UK Needs An Acquisition Culture To Have a Sustainable Startup Culture(techcrunch.com)
techcrunch.com
UK Needs An Acquisition Culture To Have a Sustainable Startup Culture
http://techcrunch.com/2013/07/08/the-uk-needs-an-acquisition-culture-if-its-to-have-a-sustainable-startup-culture/
15 comments
If by "viable long-term businesses" you mean ordinary slow-growing ones, people already do start lots of those in the UK.
But if you're talking about startups, meaning super fast growing companies like Google, Facebook, etc, what you seem to be claiming implicitly here is that there is a way for the UK to become like Silicon Valley in the sense of becoming a place where such companies are started, without also acquiring other qualities of Silicon Valley that you seem to dislike, like early acquisitions.
That seems pretty unlikely. Any other city that evolves into a big startup hub will have its own personality to some extent (e.g. NYC might be more focused on retail), but it seems unlikely that a new startup hub would be structurally different.
But if you're talking about startups, meaning super fast growing companies like Google, Facebook, etc, what you seem to be claiming implicitly here is that there is a way for the UK to become like Silicon Valley in the sense of becoming a place where such companies are started, without also acquiring other qualities of Silicon Valley that you seem to dislike, like early acquisitions.
That seems pretty unlikely. Any other city that evolves into a big startup hub will have its own personality to some extent (e.g. NYC might be more focused on retail), but it seems unlikely that a new startup hub would be structurally different.
The trouble so many have with the Valley isn't early acquisitions per se, it's that so many companies are basically fake. As you yourself explain, in "Hiring is Obsolete", many companies wind up being something the founders do to prove their worth as big company employees, rather than something that might someday make money. A huge fraction of acquisitions are shut down afterwards - pretty conclusive proof the "company" (the software, product, business model and sales channels) has negligible value.
Of course, as you've also pointed out, such "HR exits" are a small fraction of your and other VCs' returns. However, if they predominate numerically - if 80%, say, of YC companies are "acquihired" - this will inevitably affect the character of both YC and its applicants, making it more similar to just another recruiting agency. When our brains assess the character of a place, they weight by "number of people I've talked to", not "market value at exit".
Of course, as you've also pointed out, such "HR exits" are a small fraction of your and other VCs' returns. However, if they predominate numerically - if 80%, say, of YC companies are "acquihired" - this will inevitably affect the character of both YC and its applicants, making it more similar to just another recruiting agency. When our brains assess the character of a place, they weight by "number of people I've talked to", not "market value at exit".
Actually very few startups are fake. Companies look fake in retrospect if they make something that flops and then get HR acquired, but very few founders I encounter are deliberately aiming for that path.
What I suggested in "Hiring is Obsolete" is not that founders build something random to get the attention of acquirers, but that they build the product the acquirer should have built. I'm advocating founders aim for product acquisitions, not HR acquisitions.
And no proportion of HR acquisitions would be enough to affect the character of YC. Not only are we not interested intellectually in funding companies that fail, we probably net lose money on them.
What I suggested in "Hiring is Obsolete" is not that founders build something random to get the attention of acquirers, but that they build the product the acquirer should have built. I'm advocating founders aim for product acquisitions, not HR acquisitions.
And no proportion of HR acquisitions would be enough to affect the character of YC. Not only are we not interested intellectually in funding companies that fail, we probably net lose money on them.
I'm afraid I'm not 100% convinced that Google and Facebook are great examples of these sorts of startups. Google was certainly disruptive to the established search industry at the time, which was drowning in poor results and nested portals. But it took years to take over and did so by being clearly better than everything else and sustaining that. FB was locked down to academia for years and even then played second fiddle to myspace as it grew almost in the background. Neither of these were acquired early (AFAIK).
I'm not suggesting there's a way for the UK to become like SV without early aquisitions. I'm not sure that I see the value proposition in the UK growing that sort of scene at all.
You can put this down to cynicism on my part. You can put this down to the British attitude to business. Or just to short sightedness. I'm not going to doubt your investment acumen or experience in this space, I certainly have nothing to compare to that and you clearly have the knowledge to make money out of what you do. And we could argue about what constitutes utility or value until the cows come home. But I'd still rather see tech firms establish themselves traditionally in silicon glen or silicon fen than I would see people get caught up in the hype cycle of silicon roundabout.
