the /opposite/ is true.

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](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](http://www.fas.org/sgp/crs/misc/R40411.pdf‎)

Acquisition don't suffocate innovation.

Acquisitions are the oil of the economy.

~~~
frostmatthew
> The place is full of vibrant startups & new ideas.

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.

~~~
chromatic
Redefine "innovation" as "generate money for VCs". Then anything which lets
you sell eyeballs to advertisers (or metadata about eyeballs to advertisers)
becomes innovative, if you do it at the right scale.

~~~
ekianjo
That's not really the meaning of innovation, though.

~~~
morganherlocker
Some amount of innovation seems inevitable for any successful startup. Most of
us could build a site in a weekend that does image sharing, but it would take
some serious innovation to scale the site up to a billion users without
blowing the bank on infrastructure. Doing the same thing people have been
doing, but at 1/10 the cost is clearly innovative.

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.

~~~
wbl
That innovation is now commoditized: AWS will let you buy it. The first few
times it was a big benefit to society to get invented, but the next social app
won't advance what society can do the same way the first one did.

------
trhway
and the alternative would be? why would VC invest money with such an ease if
there wouldn't be a good chance of a good exit? And how would you have
innovation without VC? I mean take any place outside Bay Area - such anyplace
would be an exaple of innovation without easy VC.

>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).

~~~
sp332
Startups could create products that generate revenue. They would use invested
money to scale quickly.

~~~
trhway
by the time startup reaches 19B valuation i'd say it either have created such
product or there is no chance for it to happen.

~~~
chromatic
Valuation by which criteria? The asking price of an acquisition, paid in RSU
with their value measured in the potential asking price for an acquisition?
This seems a little circular.

~~~
trhway
"The fair market value is the price at which the property would change hands
between a willing buyer and a willing seller, neither being under any
compulsion to buy or to sell and both having reasonable knowledge of relevant
facts."

~~~
chromatic
Perhaps a more specific question is: what's the valuation in a real currency
such as USD, not the monopoly money of FB RSUs?

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msoad
He forgot that those big acquisitions give employees enough money to start
their startups independently and be crazily innovative.

If I get $500M I might work on my good bad idea. Good bad ideas like Space X

------
nl
Meanwhile, in the rest of the world: _" What I would give to have problems
like that"_...

------
jfasi
Acquisition fever is certainly a force pushing innovation downward, and I
think the argument this article puts forward is sound. On the whole, however,
I think innovation in the technology sector is driven by other factors. In
particular, the barriers to entry for a new company in the technology space
are extremely low.

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.

------
argumentum
The (bad) article discounts at least the following:

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.

------
adventured
Silicon Valley has a cash 'problem.'

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.

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lmg643
this is a silly article. re-write the headline and it is an explanation of
reality:

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.

------
joesmo
It's worthless to speculate about what would have been if this or that. There
is no way to know. It is sad, however, when the aquisition happens simply to
remove competition like some of the buyouts that are immediately followed by
startups removing their product offerings.

------
salem
Google maps was based on an acquisition, as were many of Google's marquee
products:

[http://en.wikipedia.org/wiki/List_of_mergers_and_acquisition...](http://en.wikipedia.org/wiki/List_of_mergers_and_acquisitions_by_Google)

------
hiroaki
Acquisitions provide liquidity for startups that hope to realize value only in
the long-term. This is actually a good thing because it can actively encourage
more ambitious startups.

------
mbesto
This is a very poor conclusion, but arguably will sit very well with the
audience of the general populace who will feel smug that "they had the idea of
whatsapp and facebook first":

> _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?

------
myzerox
It's bad for innovation at Whatsapp but great for innovation in Silicon Valley
as capital flows back into the cycle.

~~~
AznHisoka
Yes, it flows back again, so the founders of Whatsapp can go fund another
photo sharing or messaging app with another twist.

------
michaelochurch
As a place for innovation, Silicon Valley is dead. It's now a cross between
Hollywood for ugly people and Wall Street for people who can't hack winter.

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.

