Why Big Companies Buy Startups

Q:  What are advantages and disadvantages of mergers?

There are a lot of subtle pros and cons and issues, but for most Big Tech Companies, the pro to buying a startup is time and scale:

• Being able to enter a space or category quicker. You can have a platform with customers now, not in the year or two or longer it would take from scratch. And you can acquire team already with domain expertise in the space.
• And if you buy a market leader, to get to scale in a space faster. For example, by buying Sendgrid for $2B+, Twilio was able to overnight also become the #1 email API service. See that story with the CEO of Sendgrid in the video below.

And a practical level, if a BigCo is falling behind due to a competitive thread, these “pros” and even bigger. An acquisition is a chance to catch up, at least potentially, fast. Versus getting left behind.

The cons are real, but not exactly as they seem:

• Most expensive than building yourself. For sure.  But — accounting makes this murkier than you might think. Paying $50m, $100m or even $2000m for a start-up is a lot more that the engineers you’d pay to build a clone. But the thing is, accounting for M&A minimizes a lot of these costs, which can be carried as “goodwill” for many years without impacting earnings. So M&A done right can almost, sort of, be close to free.
• Technical debt and integration issues. You are probably buying a hack, and even if you aren’t, it’s not software build your way.
• Team issues. Why will people stay?

In the end, yes in an ideal world, you build it yourself, with your team, your way.

But if time matters, and scale matters … and/or if the market is passing you buy … you gotta make a play. And buying something is the fastest play out there.