Ask any entrepreneur what they want to do, and they’ll nearly all say the same thing: change the world.
In reality, though, the fact is that almost everyone is looking for something else: a way out that changes their life. Whether it’s going public or getting acquired, everybody wants a return on their investment and the big exit. The life-changing sum of money is, ultimately, the pot of gold that drives startup culture.
But how do you make your dream exit a reality?
I spent yesterday at an event in London run by Seedcamp, the pan-European seed investment program, where an interesting discussion emerged about the nature of acquisitions, and how to achieve them. It started with a to-and-fro between insiders at two of the biggest potential buyers for most web startups, Facebook and Google. The question: how do they decide which companies to buy? What is it that they are looking for?
Christian Hernandez, Facebook’s head of international business development, pointed out that although Mark Zuckerberg’s company has made more than its share of purchases over the last couple of years, most of them were not obvious purchases.
“We think about either acquiring talent or actually looking at technologies that we can bring in and build products on,” he said. “We don’t usually acquire products.”
“There’s very few,” he pointed out, referring to a couple of recent transactions. “There’s Beluga, which we launched as Messenger recently; there’s Snaptu in Israel, which is a simplified low-end phone application. All the rest have been talent acquisitions. Expensive acquisitions, but…”
This is a tricky situation to navigate. In fact, perhaps it’s impossible. After all, you need to be successful to get interest from acquirers — but looking at what he said, there’s a subtext: that if you’re too successful, you may end up pricing yourself out of the market.
Even most product purchases are small
Conversely, Google has bought in a lot of products — Maps came from buying Australian company Where2; Analytics was built on the work of acquisitions like Measure Map; Android, meanwhile, was an eight-person outfit when Andy Rubin (pictured) sold it to Google in 2005. But Anil Hansjee, who ran Google’s acquisitions team across Europe, Africa and the Middle East for five years, pointed out that the vast majority of its purchases actually fell into a similar category to Facebook’s: talent.
“Eighty five percent of all Google’s deals since day one have been sub-$ 50 million transactions,” he said. What did that mean? “You have to think about what kind of company you are, and what kind of money you take on board.”
This, he suggested, meant understanding the way your incentives change over time. It’s easy to imagine that there is one easy answer for getting acquired: build a prototype, raise money, scale, profit, exit. But, in fact, there are two paths for entrepreneurs to follow, he suggested.
On one side there’s a track followed by those who are either early in their lifecycle or who have not taken large rounds of funding. This leaves the door open to a talent acquisition (but probably means your product dies). On the other side, there’s a route followed by those who take — or need to take — some sort of significant investment. The size of the acquisition that investors require to make their money back means that many companies will have probably already reached the point where they need a big exit. And that means they have to be one of those uncommonly large acquisitions that fall into the 15 percent category.
In some ways this may sound crazy — that raising money reduces your chances — but Hansjee was circumspect.
Misaligned incentives
He pointed out that it was simply that more entrepreneurs needed to understand the consequences of their actions; that they needed to think about how the incentives for founders and investors changed as money comes in. Bottom line: take significant venture capital — $ 5 million or above, say — and your board is much more unlikely to get the deal they want from an acquirer like Google or Facebook.
In some extreme cases, this is obvious. Look at the famous example of Color, which raised so much money it immediately priced itself out of the acquisition market.
The discussion also turned to Path, which rejected a reported offer of $ 100 million despite the fact that the service has not got a lot of traction. In both cases, the founders and investors had different incentives which meant that most of them had already decided to play the long game. But not everybody is in that position, or has the luxury of personal wealth.
So is it possible to be too successful? The answer — thankfully — seems to be no, at least if you measure success by the size of the business you build, not the amount of venture funding that you raise.
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