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Top VCs Predict Where They'll Invest Their Money In 2014 - Forbes

What types of companies will prove the next investment feeding grounds and what’s gotten overhyped? Will 2014 continue the trend of large, even  inflated valuations for young private tech companies while the mature ones look to go public?

FORBES asked some leading venture capitalists those very questions, from Silicon Valley to London. The predictions below come from a mix of established long-time Midas List staples with big wins to their names as well as those fresh to last year’s list of the world’s top tech investors. Their thoughts have been organized across three major themes–market trends and predictions for both consumer and enterprise tech–but it’s worth noting several recurring views.

 

When it comes to increased valuations for private companies and the allure of the IPO, the investors agreed that they’re paying more to participate in funding rounds right now–what one VC said is a 15% to 20% premium due to a frothy market. But given the nature of their business, investors aren’t simply going to stop considering new startups or maintaining their positions in their portfolios, instead being just a bit more careful in when to write a check. The opposite holds true for founders, as multiple investors said they’re advising entrepreneurs to raise whatever millions they need while the conditions are so favorable.

And the top area for growth mentioned across either consumer or enterprise tech was security–be it for mobile data, social media accounts or the cloud. Several reasons for security’s boost in 2014 are below, but the basic gist: more people are working more with more mobile devices, which is great for productivity and a nightmare for data protection. And corporate concerns post the Edward Snowden revelations don’t hurt.

Other views include bear and bull takes on e-commerce and education tech, opportunity working with financial services, plus one bold prediction that Apple is primed to make a major move.

 

Todd Chaffee, IVP: The valuations will continue to climb and the IPO party will continue. At some stage of the game, we will have a huge unforeseen market correction come, a black swan event, that nobody sees coming, and we will have a massive correction. For us, it’s a very cautionary environment for us when valuations continue to part from fundamentals. We go, ‘Careful, we’ve been to this movie before.’

Raising money right now is absolutely what you should do as an entrepreneur and not what to do as a VC. For us right now, we are in the art of paying up. Even though the markets are frothy, there is still incredible innovation.

Mike Maples, Floodgate: Next year is likely going to be another acceleration in year. In years like that, more funds get raised and more investments happen. There’s going to be a lot more heat across the board. Some of that won’t be so good. We are headed to a crescendo, and I get nervous about it every day.

Scott Sandell, NEA: I think the industry overall is in a really healthy spot. We contracted significantly after the global crisis to 1996 funding levels. Going into 2014, I don’t expect money to rush back into the venture business. On the other hand, I see a continued rise of investment from the angel side. It’s now about 20 billion, and that’s great for venture for the most part.

I do think we are seeing a change in the IPO market in the last month or so. There have been a few IPOs that got pulled. Now until they file they can go through the process confidentiality. We’ve seen that happen a few times, so we know the market has cooled a little bit. My guess is there will be 1 or 2 of those next year [of IPOs from Airbnb, Box, Dropbox, and Uber].

Are we in a bubble? I think the answer is no, we are not. We are in a tremendous time of change and growth, highly valued by the public market.

Richard Wong, Accel: We are cautiously optimistic that 2014 will continue to be a big year both in the public markets and as the potential for IPO drives the M+A [mergers and acquisitions] market. The other leading indicator is that the quality level has stayed high. There’s a dynamic [sometimes] where when you see companies going public, lesser quality goes public. That has the impact of eventually shutting down the market. These [current] companies have great fundamentals.


Consumer tech

Michael Abbott, KPCB: Wearable devices will rule. [This] extends from the meme of hardware is going through its own revolution like software has done (and is doing). Ephemeral content will rule. Secure messaging will continue to thrive as a result. Who wants certain content to live forever online? But passwords will die. How many passwords do you have? Are they strong enough?
Todd Chaffee, IVP: If I have a general theme across the board, it’s about market dominance for the key players. Facebook will continue to be the dominant social network, and Twitter the dominant information network, and LinkedIn the business network. Who is the second place to eBay? You don’t know. Once you have a marketplace, there’s the network effect. In the world of messaging, I think Snapchat and Instagram will continue to grow dramatically. The younger crowd, that’s what they use.

But I also think YouTube will continue to become even more powerful as a player in the network and media world. The sleeper out there is SoundCloud. I think it will grow in its dominance and be the YouTube of sound. It just seems like where we are at a point where a lot of these new things emerged and now it’s time for the big player to take over.