I'm not suggesting there's a way for the UK to become like SV without early aquisitions. I'm not sure that I see the value proposition in the UK growing that sort of scene at all.
You can put this down to cynicism on my part. You can put this down to the British attitude to business. Or just to short sightedness. I'm not going to doubt your investment acumen or experience in this space, I certainly have nothing to compare to that and you clearly have the knowledge to make money out of what you do. And we could argue about what constitutes utility or value until the cows come home. But I'd still rather see tech firms establish themselves traditionally in silicon glen or silicon fen than I would see people get caught up in the hype cycle of silicon roundabout.
You're certainly correct in that neither Facebook or Google were acquired and it's not the cash from smaller acquisitions which make the real jobs and the real revenues.
However it was the fast sale of Paypal which put enough money in Peter Thiel's pocket to put $500k straight into a young and green Mark Zuckerberg's pocket. It was also the acquisition of Granite Systems after only a year which put $132M in Andy Bechtolsheim's pocket such that he was happy to write a $100k cheque to the Google founders on his doorstep.
Acquisitions are like occasional rainfall in deserts. It may take plants which are focussed on arid survival to make it and you need to be a tough survivor. Without the occasional life-bringing rainfall though everything dies.
There is a growing number of high quality entrepreneurs and engineers starting to bed in in London (and the real ones are not the noisy ones you read about in the UK press) and given the right conditions they can create some substantial, revenue generating companies.
This is a pretty special opportunity. For what is comparatively very little funding indeed, there is the chance to get the brilliant engineers who would otherwise go into banks and getting the money that would otherwise go into property and creating some really interesting high quality new companies and job-creators.
While I think the odds are probably stacked against it happening, one essential ingredient either way is some acquisitions. Bring enough of those and the giants will follow.
However it was the fast sale of Paypal which put enough money in Peter Thiel's pocket to put $500k straight into a young and green Mark Zuckerberg's pocket. It was also the acquisition of Granite Systems after only a year which put $132M in Andy Bechtolsheim's pocket such that he was happy to write a $100k cheque to the Google founders on his doorstep.
Acquisitions are like occasional rainfall in deserts. It may take plants which are focussed on arid survival to make it and you need to be a tough survivor. Without the occasional life-bringing rainfall though everything dies.
There is a growing number of high quality entrepreneurs and engineers starting to bed in in London (and the real ones are not the noisy ones you read about in the UK press) and given the right conditions they can create some substantial, revenue generating companies.
This is a pretty special opportunity. For what is comparatively very little funding indeed, there is the chance to get the brilliant engineers who would otherwise go into banks and getting the money that would otherwise go into property and creating some really interesting high quality new companies and job-creators.
While I think the odds are probably stacked against it happening, one essential ingredient either way is some acquisitions. Bring enough of those and the giants will follow.
"viable long-term businesses" might mean ones that don't change hands at values based on increasingly speculative multiples. Can't a tech scene without a casino-like investment atmosphere succeed?
I'm sorry, but being bought out as your only goal is not a business plan. I work in VFX so I see lots of startup companies.
They start up to make a profit, not tread water until they are bought by a bigger company.
The majority of the inhabitants of "silicon roundabout" are carbon copies of whats been before. whats more the service they provide is usually free. So there is no hope of long term success without a buyout.
In short, the very definition of a startup is unsustainable.
They start up to make a profit, not tread water until they are bought by a bigger company.
The majority of the inhabitants of "silicon roundabout" are carbon copies of whats been before. whats more the service they provide is usually free. So there is no hope of long term success without a buyout.
In short, the very definition of a startup is unsustainable.
I get these sense that the UK has a startup culture, but Silicon Roundabout isn't it.
Several major exchanges (in energy, commodities) are recently ex-startups, and there is an ecosystem of innovative, fast growing companies servicing the city. Because finance is what London does.
Outside Central London, often clustered around universities (Cambridge, Surrey, and the Thames Valley) are interesting non-internet start-ups. Chip design startups, making IP they hope will be acquired by ARM or Qualcom. Startups creating software for the UKs huge, NHS motivated big pharma presence. These are B2B companies that you don't hear about unless you are involved, so I'm sure there are plenty popular niche I'm unaware of.
But Silicon Roundabout, or UK web service companies? I've looked at the companies there, hoping for one that looks interesting enough to grow, interesting enough to join. Nothing caught my eye. Datasift maybe.
