Starting from one idea, one piece of code and just one user, a tech company’s growth can snowball into a major multinational organisation with millions of users and a valuation of billions of dollars.
However, with hundreds of thousands of start-ups born in the UK alone every year, very few make it to this elusive “unicorn status”. It requires a phenomenal level of growth and innovation, the likes of which can be difficult to maintain as the start-up evolves.
As a tech start-up becomes a tech giant, the pressure to maintain high levels of forward-thinking and product development is immense, with an expectation to have a permanent grasp on the top spot as a leader in the field.
Despite the eight or even nine-figure research and development budgets, it seems it is difficult for these tech titans to continue to innovate and dominate the advances in their field as the company AI market continues to evolve. So, what is the solution? It seems the biggest players are looking to bring innovation from the outside in.
In the first nine months of 2018, global merger and acquisition activity reached an all-time high. According to the Financial Times, nearly $3.3 trillion worth of deals were agreed in the period, eclipsing the previous record set before the financial crisis.
Companies such as Microsoft, Apple, Oracle, Salesforce, Amazon, Intel and IBM are in the midst of major M&A spending sprees, snapping up SMEs specialising in artificial intelligence and machine learning for eye-watering sums – potentially to the point of over-valuation.
In 2013, Yahoo acquired social networking site Tumblr for $1.1 billion in a bid to increase its audience by 50% and take on major tech competitors. However, by 2015, Tumblr was still not making a profit. The following year, according to Quartz, Yahoo admitted Tumblr was “hugely overvalued” with Yahoo eventually writing off losses to the tune of $712 million.
Why are major tech companies paying above the odds for these small players? Corporates crave the unique combination of technical genius with unbound creativity that start-ups offer. This culture is often lost along the way in the transition from a start-up founded in a garage to a corporate global conglomerate. It seems the yearning for success that is fostered by the make-or-break nature of an early business is lost as the millions amass. Away from the control of a global brand, true innovation often flourishes more naturally, fostering truly ground-breaking products and technology.
In fact, a Tumblr executive was cited in DigiDay as saying the reason for the failed acquisition was that “nobody at Yahoo ever understood what .”
Buying in these products and technologies often brings with it the founder of the business that brought it to life. Mergers and acquisitions offer big tech a double-edged sword, with the ability to lure the brightest minds in the industry on board.
The mergers and acquisitions that have proved the most successful have been careful to integrate in a way that accelerates the acquired businesses’ growth and market share, whilst at the same time, creating synergies with the mothership’s existing strategy. A steady approach to unifying operations has led to mutual growth short term, with exponential growth long term.
A great example of this is Facebook’s acquisition of Instagram. The social media giant bought its rival Instagram for a record sum of $1 billion in 2012. At the time, the photo-sharing app had 300 million users and did not generate any revenue, so the purchase price seemed far above market-value. With this purchase, Facebook was able to bring its rival on board, which had a myriad of benefits, such as learnings from Instagram’s strong mobile platform and the ability to add filters to photos. It also offered more data for Facebook’s advertising tools, allowing the social media platform’s advertising arm to become even more highly targeted.
There was no assimilation between Facebook and Instagram. Some features were quietly rolled out from one platform to the other, such as Facebook adopting filters and Instagram offering advertising, and compatibility between the two social sites became apparent, with functionality such as sharing an Instagram post to Facebook. However, each platform largely maintained its own look and feel, offering different USPs and, as a result, attracting different audiences.
Ultimately, the acquisition allowed Facebook to bring Instagram’s two co-founders on board, benefitting from their creativity and forward-thinking innovation that appealed to a younger user-base.
In 2018, Facebook purchased at least four companies and it looks like this M&A spending spree is set to continue in 2019. Just last month, Facebook acquired AI visual shopping start-up GrokStyle Inc and blockchain technology company Chainspace, both for undisclosed sums. If Facebook’s proven track record for successful acquisitions is anything to go by, these should become fruitful integrations, subtly incorporated into Facebook’s operations to ensure it maintains its status as a well-rounded, cutting-edge platform.
The major tech companies who open their doors to a new way of thinking and a monogamous partner approach are reaping the benefits of ‘inspired innovation’ and ultimately getting ahead in the AI arms race. As the saying goes, ‘if you can’t beat them, join them.’ This could certainly be true for the tech sector, a trend we will likely see continue over the course of 2019.
