The week of February 17, 2014 was notable for the eye-popping occurrence of the Facebook - WhatsApp deal. That a technology startup, which achieved a user base of 450 million through its private messenger service in just three years, could garner a deal value of USD 19 billion is certainly amazing. Yet, Mark Zuckerberg, the Founder-CEO of Facebook went on record to say that WhatsApp was worth much more. Analysts say that the acquisition was a reasoned attempt by Facebook to stay relevant to the younger generation which has part moved away from its infatuation with Facebook and part is taken in by the exclusivity, privacy and snappiness of WhatsApp. While the Facebook - WhatsApp deal has attracted huge interest, one cannot overlook certain other past technology deals of similar eye-popping nature of their times. The deals, in fact, are indicative of an interesting dimension of the technology companies – despite their rapidly ramped up scales and large market capitalizations they remain respectful of the value the technologically savvy startups can bring to the future businesses.
The more prominent of the past technology deal history has been the Google - YouTube deal. When Google acquired YouTube in October 2006 at a deal value of USD 1.65 billion, many thought that it was a risky foray by Google into a disorganized and often self-compelling online video streaming service. Yet, YouTube has emerged to be one of the most successful technology acquisitions ever, and probably the most notable amongst all of Google products, aside of the core Google search engine product. Equally important but not so well known has been Google’s acquisition of the Android mobile operating system startup in August 2005 for an undisclosed sum. Android has since raced, under Google, to become the most dominant mobile operating system, overtaking iOS of Apple. Other notable deals are Microsoft - Hotmail (December 1997, USD 500 million), Microsoft - Skype (May 2011, USD 8.5 billion), Google - Instagram (April 2012, USD 1 billion) and Yahoo - Tumblr (August 2013, USD 1.1 billion) acquisitions, each with its compelling logic. These deals, which are only a few of the several scores of the deals that have happened, and which will no doubt be followed by several others of such unique nature, signify certain important lessons for corporate sustainability.
Technology bets as game changers
Many of such amazing acquisitions are seen to be bets placed by the acquirers on promising startup technologies and rapidly revving up businesses. When such technologies succeed in shaping new user functionalities and behaviors, more especially and more strongly under financially stronger acquirers, they become truly game changing, as technologies themselves, and for the acquirers’ businesses. While they seem to be technology bets, they actually signify a wise appreciation by the larger acquiring firms of the futility of trying to organically emulate the successful startups against a background of the need for such new technological functionalities. When a technology ceases to be a futuristic bet and instead becomes a business booster is a case by case occurrence.
From a strategy perspective, acquisition of such promising niche technologies and businesses is validated by the superior performance of such acquired entities and acquiring firms, post such acquisitions. All these acquisitions point to such technology bets becoming game changers. Some of these have been huge bets in a technological sense (technology was not yet proven but the acquirer placed the bet with financial ease) while some have been huge bets in a financial sense (technology was well proven but the acquirer placed rather high financial bid). In the former category we have Google’s acquisition of an unproven Android at a relatively low price while in the latter case we have Facebook’s acquisition of the popular WhatsApp at a very hefty price tag. It is also interesting that in most cases, the branding of the acquired entities continued to be maintained indicating that niche technologies have their market followings and brand equities.
Breakthrough ideas are non-linear
Conventional strategies tend to be anchored around linear development of technologies and businesses. For example, if email was successful in the 1990s as a popular niche technology of instant communication, all subsequent efforts focused on making the email more powerful and more collaborative, for example an Outlook version. If Facebook wove an expanding open social community, Google+ attempted to build multiple circles of communities. Successful technologies tend to be non-linear, however. Twitter achieved success with the 140 character instantaneous brevity of messaging. WhatsApp achieved success through texting service that is both free and private. Both also built rapidly expanding communities of users. A motor pump can be continuously improved for performance and power consumption, including multi-stage draw of water and graded power consumption. A water submersible pump, however, is a breakthrough technological idea. A laptop battery charger can be continuously improved for the charging efficiency, power consumption and form factor. A technology which draws back the laptop’s heat and recharges the battery would be a niche technology.
