
Ask HN: Why do startups get acquired for a cost way more than the revenue made? - newgrad
Why do big companies want to buy the startup companies with prices way more than the revenues made (even if they were multiplied by many years)?<p>Is there any specific example where the startup's technology affecting the buyer companies significantly?
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DanielBMarkham
Big companies are using startups as proxy innovation labs. So instead of
figuring out themselves what users are doing, they let startups. Then they buy
the startups. Much easier to buy an audience and all the possibilities
associated with a new brand than try to make it all work in-house.

Combine that with raw talent acquisition, and a lot of startups begin to look
like highly-rewarded spec R&D work for big companies. Picking up that kind of
talent, audience, and potential? It's easily worth it to BigCorp, even if
there's no income at all.

(I hope the tone sounds okay on that. There's nothing wrong with gaining a
million users and flipping your company to Google -- assuming that's what you
want to do, of course)

Of course, there's a ton of startups that don't fit that model. But many do --
at least many in the valley.

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antirez
That's something strange from my point of view.

I mean, imagine some big company opening a BigCompanyName-Seed division, where
they do something like Y combinator is doing, but instead of giving a small
amount of money for 6% they get 50% of the company for a bigger investment (at
least in perspective, so if future investments are needed, there is no
dilution up to a given sum).

But in the process of course the company doing this stuff should be smart
enough to don't force any strict rule like technology to use, type of
authentication, domain name, and so forth. Must be a startup with its own
life. Just they can select things that are interesting in general, or are
interesting for the general goals of the big company.

I'm not sure why this model could not work.

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fizx
Yahoo!! tried this with Brickhouse. They opened a pseudo-startup innovation
lab in SF. I don't know all the details, but iirc, it was 30-100 people for
1-2 years.

This failed utterly.

Why? Once a company is beyond a certain size, employees maximize their
expected value by spending time seeking internal resources. Budget, headcount,
etc. If the lab is still part of the parent company, these games are still
played.

You also have companies like Hulu, that exist at the pleasure of their
"investors." This might work a little better, but Hulu can't act fully in
self-interest.

Perhaps the best thing I can think of is a spinoff with initial funding,
control of its own board, and an irrevocable IP grant. This would potentially
be a huge head start. But then what happens if a competitor acquires your
spinoff (for the IP grant) right away?

I guess all this seems more fraught with risk than the simple buy a random
startup model.

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antirez
Yes I think the startup branch should be a separated company, with a clear
separation of management and so forth. Just the mother company has some
specific rights that can use after a given amount of time a given startup was
created and under specific terms. So that in the end it's really a lab without
the weight of the big company, but the big company can avoid paying a lot of
money, especially if the final aim is often to hire.

~~~
asanwal
From an entrepreneur's perspective, being in bed with one corporation to this
extent significantly reduces your options and flexibility. Sounds more like
you'd be an employee in a skunk-works than a real entrepreneur in this type of
setup.

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jeremymims
1\. Brand and scale.

If a company buys a startup with a promising product that they can quickly
sell to a large portion of their customers, they're willing to give up a
portion of that future revenue. It may not be at all tied to past performance.

2\. Talent

Facebook payed a premium for FriendFeed because they wanted their team to work
on the Facebook platform. This team has developed more than $50 million in new
value for Facebook.

3\. To keep a competitor from having the advantage.

Google paid $1.5 billion for YouTube. They've lost money on owning it, but in
the process kept their biggest competitors from controlling an asset that
drives an enormous portion of all video traffic on the web. You'll see
companies buy up companies they're not really interested in just to keep
someone else from having them. Powerset was bought for $100 million by
Microsoft because if they had developed some interesting or successful search
technology, they couldn't chance letting Google have it.

~~~
asanwal
The above are spot on.

However, acquisitions are not always so rational. The other reason is hype. If
you're in the hot area of today (cloud, location-based whatever, social
gaming, photo sharing) and a corporation is hearing a lot about this, even if
they don't know what it's all about, their desire to be part of this "thing
that will be big" can motivate them and cause them to pay more than it may be
worth.

