Why do big companies want to buy the startup companies with prices way more than the revenues made (even if they were multiplied by many years)?<p>Is there any specific example where the startup's technology affecting the buyer companies significantly?
Big companies are using startups as proxy innovation labs. So instead of figuring out themselves what users are doing, they let startups. Then they buy the startups. Much easier to buy an audience and all the possibilities associated with a new brand than try to make it all work in-house.<p>Combine that with raw talent acquisition, and a lot of startups begin to look like highly-rewarded spec R&D work for big companies. Picking up that kind of talent, audience, and potential? It's easily worth it to BigCorp, even if there's no income at all.<p>(I hope the tone sounds okay on that. There's nothing wrong with gaining a million users and flipping your company to Google -- assuming that's what you want to do, of course)<p>Of course, there's a ton of startups that don't fit that model. But many do -- at least many in the valley.
1. Brand and scale.<p>If a company buys a startup with a promising product that they can quickly sell to a large portion of their customers, they're willing to give up a portion of that future revenue. It may not be at all tied to past performance.<p>2. Talent<p>Facebook payed a premium for FriendFeed because they wanted their team to work on the Facebook platform. This team has developed more than $50 million in new value for Facebook.<p>3. To keep a competitor from having the advantage.<p>Google paid $1.5 billion for YouTube. They've lost money on owning it, but in the process kept their biggest competitors from controlling an asset that drives an enormous portion of all video traffic on the web. You'll see companies buy up companies they're not really interested in just to keep someone else from having them. Powerset was bought for $100 million by Microsoft because if they had developed some interesting or successful search technology, they couldn't chance letting Google have it.
The most general answer is "talent acquisition" (you should do a web search on that, also a HN search will be very helpful). In short, the proposed value of the company is based on the value of the engineering team.
Generally its because people who run/operate companies are terrible at allocating capital. Operating a business and effectively allocating capital are two very different skills, but smart operators seem to believe their intelligence carries over to capital allocation.<p>The fact is that most companies destroy shareholder value when they buy other companies. A recent example is the whole yahoo/delicious debacle but anyone reading this can think of a handful of other equally terrible examples off the top of their head. A far more difficult exercise would be to name the acquisitions that actually added long-term value. For example, Apple is generally great at only buying companies that add real value. They are an exception.<p>The fact that operators are terrible at capital allocation is great for founders and VCs. Its terrible for shareholders of the acquiring company!
One reason could be user acquisition. It can cost a lot of money to acquire new users or reach a specific target market. So sometimes it makes sense to buy a company who reaches that audience, regardless of their revenue. Then you can roll that business into your existing product.<p>Other times it's worth a premium if you want to get into a particular business and have nothing or are playing catchup.
My first hypothesis is that it's a question of comparative opportunity cost, rather than absolute cost.<p>When a company gets very large, it usually struggles to keep innovating under inertia. Trying to build in completely new directions becomes both necessary and difficult. Buying a startup is often cheap compared to trying to fork an existing team to build new things. Furthermore, the startup's business model is already partially proven by time of acquisition - so they are buying some certainty compared to assigning a team to generate new ideas.<p>Another hypothesis is that with the resources of a large company behind it, the startup may grow very fast. Adobe seems to be good at this. Other companies don't seem as good at managing post-acquisition.<p>I have never been in or acquired by a large company, however, so what I say should come with a grain of salt.
There's a variety of reasons why you'll see M&A prices that are several multiples of a startups revenue. In financial terms, its a long term investment just like any other. Figuring in the net present value of money, the selling price must consider the asset's future value. Everything such as good will, userbase, and talent that comes along with the startup are simply indicators that the asset's value will grow with time.
I suppose its because the same code serving millions instead of thousands might be worth 1000x as much.<p>If you invented a process that turns lead into gold, how much has been converted so far really doesn't affect how much the patent is worth.