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Summary:

Big companies buy hot web startups for their audiences and their cool factor. Increasingly, along with the transaction is the up-and-down pinkie-swear promise to have little-to-know impact on the acquired company. No name change, no office location change, little-to-no leadership change. Acquirers, despite their enormous and […]

Big companies buy hot web startups for their audiences and their cool factor. Increasingly, along with the transaction is the up-and-down pinkie-swear promise to have little-to-know impact on the acquired company. No name change, no office location change, little-to-no leadership change.

Acquirers, despite their enormous and asymmetrical audience, money, and power compared to their purchases, seem like awkward first-time parents afraid of hurting a baby. They are more than conscious of their status as old farts swooping in and quickly turning cool to lame. It’s not just media companies; Google is doing exactly the same thing with YouTube, which captured global attention like its internally built competitor, Google Video, could not.

“We have to keep the communities, otherwise what is the point,” CBS Interactive President Quincy Smith told us when his company bought Last.fm for $280 million. “In the end that is what we are buying. I think we want to do some minor grafts with the start-ups we acquire, help enhance their business without coming in their way.”

Community building is serendipitous and often unexplainable. When it works, it works in the ridiculously viral way that all web companies live for. But impressive registered user counts don’t pay the bills; so nine times out of ten you’ve got to sell out to a big awkward parent. And that’s unlikely to make your members happy.

“If the Man buys a social network,” Smith said, “the key is to keep our influence away from it.”

Yahoo bought Flickr and kept the name, but made the company move from off-the-beaten-path Vancouver to blah Sunnyvale. These days, it seems, making the move from San Bruno to Mountain View (YouTube) or London to New York City (Last.fm) is not a requirement. Even little Wallstrip isn’t shacking up at CBS HQ, staying at its own studio across town.

Buying a cool startup wins you media coverage, cocktail-party relevance, and other things that fade over time. But maybe you can hang onto that fresh feeling — the awkwardness of explaining every time we write “YouTube, now owned by Google” — a little longer. We’ve even been told by startups bought three years ago, at the beginning of the current wave, that their parents are trying to bring back their brand names and the sort of indie cred they bring.

Peter Chernin, president and COO of News Corp, said that his company bought Photobucket because its photo-sharing site figured things out better than the one developed internally at MySpace (a purchase that couldn’t be left alone because of its massive infrastructure needs, though it hasn’t changed a ton since being bought).

“We developed our own photo tools and we increased capacity to 300 photos,” said Chernin, “but we looked around and Photobucket did a better job. Photobucket is going to be left alone, because it is doing what it is doing.”

And what is it that it is doing? It’s hard to explain.

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  1. Nice post. Large conglomerates often just don’t get it. Once they’ve bought it, the think that makes it worth buying will fade. The independnce and trust such sites have.

    Cheers
    steve

  2. Marshall Kirkpatrick Monday, June 11, 2007

    Interesting post, Liz.

  3. Dave McClure Monday, June 11, 2007

    on the other hand, looking at how eBay acquired PayPal (and other companies), over time the parent company does certainly impose its will on the young acquisition.

    while this may vary from parent to parent and acquiree to acquiree, the basics looks like this:

    1) if the child maintains a faster growth rate (users, page views, dollars, whatever) than its parent, it will have more freedom / control over its future.

    2) if the child does not maintain a faster growth rate than its parent, or only manages to keep up, then it will quickly be overrun by the politics of its acquirer.

    so the lesson learned here?

    plan to lean forward, not back, after you’ve been acquired. unless you walk out the door with a big check & all your vesting completed, most of the real hard work comes after you’ve been acquired… and not before.

  4. I recently met with a large portal at their headquarters to discuss a recent acquisition of theirs. In bragging about the critical mass they’ve just accrued in the Web 2.0 space, one of their best and brightest blurted out, “And we can’t wait to bring them in-fold!”

    I think my mortified look across the table may have had them rethinking the strategy…

    On a separate but equally relevant note, I had lunch with a member of the advertising press today who made an interesting observation regarding the CBS acquisition of Last.fm vs. the Facebook’s iLike service. Think CBS has buyer’s remorse yet?

  5. Off the beaten path Vancouver? Interesting phrase :P

    If you mean “outside of the US bubble that most people can’t see beyond” … then yes.

    My number one goal is to get a Yahoo engineering office back up here. Maybe a Google one, too. I mean, Cal loves Vancouver. Right, Cal?!!?

  6. Hey boris, we love Vancouver, even though real estate prices are just like Silicon Valley. Or so we have heard from one Mr. Bell.

  7. We know ya love Van Om and Ian isn’t that far off the prices of real estate in certain areas but I would not give up my pad here for for anything. We are creating a groove here that you will not likely find anywhere else.

  8. Maybe the cool to lame transition is inevitable, parentco or no? Like music and fashion, a younger generation will always seek to differentiate themselves by going elsewhere. Possibly, companies are being valued like tv technology when they are more like tv shows. I expect valuations will begin to come in line with more realistic life-span expectations.

  9. rod/techfold.com Tuesday, June 12, 2007

    I wrote my thoughts on these acquisitions here:

    http://techfold.com/2007/05/30/im-becoming-a-curmudgeon/

    In a nutshell:

    The problem I see is one of memetic infection. Old companies with deep pockets impose old ideas and business models on new industries. Is Last.fm more likely to cave to things like the Copyright Royalty Board as a part of CBS? Yes. Does wrapping new ideas in a layer of old money ultimately stifle innovation? Yes. Sorry, Sam – even if CBS keeps their hands off, that’s not the same as being independent.

  10. One really relevant question that takes this a little bit further is what the acquisitions do to recruiting and the “cool factor” that the tiny HR departments at companies like Photobucket and Wallstrip have used as a recruiting tool since Day One.

    Are they getting the same caliber of creative minds walking in the door that they were getting pre-acquisition?

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