Sometimes non-linear ideas have their roots in the basic and oft forgotten natural configurations. Most of the Internet firms and search engine firms are dependent on vast server farms, established on vast tracts of land. Tesla’s electric car revolution would hinge on a massive battery factory ("giga factory”) with adjacent solar and wind farms, making Tesla as much a huge power storage company as a premium electric vehicle company. In future, just as Sun provides free solar power as nature’s gift to the mankind, manmade satellites may be designed and launched to provide wifi connectivity all over the world. Technologists and business persons may, in future, learn more from nature with inventiveness, and offer new public services with affordability and humility. Conventionally, technologies have tended to influence new user lifestyles. Non-linear technologies would increasingly tend to align with human body as well as nature to develop game changing products and services. Newer technologies would follow human thoughts and physical capabilities to invent new niche products that could improve human life and environmental management in an almost limitless manner.
Technological efficiency, financial sufficiency
Embracing a niche idea to serve life or nature, converting the idea to a product using new or existing technology and influencing customers to use them is often in the capability of technology-driven startup firms. Large firms have the ability to innovate new products in a linear fashion, for example from simple Positron Emission Tomography (PET) to PET combined with Computed Tomography (CT) or with Magnetic Resonance Imaging (MRI). In each combination, the number of slices could increase across generations of equipment (say, from 64 to 360) or the efficiency of 3 D imaging could be enhanced. These developments are best done by the medical equipment giants such as GE, Philips and Hitachi. However, the very basis of PET in the past had been university level researches in the late 1950s (University of Pennsylvania, Washington University School of Medicine, Massachusetts General Hospital and Brookhaven National Laboratory, for example).
Futuristic radical biomedical technologies in this domain could be non-linear. Nuclear medicine and imaging studies require a radio-isotope tracer (or, a radio pharmaceutical) being injected into the blood stream for imaging. If there were to be new technologies that make a constituent of the blood itself or the blood volume and flow rate themselves descriptors of the imaging study, there could emerge a totally new generation of non-interventionist, bio-friendly non-nuclear medical diagnostic equipment. Newer, non-linear technologies in any domain make for efficiency. However, technological efficiency requires financial sufficiency to germinate and grow. As seen by the PET example, public funding of such universities and research grants made such technological innovation possible. However, firms which licensed the technologies had the financial capability to mass-produce the products and also achieve increasing levels of technological efficiency in such equipment. In a technologically virtuous world, there would be far more number of technology ideas than individual funding opportunities. The academic, industrial and business ecosystems must evolve in a manner of combining technological efficiency and financial sufficiency.
From startup to ramp-up, from passion to fusion
The above discussion brings us back to the examples that were reviewed at the beginning of this blog post. Successful startups have technological efficiency but they need financial solvency to validate their entrepreneurial theorems and ramp up their business models. While the examples quoted in this post are dramatic indicators of the practice and potential in the technology space, routinely hundreds of decrepit as well as robust startups get acquired or co-share and license their technologies to enable the growth of startups. It is a virtuous even if occasionally chaotic and brazenly capitalistic world as technological efficiency and financial sufficiency seek the synergy of each other. The point at which the synergistic marriage gets made in each case is a matter of considered judgment and reasoned risk-taking. Despite the virtuosity of this equation, many times lack of introspective ability on the part of the brilliant startups and the lack of prospective ability on the part of the financial behemoths act to derail the virtuous process.
Not to be outdone, big firms do try to set up mini-laboratories, incubators and venture teams to bring some of the startup innovation organically into their behemoth structures. However, behemoths tend to be more adept at scaling up product lines and businesses rapidly rather than patiently nurturing potential ideas and products. External startups would continue to be the most important resource for innovation and new business. The inventiveness and passion of the technologists and entrepreneurs would continue to be responsible for converting new ideas into innovative products and then onto scalable businesses. When inventiveness would mature into practicality and passion would accept fusion on the part of startups, and when institutional solidity would get flexed by respect for external technologies and clinical analytics would get overruled by futuristic visions on the part of corporate majors are the vital time-points of intersection for the startups and the acquiring firms, respectively. The equation of adding technological efficiency and financial solvency for sustainable growth delivers maximum value when the timing is right, and mutual competencies are well-understood, well-respected and well-supported in the pre- and post-acquisition scenarios.
Posted by Dr CB Rao on March 2, 2014