That's exactly my point. Silicon Valley rewards "go big or go bust", it doesn't reward "small, sustainable business".
I don't for a second blame the founders of Mailbox for doing what they did. When the market creates a strong set of incentives like this you can't really expect anyone to do anything other than take the $100m. But this is the side-effect.
VC is generally designed for big bets and big payoffs (invest in 10 risky bets in the hope that 1 pays off to cover your losses on the other 9). Less risky ventures with smaller payoffs take longer to grow, and don't satisfy the payoff requirements of the VC model.
That doesn't mean they're bad companies, but there's definitely a funding gap for the type of company that will require $3M in investment up front and be worth $10M in 5 years. That's still a great return, but right now it's the domain of private equity.
VCs themselves aren't the problem. Big bets are fine. The problem is acquihiring. It's:
- good for founders - they get a big fat paycheck and a chance for a job in a big company
- good for VCs - a payoff, even if small, is better than no payoff at all, so they want their 9 not-so-good startups to be bought
- good for the buying company - they can literally just kill the competition by throwing money at them, + they get some proven and experienced employees, which may be worth it given the unreliability of the standard hiring process
Care to guess who this deal is not good for?
Startups are (and are being heavily marketed as) a get-rich-quick scheme. Most of the people involved are self-selected to follow this process. And all this talk about providing value to the users? That's the part of the scheme where you get used.
This may be a contrarian view, but: I'm not convinced it's good for the buying company. Good engineers are hard to find, but this is an awfully expensive way to hire; you may not keep the good people for very long; and if you're the kind of company that has a really hard time hiring good people, you may not also be very good at getting engagement and productivity out of the people you acquihired.
My view on acquihires is that to some extent it's a trick the acquiring company plays on itself. Some manager is getting to hire a few good people using money (the acquisitions budget) they wouldn't otherwise have access to.
Acquihires are more about hiring functioning teams composed of engineers and executives who are used to working with each other. That's a lot more expensive to build than just the salaries; and you can generally take that team and throw them at a problem with a reasonable expectation they'll accomplish something.
Also, there's generally some amount of IP and customer data involved as well.
"you can generally take that team and throw them at a problem with a reasonable expectation they'll accomplish something"
For about 6 months to a year, after which time most of them have left, or have gone into "waiting for the golden handcuffs to come off" zombie-worker mode on a project they have no inherent interest in.
Totally anecdotal but the couple of acquihires I've seen from the inside have gone like this and it seems to be the natural state of them based on what I've heard second-hand from others.
I agree with this based on the 20 or so people I've known to go through this process to join a large company (amazon, google, etc). I've heard first-hand accounts of people even re-negotiating deals just to get out of the golden handcuffs they thought they could tolerate but couldn't. I understand this sounds a bit hoaky and I would love to give names and companies here, but obviously can't.
Agreed; they tend not to be great deals for the acquiring companies long-term. But short term you can rally that team to build something else, and your likelihood of finding the mythical 10x developer (or manager) is statistically higher in a startup that successfully launched a product in a compressed time frame (even if the market didn't work out for them).
Any acquisition involves a lot of turnover. Guaranteed that this turnover is built into the models they use when evaluating acquihires. Consider how expensive most company's talent acquisition costs are though (upwards of $100k+ per candidate hired for top talent) and it starts to make sense.
VCs are totally the problem here. It's not that VCs are bad people who want to screw over users, but their business model requires them to get payback on their bets, even if it's small. It can be hard to know up front if an idea is viable as a hockey-stick software company or if customer acquisition is much, much harder - often because you don't know who your target customer will be specifically until you've iterated a few times.
And many times, there's no other exit option for the VCs. Does it suck for users? Absolutely - which is why companies often have lots of apprehension about being early adopters of a startup's technology. It's why B2B startups are really hard, and why they tend not to hockey-stick because the customer acquisition costs are high and don't shrink with scale.
It's up to the founders to convince their VCs to pass on the acquihire because they think the company still has hockey-stick potential. Zuckerberg did this a number of times - it was still really arrogant, but it paid off for Facebook and shows why founders need a bit of arrogance to be successful. It's a lot harder to do this if you're running a startup that doesn't have a lot of market traction.
I think most VCs would rather see the company stick it out and go for the hockey-stick & IPO. An acquihire is a blip on their returns; it's basically worthless. They're usually arranged as a courtesy to founders, so that if you work your butt off for 3 years, do everything right, and still don't find success, you don't leave with hard feelings toward the other people you worked with.
You get acquihires when the assumptions behind the company's business model have been proven false and there's basically no way to solve it other than rebooting the company. Arguably this is an argument to not take VC until you've got the hockey-stick trajectory, so you can pivot & reboot at will without dissolving an existing organization. But even this sucks for customers, if you have any.
>VCs are totally the problem here. It's not that VCs are bad people who want to screw over users, but their business model requires them to get payback on their bets, even if it's small.
Doesn't that make them bad though? I mean it's like saying "It's not that the mafia are bad people who want to screw over people, but their business model requires them to blackmail and occasionally kill" (not comparing levels of "badness" of course, merely showing the problem in said reasoning).
It's not like following a particular "business model" is not a decision people get to make. And if people take the VC model that favours acquihires, then they very much have decided to do stuff that screws with users.