Jeremy Levine, BVP: My bear pick is ecommerce. Amazon is on the warpath, it’s going to steamroll everybody. The exception appears to be Zulily [which went public in November], and I can’t figure that one out. I think somehow they found a way to beat the Amazon pricing bots, but long term I would not bet against the Amazon pricing bots.

Mike Maples, Floodgate: The smartphone is not just the next generation of computing, it’s as liberating as the car was. That’s become the way that teenagers and people activate their freedom seeking. If you take that as a premise, it leads you down some interesting paths. What does it mean for the car industry if people don’t want cars? What does it mean for the sharing economy? What happens in the world with how often I use my tools in my garage? Will a drone come to my yard and I pop them back in and call for the drone when I need those tools? With applications like Uber and Lyft, there’s a wow factor and experience that couldn’t exist before mobile.

I think e-learning is still very compelling but very, very crowded. Companies involved with e-learning will struggle unless they have a truly disruptive idea and a structural advantage.

Scott Sandell, NEA: Educational technology will reach the mainstream in 2014. It’s a sector that’s had a lot of lingering attention but there’s been question whether these are businesses. We see 12 startups in one way or another helping to reshape education. I think they will be sizable businesses. It will take a couple of years before the real winners are determined.


Enterprise tech

Asheem Chandna, Greylock: People are trying to access information from mobile devices and the devices have grown in prevalence. That data is leaving the [person’s] corporation and going beyond the firewall. And as more data goes to cloud infrastructure outside the firewall, data that was previously secured on servers has crossed over.

There are four areas in security where I think solutions will come from and profits be made: 1) On the mobility side, you will see existing mobile device vendors and others providing services on mobile, you will see solutions come to market next year and the following year. 2) Insecure clouds on the cloud side: You will see cloud vendors differentiating themselves. 3) Firewall vendors are also going to add to that capability, as data moves through the firewalls. You will see increasing control of SaaS applications and data leakage. You will see firewall vendors evolve these capabilities. 4) What Gartner is calling CASB. Cloud Access Security Brokers, a new category of vendors for corporate data and cloud.

The whole [Edward] Snowden incident from 2013 has heightened this issue for companies. And also many international companies want to be closer to the data, those in Europe in particular. That’s added fuel. This issue is important across large corporations, but it’s heightened in regulated industries like healthcare and financial services.

Jeff Jordan, Andreessen Horowitz: Technology is poised to disrupt the massive global financial services industry. Following the recent credit crisis, banks are becoming more risk adverse and more highly regulated. Also–Internet competitors have key advantages relative to traditional banks including lower operating costs and incremental online “signals” to inform credit decisions… We expect this activity to increase dramatically!

Jeremy Levine, BVP: I’m excited about really small businesses entering the world of software-buying companies. A lot of the software will end up being vertical specific, the yoga studio, hair salon, or fitness club. It’s specific to the category, mapped to the business. It’s a growth opportunity as opposed to a substitution opportunity–these businesses are so small they couldn’t afford this software before. Silicon Valley is supposed to be anti these businesses, because these companies aren’t billion dollar opportunities on their own.

Peter Levine, Andreessen Horowitz: What we’re seeing in the new data centers of today’s tech leaders—e.g. Facebook, Google and Amazon—is a dramatic departure from the old. No longer do applications require virtualized or carved-out, proprietary, monolithic servers. Instead of division, new and future applications will require infrastructures that aggregate or bundle together cheap, commodity parts to achieve incredible scale and processing power, efficiently and economically. And the ultimate the coup de grace will be an operating system for cloud infrastructures that basically converts your data center into one giant supercomputer.

Mike Maples, Floodgate: Security I think is obvious. The world of the Internet is a more dangerous world. The bad guys have been investing in technologies that make them more capable in a decade. There’s a lot of vulnerability. If you combine that with the mobile cloud breaking everything, all the existing security companies have big holes in them. We see lots of startups pursuing this who may take off.

If you think about traditional perimeter security, it doesn’t really make sense. You need a solution that keeps an individual’s private life private, and at the same time allows a user to protect that user. It’s very early and there are a couple other startups in the space. My guess is that over the next 24 months, there are 2-4 well-funded high quality teams.

