Chris Dixon

Seth Godin left an insightful comment on my post yesterday (“Three types of acquisitions“) describing a type of technology acquisition you might call an “organization momentum” acquisition:

I think the most common form of tech acquisition is a variant of the [business acquisition], in which the acquirer wants to inject forward motion into the organization. It’s far more difficult for a public company to rally around a launch into what might seem like a small sector… it just doesn’t seem worthy of the biggest brains and bravest folks, so it gets shunted aside.

On the other hand, once a smart tech company acquires a smaller company with momentum, it gives the company permission to drive, perfect, polish and grow that business. I’d argue that this what actually happened with YouTube.

The logic underlying organizational momentum acquisitions can be found in Clay Christensen’s disruptive technology theory. Smart CEOs of large companies realize how hard it is to shift internal momentum away from developing sustaining technologies. As a way to avoid this trap, Christensen recommends that large companies set up internal startups that are as organizationally separate as possible. But, as Seth points out, acquiring startups with momentum is another way to get the same result.

There are three types of technology acquisitions:

- Talent. When the acquirer just wants the team (generally just engineers and sometimes designers). As a rule of thumb, these acquisitions are priced at approximately $1M/engineer.

- Tech: When the acquirer wants the technology along with the team. Generally the prices for these acquisitions are significantly higher than talent acquisitions. Sometimes they are even in the hundreds of millions of dollars for fairly small teams (e.g. Siri). The calculation the acquirer uses to price tech acquisitions is usually “buy vs build”. An important component in this calculation is not just the actual cost to build the technology but the opportunity cost of the time it would take them to do so.

- Business: When the company is either bought on a financial basis (the acquisition is “accretive”) or bought based on non-financial but highly defensible assets (Google buying YouTube which had minimal revenue at the time but a huge network of producers and consumers of video).

As large companies mature they move from doing just talent acquisitions to doing talent and tech acquisitions to eventually doing all three types of acquisitions. Usually it takes a startup beating the large company in an important area for the large company to realize the necessity of business acquisitions. For example, Google seemed to dramatically change its attitude when YouTube crushed Google Video. Eventually every large company has a moment like this.

In response to my recent post “Making industries ‘garage ready’ for startups“, venture capitalist Jordan Elpern-Waxman made an interesting comment:

If I understand correctly, “garage-ready” essentially means separating design from manufacturing, i.e. “creativity-intensive” processes from capital-intensive ones. This may be an inevitable result of industry maturation and specialization, but there is a downside to it, at least for the so called “developed” nations. The result of differential costs for commodity labor, the fungibility and liquidity of capital, and the ease of transmitting both human and machine-readable information across arbitrary distances, means that capital-intensive processes – i.e. making things – migrate to locations with lower total cost of operations (which, Germany excepted, tend to be locations with lower labor costs). Another way of saying this is that nothing is fabless; the foundry is merely outsourced and moved to a cheaper location. This reality is great for the creative class and for the lower cost locations, but it’s less happy for the residents of the higher class locations that are not so lucky to be part of the creative class.

I’m not ready to draw the conclusion that this is the cause of the economic inequality in the US and malaise across Europe and Japan, but there definitely appears to be some correlation. Again, I don’t know if these results of the “garagification” of an industry can be reversed or mitigated in the name of societal stability, but if anyone can find a way to do it it would be the creative class. Unfortunately, because techies and entrepreneurs are solidly part of the creative class and perhaps even *the* primary beneficiaries of the separation of design and manufacturing, we generally avoid acknowledging or discussing the negative aspects of this trend.

Note that I said “reversed or mitigated.” Trying to reverse or stop these trends is probably a quixotic goal, but perhaps mitigation is in fact possible. For example, is it possible to create a country in which the entire labor force is “creative”? I myself have trouble seeing how such a possibility could be made real, but I’d like to see more intellectuals and entrepreneurs spend some brainpower on the question.

It is true that new technologies often lead, in the short term, to lower wages and fewer jobs. Craigslist, for example, has about 30 employees yet, by replacing the classified ad industry, eliminated many thousands of jobs (local newspaper reporters, classified ad salespeople, etc). The same could be said for almost every popular website.

