A new liquidity event

Fred Wilson has an important post today arguing that we need a new way to find liquidity in innovative startups. The IPO market is over. Big companies buying new companies usually just ruin them. Big companies buying big companies — MyMicroYaAOlSpace — only makes it worse. My response:

I think there’s a new opportunity to buy up good startups without even trying to integrate them: the unsynergy corp.

AOL has ruined everything from Netscape to Moviefone to ICQ to Mapquest to Tacoda Being bought by bigco is a disaster for an application’s users and fans; the only reason it is done is liquidity for the founders and investors.

If I were, say, Carlyle today, I’d raise a fund to buy up and manage — but not synergize — some of the best applications and startups out there. I’d give them decent management and shared services (a la a later stage Idealab, I suppose) but let them still operate independently and entrepreneurially. I also wouldn’t want to buy 100 percent of the equity; the founders should stay and have earnouts that motivate them to improve their products, give them the control necessary to do so, and still let them and their investors cash out.

What I’m really proposing, then, is networks over corporations. If small is the new big — but, as Mark Potts said at my conference, “If you want to be small, you probably have to be part of something big” — then we need a new definition of big with all the benefits and none of the stupid corporate ruination.

Deeper in the comments — and a very good discussion there — Subhankar Ray says this is what Berkshire Hathaway has done for years. Good point. We need the hip version. Commenter Ambrosini adds:

What Jeff describes does seem like the obvious next phase of tech “growth/later-stage” funds, especially as vc/pe firms are looking to more money to work. As Fred mentioned, it seemed this was where Velocity was headed (which didn’t really happen).

This strategy extends to many of the types of deals that are probably viewed as successful as well. At the time of its acquisition, Myspace HAD to get acquired by someone like News Corp. because the company and its backers–Redpoint–couldn’t fund its huge and growing cost structure. Was Myspace worth more than $150mm (remember it was Intermix that sold for $580mm…Myspace was just a piece of that overall deal)??? In hindsight it would obviously seem so, but without News Corp. coming in with its big balance sheet the cost of business would have killed growth and Myspace would not be Myspace as we know it today.

However, a Carlyle-funded late-stage Idealab would have been a great buyer/investor. Redpoint gets a good return on its earlier stage/higher risk investment, and Carlyle funds/grows Myspace into a fast growing, highly profitable business. The story would be the same for Youtube and many other top start-ups. . . .

  • http://smoothspan.wordpress.com/ Bob Warfield

    Now that is serendipity. I read your other post about MicroHoo, put it together with Fred’s post on liquidity, and got to wondering, What if Moore’s Chasm has Moved?:

    http://smoothspan.wordpress.com/2008/04/10/what-if-the-chasm-has-only-moved/

    Then I thought about it some more and wrote Entrepreneurs Need a Portfolio Effect Too:

    http://smoothspan.wordpress.com/2008/04/10/entrepreneurs-need-a-portfolio-effect-too/

    In it, I comment that there are no Johnson and Johnson decentralized conglomerates in Tech, with the possible exception of Cisco. Strangely reminiscent of this excellent post!

    Cheers,

    BW

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  • Steve Hochschild

    The best match for this notion might be the CML Group, which was founded on the premise of buying small companies and letting them continue to be managed by their founders. Boston Whaler, NordicTrak, Nature Company, Carroll Reed, Smith & Hawken, Kelty packs, and Ted Hood Sails were but some of their acquisitions.

    There was a business school case on this that used the name The Leisure Group, and I seem to remember that the founder was a HBS professor. They eventually got attacked by a corporate raider, but even before that, they became so big that new acquisitions of small start-ups were no longer material to the results, which messed up their model.

    All of this was decades ago, so I might have some of the info wrong, but my point is that this is a good concept that has been proven to be good…

    Thanks for the blog!

  • roger rainey

    SilverLake not Carlyle.

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