Richard Wong, Accel: I could see a major acquisition by AOL, Yahoo or Microsoft coming, but add Apple to the conversation. They bought the number two player, Quattro, in 2010. That formed the basis of iAd today. But if you asked around developers, they’d say iAd is not a player for making money or acquiring users at scale. Apple obviously has a lot of market cap to work with. It’s strategically important that they get this right. It’s going to be really important for Apple and iAd to get better and make money.

 

And a bonus international view:

Harry Nelis, Accel: What you’ve seen in the last five years is many consumer-oriented investments, including in the United States. I think the pendulum is now swinging back to enterprise-oriented investments, which means there’s a slight shift in the emphasis geographically. Israel, which used to have opportunities that were a bit more subdued, is now really interesting again with all kinds of opportunities on the enterprise side.

One area that is specific to Europe and the United Kingdom is new disruptive financial services for consumers and businesses. These guys are faster and better at underwriting small business loans for banks. It’s taking off for a combination of reasons: 1) London is the financial center of Europe so there are a lot of people with the expertise. 2) U.K. banks have been hard-hit in the financial crisis. 3) The regulatory environment in the U.K. is a bit more conducive to these startups than in the environment in continental Europe or in the U.S., where to target consumers you have to be licensed in all states.


Via Linda Holroyd
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Linda Holroyd's curator insight, January 2, 2014 12:35 PM

Asheem Chandna from Greylock: 

1) Existing mobile device vendors and others providing security services on mobile

2) Differentiation of cloud vendors

3) firewall vendors and others Increasing control of SaaS applications and data leakage

4) Cloud Access Security Brokers 

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Maybe Snapchat is crazy to turn down $3B, but was Facebook nuts to offer it?

Maybe Snapchat is crazy to turn down $3B, but was Facebook nuts to offer it? | M&A and Innovation | Scoop.it

Apparently for Facebook FB +0.66%, $3 billion is the new $1 billion. With reports that the social-networking giant tried to buy upstart Snapchat for 3 times what it paid just last year for Instagram, it’s clear CEO Mark Zuckerberg believes that if you can’t beat them, buy them. But while most of the incredulous reactions to yesterday’s news about the proposed acquisition centered around Snapchat’s willingness to walk away from the deal, less was said about the fact that Facebook was ready to pay more than the market cap of the Cheesecake Factory for a 2-year-old app that until recently was best known for its use in sexting. Has Zuckerberg gone completely mad? On the contrary, his designs on Snapchat were borne of the same healthy dose of fear that led him to buy Instagram last year. Intel's INTC -0.79% Andy Grove famously said, “Only the paranoid survive” and Zuckerberg seems to be worried about every would-be claimant to his throne.


What Zuckerberg gets is that Facebook’s position at the apex of social networking is under constant attack. The power of Instagram was two-fold: It was strong in photos, where Facebook dominated, and in mobile, where Facebook was decidedly weak early in 2012. Had someone else — for example Twitter, the jilted suitor Facebook beat out — been able to woo Instagram, Facebook would have risked losing its control over photo sharing as well as an inroad into mobile. Critics will say that the Instagram acquisition has proved mixed. That despite the five-fold growth in users since Facebook’s takeover, so many other ways to share photos have developed that whatever strategic threat Facebook might have headed off, it didn’t achieve much other than buying Instagram for a bargain price. Those opinions are perhaps best encapsulated by the always-erudite Benedict Evans:

He wrote that a few days ago. We then learned of the Snapchat offer which seems to suggest that, while Facebook won’t be buying “the next ten,” it will try to buy at least a few of them. And quite frankly, there’s sound logic to that. Facebook can’t possibly hope to buy up all the barbarians at the gate. First of all, they aren’t all for sale. Even a Snapchat can turn down an offer that would make its two founders billionaires at 23 and 25 because a recent funding gives them some liquidity and strong capital markets have them believing there’s a higher price to be obtained next year. Second, the incredibly rapid growth of all these services, several of which has scaled past 100 million users far faster than Facebook itself did, proves that there are likely going to be more of them than it’s realistic for anyone to try to own all of.

But Facebook doesn’t need to acquire everyone, it just needs to be constantly buying someone that either protects its flank or offers a new opportunity. By Facebook’s very nature, the user base will get older with each passing year. (This is an inevitable consequence of being the default network and having rich social-graph data on more than a billion people.) As a result, the next wave of internet users, will likely see it as someone else’s app. While they might sign up, Facebook itself admits, they are likely to use the service somewhat less. Teens will always seeking the new. As Evans points out, the glue of your smartphone’s address book and notifications makes it increasingly easy to use several apps at the same time to communicate and in this paradigm, Facebook itself becomes just one of many.

