The Times Are Indeed Changin' (continued)

In the interview with Sam Gustin last week, I said:

I think we have to be mindful of the overall macro environment that
we’re in… It will be less attractive to sell our
companies, so we may choose not to do that, and we may choose to
continue to finance them and grow them and develop them some more. It
may mean that we finance our companies differently. We may finance them
for longer periods of time, and take a more conservative approach to
how we do the financing rounds. So I think we will have to adjust.

It looks like that scenario is coming true faster than I thought when I uttered those words. As Bill Burnham (not my partner Brad Burnham) said in a post yesterday on the YHOO-MSFT deal:

Because by swallowing up Yahoo, Microsoft will be removing one of the
biggest and most active acquirors of start-ups in Silicon Valley.  The
intense competition between Microsoft, Google, and Yahoo has arguably
been one of the main factors helping drive up M&A activity and
prices for internet related start-ups.   It seems like every rumored
acquisition over the past few years has had all three fighting in some
way to win the deal.

I am not saying the M&A market is going away, but I think there are several factors that might slow it down. In addition to one less mega Internet compay, we also have IAC in an unstable situation that could well result in it (or part of it) getting gobbled up. And the big media companies like NBCU, CBS, News Corp, Disney, Viacom, etc have never really been able to compete with the valuations that the big Internet companies were paying. At times they’d step up, like News Corp’s brilliant buy of myspace or CBS’ buy of for $285mm.

I think all of us who start or finance consumer oriented web services should be thinking a bit differently about exit scenarios now. It’s time to think long term. Back in 2000, when the market broke, my partner Jerry said to me:

Now we’ll see who is doing this for the money and who is doing this for the passion

We had quite a few companies in our portfolio weather the storm from 2000 to 2004. The ones who did were in it for more than the quick flip. I think it’s time to do that same gut check again.

#VC & Technology

Comments (Archived):

  1. Jerry

    “I am not saying the M&A market is going away, but I think there are several factors that might slow it down.” I disagree. Historically its deals like MSFT/YHOO that have driven new waves of acquisition frenzy. Look at the spate of acquisitions, for example, that occurred in 1999 following the acquisition of Netscape by AOL in 1998. While it is true that the number of larger acquirers capable of paying large prices might be in decline, the number of smaller “large” companies continues to grow. For example, give this movement, if Facebook were public at this point, you know there would be pressure on the board to “do something,” make some move. Now I’m not suggesting that acquisitions made in such a climate are necessarily strong business decisions; indeed, I’d posit that more often than not such moves are explicitly motivated by the worst of all business motivations: fear (“We’ve GOT to do something!”). Moreover, when such moves (either being acquired or acquiring) are made out of fear, chances are slim that there’s a full-blown integration plan designed to unlock the synergies. Look, for example, at how poorly Yahoo worked to integrate Geocities (arguably one of the first blogging sites with a touch of social networking) or Lycos integrated Gamesville and exploited the inherent capabilities that came along with that acquisition.Nevertheless to suggest that the activity will slow down is to ignore history.There is, of course, the argument that, without Yahoo making acquisitions, there will be by default–fewer companies being acquired. Again, I think that’s a misreading of history. The shake-ups, acquisitions and mergers in the late 1990s (remember InfoSeek, Goto, Excite!, Lycos, et al?) inevitably led to the emergence of Google, Facebook, et al. It’s like when a fire burns through a forest; the landscape looks devastated then but it’s in precisely that place that new growth occurs. As an investor, I think you need to look for the birches, the first trees to colonize a forest after a fire.I completely agree with your last point (and not just because you so ably quote me!). The MSFT/YHOO might just be the start of a significant re-shuffling and if so, those who are in it for the quick buck will be pruned—I suspect however it will be about a year before the fire burns through those companies. The next several months should be marked by some quick pick-ups by MySpace/NewsCorp.; Facebook; Google, et al. (And of course the large question that remains unanswered is AOL—who will bother to pick up that declining asset. Someone ALWAYS thinks they can catch a falling sword without getting cut.)Then, in about 10 months, after the election and assuming there isn’t a total meltdown in the public markets, you’ll see the fire burn through the forest. The perception will take hold among investors that there are “no more exists”—that perception already exists in the market as it relates to public offerings—and then funding from venture funds will dry up and those without real chances will be toast.But hey, what do I know?

