3 random observations about the Silicon valley.
- In the decade since Google search, Google’s only major in-house developed product was Gmail and rest of its major products – from Youtube, Blogger to Android, Maps, Picasa to Adsense, Doubliclick, Analytics have all been acquired from outside. Google is not alone. In the past 2 decades tech companies have used acquisitions as the primary mode of innovation.
- Tech companies have been on a buying binge – Google alone has gulped 57 companies this year.
- A lot of present successful startups would not be able to survive on their own and depend on acquisitions as the primary exit strategy.
Cynics would argue based on these observations that
- Big companies are no longer innovating and they no longer have the drive
- Big corporates pay too much for worthless startups that don’t even make revenues, so they are stupid
- Startups these days have no strong revenue models. So, these founders are crazy.
The biggest assumption is that startups need to be complete enterprises – with ability to stay on their own, with revenues, sales departments, and so forth. I believe that assumption need to change. Startups need not be always thought of as complete enterprises but could be thought of as makers of innovation components that would then be fit into a larger corporation.
Think of Youtube and Android. They would have no way survived on their own fighting against colossal corporations and having little revenues to speak of. But, in the hands of Google, adsense or youtube or android are extremely valuable compared to what they would be if they had stood alone. And it is a win-win, the startups get their pay day and Google has established its stronghold over the Internet.
The problem with big companies is that they provide very little incentive for their employees to innovate. They have all heard of the guy who invented the microwave oven and got paid peanuts while his employer Raytheon make billions. An employee who could make a Youtube would rather quit, build it and sell back to Google, rather than take a 10% extra pay and a fancier title.
Second, most of the managers in big corporations neither have the capacity nor have the hunger to innovate. These are mostly in the middle of their careers, happy to have a suburban home. They are also given huge budgets that makes it easy for them to chase the wrong targets. They are no match for the hard-hitting startup founders who are penny-pinching. The kind of products that startups typically get into are too risky & too dynamic for big company managers to manage. Thus, Google videos never gave Youtube a ride for money. Startups are highly fast paced and the founders take far more risks and are willing to take steep paycuts to get their vision.
Given that big companies find it easy to make money but hard to innovate and startups could easily innovate but make no money, there is a very nice symbiotic thing possible. We have to stop thinking of startups as full enterprises but rather as innovation factories that would greatly fit into the projects or visions of big corporations. By outsourcing R&D to startups, the corporations are able to cut their budgets, stay lean while still be on the top through acquisitions.
I’m not saying all M&A is good for the system, but we have to start thinking startups in a different way. The traditional way is to build revenues (and these tend to build the longstanding empires) and the modern way is to make innovation components that are then sold to big corporations. The modern way is not worse or contribute less but is just a different approach. And if the founders in the modern way keep a track of the broad trends they could get a quick paycheck and then build their next startup in the traditional way.
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Google’s major acquisitions: Adsense (Applied Semantics), Google Maps (Where2), Android, Youtube, Blogger, Picasa, Google Analytics (Urchin software)
Microsoft major acquisitions: Powerpoint, Hotmail, Visio, Skype, aQuantive, Powerset (merged into Bing)
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