But Facebook still wins so long as it controls some of the others apps on your home screen. However those end up making money — and most will likely do that with some form of advertising — Facebook’s relationship with more than a million advertisers gives it a leg up in profiting from a given app. And when the current investment climate is replaced by a more normal one, where the need for profits replaces the ability to exist endlessly on investors’ capital, Facebook-owned services will likely fare well. So Facebook is in a situation where it can benefit monetarily from these acquisitions as well as strategically. It keeps the next wave of users in the “Greater Facebook” family and it uses its increasing leverage as an advertising powerhouse to grow from the sub-$10 billion company is today to the $20+ billion behemoth it can become by mid-decade.

And as for resources, Facebook is flush. It has more than $9 billion in cash and marketable securities on its balance sheet. It also generated $3 billion in cash flow from operations in just the first three quarters of 2013. Buying a Snapchat would make not dent to its bank account. Keep in mind, also, the company is worth nearly $120 billion and could use stock as currency for future deals (though it offered cash to Snapchat). If you view these kinds of things as insurance against someone rising up to defeat you, it’s perfectly reasonable for Facebook to spend 5% or so of its value every year on acquiring “threats” that are clearly strategic fits to its business of connecting people. That amount would purchase two Snapchats this year and perhaps even more of them in 2014.

A significant premium will be placed on making the right bets. Facebook will need the skill of Google GOOG +0.44%, which has arguably the greatest acquisition track record in the history of Silicon Valley (YouTube, Android, Applied Semantics). And for the moment, at least, it no longer matters whether Snapchat was a good bet or not. But Zuckerberg tried to clone Snapchat’s features with Facebook’s own Poke app, only to see the competitor grow and the homegrown one fail. A long time back, eBay had a similar problem with its home-built payments system and had to go out and buy PayPal, which ended up as the most important piece of the company. Maybe chat and personal photo-sharing apps become the minnow that eats the whale of social and Snapchat wisely remained independent. Or maybe Facebook convinces the next one to join its family and crushes Snapchat. Zuckerberg is doubtless already trying to decide which one that is. And how much to pay.

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How Mark Zuckerberg’s control of Facebook lets him print money

How Mark Zuckerberg’s control of Facebook lets him print money | M&A and Innovation | Scoop.it

When Mark Zuckerberg pays astronomical prices for unprofitable start-ups like Oculus ($2 billion) and WhatsApp ($19 billion), the Facebook CEO and founder is paying with a special currency, all his own: Facebook stock.

Many mergers and acquisitions are funded with company stock, of course, and in many cases the acquiree might prefer it: Stock gives them access to the potential upside of the merger in a way that cash can’t. But Zuckerberg’s deployment of company stock is special because of the corporate governance structure that Facebook and other tech companies have adopted.

These “dual class” structures allow founders to maintain control of their companies even if they don’t technically own a majority of its stock. As of February, Zuckerberg owned about 20% of the company, but almost all of that is “class B” stock, which gets ten votes for every one vote given to regular old class A shares; so he still controls the company personally, despite a minority economic interest.

That’s one reason Facebook acquisitions tend to come fast and furious: There’s no real need for Zuckerberg to chat with the board when he wants to issue 23 million new shares of Facebook stock, as in the Oculus acquisition.

Investors are rarely keen on the dilution of equity with the creation of new shares, and typically they find ways to protest: Just look at fund manager David Winters urging Coca-Cola shareholders to reject a plan to pay executives in stock, because he thinks it is over-generous. But, because of Facebook’s governing structure, there’s no way for shareholders to check Zuckerberg’s antics, even symbolically.

Except, of course, by selling the stock. And enough of them have chosen to do so that the stock has fallen about 7.5% since the Oculus acquisition was announced. That makes a dent in Zuckerberg’s net worth, but probably not one he really notices.

Facebook is still trading at more than 90 times earnings, which means that Zuckerberg has rope left when it comes to paying people off with shares, as long as the company remains profitable and there’s enough cash on hand to round out the deal-making. Oculus required $300 million in cash out of the $2 billion total price; WhatsApp required $4 billion in cash out of the $19 billion total.