Another thing that should be mentioned is that most VC's have a close relationship with bigger tech companies. Its a way to move money out of the public markets and back into private. There are multiple implications with this type of behavior.
But this totally negates your point about "there isn't enough money in an email app". Clearly Dropbox thought there was at least a $100MM opportunity...either talent to produce $100MM+ in value, customers to convert into $100MM+ value, or staving off competition that would result in $100MM in potential loss.
> "Clearly Dropbox thought there was at least a $100MM opportunity"
The opportunity was the team, not the product they were producing.
Say you had a room full of math prodigies, but all they were doing was watching TV all day. You hire these math prodigies for $X and put them to work solving math problems - this doesn't mean that watching TV is worth $X, in fact it likely means the opposite, that their value is underutilized by whatever they're doing right now.
So there isn't enough money in making email apps, but a team capable of producing a great email app can be put to use doing things that do make a lot of money - but it sure isn't making email apps.
And that's unfortunate, because as users we're missing out on a lot of great products. The dark side of the immense growth in software (and immense growth in software salaries) is that entire products and services are no longer economical, even though we'd all love to see them. The VC system that drives these early acquisitions and acquihires is just one more factor among many that limit the field of what can be economically produced.
Yeah but that's ridiculous, they had only 13 employees that's 7.6MM per employee over the span of 2.5 years, some of them I'm sure they left already... You tell me when this starts making sense because it just doesn't right now.
Too much money! I don't care how big of a genius you are you're not worth that as a developer of an email client, and honestly to write an Email client is not genius level shit. The UI was dope, and their invite process was funny, that's all.
Looks like Dropbox fucked up, that's all, bad business decision, trying to copy Google and do better than them in the end they did the same.
The deal was stock and cash, so it is pretty much impossible to judge how good a deal this was for Dropbox[1]. Stock is a very cheap way for a company to acquire another.
Except since it is the company issuing stock in itself you can't really think of it as fungible. If it ends up being worth more than the strike price then literally one of the events that led to that price was the purchase stock being issued. Of course that doesn't mean the is a causal link, but in a very real sense the stock was free for the company itself.
"in a very real sense the stock was free for the company itself"
Stock always has value, especially to management.
Unless the company has poor self-esteem. :)
The reason so many technology companies today make acquisitions using stock is because they (correctly) understand their stock to be inflated, relative to intrinsic value. If that were not the case, if they understood their stock to be undervalued, then they would definitely not be giving it away in transactions. They would be making all-cash offers instead.
> " I don't care how big of a genius you are you're not worth that as a developer of an email client, and honestly to write an Email client is not genius level shit. The UI was dope"
But that's the key isn't it? I think you're looking at this from too narrow a point of view.
Yeah, email clients aren't worth much money, so its development isn't worth much either (when's the last time anyone you know paid for an email client?).
The point isn't to acquire a "developer of email clients" it's to acquire a "developer of top-of-class mobile apps", which is considerably valuable. Think of the average quality of a mobile app you use on your phone, the bar is pretty low. Producing truly amazing mobile apps (like you said, the UI was dope) is hard, and requires the flawless, cohesive operation of a lot of facets from engineering to UX design.
Truly excellent mobile teams are very rare, and worth a lot of money. To the tune of $7.6MM over 2 years? Beats me, but it doesn't seem completely out of the question.
Talented developers are worth a lot of money - teams of talented developers, designers, and product people who have a track record of producing stellar work together are worth a multiple of their individual values.
> " and honestly to write an Email client is not genius level shit."
It's not genius level shit, but it's a surprisingly rare skill, and by that I mean writing very, very good frontends. Most people here can write a functional email client if they had to, but how many of them can write a really fucking good one, so good and so easy to use that people - and not just the technorati - sing its praises from the rooftops and get their friends and family to download it?
The Mailbox team was operating at a level well above nearly all mobile app teams, and the quality of their work was easily an order of magnitude better than the industry norm of its time. This may not justify their acquisition price, but I think you're selling them short a bit. They're a team of people known for exceptional quality work, and command a high price for it.
I'm sure some of them are still there, however. They shutdown the product and put the team members to work elsewhere. So it could be prorated over a longer period depending on the acquisition deal.
Dropbox could have thought that and just been wrong. Even in the normal economy, per The Economist about half of all acquisitions destroy value. In our little hothouse, I'd expect a much larger percentage of value-destroying takeovers.
But there are plenty of other reasons deals get done than a company-wide coherent calculation of economic value. E.g., I've heard of acquisitions happening because a CEO needs to demonstrate to the board that they're doing something. Or incentive structures set up to reward an M&A team based on how many deals they do. Or executives wanting to bring in their old buddies from another company. Or, "gosh, money is so cheap right now we'd better spend it because our competitors are spending."
It's pretty clear that Dropbox valued Mailbox for its potential to be something other than the standalone email app it was. And you might be right - there might well be enough talent on the Mailbox team to produce $100M+ in value - but not making a standalone email app.
If we're being ultimately generous with Dropbox then what they are doing is exactly correct - taking a team that can create a $100M+ product and reassigning them somewhere that they can fulfill that potential. But that's of scant consolation to all the people that want to continue using the email app.
