Sarah Lacy calls acquihires a payday lending scheme. I have to disagree. There are a number off issues at play here but some counter-points to her whole thesis:
- Not all failed startups are acquihired - I’ve spoken with countless entrepreneurs who have shut down their apps. You’re just not reading about them because the main tech blogs aren’t discussing it frequently. It’s not sexy.
- Investors aren’t looking for 1X - Venture capitalists aren’t running around celebrating acquihires. Is it better to get your money back then no money at all? Of course! However all invested money has opportunity cost and when you’re running a startup that’s going to get acquihired, you’re not doing your investors any favors.
- How many famous acquihires can you name? How many billion dollar acquisitions can you name? - Getting acquihired does not get you much notoriety. As Sarah Lacy mentions, “[Acquihires] are companies whose products didn’t work.” Will investors give you money next time? Maybe. However I can guarantee you that they’d much rather give the founder of Instagram a check.
- Customers hate it - If you read the HackerNews comments on acquisition stories, they’re all pretty much the same thing: “great, one of my favorite products will cease all development”. In other words, you’re abandoning your vision because it failed. This isn’t a celebration.
Companies are failing daily, Sarah Lacy just doesn’t appear to see it. As she states, “A rational economy would let these companies fail, and then everyone could fight to hire the talent.” They are!
A Founder Gets Screwed By Amazon
I was at a BBQ the other day when one founder told me the story about Amazon’s aggressive maneuvering with a company run by a friend of his. The company was doing great, so well that Amazon approached them with an acquisition offer. The founder was so excited that he decided to forgo further financing (and dilution) by entertaining Amazon’s offer.
The negotiations dragged on for a while. At the last moment Amazon pulled the offer and the company effectively went belly up. Amazon had limousines and contracts for software engineers waiting outside the office as they walked out with their boxes.
Another founder slips up
I was speaking with a venture capitalist the other day about one of his portfolio companies. He mentioned to me how the founder had completely messed up an acquisition. Literally the day before an acquisition closed, the founder went out and got wasted. He started tweeting how stupid the company was that was about to complete the acquisition. The offer was pulled. Good luck keeping motivation going at that company after that royal f-up.
The Press Gets Foiled
While you may be reading these acquisition articles that are phrased as though they were a huge success, the reality is that those articles are basic face-saving by the founders and investors. The founders look great, as though they had an awesome exit, investors look great because they have winning portfolios. These articles are lies though. When you start to believe those articles, you end up writing pieces like the one by Sarah Lacy.
The companies that are getting acquihired are those that have the best teams (and are small). Yet for each acquihire, there are easily 10 more that are struggling and likely to go belly up. There is failure out there. We just like to ignore it. That’s because it’s the wins that make this whole space appealing in the first place.