When to Head for the Exit … or Not

Mike Peña, Stanford University October 13, 2014

Whether it’s Yahoo! buying Alibaba, or Google gobbling up Nest and Skybox Imaging, the acquisition of startups by tech giants are no longer just fodder for the business section. In today’s screen-lived age, they are increasingly the top news stories of the day.

But while entrepreneurship in the tech sector can sometimes seem like a race to cash in from the moment a startup is founded — OK, for some, that’s exactly what it is — acquisition isn’t always the goal. When corporate giants snatch up smaller competitors just to show growth, it hasn’t always worked out well. And when founders allow their startup to get acquired simply for a profit, it can mean the end of a venture that might have otherwise been able to make a truly lasting impact on the world.

In short, acquisitions have to be strategic for parties on both sides of the negotiations. Here, Padmasree Warrior, chief technology and strategy officer for Cisco, lays out her company’s rigorous and structured approach to mergers and acquisitions. According to Warrior, Cisco’s acquisitions fall into one of three categories: tech and talent purchases, acquisitions that fill strategic gaps with growth potential, and large, complex platform acquisitions that immediately raise revenue.

For the startup being courted, the entrepreneurs behind it also face some tough questions. Although it may be hard to imagine it now, Yelp was once a scrappy upstart — rather than the modern-day Better Business Bureau it has essentially become. In the following clip, Geoff Donaker, the increasingly popular review site’s chief operating officer, talks about the company’s early decisions to turn down lucrative acquisition offers pre-IPO.
While selling would’ve benefited Yelp’s founders and early investors, Donaker says it was unclear at the time what the effect would have been for the rest of Yelp’s employees and growing user community. What is clear now is that the company made the right choice.

What still has some people scratching their heads is the bold decision by Snapchat’s founders to walk away from Facebook’s $3 billion all-cash offer in late 2013. In the ensuing weeks, mashable published an article in which the messaging service’s CEO Evan Spiegel explained that he and his fellow cofounders sensed desperation when Facebook CEO Mark Zuckerberg flew out out for repeated face-to-face meetings to convince them to sell out.

“There are very few people in the world who get to build a business like this,” Evan Spiegel told Forbes for its cover story on him. “I think trading that for some short-term gain isn’t very interesting.”

While some may still question Snapchat’s move, a startup assessing its own market value by seeing how much others would be willing to acquire it is not new. Here, Ed Catmull, president and cofounder of Pixar Animation Studios, recalls how the late Steve Jobs would enter into talks with other companies about selling Pixar as a tactic to determine its market worth.

And Jobs, who also co-founded Pixar and was its chief executive officer, was testing the waters at a time when the movie studio was still in startup mode and struggling financially, according to Catmull.