I've mulled over this question for some time now. I've kept watching startups (both funded, and bootstrapped) that never generate a profit (not even close), don't get much traction, and then get acquired by some bigger name company. The founders celebrate the success of their venture and add it to their successful entrepreneurial resume.
But does it really count as a success? Is there something about economics that I'm missing? Is it only about how much money you get back into your (or your investors) pockets? Does the term acquisition actually mean more than "rescued from drowning"?
I don't want this to come off sounding negative. I just want to understand what I'm not getting. Thanks in advance.
A startup on the other hand can take these risks freely. Startups are expected to fail, so the fallout can be managed easily. Recognizing this advantage, entrepreneurs start businesses with the express purpose to be sold to a large company. That's the goal from day #1. So the product is really the company itself: the people, the IP, the early-adopter customer base, the proof-of-concept tech.
The large business has money and infrastructure necessary to turn something small into something big. The startup can experiment freely and be risky and irresponsible. It's a win-win. The large business doesn't care if the startup makes $1M or -1$M, because both numbers round to zero.
Startups that focus on profitability at the expense of growth tend to turn into lifestyle companies.
When companies without traction get acquired, it's typically a talent acquisition. The tech gets discarded. Not much money is involved, but the entrepreneurs get to claim a successful exit. This makes it much easier for them to raise money for their next venture. When companies are forced to sell because they've run out of money that's not a success, but a graceful failure.
I enjoy working for a small company where we are paid well, stable, profitable, have been for years, and everyone still leads a very fulfilling life outside of work.
And even so, our growth rates are well above average... just not the hyper growth expected of a startup.
It's good that there are different reasons and mindsets to entrepreneurship and there's no reason for anyone to get territorial about their preferred method. Plenty of room for everyone.
In general I agree with you, but Apple, Google, and Amazon all have very risky, very high profile internal projects in their portfolios. These are also the main companies playing the acquisition game in SV.
When you're that big a failure tends to be written up as "They tried and couldn't do it, so it must be impossible. But weren't they brilliant for trying!" Failure is marketed as success.
This is a rather narrow view and is not necessarily true. Plenty of people start companies to solve (or even explore) problems. Liquidity events (M&A, IPO, etc) are not always the end-game.
entrepreneurs often start businesses with the express purpose to be sold to a large company
Why would a big company want the "talent" that couldn't produce any useful tech even given the freedom working in a startup provides?
For VCs, the answer is easy: it's calculated in terms of how it looks for their fund. If the acquisition price tag was high enough, it's victory. If not, meh. Lower than what they put in: definite failure.
For founders, I think it depends on what they set out to do. Some people build to flip. Others look to be the next Zuckerberg.
For employees, it depends even more. If the payday's solid, many people call it a success regardless. Others, there for the work, care much more about what happens to the product after.
For me, I'd say the loss is a red herring. As gizmo explains, startups are expected to run at a loss; any potential profit should be pumped back into growth. It's only once they've captured a fair bit of territory that they should use the money for something else.
Personally, what catches my I here is the "not much traction" bit. The societal purpose of business is to create value for others. Low traction is a sign of failing to do that. The question for me is whether the acquisition changes that. Sometimes the acquirer's resources are the key to making great progress. I'd happily call that a success. More often, either nothing changes or the acquirer makes a hash of it, in which case I would call it a failure.
But yes, in the current game, people will happily claim that last sort of failure as a success. I'm sure some of them believe it, and some are just putting a brave face on it. I think you're correct to see that as somewhat false.
It's really that simple.
Some people would count selling into an acquihire outcome a success. Maybe because building the product was a fun adventure and they managed to actually ship it. They got a little bit of money, and now have nice jobs with Google. So to those people, based on their subjective view, it was a success.
Other people would take the opposite view, that it was a capitulation into the acquihire outcome and a failure. It's all strictly based on an individual's standard of what success means (which can also vary dramatically based on context).
I love this quote of yours: https://news.ycombinator.com/item?id=9339307
I've added it to this page (a github project about awesome comments from HN): https://github.com/thomshutt/infinite-monkeys/pull/5
I also gave it to a reporter recently who asked why I hadn't started a business yet: http://www.democratandchronicle.com/story/money/business/201...
As an investment, it probably wasn't successful.
As a 6-year education program in entrepreneurship, it was probably very successful. If the people running that company take those learnings and apply it in their next venture, or within the company that acquired them, it could lead to great outcomes later.
If the company paid salaries to employees, then it employed people for six years. That is success.
If the company contributed to open source or otherwise gave back to the community in whatever form they could, that's positive. Depending on how their contributions were used by others, it could've been very successful.
I'm sure there are other dimensions you could consider.
What were the initial and later cash investments? What was the opportunity cost to the founders? When was that money and time spent? When were they payed and how much? Compare this to what they could have done otherwise with the same investment money and time used otherwise and deployed during the same period, and you have your answer. In this case that time is valued on one's capacities, so it is a qualitative and highly subjective answer once you are comparing to anything more than "industry standard pay".
Because of business structure, a success to a founder may not be as successful for an initial investor, etc. The key in all this is to factor in when things are done and when rewards are received, along with viable alternatives. 5 million 5 years later is not worth anywhere near as much as 5 million in the first year.
See https://en.wikipedia.org/wiki/Modified_internal_rate_of_retu...
[1]http://www.theatlantic.com/business/archive/2015/02/japans-o...
(a) Return the investors money? (b) Compensate the founders for the opportunity cost of their time?
If so, then the acquiring company valued the startup as being worth more than the resources that went into it, so the startup created value.
With most acquihires, I think the answer to both (a) and (b) is "no", so it's not fair to call the startup a success.
There are other considerations - the value the startup created for customers, the enjoyment of the founders, the treatment of the startup employees, and so forth. But if you burnt investor money and / or didn't make back the cost of your time, it's hard to call it a success.
If the chances of total failure ($0 return) are 9/10, then anything less than a 10x return is a failure in my opinion.
Also as an individual, there is a cost to "volatility" so the payoff needs to be even higher to account for that too.