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jcr
The most general answer is "talent acquisition" (you should do a web search on
that, also a HN search will be very helpful). In short, the proposed value of
the company is based on the value of the engineering team.

~~~
antirez
If that is common, it is very very bad. It means startups are not doing real
innovation mostly. What is even worse is that once this starts to be
established way of business, startups will be more and more group of good
hackers producing a good product but perhaps not outstanding, waiting for some
big acquisition.

In the long term this can completely killed innovation.

What was very good with the model of creating a startup to create things that
really users want, in order to earn money, is that people tend to give money
to a company only when the product they do is really something worthwhile.

This was what happened to the big startups in 70s and 80s. This drives
innovation.

~~~
jcr
It is common, in fact, painfully common. As for whether or not it is "bad"
that depends on who you are. If you need a bunch of innovative engineers and
you are the current darling of the technical world (i.e. great people applying
to your company), then your only solution is to buy out companies who have
proven innovative engineering acumen.

If you are Microsoft, or even Google for that matter, talent acquisitions
might be your best avenue for getting great people working for you.

There were some posts to HN about the estimated value of an engineer during an
acquisition. I believe one of the folks from PowerSet or FareCast (both
acquired by Microsoft) was talking about it in a blog post. The effect on
valuation was roughly 1 million USD per engineer at the startup.

hmmm... my meatware memory is failing and I can't find a link, but I'm pretty
sure it was PowerSet.

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AndyParkinson
Generally its because people who run/operate companies are terrible at
allocating capital. Operating a business and effectively allocating capital
are two very different skills, but smart operators seem to believe their
intelligence carries over to capital allocation.

The fact is that most companies destroy shareholder value when they buy other
companies. A recent example is the whole yahoo/delicious debacle but anyone
reading this can think of a handful of other equally terrible examples off the
top of their head. A far more difficult exercise would be to name the
acquisitions that actually added long-term value. For example, Apple is
generally great at only buying companies that add real value. They are an
exception.

The fact that operators are terrible at capital allocation is great for
founders and VCs. Its terrible for shareholders of the acquiring company!

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agotterer
One reason could be user acquisition. It can cost a lot of money to acquire
new users or reach a specific target market. So sometimes it makes sense to
buy a company who reaches that audience, regardless of their revenue. Then you
can roll that business into your existing product.

Other times it's worth a premium if you want to get into a particular business
and have nothing or are playing catchup.

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ndl
My first hypothesis is that it's a question of comparative opportunity cost,
rather than absolute cost.

When a company gets very large, it usually struggles to keep innovating under
inertia. Trying to build in completely new directions becomes both necessary
and difficult. Buying a startup is often cheap compared to trying to fork an
existing team to build new things. Furthermore, the startup's business model
is already partially proven by time of acquisition - so they are buying some
certainty compared to assigning a team to generate new ideas.

Another hypothesis is that with the resources of a large company behind it,
the startup may grow very fast. Adobe seems to be good at this. Other
companies don't seem as good at managing post-acquisition.

I have never been in or acquired by a large company, however, so what I say
should come with a grain of salt.

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ABrandt
There's a variety of reasons why you'll see M&A prices that are several
multiples of a startups revenue. In financial terms, its a long term
investment just like any other. Figuring in the net present value of money,
the selling price must consider the asset's future value. Everything such as
good will, userbase, and talent that comes along with the startup are simply
indicators that the asset's value will grow with time.

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Helianthus16
Because in a really bizarre way we're investing in the utility of a company
rather than the money it makes.

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stretchwithme
I suppose its because the same code serving millions instead of thousands
might be worth 1000x as much.

If you invented a process that turns lead into gold, how much has been
converted so far really doesn't affect how much the patent is worth.

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chopsueyar
I believe that is most businesses, not just startups.

