Buying a start-up can be murder incorporated

21st May 2012

Mat Honan's piece at Gizmodo tells one such story, detailing what the tech industry's favourite whipping boy of the moment did to photo hosting website Flickr. Even if he says so himself, "it's a classic case study of what can go wrong when a nimble, innovative start-up gets gobbled up by a behemoth that doesn't share its values."

The accompanying image of a bloody knife with Yahoo's name on the handle – and smearing the red stuff all over the online photo hosting site's logo – spoke more than a thousand words about Flickr's current fate.

Founded in 2004, Flickr was once the go-to online destination to post, share and store digital photography.  Exactly a year later Yahoo bought the Canadian website along with its holding company Ludicorp for between $25 million and $35 million – depending on your source.  Before its sale, Flickr was at the heart of what it meant to be an online social network: sharing, showing, and commenting on those most personal of possessions – photographs.

But Yahoo singularly failed to understand the Web 2.0, community-oriented dynamic at play, leaving Flickr it to lie fallow as Facebook, Twitter, Dropbox and lately Instagram collectively usurped the functions it had pioneered.

Another criticism levelled at Yahoo was that it changed Flickr from a space where the motivated amateur could curate their images into a glorified online photo agency. This was compounded when in 2008 Yahoo struck a licensing deal with Getty Images to sell images from the site.

Other Murders and Executions

While this piece is about more than Yahoo's corporate filicidal tendencies, it's worth touching on the treatment of its another social media property it acquired in the same year as Flickr for a reported $30 million – the social bookmarking site Delicious.

Delicious had managed to convince people to publicly disclose, tag and swap details the websites they found useful and interesting – an impulse that spoke directly to the collaborative Web 2.0 ethos.  

Then on December 16, 2010  Andy Baio, founder of the Yahoo calendar business unit Upcoming retweeted this: details of an internal presentation slide listing Delicious, among others, to be "sunsetted."  

Following widespread outcry from its substantial user base, Yahoo sold Delicious on to YouTube founders Chad Hurley and Steve Chen for an undisclosed amount (rumoured to be $1 million) last year.

It's a given that many of the conditions under which initially impressive start-ups thrive tend to disappear upon merger or acquisition. So when acquisitions like the above do fail, why do they do so in such spectacular fashion?

Some suggestions:

 1. The Balance of power and input between buyer and target:

When the deal is an acquisition rather than a merger, there are legal and strategic reasons why the buyer would dictate the terms of absorption of the target company, but to what degree is the latter empowered to project its own ideas about how it fits into the new, corporate scheme of things?  Logic would defy it to always be completely on the buyers' terms.

2. Clash of cultures: Many start-ups' raison d'être is to distinguish themselves from the corporate status quo and define themselves in terms of flat hierarchies and rapid decision making, informality and a ‘casual' outlook to staff and customers that goes beyond the ‘pinstripes versus t-shirts' dichotomy. Few cases personify that more than the News Corp-MySpace deal.

3. Tensions between integration and innovation: Sometimes the priority for the buyer is to bring the new unit into the fold, at the expense of providing the resources and encouragement to continue the innovation that made them so attractive in the first place.

4. Considered obsolescence: built to last or built to die?

One might as well face facts: some start-ups have selling out in mind even before the first draft of their business plan is written. When this is the case and that ambition is fulfilled early on, there's little to stop them treading water within the new corporate swimming pool until the designated ‘exit' time.

Feel free to post us any more you can think of below.

To Instagram: a warning from history

The jury is still out on what Facebook's $1 billion purchase of the photo sharing start-up will mean for the newly acquired unit. Was spending that much on a company with practically no revenue a defensive move by Facebook? With the intention of smothering the staff-of -thirteen social media upstart at its embryonic stage?  Or is there a genuine fit within the $106 billion giant, with room to carry on innovating? Perhaps because they are closer to each other in (Web. 2.0) cultural and generational terms, the latter remains a possibility.

When the big buyer comes calling, is it time for investors on both sides of the table to get out? Not necessarily. But it would certainly be a prompt to monitor due diligence closely and be get fully versed in all of the arguments for and against the acquisition – financial, intellectual, social, cultural, even ‘political'. If they don't stack up then perhaps it's time to leave.

Finally, report card of some tech M&A activity in recent times:

Pass:

Disney bought Pixar in 2006 for $7.4bn in a near-perfect combination of content and storytelling with technological prowess.

Enterprise storage manufacturer EMC made 17 acquisitions between 2003 and 2006 costing $4.7 billion, to diversify into information management. By 2006, 15 of the 17 CEOs remained with EMC. At the start of the drive, the perceptive CEO Joseph Tucci was quoted as saying to his integration management team: "Don't mess it up. I'm going t
o spend a lot of money, and I don't want you to crush their DNA."

Fail:

AOL and Time Warner

Instead of the perfect union between new and old media, it was classic cultural clash when AOL picked up Time Warner for a staggering $164 billion in 2000. Two years later the combined company announced a $99 billion loss. They split after nearly a decade, from what's considered in industry circles as the worst merger of all time.

NewsCorp and MySpace

NewsCorp bought the social media network in 2005 for $580 million. In its early days MySpace was to the ‘kids' what Facebook was to undergraduates and professionals, before it became the place to find and interact with bands and other artists. Newscorp thought it was buying a piece of the social media pie and Web 2.0 cool to feed into the rest of the entertainment empire. Then Facebook went stratospheric, Twitter ‘blew up' and MySpace was left for scrap – sold last June to online advertising firm Specific Media for $35 million.   

 

More on Mindful Money:

Facebook IPO: How can investors profit?

Is Netflix the new HBO?

Y Combinator and the rise of 'incubator' companies

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The Financialist

1 thought on “Buying a start-up can be murder incorporated”

  1. Walé Azeez says:

    Hi there. I am the author of this piece and a number of others for Mindful Money on the tech industry. I’ve just noticed that the whole of the standfirst/ introductory paragraph has been lopped off, giving the story a very odd lead-in…Said paragraph only shows up in the search list. You might want to restore it back to its former glory…

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