Hacker News Reader

Comment by pg | Hacker News Reader

This guy has not done the math. An investor makes so much more from big successes like Dropbox and Airbnb than from HR acquisitions that they'd be acting counter to their own interest to focus their attention on the latter. Far from making out in HR acquisitions, early stage investors generally get screwed in them. We often make zero from an HR acquisition, between the liquidation preferences of later stage investors and the fact that much of the supposed acquisition price is set aside as incentives for the founders to stay with the acquirer.

View on HN

I have to ask, what are the "takes" on different exits? When do founders get the best return on their energy, vs the best return on the potential of their company? When do investors?

Edit: basic 3rd grade grammar.

The expected value of turning down the current offer is almost always positive. It's very rare for founders to reject an acquisition offer and then later wish they'd taken it.

The difference between founders and investors is that founders care about more than just expected value. A founder with no assets other than his stock in the company will often prefer to sell now and lock in the current price rather than keep rolling the dice. So to the extent there is a difference between the motivations of founders and investors, it's exactly the opposite of the situation this writer describes.

The author may very well be wrong about the investors' perspective and the talent-hunt motivation, but he's probably right about who's running the show, and the answer is, invariably, the big companies. Why? Because there just aren't enough successful startup IPOs to keep the entrepreneurs trying. Founders may like risks, but they're not suicidal. The only reason this show is running is that there are plenty of acquisitions at prices that appeal to both entrepreneurs and investors. So if it's big-tech that's running the show, the only question is what's in it for them. The author suggests talent, I think it's market and product research, but one way or another, if big-tech stop acquiring, the startup craze will be over within a day.

EDIT:

I guess you could say that entrepreneurs and investors are all actually working for Google or IBM or whomever, trying to find the next big thing. They're just not getting a salary but working on a commission. And once in a while, some startup may get away, do an IPO and become a real force, but that's just like an agent on commission starting his own competing business. That's a risk any employer takes.

At a certain point, big companies don't have any choice about whether they do acquisitions. If they want to be in a certain business and some startup already has an unbeatable lead, they have to buy it.

Maybe, but that startup exists in the first place only because the big companies willed it. How did that startup come to be? It got some investment money. And why did anyone invest in it? It wasn't for the hopes of an IPO because the chances are too low. The only reason that startup came to be is because the investors liked the odds of that startup being acquired. Like I said, if tomorrow morning Google, Apple, IBM, Facebook etc. decide they're not buying startups anymore but employing all developers directly and doing their own risky development, the startup scene will vanish in an instant. So the author is right in that the startups exist to serve the big companies. The reason the big companies don't do that is that they know that true innovation flourishes under perceived freedom. So we all win, but big-tech still wins the most.

No, the only reason the startup exists is because the founders started it.

That's a a fairly redundant statement if you don't explore the reasons behind why they decided to start it.

And why did anyone invest in it? It wasn't for the hopes of an IPO because the chances are too low.

That's not true. VCs will only invest in a startup if they think it has a chance of an IPO. Angels prefer that sort of startup too, though they are not as rigid about it as VCs.

OK, so the possibility of an IPO is a necessary condition for investment, but is it sufficient? Would any kind of investor put money in if they think there is a chance of an IPO (with the odds being what they are now) but zero chance for an acquisition? Isn't acquisition the attractive fallback that tilts the odds more favorably? Wouldn't a scenario of no acquisitions stack the odds against the startup so high as to preclude investment? That is the big question. Aren't acquisitions the motor behind the startup system? Aren't they its bread and butter?

A VC would have no problem investing in a company with no chance of being acquired, if it had IPO potential. Airbnb is an example.

IPOs are unquestionably the "motor" of the VC business. That's what drives all their thinking.

Then I stand corrected. :)

Reply on news.ycombinator.com