And Facebook isn’t the only Silicon Valley acquisition hound with this structure: Google’s Larry Page and Sergei Brin use it to their advantage, as do founders at LinkedIn. Their ability to be free-spending with shares has helped drive up acquisition values and give rise to fears of a tech bubble.

But those aren’t necessarily prices an investor would pay after assessing a company’s fundamentals: An Oculus IPO likely wouldn’t value the company at $2 billion. These are prices that a few big tech companies can afford, thanks in part to their ability to pay with stock and the value they see in denying an advantage to their competitors.

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Yahoo Board to Meet Sunday to Consider $1.1 Billion, All-Cash Deal to Acquire Tumblr

It's (nearly) done.

 

According to sources close to the situation, the Yahoo board plans to meet Sunday night to decide whether to approve a $1.1 billion all-cash offer for New York-based blogging site Tumblr.

 

As AllThingsD.com first reported yesterday, Yahoo has been mulling some kind of deal with the hip New York-based blogging site, from a strategic investment to an outright acquisition. Sources said that the Silicon Valley Internet giant’s CEO Marissa Mayer has decided that buying Tumblr was going to be “the stake in the ground of what her strategy is going forward for Yahoo.”

 

And that is to attract younger audiences with just the kind of user-generated content Tumblr has pioneered to huge growth.

As with all big-time acquisition deals, this one could certainly fall apart at the last minute, but source said the agreement was still in place as of today. If approved by Yahoo’s board, it will be announced Monday. Yahoo has already said it has news to announce then.

 

According to numerous sources, Mayer started an intense focus on Tumblr about six weeks ago and determined quickly that the fast-growing content site, turbocharged by mountains of user-generated content, was just the kind of property that Yahoo needed to make it both “cool” and relevant to new audiences.

 

Yahoo is looking to undergird its strong set of existing media offerings to appeal to a different audience and also get into the social space via consumer-based software solutions that are both elegant and easy to use.

Tumblr’s mobile usage has also been strong, which also interested Mayer. While Tumblr started as a desktop-based service, its mobile usage has ramped up quickly in the last few years. ComScore says that a quarter of the service’s U.S. visitors now come from mobile devices.

 

At this price, it will be Mayer’s biggest acquisition so far. Since she became CEO last summer, Mayer has made only a series of small acquisitions of mobile startups.

 

Sources said that as part of the deal, founder and CEO David Karp would continue to operate the business, with Mayer promising him a level of autonomy, despite the need to integrate closely with Yahoo too. He will be locked in, sources said, via a four-year deal that will reward him for performance of the business.

 

Presumably, the Tumblr brand will continue.

 

The deal, if consummated will be a big win for investors. In a series of fundings since 2007, Tumblr has raised $125 million so far and is now at a reported valuation of $800 million. Investors include Spark Capital, Union Square Ventures, Sequoia Capital, Greylock Partners, Insight Venture Partners and the Chernin Group.

 

While Tumblr’s Karp has resisted various offers for the company over the years, Mayer spent a lot of time with him reassuring him of how Yahoo could turbocharge his business. He has also been searching for a COO to help him build out the infrastructure of its business, especially its advertising one.

 

And as Peter Kafka and I previously wrote, Tumblr could certainly bring Yahoo a big, young audience. Its worldwide traffic was at 117 million visitors in April, according to comScore. On its home page, Tumblr claims it has 107.8 million blogs and 50.6 billion posts. U.S. desktop traffic to Tumblr was 37 million in April, close to LinkedIn and Twitter, although Twitter obviously has much more via mobile.

 

But figuring out how to make money from that audience is a task that the company has only recently started to tackle.

 

Like other recent Web startups that have seen rocket ship growth — see: Twitter, Facebook — Tumblr resisted advertising for its formative years, and its user base seems particularly unwilling to accept standard banner ads. In addition, many industry observers think that Tumblr’s pages are packed with porn and/or other questionable content that would scare off advertisers.

But within the last year or so, Tumblr has started selling modestly sized “native ads” promoting brands’ Tumblr pages, on users’ “dashboards,” which has shown promise. Tumblr has said it had $13 million in revenue last year and sources said it could get to up to $100 million this year.

Tumblr has been represented by Qatalyst Partners’ Frank Quattrone, while Yahoo’s Mayer, as well as M&A head Jackie Reses and CFO Ken Goldman has been on the company’s side.

