Why Most Startup Acquisitions Fail, and Always Will

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As 37signals co-founder and CEO Jason Fried has noted in a recent blog post, Yahoo has a pretty miserable track record when it comes to startup acquisitions, a roll-call of the doomed and soon-to-be forgotten that includes Flickr, Delicious, MyBlogLog and several others that may or may not be trapped in “sunset” mode. But it’s not just Yahoo, of course: Google has also made a series of startup acquisitions that went nowhere, including the purchase of Dodgeball — which languished until founder Dennis Crowley left to create Foursquare — and the acquisition of Blogger, which also withered on the vine for the most part after the company bought it. The reality is that most of these big startup acquisitions fail, and likely always will.

The stories that Fried 37signals collected in his its post give a sense of why Yahoo’s acquisitions did so poorly; it’s like the movie Groundhog Day, except instead of Bill Murray reliving the same day over and over in Pennsylvania, it’s startup founders like Joshua Schachter of Delicious repeatedly running into big-company bureaucracy, combined with a toxic mish-mash of technological determinism, ignorance, and outright incompetence.

A Flickr developer’s tale of how Yahoo continually tied up development at the photo-sharing service is a perfect example: 85 percent of the unit’s time was spent dealing with the Yahoo bureaucracy, says Kellan Elliott-McCrea, and months were wasted trying to migrate Flickr’s API over to the mandated Yahoo equivalent. Oh, and Yahoo also starved its new acquisition of resources, which made it impossible to add new features or expand to remain competitive — and as a result, Facebook ate the company’s lunch in the photo-sharing market. Schachter, meanwhile, has described how he was effectively shunted aside and not allowed to have any input into the design or development decisions around Delicious, and called his time at Yahoo “an incredibly frustrating experience.”

Are some of these kinds of complaints a result of founder egos clashing with big company management processes? Perhaps. And a number of commenters on Fried’s the 37signals post noted that some startups have no choice but to be acquired, because they have no real business model. But the biggest single reason why startup acquisitions fail to have any impact on the company that acquires them is that large companies like Yahoo and Google in many cases don’t have the institutional know-how or the internal DNA to really take advantage of them. And it’s not just Google and Yahoo — large companies of all kinds require large infrastructure, and that means layers and layers of management processes, departments, committees and boards, not to mention alignment with strategic goals, revenue targets, marketing messages and so on.

Startups grow and succeed in some ways because they don’t have any of those things. In most cases, they are poorly funded and inadequately managed collections of misfits who are powered solely by a passion and determination that borders on mania. The marketing department, payroll department and IT department are frequently a single person, so getting them to agree on something isn’t usually a problem. They can move quickly — and make mistakes quickly — and that can make all the difference. The most that a big company can hope for is to get a startup founder who can make the transition (as FriendFeed founder Bret Taylor, now CTO of Facebook, appears to have done).

The flipside of all this, of course, is that founders whose startups get acquired and then smothered can go on to do some incredible things: Crowley started Foursquare, which is what Dodgeball could have been, and Evan Williams started what became Twitter. And did the cash and notoriety that they got from being acquired help them do so? Undoubtedly (although Delicious founder Schachter said that if he had to do it over again, he would gladly give up the cash and not have sold to Yahoo).

So large companies like Google and Yahoo will no doubt continue to try to inject some startup DNA into their corporate bloodstreams — and in an overwhelming number of cases, they will fail. And startup founders will continue to cash in, and then cash out.

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