Three types of acquisitions

There are three types of technology acquisitions:

– Talent. When the acquirer just wants the team (generally just engineers and sometimes designers). As a rule of thumb, these acquisitions are priced at approximately $1M/engineer.

– Tech: When the acquirer wants the technology along with the team. Generally the prices for these acquisitions are significantly higher than talent acquisitions. Sometimes they are even in the hundreds of millions of dollars for fairly small teams (e.g. Siri). The calculation the acquirer uses to price tech acquisitions is usually “buy vs build”. An important component in this calculation is not just the actual cost to build the technology but the opportunity cost of the time it would take them to do so.

– Business: When the company is either bought on a financial basis (the acquisition is “accretive”) or bought based on non-financial but highly defensible assets (Google buying YouTube which had minimal revenue at the time but a huge network of producers and consumers of video).

As large companies mature they move from doing just talent acquisitions to doing talent and tech acquisitions to eventually doing all three types of acquisitions. Usually it takes a startup beating the large company in an important area for the large company to realize the necessity of business acquisitions. For example, Google seemed to dramatically change its attitude when YouTube crushed Google Video. Eventually every large company has a moment like this.

Selling pickaxes during a gold rush

There is a saying in the startup world that “you can mine for gold or you can sell pickaxes.” This is of course an allusion to the California Gold Rush where some of the most successful business people such as Levi Strauss and Samuel Brannan didn’t mine for gold themselves but instead sold supplies to miners – wheelbarrows, tents, jeans, pickaxes etc. Mining for gold was the more glamorous path but actually turned out, in aggregate, to be a worse return on capital and labor than selling supplies.

When a major new technology trend emerges – say, the rise of online video or social media – entrepreneurs can try to capitalize on the trend by creating a consumer product (mining for gold), or by creating tools to enable consumer products (selling pickaxes).  For most technology trends, the number of successful companies created in gold mining and pickaxes are comparable, yet the gold mining businesses tend to get much more attention. In online video, YouTube is often thought of as the big winner; however, to date, more money has been made by online video by infrastructure suppliers like Akamai. Y-combinator is known for their high-profile B2C startups but their biggest exits to date have been in infrastructure (most recently Heroku which rode the popularity of Ruby on Rails to a >$200M exit)*.

When you start a company, the most important consideration should be working on a product you love (a startup can be a 5+ year endeavor so if you don’t love it you probably won’t be able to endure the ups and downs).  A secondary consideration should be matching the skills of the founders to the market.  Tools companies tend to require stronger technical and sales skills, whereas B2C companies tend to be more about predicting consumer tastes and marketing skills. A final consideration should be the supply-and-demand of startups in the space.  Because B2C companies tend to be “sexier” and get more press coverage, many entrepreneurs are drawn to them. This tends to lead to greater competition even though the market opportunities might not justify it.

There are many exciting technology opportunities emerging today: some are horizontal like mobile, location, and local; others are vertical like fashion, art, real estate, education, finance and energy. If you are an entrepreneur thinking about starting a company around these trends, consider selling pickaxes.

* Note that there are many great B2C YC companies, so the list of exits will no doubt change and probably skew more towards B2C over time.

The ideal startup career path

For most people I know who join or start companies, the primary goal is not to get rich – it is to work on something they love, with people they respect, and to not be beholden to the vagaries of the market- in other words, to be independent.  The reality is being independent often means having made money and/or being able to raise money from others.

A while back, I posted about how I recommend thinking about non-founder option grants.  In the comments, Aaron Cohen made the point that given today’s “good” exit sizes and standard equity grants, most non-founders will not gain independence even in the (non-extreme) good cases:

Most startup employees need to realize they are on a journey and that in addition to making a few hundred thousand dollars on a good outcome they are learning how to become more senior at the next company. Real wealth creation will take founding, seniority, or staggeringly large exits.

As Aaron said, you shouldn’t think of joining a startup as just joining a company. You should think of it as joining the startup career path. This career path could mean starting a company as your first job.  It could also mean working at a few startups and then starting a company.   (In my view, if your goal is to start a company, it is mostly a waste of time to work anywhere but a startup – with the possible exception of a short stint in venture capital).

Maybe you will make some money working at a startup, but more importantly you will hopefully work for founders and managers who are smart and willing to mentor you and eventually fund or help you fund your startup.

The startup world is extremely small.  If you’re smart, work really hard, and act with integrity, people will notice.  Contrary to popular wisdom, you will actually have more job stability than working at a big company.  And hopefully you’ll go on to start your own company, gain independence, and then help others do the same.

function my_exit_payout(…)

/* aggregate_options_strike_price = your options strike price per share * number of shares you own
company sale price is 1) if private transaction: amount paid by acquirer plus any funds in startup returned to investors,  2) if IPO = market capitalization.
note: if you assume all financings were 1x preferred, investor preferences == total amount of money the company has raised
to do:  add condition for participating preferred, graph various scenarios


function my_exit_payout(  company_sale_price, your_percent_ownership, your_aggregate_options_strike_price, investor_preferences, investors_ownership_percent)

if (investors_ownership_percent * company_sale_price < investor_preferences) investor_converts=FALSE;
else investor_converts=TRUE;

if (investor_converts) return your_percent_ownership * company_sale_price – your_aggregate_options_strike_price;
else {
common_stock_proceeds = company_sale_price – investors_preferences.
your_percent_common = your_percent_ownership / ( 1 – investor_ownership_percent );
return common_stock_proceeds * your_percent_common – your_aggregate_options_strike_price;


TheFunded term sheet