More to come, obviously.


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New Buying Strategy as Facebook and Google Transform Into Web Conglomerates

New Buying Strategy as Facebook and Google Transform Into Web Conglomerates | M&A and Innovation | Scoop.it
A buying spree among technology companies has revolutionized the venture capital business model, Steven Davidoff Solomon writes in the Deal Professor.

Facebook, Google and other Internet titans have been busy transforming themselves into web conglomerates, making fortunes for the venture capital industry. But is it good for everyone else?

The stream of acquisitions has been head-shaking. Facebook acquired the social media companies WhatsApp for $16 billion and Instagram for $1 billion. Google acquired the thermostat and smoke alarm developer Nest for $3.24 billion and Waze, a social mapping start-up, for $1 billion, while Apple bought the music brand Beats Electronics for $3 billion.

The titans’ buying spree has not just minted more than a few 20-something millionaires; it has revolutionized the venture capital business model. Outside of the technology bubble, it used to be that someone struggled for years to build a company before it went public. Sure, some companies were sold when they were at an early stage with little, or even no, revenue, but that strategy reaped tens of millions of dollars, not billions.

The deep pockets and willing buyers among Google and the like have changed the venture capital strategy. Now, the idea is to move into a hot space — social media! — and develop a product that the web conglomerates will buy at prices never before seen in private deals.

The goal is no longer building a business but to be in the orbit of these tech giants. Or to put it another way, to win the lottery. The slowdown in recent months of the I.P.O. pipeline for Internet companies has only made this exit route more important.

You may be asking, so what? This may just be another bubble, and perhaps the bubble is deflating a bit.

Moreover, others, like the indomitable Marc Andreessen, are optimists and deny a bubble exists, citing the low price-to-earnings ratios of the big tech companies and the dearth of good companies to invest in as factors that are driving these prices. Even Mr. Andreessen, though, is critical of the “SF-centric consumer tech party scene.”

You can debate whether there is a bubble or a lasting trend, but there is no doubt about what is driving much of venture capital these days: the headlong rush by Google and other tech giants to become conglomerates.

This is a boon to the cozy, venture capital industry, which has willing buyers that they know well and have lots of cash.

The Internet giants, after all, have core products that mint billions of dollars, if not tens of billions of dollars a year. And that cash needs to go somewhere.

But cash is not the only factor driving the conglomerate wave. Fear is, too. The Internet giants do not want to face obsolescence because of new disruptive technology. So they are riding every hot technology wave. The competition to stay on top has led the tech conglomerates to drive valuations sky high as they battle for start-ups.

Nor do the conglomerates want to lose out to one another. Google, for instance, bought Waze not just because the company offers a potentially good product that Google can link to its own dominant map service, but possibly because its purchase keeps Waze out of the hands of its rival Facebook, which was also a rumored bidder.

New entrants like Alibaba — a Chinese conglomerate seeking to become an American one — are likely to make this competition even more fierce. Alibaba, for example, has spent millions of dollars this year investing in tech companies in the United States.

The Internet giants are not just conglomerates but also the largest venture capitalists on the block. Not only are they buying early-stage businesses to incubate and grow, they are starting their own businesses outside their original mission.

Google is the leader in the conglomerate move, researching blood monitoring for diabetes through contact lenses and investing in 23andMe, the gene analysis company. Google has also developed the product Google Glass for the (hopefully never coming) wearable computing trend. But others like Amazon are in multiple businesses, including cloud computing as well as television and even drones.

In other words, these tech companies keep expanding into new realms, far beyond their core businesses. If you ask them, this is not just a business strategy but grows out of their basic belief that they are incredibly smart and can solve the problems of the world while also delivering products. Not only that, these higher goals justify the incredibly shareholder-unfriendly governance structures of Google and Facebook, which concentrate control with the founders.

The idea that smart people can solve all the world’s problems or at least provide an online friend is a noble one, though, somewhat worthy of an episode of “Silicon Valley,” the satire of the technology culture on HBO.

The paradox is that conglomerates outside the tech sector are an endangered species. The 1960s was the age of the conglomerates. ITT, for example, made both weapons and movies, with the idea that smart managers could operate any business and different operations would diversify the business. But that strategy did not work out as planned. The problem was that managers needed to focus on their businesses. If investors wanted to diversify, they could do so by simply investing in the separate companies. And splitting off businesses would discipline managers not to waste extra cash.

