What is the purpose of a firm? Is it a collection of synergistic business ventures? A source of capital? Does it make sense to continually expand it's scope of activities? Would investors be better off if Google kept the equity it needed to run its search business and paid the rest out in a dividend to shareholders?

We think of the big boys as a black box - a black box full of money. I'd like to understand them, how they operate and how they could be better. I don't understand their purpose in pursuing many of these acquisitions, besides making sure their rivals don't buy the target first.

Acquisitions only really make sense if a company is creeping horizontally. Otherwise not that man opportunities make sense.

Say Apple decide to concentrate on what their exisitng lines (they've pretty much said so), how many startups would they find to buy? Probably not enough for a CAO.

I think that says a lot about how Apple's acquisitions strategy.

Although, they also bought PA Semi, and we still don't know yet just what they're doing with them.

The volume of software start-up acquisitions should be directly related to the volume of software product lines.

I am a firm believer in the idea that the most important asset that a company can have is its employees - even Google. Granted - acquiring a company and forcing the employees to work within the Google system is a piss-poor way of getting someone to work for you, but ultimately, how else can you get those crazy entrepreneaurs to work for you?

This acquire-to-hire plan backfires all the time - under performance, stagnation of the acquired product, etc etc, but I can see the appeal to it. At least, in theory.

"At the moment, there is no one within big companies who gets in trouble when they buy a startup for $200 million that they could have bought earlier for $20 million. There should start to be someone who gets in trouble for that." - Paul Graham

I think its well understood that there exists a tremendous amount of inefficiency. That large companies should spend some energy identifying what they need so it costs them 20 million instead of 200. I'm know some large companies already try to do this. They will get better at it over time and others will emulate their models. As a result, the investment and startup model/process/vc-lifecycle will shift accordingly. I feel PG thinks that ycombinator is on the leading edge of being able to take advantage of this shift as...he probably is.

My attitude for my startup has always been that if I sell early, I get 20 million and get to keep all of it. If I take on lots of VC, I have to sell for 200 million and I still net out at 20. Most stertup founders are happy to take the early 20 and get on with their next big idea. I do think PG is correct that the model is slowly shifting in this direction. And its the right direction for innovation to continue.

- It takes two years for a start up to go from $20m to $200m

- The two year startup failure rate is greater than 1 in 8.

- The performance risks of independance are about equal to the performance risks of being owned (capital scarcity etc vs loss of agility etc).

It makes more financial sense to buy at £200m than at £20m, assuming your information is imperfect.

Working:

$20m + $2.05m inflation (5%) + $4.2m cost of capital (10%) = $26.25m.

Cost of risk ~= $200m/$26.25m = 7.6 multiple.

(The cost of acquiring better information can be costed, of course, and the new probabilites and expected value calculated - which may be a better strategy, but information is not free, especially if you need to employ $400k/yr+ 'CAOs').

At the moment, there is no one within big companies who gets in trouble when they buy a startup for $200 million that they could have bought earlier for $20 million.

Isn't he talking about the VP/BizDev here? I know, for instance, that Cisco has an entire group dedicated to evaluating and executing acquisitions.

There's really no reason for this blog post, and especially no reason to post it on HN. It's just a repost of an essay, with absolutely no additional analysis. The HN link should just go directly to the essay.

It is often much quicker, and ultimately cheaper, to aquire someone than to develop the software themselves. When software development costs reach the dizzy heights of drug development costs, then there will be the necessity for a cheif aquisition/partnership officier.

I might agree with that statement if it wasn't so obviously self-serving (given pg's role in YC) and if it were a little more qualified.

If acquisitions go the way of existing standardized hiring practices then it's more likely that they will become burdened with the very kind of bureaucratic and institutional nonsense that has traditionally prevented big companies from hiring high quality hackers.

On another note: I really hate posts with nothing more than a quote.

this comment is amusing although i do believe he is being facetious.

i am of the opinion that everyone in a company should have an eye out for innovation that is relevant to the company and should call it upon themself to escalate an emerging "acquisition worthy" startup to the attention of the powers that be. and of course let it fall upon their heads if they fail to take action.

it would show how well communication flows in your company as to how agile you are in making these kinds of acquisitions. a company that did it well would be fearfully predatorial indeed