This post is not about the potential Microsoft/Yahoo merger.
Instead, let’s just assume for the moment that Microsoft succeeds in its bid for Yahoo.
What would a Microsoft/Yahoo merger mean for startups in Silicon Valley?
Some smart people whom I respect a great deal believe that a Microsoft/Yahoo merger would be bad for Silicon Valley startups.
Says Bill Burnham, for example: “By swallowing up Yahoo, Microsoft will be removing one of the biggest and most active acquirors of start-ups in Silicon Valley… [making] M&A less competitive in general and [reducing] the # of potential exits… [which is] bad news for Internet [startups] and their VC backers anyway you look at it.”
I respectfully disagree; I think that a Microsoft/Yahoo merger would have practically no impact on any high-quality Silicon Valley startup.
And here’s why:
First, Yahoo has simply not been all that active in buying Silicon Valley Internet startups — nor, for that matter, has Microsoft and Google — contrary to popular perception.
Since Terry Semel’s arrival as CEO, and continuing since his departure, Yahoo has become quite conservative when it comes to buying startups.
Yahoo only bought a relative handful of companies in 2007. The big ones were Right Media and Blue Lithium in the advertising space — where Yahoo was highly motivated to make progress — and Zimbra in the email space. The small number of other acquisitions (three in the US, I believe — Mybloglog, Rivals, and Buzztracker) were tiny enough that Yahoo didn’t even have to disclose the purchase prices.
Similarly, Microsoft bought surprisingly few companies in 2007. aQuantive was the big dog, and Microsoft was similarly motivated by a high degree of urgency to get on the advertising bus. Apart from that, you’re looking at a very small number of very small deals, such as Screentronic and Jellyfish — fine companies, I am sure, but tiny deals.
And even Google, which did more deals than Microsoft and Yahoo combined in 2007, only did a coule of sizeable ones — Doubleclick (again that advertising thing), and Postini in email. And, Feedburner got a fine exit from Google given that it hadn’t raised much equity funding. But most of the other companies Google bought largely to acquire engineers, and perhaps nascent products that hadn’t yet shipped — not doubles or triples or even necessarily singles from the perspective of venture-funded Valley startups.
Microsoft, Yahoo, and Google are only buying a relatively small number of smaller companies at all today — so given that, taking Yahoo, or even Microsoft for that matter, out of the M&A races isn’t going to reduce the number of deals going down each year by very much.
Second, the spectrum of companies that are doing Internet M&A is surprisingly broad, and, drawing from lists of deals from just 2005-2007, includes names like:
- American Greetings
- Digital River
- Jupiter Media
- Liberty Media
- NBC Universal
- New York Times
- News Corp
So the base of buyers for Internet startups is considerably more diversified than you might think.
Third, consider what’s likely to happen next.
Many of the traditional media companies — in the US and overseas — are looking at their core businesses today and seeing either rapid or imminent deterioration. This is certainly true for television, radio, music, newspapers, and magazines, and quite possibly also true for movies (given the decline in ticket sales and the recent apparent stalling out of the DVD market). And this is also true — or will be true — for a pretty broad range of various other businesses that are getting touched by the Internet.
For historical reasons — skepticism about the potential of the Internet, combined with the false hope presented to many traditional businesses by the dot com crash of 2000-2002 — many of these traditional companies are not yet appropriately positioned for an Internet-dominated future.
And now, if the Microsoft/Yahoo deal does go through, those same companies in many cases will be looking down a very scary double-barreled shotgun of an ascendant Google and an armored-up Microsoft, aimed right at their lunch, if you know what I mean.
I’m pretty confident guessing that the level of concern and even panic among many traditional companies — particularly media companies — is only going to escalate from here, as traditional non-Internet businesses in various sectors deteriorate and consumers continue moving en masse to the Internet.
And from there, it’s not hard to guess that Internet M&A is likely to heat upconsiderably over the next several years, compared to the last several years, across a very interesting and surprisingly diverse cross-section of buyers.
Fourth, new buyers appear on a regular basis.
