Startup Acquisitions - Phoenix from the Ashes or Mere Vestiges

We often ignore the simple rules of a pond - the big fish will try to devour the small ones. And in the world of technology, the big companies will try to (in the garb of supporting and mentoring) acquire new ventures. But experience tells us, that not all of these mergers are a success.

Be it Yahoo!, Google or Skype, all of them have made various startup acquisitions, most of which failed to take off. Yahoo’s unfortunate tryst with Flickr, Delicious, MyBlogLog and many others has given disastrous results. Even Google’s purchase of Dodgeball and Blogger did not make the grade. Since the list of failures is quite long, it is imperative we examine the causes.

Flickr was acquired by Yahoo in March 2005 for $35 million. And its initial excitement was visible in the statement – “We’ll be working with a bunch of people that totally Get Flickr and want to preserve the community and the flavor of what is here. We’re going to grow and change, but we’re in it for the long haul, with the same management and same team.”

But dealing with Yahoo’s bureaucracy and struggling for resources took up all of Flickr’s time, leaving no scope to get ahead of Facebook at the photo-sharing market. Joshua Schachter of Delicious described how he was shunted aside and not allowed to contribute to the creative or development decisions of Delicious. He called it “an incredibly frustrating experience.”

As important as big companies are for new startups, the big fishes also need to keep on their toes and invest into promising ventures. Large companies like Google and Yahoo do not have the technical know-how to run fresh projects. And the small ones don’t know how to get around the various departments, committees, boards and marketing messages.

Poor funding and ill-informed management are the major reasons for fallout of the startups Bridging the distance between the humongous operations and the tiny steps of a new firm is a delicate matter. The most a big firm can ask for is to acquire a startup that can make the transition from small to big, like FriendFeed founder Bret Taylor, now CTO of Facebook.

Some startups are like Phoenixes rising from the ashes. Crowley’s Foursquare (which could have been Dodgeball), Evan Williams’ Twitter have become a rage, after initial hiccups. The money and publicity from their initial acquisitions come in handy and they go on to become very famous.

There is as much possibility of a loss as there is of a substantial gain from acquiring startups. If the innovativeness and pioneering attitude of the new companies takes it in the right direction, then legends are created, otherwise it adds to the long list of corporate experiments.

For once I would say, the biggies in the game, must do a much enhanced SWOT before their M&A team sits to handpick companies which can be acquired. Acquisitions more than anything, are about creation of more value to the end user. And till the time, the “value element” is missing post acquisition for the end user, most of that money would go down the drain.