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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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14 Responses to “Why Most Startup Acquisitions Fail, and Always Will”

  1. Insightful post, but lacks a structured approach to explaining this phenomenon. Rightshifting (specifically, the Marshall Model) provides such a structure (aka hypothesis). Basically, startups are likely to have an Ad-hoc (or, more rarely, Synergistic) collective mindset, whereas the acquiring organisation is most likely to be of an Analytic mindset. Attempting to merge two organisations of different mindsets (particularly where the folks involved don’t realise what’s going on in terms of this explanation) is a Fools Errand and almost always doomed to failure.

    There are ways to make it work, but if people don’t see the problem coming, they’re unlikely to seek a solution – at least, before it’s too late.


    – Bob (@FlowChainSensei)

  2. There’s something that’s always puzzled me about these acquisitions: why would anyone expect a startup founder to enjoy being an employee of a big company? I started my own company partly to avoid working for some huge, bureaucratic organization. If I wanted to work for Google or Yahoo, I’d apply for a job at Google or Yahoo.

  3. most acquisitions fail, however the ones that work can sometimes succeed so well that they offset the vast amount of other failures.

    like venture portfolios, acquisitions should be managed with asymmetric return expectations — most will fail at -1x, however a small percentage will work, and may succeed at 5-10x.

    examples of such outsize success include: PayPal (by eBay), YouTube (by Google), Overture (by Yahoo).

    in light of this, the popular intuition that most companies are *TOO* acquisitive could be incorrect — in fact, it might be that they are not nearly acquisitive enough.

    • Always one to look at it from a different angle Dave. People often miss the bigger picture. In the end you only need a few big hits to make up for all the little losses.

      Sounds like what you’re doing with 500 Startups (I presume).

  4. The EDA (electronic design automation) sector, where Carl Icahn is currently roiling Mentor Graphics, is on that grows mostly by acquisition. Their ModelSim digital circuit simulator was an acquisition of Model Technologies, Inc. A circuit verification technology called inFact came from the acquisition of Lighthouse, formerly Silicon Forest Research. Etc.

  5. This all depends on what your definition of “fail” is.

    The executives at many acquiring companies often have no intention of bothering to integrate an acquired startup. It can be more valuable to let it die to keep it (or its technologies) out of the hands of competitors, or to reduce competition if the two companies are in the same market and represents a threat. Some startups are purchased for their engineers.

    But I agree 100% with your larger point. Integrating acquisitions is extraordinarily difficult for all the reasons you list, particularly cultural differences.

    Another is that the media, investors, bankers, and executives and others out to make a quick buck start to salivate at the deal itself and not the more important but less sexy integration, so the moment the ink on the contract dries, these parties wash their hands and run off to chase the next deal.

    The junior managers who are then left holding the bag quickly find they don’t have the influences or resources to properly integrate the new company, and things start to fall apart.

  6. Now here’s a very good point, and one that I can’t remember seeing before: “founders whose startups get acquired and then smothered can go on to do some incredible things.” So that entrepreneurship isn’t lost, it just hangs out for a while and then attains escape velocity.

    I’d be interested in reading (or writing, if you’re looking for a qualified guest blogger at GigaOm) about the acquisitions made by Automattic.

    • Interesting take, Andrew. So you are saying the founder is like a comet… they get pulled in close to larger bodies, spend a short time in their orbit, shed some of their mass, and in return they get the boost of the gravitational acceleration as they swing out of the big object’s orbit, and back into the freedom of space.

      Nice analogy. I like it! (And I think those founders would like it, too!)

  7. Yahoo did really bad because Yahoo is a mess of a company which still does not know what business it is in …

    Saying most acquisitions fail is an overstatement….

    Google has had some good acquisitions. Youtube would count as a decent acquisition in its relevance to google. Grandcentral looked like a wtf acquisition till google voice rolled out. Android now seems like the most killer acquisition ever …The maligned blogger still has incredible traffic (see matt mullenwegs blog) .. I dont know how much of that is span, but spam is over much of google nowadays…

    Sure there are acquisitions like omnisio (where did that go) or dodgeball which google could never quite understand …

    For an acquisition to work the acquirer needs to know what they want to achieve with the acquisition .. the acquiree also needs to know what they want from the acquisition… Most of the time the acquiree wants money and not their baby which would cause the product as you know it to disappear in a few years …

    If the acquirer is yahoo , you can be sure that they had no idea what to do with any company they acquire …

  8. How did Blogger fail? They’ve been the number one service platform for years now (even when Google ignored them).

    I think Jaiku (which was suppose to be Google’s answer to Twitter) would have been a better substitute.

    Aside from that, you would think startups would fair better as they would have more access to funds. It probably explains why Groupon, Facebook, etc. chose to go it alone instead.

  9. Its a flat conclusion. It would have been better if you can present numbers of successful / unsuccessful acquisitions and the amount of their success or failure. Right now your accuse seems primarily based on Yahoo & Google acquisitions.