The other day New York Times had an interesting article about 1 Billion dollar (Internet) startups. The piece opened up by saying:
The number of privately held Silicon Valley start-ups that are worth more than $1 billion shocks even the executives running those companies.
That kind of gives a flashback of the Dot Com Hype, doesn’t it? Do you remember the “eyeball logic” i.e. the acquired companies had no business model, no assets, but only data of people come came to their site.
Maybe it is different this time? Or, like Gordon Gekko in Wall Street: Money Never Sleeps, looks different but is still the same.
Let’s start answering that by asking is Billion dollars a lot of money? Of course it is. But in relative terms and as an investment? For comparison, the beer company Anheuser-Busch paid 20 Billion to get their hands on Corona, and their competitor SAB Miller paid 10.2 Billion for Australian Foster’s.
And all that is, paraphrasing the late Steve Jobs, not really changing the world, but just mixing barley with water.
Okay, okay. Fair enough. Those acquisition pricetags surely cover more than just the brand goodwill and the customer base. There must be “hardware” involved. Bottling plants, distribution, exclusive contracts and so on. I am definitively not an expert, but, apart from the time it takes to replicate those, how valuable is all that really? So I am sure the math still contains big numbers for the brand and customer base value that make “investing 1 Billion to acquire a household Internet brand(s)” to sound more reasonable.
A billion here or there, but somehow the the get-rich-with-internet story may not feel that glorious. Could feel more like luck, gold-digging or opportunistic. People can picture how the blue collar beer makers brewed and bottled beer in the farmhouse, with the family helping, to meet the increasing demand, as the grapevine spread the news about the awesome, differentiated product. And, in comparison, the Internet entrepreneur did what? Sat at Starbucks hacking some code to his Mac, while making sure none of the Asian subcontractors were using child labor?
None of this matters. The valuation is what it is, because somebody built a product line or a customer base that Big Corporations need, but wouldn’t, or couldn’t, build organically.
And, unlike some of the beer companies going directly to the acquisition mode, most technology companies have first tried to build the new things themselves. Because that coding at Starbucks was supposed to be easy, remember? But it turned out to be everything but, their build-it-from-scratch efforts failing miserably. And often failing for so many different reasons, nothing to do with technology, but more with business model conflict and leadership culture. So companies are willing to pay the big bucks for the acquisition so that they don’t need to go through those self-inflicted failures again.
So in a way, yes, “eyeball acquisition business logic” is back.
But there is one major difference to the Dot Com era. Today’s Internet is no longer an experimentation of the early adopters, but the necessity of the Main Street (how do you think most people would answer: “Which one, and only one, would you take to a deserted island? A case of Corona or the Internet?”). Unlike ten years ago, people are quite much more willing to pay for, or truly engage with, services. And stick with them. Yes, people might switch away from Spotify or Dropbox, like they could switch away from Corona or Foster’s. But that churn probably can be estimated way better than 10 years ago. So good are many of these services, and so high is the user engagement. Which, in turn, means the investment banker estimates for the net present value of those eyeballs is more reliable.
The M&A excels aside, at the end, the payback of any acquisition is largely defined by what the Big Corporation does with the new stuff it owns. In 2000, a major global conglomerate acquired a known-but-not-yet-mega-known, unconventiontal ice cream brand for USD 326 Million. It continued to let the brand do its thing, perhaps learning also something about its culture along the way. And now everyone knows Ben and Jerry ice cream, owned by Unilever, which by the way recorded its all-time high share price.
Maybe one day the price tags go down, as big corporations learn to innovate better themselves. It just may take some more ten-year cycles.