The trend against conglomerates has gotten so intense that hedge funds seek not only to split companies with different business but different types of businesses in the same industries. Darden Restaurants, for instance, has been fighting an activist campaign that it split off Olive Garden and Red Lobster from its higher performing restaurants. Darden responded by first trying to spin off Red Lobster then selling it.

Will that same sensibility eventually catch up to the new web conglomerates? Are they simply management’s larks, with the huge profits of the core businesses allowing the other cash-wasting enterprises? Or is it really true that smart people can do everything and that the conglomerates can replicate the venture capital structure? Perhaps these conglomerates are all about taking control of the web and making sure that no new big competitors spring up.

So far, the success of these purchases is uncertain. Google’s purchase of YouTube, for example, and Facebook’s purchase of Instagram seem to have been nicely timed. But Microsoft’s purchase of Nokia and Google’s acquisition of Motorola Mobile? Maybe not so much. And then, there are the ancient failures, like Yahoo’s purchase of GeoCities and Broadcast.com in 1999. We will see whether the $16 billion for WhatsApp or the money spent developing Google Glass was worth it.

But perhaps the new conglomerates are no better than the old ones. That’s a question consumers and investors — as well as the companies themselves — may want to ask.

 

 

Get your Free Business Plan Template here: http://bit.ly/1aKy7km





Via Marc Kneepkens
Yousra Maarouf's insight:

Thanks for this relevant article. 

The tech giants'buying spree has not just changed the VC business model, it has changed the world's business model. Now, the start-ups' new challenge is to move into a "hot space" which increasingly turns to be social media, and to develop an output that the the "titans" will be eager to acquire at prices never seen before. 

It goes without saying that the Internet giants'race to become web conglomerates is to connect with their fear of facing obsolesence because of new disruptive technology. 

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Marc Kneepkens's curator insight, August 7, 2014 9:33 AM

The tech giants are changing the world of venture capital and M&A

AleksBlumentals's curator insight, August 9, 2014 3:48 AM

I look at the start-up ecosystem as experiments to discover higher order solutions. from this perspective it makes all the sense in the world that the larger companies foster the experiments and buy units that promise success. 


The work to understand the patterns and possibilities applied to high impact problems like energy, water and health is just beginning. Yet this is the ultimate challenge, to take what the huge Web/app laboratory of collaboration has taught us and apply it to the wicked problems.

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Get acquired! An idiot's guide to technology M&A | VentureBeat

Get acquired! An idiot's guide to technology M&A | VentureBeat | M&A and Innovation | Scoop.it
In Silicon Valley, where startup activity is at an unparalleled high, mergers and acquisitions are the fastest-growing exit for venture-backed companies. According to a recent study by Ernst and Young, the volume of M&A in the ...

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Corporate Acquisitions of Startups: Why Do They Fail?

Corporate Acquisitions of Startups: Why Do They Fail? | M&A and Innovation | Scoop.it

For decades large companies have gone shopping in Silicon Valley for startups. Lately the pressure of continuous disruption has forced them to step up the pace. More often than not the results of these acquisitions are disappointing.


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Is the App Bubble About to Burst?

There are a number of voices predicting the bursting of the second dot com bubble. Silicon valley may take pleasure in the roller coaster rise of social media valuations but Wall Street is having difficulty keeping its breakfast down. Brian Nichols of Seeking Alpha writes, “If you take a minute to look through the valuations of the publicly traded companies of the social media space you would find it hard to identify a valuation that makes sense. And if you take another minute to look at The Wall Street Journal’s list of 20 start-up internet companies valued over a billion dollars then just maybe you can see the true insanity of how we are valuing these companies. Yet some of the largest most consistent companies of the last 20 years are starting to fall in some of the same traps and are apparently blind to the mindless valuations that are being created in Silicon Valley. To better explain take a look at some of the most infamous dot-com acquisitions back at the start of the new millennium.”


