Dumb venture capital? Sure, but what about dumb M&A?
Venture capital is a tough industry—most firms are never actually profitable and it’s for a variety of significant reasons. The biggest is that there is a lot of dumb venture capital right now, and this dumb venture capital usually comes out of the pockets of:
1) Financiers with lots of money, but who have made that money doing something unrelated to high-growth tech startups. These VCs lack an appropriate network, knowledge and background to add much value to their investees, and have raised their entire fund from other rich buddies who worked with them at Goldman Sachs in the ’80’s.
2) Entrepreneurs who have had one big success and understand their domain, but don’t know anything about other industries and think every entrepreneur should do things exactly as they have.
3) Venture capitalists who just follow the herd thinking that, “If Fred Wilson’s investing in something, I should too.”
4) Venture capitalists who have already made it, and just don’t care enough anymore.
But at a time when everyone is focusing on all the sluggish VC money out there, I think we’re going to begin seeing a time of dumb M&A money as well, and this isn’t a bad thing. We’re seeing the same thing that happened in venture capital happen to the M&A world—except this time it will lead to a positive conclusion.
Once upon a time, a few venture capital firms dominated the Silicon Valley ecosystem. Sequoia, Kleiner Perkins and a couple of other hallmark brands invested in Google, Cisco, Apple, YouTube, and everything else that became absurdly profitable. So what did other people do? They figured that there was room for more players, and they jumped into the game as well! And now people are complaining that there are too many firms out there, and that unsophisticated people are in the space.
So looking at M&A, what has happened since 2000? Companies like Google, Facebook, Microsoft and Amazon have begun building out their product lines or revenue streams using strong acquisition strategies. Google would not be what it is today without having purchased DoubleClick, and Facebook may have saved itself by purchasing Instagram. These M&A superstars have had a ton of success buying companies—so what does that mean? It means that new players will get excited from witnessing all the success, and want in.
But the next group to enter the M&A scene will be large firms from low-tech industries looking for a quick way to introduce innovation into their old systems and eliminate the destruction of margins caused each time a startup “disrupts” their industry.
I don’t think these new players are going to try engaging in acqui-hires, as those are specific to the tech space. Instead, I see a lot of these companies coming into the scene with the intent of either replacing R&D, being introduced to a new networks of clients, or leveraging existing client-bases to make a new product offering far more valuable.
Tech companies already do this well. If Facebook purchases Waze, it’ll have acquired a great technology made more valuable because of its introduction to the huge base of users Facebook currently has. TripAdvisor and other big travel giants often purchase new travel startups because of the data they’ve curated that is hardly valuable to a startup with only a few hundred thousand users, but incredibly valuable to TripAdvisor, which can direct its huge user-base to new travel destinations.
So enter the new players: I envision a world where Proctor & Gamble begins replacing a lot of its R&D with new tech acquisitions, or tries to improve its distribution streams and internal operations by buying up SaaS companies to make such technology proprietary. I also can imagine Whole Foods competing with Amazon to buy Instacart or FreshDirect, seeking to expand to new customers and improve efficiency.
This hyper-acquisition movement will help sustain a lot of new seed funds desperate to get dead deals off of their portfolio without marking them down as zero’s. There will thus be demand from the venture side to catalyze this shift. The movement of all these new players will also distribute top-notch talent outside of the tech world and San Francisco into new industries, companies or cities where elite engineers had not previously been attracted to.
But early acquisitions are going to sting, introducing two clashing cultures and two clashing systems that won’t get along at first. The new giant companies purchasing startups for the first time won’t have a great plan of what to do with the products they’ve purchased, or will over-plan, only to be baffled when things don’t work out exactly as they had hoped. Big companies that don’t have startup DNA baked into their culture won’t be malleable enough to let the acquired companies continue to reiterate and grow efficiently.
The entrepreneurs who run companies acquired by these big, boring giants will feel strained by all the pressure put upon them to hit revenue projections and will be forced to run their divisions using new strategies. In the past, acquired startups won by being scrappy and taking shortcuts to compensate for a lack of resources; now these entrepreneurs will have to win with the help of vast but inefficient resources of the parent company, only accessible behind yarns and yarns of red tape. There will be a huge learning curve.
The acquirers will feel pained each time the newly acquired company does something a bit risky and off-brand in an effort to continue finding itself, and ultimately, marriages will fail. A lot of products will get killed, and innovation once thought to be catalyzed by the new resources presented by an acquirer will be off the market forever.
The companies new to the tech M&A space will have to improve their strategies, some will go back to their old ways and realize M&A isn’t for them, while others will figure it out and become a player in the space in a meaningful way…it will just take time. Walmart has already done a surprisingly good job of embracing a tech M&A strategy, and it’s only a matter of time before others start seeing similar success.
This brings me back to what makes for bad venture capitalists:
1) People who have cash but no tech expertise.
2) Those who think entrepreneurs should do things just like they had.
3) Those who just follow the herd.
4) The VCs who don’t care enough.
What will make for bad M&A?
1) Companies that have money but don’t understand the tech M&A space
2) Companies that pressure the startups they acquire to act just like they do— not letting them breathe
3) Companies that just enter tech M&A because everyone else is doing it
4) Companies with so much cash that they don’t care enough about the startups they buy and let them squander.
Eventually the new buyers will get smarter and come up with viable acquisition strategies. These purchased companies will beg, push and shove boring companies into learning how to be innovative again, and will introduce new technology to industries that haven’t budged in decades.
It’ll also mean that for the startup world, more seed funds will survive than we have predicted because they’ll live off of this increase in acquisition activity, more smart engineers will wind up working for companies they never expected to be at, and more entrepreneurs will be able to flip marginal successes for legitimate money. In the end, this will all be a good thing for both sides. It just won’t come easy.