Several major exchanges (in energy, commodities) are recently ex-startups, and there is an ecosystem of innovative, fast growing companies servicing the city. Because finance is what London does.
Outside Central London, often clustered around universities (Cambridge, Surrey, and the Thames Valley) are interesting non-internet start-ups. Chip design startups, making IP they hope will be acquired by ARM or Qualcom. Startups creating software for the UKs huge, NHS motivated big pharma presence. These are B2B companies that you don't hear about unless you are involved, so I'm sure there are plenty popular niche I'm unaware of.
But Silicon Roundabout, or UK web service companies? I've looked at the companies there, hoping for one that looks interesting enough to grow, interesting enough to join. Nothing caught my eye. Datasift maybe.
Which shows how much you know about the area. Datasift is not even based in London, it's in Reading. Here's a list for you to peruse http://www.builtinlondon.co/
Yeah, they are based in Reading, on the UoR campus, which is in the Thames Valley area I mentioned. I though they were exciting, and considered using them for a project.
I guess my comment was a bit negative. I wish good luck to anyone trying to make it. You'll have the last laugh when you cash out.
I guess my comment was a bit negative. I wish good luck to anyone trying to make it. You'll have the last laugh when you cash out.
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My belief is that the focus on exits in startups is an American effect in nature - because it matches the VCs business model. Why not just building sustainable businesses and make VCs do with dividends on them? That will be way more beneficial to the economy than building Zynga-style bubbles.
That is a common misconception, but it's usually founders who are eager to sell, not VCs. There is a power law distribution of outcomes in startups. The big successes are so big that that's where all the returns are for investors.
VCs routinely reject startups because they worry that the founders are only interested in selling the company. We tell founders who are about to present to VCs never even to use the word "exit."
VCs routinely reject startups because they worry that the founders are only interested in selling the company. We tell founders who are about to present to VCs never even to use the word "exit."
I think in part this is because the founders reach the point where they feel it's 'enough' way before VCs do, because VCs are risk hungry (distributing their risk across dozens of deals makes that easy) and want to roll the dice again and again. In the end, i believe that timeline of the VC's fund existence preclude them from meeting their return goals otherwise than through exits.
This article should have been called "The UK Needs An Acquisition Culture If It’s To Have a Sustainable Venture Capitalist Culture"
+1 to what anovikov and KaiserPro have said already -- If these founders are building things they love, to solve real problems, they should be building sustainable businesses and doing what they set out to do, not waiting on a VC to buy them out.
+1 to what anovikov and KaiserPro have said already -- If these founders are building things they love, to solve real problems, they should be building sustainable businesses and doing what they set out to do, not waiting on a VC to buy them out.
Thats fine for some. Run on revues and retire in 40 years satisfied. But sometimes other founders need financing to build the things they love, and that require capital. European banks are not good at risk capital. So you're going to have to get it from somewhere. If eventually a founder has a big exit, maybe they can finance their OWN NEXT STARTUP? How about that for you?
Without being combative, who, exactly needs the financing that badly? Certainly not the large percentage of social startups, right?
And also, if they need the capital to enable/manage growth, a reasonable business model should get them SOMEWHERE close to sustainability. What I mean to say is that if people are falling themselves to use your creation (so much so that you must expand infrastructure significantly -- keep this in mind that many of the open source software that is available these days "scales" to thousands if not millions of users without much more than one guy sitting behind a computer) it should not be difficult to get some portion of people to PAY for the service.
Now, of course, this is very different when it comes to something like a manufacturing-based startup, in which someone is looking to achieve mass-production from the get go (which I don't even think is a reasonable approach) -- or break into some sort of heavily "regulated" area and needs money for patents/licenses/whatever. But even to that, I'd say more introspection is needed -- VCs are not just looking to hand out money without prototypes, and if you have prototypes that are good, and work, and show that you know what you're doing, even regular banks can give loans with a good enough business plan (especially with all that internet money everyone's been trying to get a hold of recently.
Also, I think that maybe this ultra-transient mentality to startups might be wrong, unless you are in the business of incubating. You don't often enter relationships with the mindset of gathering experience for the next one right? Most people would like to think that people enter relationships with the intention to make them successful. I think startups are the same way, especially given how people think about them on sites like these and others.