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Startups get a boost as Indian mergers and acquisitions top $22B and deal size fattens up

Startups get a boost as Indian mergers and acquisitions top $22B and deal size fattens up | M&A and Innovation | Scoop.it
Average deal size reached US$99 million, a 59 percent leap from US$62 million a year earlier. This shows a maturing of the business ecosystem.
The startup pot in India has been simmering hot lately. Everyday there’s much news about innovations, new companies sprouting, and investors pumping in venture capital money. But so far, on the mergers and acquisition front, it’s been lukewarm. Quicker exits keep investors happy and the pot boiling. Uncertainty over how long it takes to see tangible returns have been giving many investors sleepless nights about a big, fat startup bubble in India. Well, the proof of the pudding is here. In fiscal year 2014, India’s mergers and acquisitions across all industries registered an aggregate disclosed deal value of US$22.6 billion, an EY analysis report reveals. Although the data includes deals made in telecoms, oil and gas, and other sectors involving large companies, it also indicates a more conducive environment for Indian tech startups looking for exits. The number of mergers and acquisition (M&A) transactions involving Indian companies in FY14 stood at 674, down by 20 percent against 843 deals seen in FY13. The deal value increased by 12 percent against the US$20.1 billion seen last year. More significantly, average deal size reached US$99 million, a 59 percent leap from US$62 million a year earlier. This shows a maturing of the tech ecosystem, with more startups scaling up faster to attract bigger deals. In an earlier analysis, we had shown how poorly the size of an Indian tech deals measured up against those in more mature ecosystems like Silicon Valley and Israel. But this is changing. Several sectors, including ecommerce, telecoms, and retail are seeing a wave of consolidation, and the trend is expected to continue over the next year. The problem of discovery Of the 674 M&A deals this year, 293 were cross-border transactions with an aggregate disclosed deal value of US$17.8 billion, which is nearly 20 percent higher in terms of value as compared to FY13. Most of them were inbound deals, for which the deal value stood at US$10.9 billion, up by 29 percent from US$8.4 billion in FY13. This trend points to international players getting more confident about India’s long-term growth story. A new, stable government has given a boost to the economic outlook, and tech innovators are reaping the benefits by coming on the radar of global acquirers. A couple of weeks back, internet giant Yahoo made its first Indian tech startup acquisition. It bought one-year-old Bookpad, which built an end-to-end document handling technology for the cloud. The size of the deal was not disclosed. Bookpad was part of software industry association NASSCOM’s Innotrek program, an initiative which showcases hand-picked Indian tech startups before global giants, and lets entrepreneurs explore opportunities for growth, mergers, and acquisitions. Sanat Rao, who leads the M&A Connect initiative of iSPIRT, an industry thinktank, told Tech in Asia: The number one problem for Indian companies is discovery. Most Indian startups don’t show up on the radar of the big US acquirers. For example, Autodesk found out that Qontext was an Indian company only at a late stage in the acquisition process. That’s why M&A Connect attempts to help Indian startups become more visible around the world, and also help them improve their marketing and bring their accounting practices up to global standards. acquisition Indian startups too are getting bolder in acquiring assets overseas. For example, restaurant finder site Zomato gobbled up four companies overseas in the last three months. But overall, outbound M&A transactions were fewer this year. There were just 102 deals in FY14, a fall of 32 percent compared to 149 deals the previous year. The reports says that’s due to Indian companies having to focus more on debt reduction and cost optimization, instead of inorganic growth through mergers and acquisitions. Also, outbound transactions became more expensive as the Indian rupee was devalued. High hopes of achche din It has been a good year for Indian companies going by the private equity landscape as well. There were 23 big deals, of US$100 million and above, aggregating US$6.1 billion. That’s more than double the US$2.6 billion value across 12 deals in FY13. The momentum has continued this financial year. Indian ecommerce leader Flipkart secured an eye-popping US$1 billion funding round, and several other mega deals are in the works. The first quarter of 2014 marked a multi-year high of nearly US$427 million in funding across 64 deals in India, and over the four quarters of FY14, Indian tech companies raised a total of US$1.3 billion across 266 deals. Interestingly, the number of early-stage deals during the year surpassed the number of growth deals by two-thirds. Global investors and acquirers are growing more confident about the emerging Indian startup market – the current surge in M&A activity is a clear indicator. Indian Prime Minister Narendra Modi came to power promising achche din – good days – and during a rousing visit to the US this week, he vowed to make it easier to do business in India. The new government’s first budget presented in the Indian parliament was music to the ears of the tech startup community. Finance minister Arun Jaitley announced the setting up of a INR100 billion (US$1.6 billion) fund for startups. Companies in India and overseas are now pinning hopes on the government’s ability to convert its strong electoral mandate into achche din on the ground. 

 

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