Long-tail acquirers for medium exits


The premise goes something like this: if software is indeed eating the world, then big cos in pretty much every industry are threatened. In reaction, they need to embrace software, and in so doing they face traditional build vs buy decisions. Yet not being software companies themselves, there is more bias towards buy because building is so much more difficult given their lack of core competency in software.
Last year I floated the concept of the acqui-tail, where big cos could start doing acqui-hires of failing startups to start getting some good software talent in-house. In a comment @antrod wrote the following.

I don't think you are right for the following reason: non tech big cos buy little startups on a multiple of earnings. The argument goes something like: they can't be earnings dilutive and we only play 3-5X this year's EBITDA (earnings). Sadly, most of the seed funded stuff doesn't have earnings, or even necessarily revenue. And even the small SaaS companies tend to be barely profitable at the point at which they can't get a series A. 

There might be an exception with the large media companies but the reality of these places is that they a) can't pay and b) have become a lot more sophisticated about understanding valuation metrics (in some cases being more sophisticated than your typical VC).

He may be right, but the same argument could work in the other direction as well. Companies out of acqui-hire stage have a lot of options. Personally I like the option of building a long-term sustainable business because I think it has the highest likelihood of a great founder outcome

Most profitable software companies getting scale have great margins, way above those of big cos not in software. If these big cos start embracing software in a big way, they could open their cash hoards to pay decent multiples of these earnings and produce a long-tail of medium exit opportunities in the process.

I haven't seen this long-tail of medium exits emerge yet. There are a lot of plausible reasons that are not mutually exclusive:
  • Big cos don't know how to acquire software cos. Until it is a general best practice in business in reaction software is eating the world, it will be sporadic, and making a best practice takes time.
  • The financial crisis delayed the ascent by several years.
  • Big cos are scattered everywhere and so buyer/seller relationships form less naturally.
  • Big cos are still gun shy from the late 90s.
  • It is somewhat hidden from view (maybe because being heavy on B2B) and is starting to occur but no one has yet put together the data to show it.
I have noticed some things popping up, like the series of acquisitions Walmart has been doing. They've always embraced technology in their domain though, so maybe that is the kind of company we'd expect to start this trend.

Otherwise, medium software exits seem pretty concentrated in a few software firms, which isn't great for startups. The problem with medium exits is that the acquirer often needs a lot of cash themselves, and we don't see a lot of that since the IPO market had been closed for so long. Now post-IPO LinkedIn and Zynga are starting to act a bit, and pre-IPO Chegg started on the lower-end following huge financing rounds. 

I was in college in the late 90s so didn't have the closest view, but I remember there seemed to be a lot of medium exit non-tech acquirers then. It feels right for a resurgence, but this time work out well way more.

Update: insightful comments on HN.


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