Thinking About Alternate Universes

| Tue Dec. 14, 2010 3:22 PM EST

Felix Salmon pushes back on the idea that established companies have screwed up repeatedly by not buying startup internet companies that eventually became giants:

But how valuable were those opportunities, really? If Blockbuster had spent $50 million on Netflix, then it would just have run out of money that much more quickly. There’s no chance that Blockbuster’s management would have let Netflix grow, unencumbered, in the way that it did independently. Similarly, Google would have been stifled as part of Excite: it would have been nothing more than one of many search algorithms competing on the internet.

Buying internet companies is very, very hard: even if they are set to be very successful on their own, that’s no reason to believe that they will have similar success in-house. Google bought Foursquare back in 2005, when it was called Dodgeball, but then closed it down; only when its founders left Google and recreated the company as Foursquare on their own were they able to succeed.

I think that's right. When my grandfather's hitch in the Navy was up in 1920, he chose to be discharged in Los Angeles. At one point shortly after that he was offered the chance to buy an acre of land on Wilshire Boulevard for $500, and this naturally led to stories later in life about how it was a missed opportunity because that acre today would be worth a million dollars.

But of course, that's not what would have happened. More likely, the land would have been worth $1,000 in 1925 and he would have sold it then. A tidy profit, to be sure, but nothing more. Still no riches to hand down to his grandchildren.

It's the same with most internet startups: you have to think not about what they've become in the real world, but what would have happened to them in the alternate universe where they got purchased early in life. The answer is that most of them would wither away if they were part of some larger, more established company with powerful internal factions determined not to let a new division kill their cash cows. These kinds of acquisitions can sometimes work OK if you're buying something brand new that doesn't cannibalize an existing part of your business, but even then it's a crapshoot.

I'm curious: is there a big company anywhere in the world that has a pretty good track record buying small internet startups and then nursing them into giants? In theory, big companies do offer some benefits: money, distribution channels, legal departments, etc. In reality, that never seems to be enough to make up for the loss of independence. Are there exceptions? I can't think of any, but maybe I don't pay close enough attention.

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