On the flip side, new technologies have driven down prices (Walmart and Amazon), led to massive increases in information productivity (Google and Wikipedia), and created new income sources (eBay and Craigslist). Greater productivity and lower prices at least partly compensate for part-time jobs and lower wages.

Jordan is right that these are questions we – the technology community – should spend more time discussing.

Pick whatever metric you want for gauging the success of a particular startup: profits, revenues, pageviews, etc. A graph I’d love to see is those metrics, graphed over time, for a wide variety of startups. From my experience, you’d be surprised how often those graphs show sudden growth. Something happens in the world (an “exogenous shock”) and the startup suddenly takes off.

I remember first observing this when I worked at Bessemer. For example, there was a startup that supplied services to video websites. For years, the company soldiered along, barely growing. Then, suddenly, YouTube blew up and this company took off along with it.

As a founder, these exogenous shocks are out of your control, but you can 1) understand what exogenous shocks you depend on, 2) try to guess when those shocks will hit, 3) manage your runway so you survive long enough for them to hit.

I was once told by an experienced entrepreneur (I can’t remember who) to always have at least 18 months of cash in the bank. The logic behind this is: 1) as a rule of thumb it takes 3 months to raise money, 2) building/marketing/selling technology always takes longer than you think.  Subtracting 3 months for fundraising and 3 months for things taking longer than expected, this gives you 12 months to execute your plan. (Also you never want to raise money “with your back against the wall” – when you are near the end of your runway.)

More adventurous entrepreneurs might argue 18 months is too conservative. It’s true that following the 18 month rule can be extra dilutive. At SiteAdvisor, we raised our Series A about three months before we were acquired. So we gave up equity for cash that we never spent. But in retrospect, given what we knew at the time, I think it was the right decision.

The question of when to raise money is one of the few times that entrepreneurs and early-stage investors have somewhat divergent economic interests. If you control a large investment fund, you always have the option to extend a company’s runway. The entrepreneur doesn’t have this option. I’ve even heard some entrepreneurs whisper about Machiavellian VCs who deliberately try to get you to the end of your runway so they can negotiate harder. I think this is a bit of a conspiracy theory. Almost all VCs I know care primarily about the success of their companies and not about extracting every last point of equity.

One of the most important events in the history of modern computing was the advent of “fabless” (“fabrication-less”) semiconductor companies.  The story of fabless semis is similar to the recent history of internet startups: various forces led to an order-of-magnitude reduction of startup costs, which then led to a surge of innovation.

Before the 1980s, if you wanted to invent a new semiconductor, you had to both design and manufacture it. This meant you had to build a large manufacturing plant, something only large companies like Intel, Motorola, and IBM could afford. Hence, semiconductor design was generally too expensive for venture-backed startups.

In the 1979, two computer scientists published a seminal book that argued for the separation semiconductor design and manufacturing. Followed by years of investment by DARPA and others, an industry emerged where chip designers used software (“EDA software”) to design and test semiconductors, and then sent standardized specifications to “foundries” that did the manufacturing (most of which were located in Taiwan – the largest in the world to this day is Taiwan Semiconductor Manufacturing Company).

This dramatically lowered the cost of starting semiconductor design shops, and in turn led to a massive wave of startup innovation. These startups designed chips for cell phones (Qualcomm), Wifi (Atheros), computer graphics (Nvidia), and much more.  Most were funded by venture capitalists and located in Silicon Valley.

Tech sectors tend to get really creative when they become “garage ready”:  a Steve Jobs and Steve Wozniak, or a Larry Page and Sergey Brin, can, with very little capital, change the world. It happened with semis in the 80s and happened in the 90s and 2000s for internet companies.

Eventually every vertically integrated, capital-intensive sector becomes garage ready. Someday, for example, we will have “fabless” gadget design and biotech research, enabling a small shop in Brooklyn or SoMa to create an iPhone killer or next-generation cancer drug.

Brian Manning put it nicely in a comment to my post yesterday about enterprise software:

In my opinion, enterprise technology is WAY behind consumer technology for one reason: because it can be.