Also, keep in mind that building something you love and making money from it instead of taking VC cash doesn't mean you'll be poor by a long shot, it's very possible (and I'd like to say probable, but I don't have a link to an article posted on here last week about non-VC exits being generally worth more to the founder). If your idea really is good, then it will make you a LOT of cash, even if you collect $10 from 1000 people on a yearly basis, you'd only need 3000 people to think your app is useful to make somewhere close to min wage in the US (which is higher than many around the world are paid)
But anyway, that's just my opinion
[EDIT] - Also, another point worth thinking about here -- what about your users? These are the people that subscribed to you, your methodology, your culture. I think there's more than enough proof out there to show that users don't get quite treated the same after acquisitions (to put it mildly)
And also, if they need the capital to enable/manage growth, a reasonable business model should get them SOMEWHERE close to sustainability. What I mean to say is that if people are falling themselves to use your creation (so much so that you must expand infrastructure significantly -- keep this in mind that many of the open source software that is available these days "scales" to thousands if not millions of users without much more than one guy sitting behind a computer) it should not be difficult to get some portion of people to PAY for the service.
Now, of course, this is very different when it comes to something like a manufacturing-based startup, in which someone is looking to achieve mass-production from the get go (which I don't even think is a reasonable approach) -- or break into some sort of heavily "regulated" area and needs money for patents/licenses/whatever. But even to that, I'd say more introspection is needed -- VCs are not just looking to hand out money without prototypes, and if you have prototypes that are good, and work, and show that you know what you're doing, even regular banks can give loans with a good enough business plan (especially with all that internet money everyone's been trying to get a hold of recently.
Also, I think that maybe this ultra-transient mentality to startups might be wrong, unless you are in the business of incubating. You don't often enter relationships with the mindset of gathering experience for the next one right? Most people would like to think that people enter relationships with the intention to make them successful. I think startups are the same way, especially given how people think about them on sites like these and others.
Also, keep in mind that building something you love and making money from it instead of taking VC cash doesn't mean you'll be poor by a long shot, it's very possible (and I'd like to say probable, but I don't have a link to an article posted on here last week about non-VC exits being generally worth more to the founder). If your idea really is good, then it will make you a LOT of cash, even if you collect $10 from 1000 people on a yearly basis, you'd only need 3000 people to think your app is useful to make somewhere close to min wage in the US (which is higher than many around the world are paid)
But anyway, that's just my opinion
[EDIT] - Also, another point worth thinking about here -- what about your users? These are the people that subscribed to you, your methodology, your culture. I think there's more than enough proof out there to show that users don't get quite treated the same after acquisitions (to put it mildly)
I read the title and immediately thought to myself "What about a startup that just becomes a successful business, does that need an acquisition to breed more startups?"
Those businesses are awesome and I think more people should build them.
The point I wanted to make in the article is that most startups are a high-risk experiment. A side effect of that is that most of them will fail and you need a lot of liquidity to fund that failure-level.
I wish more developers would just create 1-5 man businesses that make $100k-$2M/year. It's exactly the right thing to do as an individual but it doesn't sustain a startup culture it just sustains a set of solid, long-term businesses.
The point I wanted to make in the article is that most startups are a high-risk experiment. A side effect of that is that most of them will fail and you need a lot of liquidity to fund that failure-level.
I wish more developers would just create 1-5 man businesses that make $100k-$2M/year. It's exactly the right thing to do as an individual but it doesn't sustain a startup culture it just sustains a set of solid, long-term businesses.
> but it doesn't sustain a startup culture it just sustains a set of solid, long-term businesses.
Who is that a bad thing for? Small, solid businesses sounds like a better option for customers and the country as a whole than frenetically building new things knowing most of them will fold. It doesn't give the founders the same chance at celebrity, but they get to do something reliable and potentially fulfilling.
I guess I'm not convinced that the UK wants a 'startup culture' at all. I'd like to think people could focus on building stuff that's useful or entertaining, rather than what sounds like desperate attempts to become a millionaire.
Who is that a bad thing for? Small, solid businesses sounds like a better option for customers and the country as a whole than frenetically building new things knowing most of them will fold. It doesn't give the founders the same chance at celebrity, but they get to do something reliable and potentially fulfilling.
I guess I'm not convinced that the UK wants a 'startup culture' at all. I'd like to think people could focus on building stuff that's useful or entertaining, rather than what sounds like desperate attempts to become a millionaire.
