Vanity Acquisitions - Do You Pity Or Appraise Them? Do They Even Exist?
In our discussion area, I posted a while back an item on the Slow death of Dopplr. It didn't receive a lot of comments, but the two that were posted got me thinking for the almost 10 days that this is actually a very interesting, yet very sensitive, topic. Vanity acquisitions are those where the acquirer is mainly buying the talent of the startup and does not have much of a will to integrate the startup's tech or business into their own line of business. Yet, be it a vanity acquisition or not - these sort of deals are (almost) always celebrated in the startup community by all. Is it the ultimate goal of an entrepreneur to sell your company no matter what the consequences? Should we be more interested in whom we sell to or does it really matter if the check is big enough?
David Heinemeier Hansson of 37 Signals, writes a timely piece on the issue titled Acquisition Condolences. He reasons that there are different kinds of acquisitions out there; those that succeed and those that don't - from the acquirer's point of view. He names the purchase of Bloglines and Dopplr as examples of vanity purchases. Bloglines is shutting down October 1st and we haven't heard of Dopplr since Nokia bought them.
The topic is an interesting one. I could argue (without any M&A experience) that founders and investors don't differentiate too much between acquisitions. If they are priced correctly - it's a deal worth doing. Investors at least, are in the business of creating returns for their LPs in the form of their fund. The more homeruns they have the better and more professional they're considered. Founders too, can add a badge of honor to their LinkedIn profile once they've done an exit. And rightly so, not many can ever achieve that.
Then again, one could argue that there are no vanity purchases or acquisitions at all - each acquisition is still an acquisition. It shouldn't be too big of a worry for the investors or founders what the acquirer does with the purchase.
In another post by David Heinemeier Hansson, he says that there are only two things worth buying: products and customers - you should be buying a solid stream of revenue. I mainly agree with this view, companies should only by assets that add dramatically to their business in the form of revenue.
However, what I'd really want to know is how the startup community thinks of these acquisitions? Do you pity or appraise them? Does it even matter?
(Photo by Johnny Vulkan)
I would say there's always more than meets the eye behind every acquisition, the general public never really gets to know all the real reasons and terms that influenced the decision that made the sellers sell and buyers buy. Thus I would be quite hesitant to speculate or judge any particular deal; nevertheless it is slightly sad to see some service or product wane in the hands of the new owner, when it at least appeared to have potential to become something even greater. But as said, only the parties who signed the deal know the full story.
From my perspective as an entrepreneur, I would not call any acquisition a "vanity acquisition". Sure, you can pile up the cases where an idea, a concept or even a working business has been nothing short of destroyed after the acquisition, but one fact does remain. I for one do not believe that any acquirer would purchase a start-up if they did not consider the start-up to have something worth buying. Whether it is indeed the talent of the team behind the start-up, the customers the start-up has or the business potential of the initial idea, is from my perspective quite irrelevant.
Sure, as an entrepreneur I would be disheartened to find that my baby start-up which I worked very hard to make successful, has in the end been shut down simply because the acquirer does not wish to develop it further, but lets be real. There are only so many start-ups, that actually have the potential generate a sustained revenue stream strong enough for the likes of Nokia or Apple to consider them as valuable additions to their product portfolio.
It must be said though that no entrepreneur starts a venture with a "vanity acquisition" in mind. The only thought one should have in mind is to make the venture work.
I like the post. Nice topic. Disagree with: "he says that there are only two things worth buying: products and customers - you should be buying a solid stream of revenue". Many businesses would never have head above water with that kind of thinking. Take care: arekskuza.com
Juhana, Sampo and Arek, thanks for your comments.
The topic is a difficult one. As an outsider, you might look down on some acquisitions, but I do agree - paying to acquire a startup - it's always a sign that either the idea/concept, business or talent interests the buyer enough to pay big bucks for it.
The day and age of acquiring for products and customers only are long gone. Today, driven by the accelerating pace of technological change and the increasing growth and importance of digital media and internet companies, a growing amount of transactions are about the long-term exploration of the target company’s capabilities. This could include technology, but more often than not is about skills and knowledge, AND having a fully functioning team that can accelerate a roadmap.
Much of this has been researched and documented since the turn of the century. Interesting readings are Chaudhuri & Tabrizi (1999), Ranft & Lord (2002), and Gammelgaard (2004).
So in my opinion, the answer is: "they don't exist". Acquisitions all have a reason, and it's not because the public doesn't get it, that they are wrong or less worthy.
Cheers,
Sven
Disclosure: While the above represents my personal opinion, I do work for Nokia Corporate BD.
I saw the Dopplr acquisition by Nokia more as a parallel to the Jaiku acquisition by Google (i.e. to get the talent and experience contained in the Company, any residual good will from the users would be a bonus).
Both services once bought, stopped new feature development, but are still up and running, and people are using them.
We are yet to see any publicly visible effect from Matt Biddulph at Nokia.
The Jaiku crew had major effects/involvement with; Latitude on Mobile, Google Profiles, Buzz...)