In a [B2B] transaction, one good salesperson (the “seller”) only has to sell one person (the “buyer”) on the value of the technology. Once the product is sold, the buyer forces their 50,000 employees to use that technology whether they like it or not. A good salesperson with a good deck can do this fairly reliably.

And a good account manager can typically retain the client for a while; employees usually get used to the product and rarely complain enough for the buyer to cancel the contract and force the seller to improve the product. As a result, an enterprise product can suck and still flourish.

With a B2C product, this is much, much more difficult. The seller has to sell 50,000 individual “users”, one by one, on the value of the product without the luxury of a face to face meeting or 18 holes on the golf course. The B2C model forces the seller’s product to “sell itself”. As a result, a consumer product can’t suck if it wants to flourish. It has be good. Much better than the enterprise product needs to be.

Fortunately, as I discussed yesterday, trends like cloud-based delivery (aka SaaS) are starting to align the interests of enterprise users and buyers.

Why does most enterprise technology feel like it is a decade behind consumer technology? For the same reason our health care system is broken. The “user” isn’t the same person as the “buyer”. In enterprise software the user is generally a non-IT person but the buyer is usually, at least in part, the IT department.* (In healthcare the “user” is the patient and the “buyer” is the doctor or insurance company).

SAP bought SuccessFactors today, in a big win for “cloud” based enterprise software. The cloud might sound like a buzzword but is in fact a vastly superior architecture, not because it makes installation and updates easier (although that’s good too), but because it starts to remove IT from the purchasing process, meaning the user and the buyer are, increasingly, the same person.

* A corollary to this is that IT-related enterprise software, i.e. infrastructure, is generally pretty good.

I live in a central part of Manhattan and work in more or less the center of the emerging internet district (21st & 6th).  Amazingly, one of our biggest challenges being a NYC startup has been getting reliable internet access. At home I have one option – Time Warner cable – and the service is down frequently (sometimes for days – I’ve set up a backup 3G network it happens so often).  Perry Chen (cofounder/CEO of Kickstarter) lives next door and we share internet and sadly our main topic of email conversation is “Is your internet working?” At work the situation is far worse.  Here’s the description of our experience from my Hunch cofounder Tom Pinckney:

We’re located on 21st between 6th and 5th aves and have had a very difficult time getting reliable internet access for our office. We’re frankly not particularly price sensitive on this given how critical fast low-latency access is for our programmers. When our internet access is down our programmers cannot be productive and our site can’t be monitored — we’re helpless and twiddling our thumbs. Every hour of no internet access is about $1,000 of wasted salary across all of our employees.

We’ve tried wireless WiMax from TowerStream, ethernet-over-copper from Megapath, T1s from Verizon, DSL from Verizon and cable modem access from Time Warner Business Services. Verizon Fios is not available. Verizon and Megapath could literally never get working lines installed for our building despite months of effort. The WiMax service suffered high latency and weather outages every time it rained hard. The Time Warner cable modem service has gone weeks with hour or two outages per day.

By my last count, there are 5 internet startups on our block alone. The situation is so bad someone set up a Twitter account so we could all go to our iPhones and lament whenever the internet is down.

It’s embarrassing how bad internet access in Manhattan is.  As a side note, I think it undermines the arguments by people who claim there is actual broadband choice (e.g. regarding the net neutrality debate).

I remember back when I started my first company, a friend said to me “get ready to have a knot in your stomach and feel nauseous for years.”  I laughed it off then, but it was probably the most accurate advice I’ve ever gotten.

I haven’t slept well for years. Even now with my last startup sold, I stay up at night thinking about how to change the website, make payroll, raise more money, etc.

In 1995, I was a graduate student studying philosophy at Columbia.  I was also doing computer programming on the side.  The programming was going well and I was getting some good job offers. I happened to get to have dinner with the philosopher Daniel Dennett, and I asked him what he thought I should do with my career.  He said: “If there is absolutely no way you can imagine being happy except studying philosophy, study philosophy. Otherwise do something else.”

I’d say the same thing about starting companies.