It wasn’t that long ago that Google would not have gone on anyone’s list as a significant buyer of other companies.
In the meantime, Facebook has emerged as a company with considerable financial firepower and is already starting to do M&A.
If past is prologue, several new buyers of one form or another will pop up over the next five years, and one or two of them will probably be on the “top buyers” list in 2010 or 2012 — when you’d be selling a company you start today — even though we probably haven’t even heard their names yet.
Think also about the telecom companies, the mobile carriers, the Japanese consumer electronics companies, the Korean conglomerates, the mobile handset makers — Nokia is ramping up their Internet M&A efforts right now, European media companies… not to mention the Chinese Internet companies. Any of these could emerge as meaningful buyers of Silicon Valley Internet companies of various forms in the years ahead.
After all, in a world where Cisco is buying social networking startups, anything is possible.
Fifth, building your startup with a goal of getting acquired is foolishness anyway, in my opinion. Smart people disagree with me on this, but I’ll make my case in two points:
- Big companies don’t want to buy startups that want to get bought. Instead, big companies buy startups that have built something of value that they decide is important to them.
- You can’t possibly guess what things of value big companies are going to want to own in one or two or three years. The world is changing too fast — witness the Microsoft hostile bid for Yahoo itself! — and besides, big companies are Moby Dick and you can’t understand the reasoning behind their decisions anyway.
Combine those two points with the fact that no big company buys that many startups each year anyway, and it’s easy to see that the odds of you successfully anticipating something that a big company is going to want in the future and then actually selling your company to them — as your strategy — is a very risky proposition that is highly prone to failure.
And in fact, in my experience, most startups that start with the goal of getting bought, fail.
The formula for success in startups is the same today as it’s always been, and it will be the same post-Microsoft/Yahoo:
Build something of value — something that people want, and something that will be profitable at the appropriate point — and the world is yours.
Successful companies — companies that have built something of value — have many options. They can stay private and throw off dividends. They can go public. They can get acquired by big companies who suddenly decide, hey, that looks really valuable, let’s buy that. They can sell minority stakes to big investors or strategic partners at very high valuations. All options that are typically not open to the startup that started with the goal of getting bought and didn’t build something of independent value.
Or, reduced to a phrase: the best way to get bought is to not be for sale.
Because of this, even if Microsoft, Yahoo, and Google stopped doing M&A completely, the strategy of any high-quality startup in the valley would not change one bit.
Sixth, I believe that a Microsoft/Yahoo merger would actually be a net positive for many high-quality Silicon Valley Internet startups, for a completely different reason.
Again, suppose the takeover bid succeeds. You’re looking at probably a year of government approvals, followed by at least a year of integration.
You can’t speed up the first part, because that’s up to the government, and they don’t react well when you scream “hurry up!” at them. And you don’t want to speed up the second part, because integrating two companies of the scale and scope of Microsoft and Yahoo is an absolutely enormous undertaking and you want to make sure you do it right, or you’re not going to get any of the benefits.
In practice, that will be two years in which both Microsoft and Yahoo will most likely be considerably less aggressive on rolling out new products and new initiatives — because the key people at both companies will be consumed with the merger.
And, just think, if they are buying fewer companies as a consequence, that also means they’re less likely to buy one of your competitors and come after you while you are building your thing of value.
I think this merger, if it happens, will help clear the field for a whole new generation of Silicon Valley Internet startups to create and scale the next set of killer consumer services that will go mainstream and be used by hundreds of millions of people worldwide.
Where does that leave us?
The Microsoft/Yahoo deal, if it happens, means very little for the entrepreneurial climate in Silicon Valley, or the opportunities available to you and your startup.
Your job is exactly the same as before: build something people want, scale it up, make sure it’s defensible, and make sure you can make money with it.
Build a company you are proud of.
If you do those things, you’ll do just fine; if you don’t, neither Microsoft nor Yahoo nor any other big company were going to rescue you anyway.
Nobody ever said this was easy, but in a world moving this fast and this much in flux, it certainly is fun!