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This article is UK-specific, but I'm personally concerned about the same problem in the US. There's a limit to how many great startups can be built if they are dependent on M&A for exits/liquidity events, and the larger companies don't start buying more startups. Also, competition on the M&A end will lead to lower exit pricing, which will eventually impact valuation and early stage investment.
The improvements in early stage investment in recent years may just wind up throwing other parts of the system out of balance.
The improvements in early stage investment in recent years may just wind up throwing other parts of the system out of balance.
You need successful exits for a startup culture, you don't necessarily need acquisitions and therefore tax breaks for acquisitions would be a mistake
What about the other path - why don't successful UK startups go public on the AIM? In the UK, companies can go public for much smaller market caps than they ever would in the US.
The UK is not burdened with the bureaucracy of Sarbanes–Oxley, so the UK doesn't necessarily need to adopt the US' cultural shift to stay private as long as possible.
What about the other path - why don't successful UK startups go public on the AIM? In the UK, companies can go public for much smaller market caps than they ever would in the US.
The UK is not burdened with the bureaucracy of Sarbanes–Oxley, so the UK doesn't necessarily need to adopt the US' cultural shift to stay private as long as possible.
Acquisitions are often seen as a route to value destruction in the UK - that's received wisdom and I suspect it will take a lot for startups to challenge the thinking.
Everyone here is welcome to look at a good selection of "Silicon Roundabout Web companies" and realise that there is a huge diversity, far beyond the stupid characterisation that they are built-to-flip app/web crap: http://www.builtinlondon.co/
I think the issue is that a larger number of people are becoming involuntary entrepreneurs. They don't want the long-term "lifestyle" business that delivers a high-but-not-stratospheric income for 20 years, because they actually aren't cut out for running businesses (or very interested in it). They want the 5-year plan to exit-- because they're not really entrepreneurs, but either (a) want to be rich, or (b) want autonomy that no longer exists in any corporate job-- not even R&D. They're involved in these red-ocean VC-funded get-big-or-die gambits because those are the only game in town for them.
In 2006, class (a) was working on Wall Street; but the pool of get-rich opportunities has dwindled. In 1975, class (b) was working in R&D labs on basic research. However, those options have dwindled too. As the few buttresses preventing the corporate world from falling under the weight of its own mediocrity give way, it's forcing a lot of the best people into one narrowly-defined class of entrepreneurship: VC-funded turn-the-crank franchise bids with a bit (ok, a lot) of random risk thrown in. It ends up requiring long hours, alternating unhealthfully between being over- and under-funded (relative to one's scope) and is generally unsustainable. Many of these people can't hack it for more than a couple years; that's why the acq-hires are so necessary-- turn the business over to something that can use it prophylactically before the founders burn out.
In 2006, class (a) was working on Wall Street; but the pool of get-rich opportunities has dwindled. In 1975, class (b) was working in R&D labs on basic research. However, those options have dwindled too. As the few buttresses preventing the corporate world from falling under the weight of its own mediocrity give way, it's forcing a lot of the best people into one narrowly-defined class of entrepreneurship: VC-funded turn-the-crank franchise bids with a bit (ok, a lot) of random risk thrown in. It ends up requiring long hours, alternating unhealthfully between being over- and under-funded (relative to one's scope) and is generally unsustainable. Many of these people can't hack it for more than a couple years; that's why the acq-hires are so necessary-- turn the business over to something that can use it prophylactically before the founders burn out.
Amusing that Autonomy is listed as an acquirer, given how desperately they had to be acquired themselves.
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Wow that link to the Internet Peeps article brings back so many memories. It's true, the whole scene was basically one room full of people.
Great post Nixey!
This is a case where the TechCrunch headline is a lot more reasonable than the HN one. I read "You need an acquisition culture to sustain a startup culture" and thought it was going to be an article about how a business's culture should be primarily about acquisition, which was a little more outlandish.
Instead of flushing money down the pan on non-sustainable startups, we need people to build viable long-term businesses. Too often we see a hype-cycle in action as people build something with a slight spin on existing tech and/or services, hype it until it seems like its worth something then cash out.
Half the time the acquiring company seems to immediately shelve the service, if not they spend a few years trying to monetise it then give up.
I'm sorry if the Shoreditch crowd aren't attracting as many 'angels' as they'd like. I can only think this is a sign of healthy scepticism on the part of UK investors.