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Too Big to Acquire

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Growing Pains

Are Some Startups Getting Too Big to Acquire?

Why you should care

Because while Silicon Valley is busting at the seams, some startups’ rapid growth makes them less practical for acquisition.

Silicon Valley is on fire.

Seems a week doesn’t go by without another company getting acquired for a billion dollars — or more. Facebook bought Instagram for a cool $1 billion. Yahoo purchased Tumblr for $1.1 billion. Google grabbed Nest for $3.2 billion. Apple acquired Beats for $3 billion. And Facebook threw down a whopping $19 billion for WhatsApp. That’s a lot of zeros and popping champagne corks.

There are generally two ways to cash out: You can get bought … or you can go public.

But there’s a new trend bubbling up under the radar: Some companies could be getting too big to acquire. Dropbox, Uber, Pinterest, Airbnb and Box are among the latest “startups” to get valued by private investors in the billions. And while it’s led to rounds of high-fives among employees, these 5 billion-dollar-plus price tags actually put most potential acquirers out of the market.

Every startup founder dreams of cashing in one day. There are generally two ways to make that happen: You can get bought by a Google or a Facebook … or you can go public. If you’re in the get-rich-quick game, though, going public isn’t the most convenient thing to do. You’re not allowed to sell off all your shares immediately post-IPO and head to the Bahamas, for fear that your company could be all smoke and mirrors. So if you just want to grab your cash and speed through the fast lane … you need to get Zucked.

More hot startups are being “forced” down the IPO route.

But what if you grow so fast, and are worth so much, that it doesn’t make sense for even a deep-pocketed company like Google to buy you? After all, 5 or 10 billion is no chump change. Few companies want to pay more than 10 percent of their own value for an acquisition. And how many consumer tech companies are worth more than $100 billion — the size you’d need to be in order to buy a $10 billion startup and not violate the 10 percent “rule”? Not many of them. “You can count them on two hands,” says Michael Moe*, co-founder of GSV Asset Management. Basically, the roster is: Google, Apple, Facebook, Oracle, Amazon and Microsoft. Then there are the rich but not that rich: Twitter, Yahoo, LinkedIn and a ton of other tech titans.

So more hot startups are being “forced” down the IPO route. But to be clear, that route is not always a cinch. Indeed, the too-big-to-acquire types sometimes realize that going public as a young company with an unproven business model can lead to heartbreak instead of triumph. Look no further than the cautionary tales of Groupon and Zynga. Both grew quickly, and received high valuations: Groupon was once worth $13 billion; Zynga IPO’d at $7 billion. Groupon spurned a potential $6 billion acquisition by Google four years ago. Today, both have fallen far from their once-soaring values; they certainly aren’t touted as the big successes anymore.

But while there is risk here, surely more startups will reach for big billion-dollar valuations. And indeed, some will still get acquired despite being too big to acquire (TBTA) — perhaps the likes of Uber (valued around $17 billion), Airbnb ($10 billion) or Dropbox ($10 billion)? Those companies, some would argue, are so important — thanks to their high number of users — that there’s no such thing as being too big. Or in other cases, a company may buy them for defensive purposes (e.g., Facebook’s aquisition of Whats App).

But those will be exceptions rather than the norm. And circling back to Zynga and Groupon — and some fear even Twitter, one day — the reality is there is risk for young public companies with ginormous valuations. And so while the days ahead are likely to give us more spectacular new successes, gilded young entrepreneurs and even cultural icons (e.g., the new Apples and Googles), the current billion-dollar boom will also offer a number of cautionary tales and spectacular flameouts as would be Facebooks become disappointed Zyngas and Aribas. Both sides of Greek mythology are about to take off.

*Michael Moe is an investor in OZY.

This OZY encore was originally published July 22, 2014.

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