  2. thomasl824

    Joe Nocera’s Times article is geting to the reality of where MSFT is in its life cycle. No more crushing the opposition but second place is OK! Innovation long gone, buy starts ups instead. They both buy start up for new stuff. Is this a dying embrace? I was also thinking which Pres candidates were these players.

  3. lazerow

    The main difference between 2000 and today is the amount of revenue at stake. In 2000, we were competing for small ad budgets, a smaller ecommerce pie and no real subscription-based revenues. Over the past 8 years, ad dollars have shifted online, ecommerce revenues have materialized and, as you have written about, multiple internet-based revenue streams have matured. So while we can debate the exits, the stakes are higher because the dollars are higher. It’s much easier for smart entrepreneurs to create REAL businesses today. And it’s much easier to sell a real business than one based on promise, buzz and a growing user base. Enjoy the weekend,all!

  4. stone

    Right on, Fred. Assume that we are in a recession and pockets of mini-bubbles have burst, and operate accordingly — great posture to take right about now. I also think there will be very little ad technology M&A outside of mobile.

  5. davemc500hats

    i actually wonder if it might fuel a slight acceleration in the M&A market, albeit at perhaps smaller scale.Yahoo has been challenged to do the scale / pace of acquisitions they’d like, due to the pressure from Google’s monetization and their own challenged stock price / available cash. Microsoft would allow Yahoo to have a much bigger treasure chest to make deals happen, and perhaps closer proximity / visibility / opportunity to see what’s out there.(anyway, that’s my hope… but i agree lots of macro developments that make me a bit uncertain about M&A market 😉

  6. John Furrier

    Fred: I was thinking the same thing last night and posted on this as well.. I agree with youEntrepreneurs beware Microsoft buying Yahoo could shut down the tech startup scene. It could send the startup climate back to 2001 levels – nuclear winter shut down. I lived through 2001-2004. It was ugly.Efficiency for Microsoft means leverage with suppliers. Translation: Startups are suppliers and Microsoft just became Walmart. This could have a chilling effect on the VC and tech investment community. This new industry structure puts even more of an emphasis on ‘hits’ or category specific deals. This could get ugly.Advice for Technology Startups and VCs: Understand where your company is in the pecking order in this war. If you’re not an arms dealer then you might want to rethink your strategy.

  7. Martin Edic

    I’m curious what you think about another hoard of cash sitting around in the Valley- I’m talking about the $18.5 billion that Apple is sitting on. If MS swallows Yahoo (and there are now rumors about other suitors including Murdoch) then the legendary MS cash pile will be reduced somewhat. I know Apple only tends to acquire companies quietly so they can fold their technology into Apple products but they are going to be under shareholder pressure at some point to put that cash to work. Where might it go? Certainly not into search, IMHO, but telecom has to look pretty tempting.

  8. tinymeat

    Rob Kalin asked me the “money vs. passion” question last spring. Although we(tinymeat) are small indiepreneurs this issue weighs heavily on where we see our organization 5,10 even 20 years from now. I cannot imagine what direction I would take in my life if the “passion” for our business was gone due to selling our brand and everyday focus.

  9. aces25

    This is actually a good thing — startups will be forced to actually start developing some new ideas rather then replicating the successes of flickr, wordpress, digg, etc. Its about time that a new wave of innovation begin.BTW — why would you think that I am interested in a charm bracelet — doesn’t seem like you are really hitting the target market with those ads on the lower right rail?

  10. W Roth

    Great blog post!Any thoughts on whats more of a threat to a young Internet company (consumer or business) that is building its business in terms of users and revenue…MSFT and Yahoo as separate competitors or them together. What would it mean to a startup when MSFT/Yahoo enter their market? Any change to the answer to the question, “ok, you guys are unique, now, but what happens to you when MSFT/Yahoo enters the market?”

    1. fredwilson

      I think its going to be even easier to compete with the combined msft/yhoo than it was to compete with them separatelyFred

      1. w_roth

        Thanks! I was feeling the same thing. Will be interesting…

  11. awilensky

    Number of layoff’s to increase if MS completes the acquisition, perhaps up to 5k of fat. And yes, the motive force that powered the hope of many ‘little engines that could’, will dry right the heck up.Everything about Yahoo’s mid-level technology leadership was right in place. They had vision, enthusiasm, and the kind of sunny optimism that you need in a valley where suits block the tracks.Everything, almost to a ‘T’, was the fault of a management gone awry. Shame on you Semel, Decker, and Yang for destroying one the Internet’s august properties and feeing to the lions.