It’s Worth HOW Much? Lessons from High Tech Sales
Originally published in Sellingyourbusiness.com
It’s easy to feel a bit left out these days.
Facebook bought global messaging giant WhatsApp for $16 Billion (£11.4bn GPB, €14bn). Google bought crowd-sourced navigation app WAZE for $1.3 Billion (£835). And Airbnb, which lets you rent your bed to strangers, has a market capitalization of about $10 Billion (almost £6b GBP), more than the established hospitality chains Hyatt, $8.4 Billion (almost £5bn GPB), and Wyndham, $9.3 Billion (£5.5bn GBP).
The technology sector has money to burn for acquisitions, and well-placed startups anywhere in the world can offer them the right technologies, talent for growth and competitive advantage.
How do large, cash-rich technology companies make these decisions? And how do newer, smaller companies decide that to sell to them is to their advantage, rather than remain independent? And what does this mean to everyone else who owns a non-high tech business?
High Tech Asset Valuation
There’s usually a method to the madness, although we can assume from the outset that all of these deals are overvalued, and not everyone becomes a millionaire overnight. But the method has important aspects for all companies, big and small, in all industries.
So, whether you’re a brick-and-mortar retailer, a specialty wholesaler, or a legal services firm, taking a page from the dynamic big book of high tech can be an advantage to your own selling strategy.
What The Tech Sector Values in a Business
Companies such as Twitter and Amazon don’t buy other companies for another piece of off-the shelf-hardware or a packaged accounting systems. Buyers and sellers in the technology marketspace are valuing a start-up or small company’s intangible assets over tangible assets such as equipment, or even cash on hand.
Small tech companies or start-ups are offering the big players new technologies, unique technology operating platforms, and fresh talent. In sum, they are offering new Intellectual Property (IP) which can’t be gotten elsewhere in a ready-made environment, and would take too long to create in-house (if ever). It’s a case of “buy instead of build,” when creating these new technologies or approaches would take up valuable time and resources in-house, and in the end, might not work.
These intangible assets occupy their own asset class of Intellectual Property, the guiding force of the technological revolution. The value to their business of intellectual capital, know-how, technology configuration, patents and trademarks, are all classified as IP.
While high tech companies did not create the IP asset class, they’ve probably done the most to develop it in the last 20 years, alongside big pharmaceutical companies.
The Seller and the Buyer
Major tech companies have a buying plan; they know and in most cases can quantify the value a start-up company will have to what already exists and for their growth plans. This is a dynamic, growing sector that gobbles up resources at high valuations to grow and expand, whether or not those valuations wind up being realistic a few years down the road.
Sometimes the new technology is a proven entity; its finished and in the marketplace, with customers and revenue (Google buying Waze). Other times the start-up is still raising money, writing computer code, and just past a prototype (Facebook buying Oculus VR for $2 billion or £1.2bn GBP.
The seller can be approached for a complete buy out of their product, or just their IP. The seller needs to have some idea of the value of their wanted assets, the market valuation, what benefits people in their small company will see in terms of short- and long-term compensation and employment. The more employees, the more the stock awards are diluted. A small number of people in a startup would stand to make the most money from even a modest sale.
Some startups, both new and mature, have made it clear they don’t want to sell, and in a cash-rich atmosphere of venture funding, can afford to build their own business and remain independent of other companies.
Start-up founders may see themselves as an personal, emerging force in the tech world – or beyond (the Gates Foundation, for example) – and prefer to create “the next Facebook” or the next “Twitter” or the next “Amazon” rather than sell.
Ironically, Snapchat, the “safe-sexting” application, spurned its Facebook suitor when it came a-calling with a $3 Billion (£1.8bn GPB) bouquet.
The Tech Sector Shopping List
If you look past the glitzy headlines and the dazzling numbers, the reasons why companies are bought and sold are not particularly new. The reasons have been around for a long time, in all sectors, and continue to make sense today.
Large deals can also be found in the pharmaceutical industry and for many of the same reasons. Novartis, the Swiss pharmaceutical giant, recently executed a set of deals as a result of a strategic review designed to jettison less profitable lines of businesses and restructure its core business.
Among other deals, Novartis bought the cancer drug business of the UK’s GlaxoSmithKline for approximately $16 billion (£9.5bn GBP, €12bn). GlaxoSmithKline also bought the Novartis vaccine business for $7.1 billion (£4bn GBP, €5bn). Lilly & Company bought the Novartis animal health division for $5.4 billion (£3bn GBP, €7bn).
Technology, because of its cash-rich positions and consumer-facing products, tends to get more of the attention these days than large pharmas or industrials.
Why Does Big Tech Buy Little Tech?
- Competitive Advantage and Strategic Planning: Staving off competition at the highest levels can lead to a feeding frenzy on smaller companies, and very high asset valuations for their IP. Usually more than one tech giant is interested in “hot” startups.
- Google’s purchase of Israel-based crowd-sourced navigation app WAZE, which combines online maps with user information about road work, traffic conditions and accidents, is a critical part of Google’s navigation system Google Maps, and the development of its self-driving car. With 47 million users and 90 employees, WAZE also could have probably sold itself to Apple or Facebook.
- New and More Users: A mature technology like WhatsApp should serve Facebook well as they move their messaging application off their main platform and creates an alternative to expensive telco messaging services. WhatsApp reportedly has over 400 million global customers and a significant but yet-to-be-revealed revenue stream.
- Facebook paid $350 million (approximately £203m GBP), per employee (of which there were 55 people), and $40 (£24 GBP) per user (many of whom use the service for free). This was a strategic buy for Facebook.
- Global Reach: Startups popular in parts of the world would attract the buyer which wants an easy entry into geographic dominance. Amazon (in 1998) bought Bookpages and Telebook for a ready-made outlet in the UK and Germany, as well as other companies resident in different countries.
- Talent Pool: Often tech companies really want to buy the “brains” (also considered in the IP asset class), along with the technology, so people can continue to develop their technology for the new company or play a new development or management role entirely. But not everyone gets an offer, and not everyone stays with the new company. Know how and when to exit once the company is sold.
- Early on (2011), Mark Zuckerberg, who at that point had made very few acquisitions, proudly announced that “Facebook has not once bought a company for the company itself. We buy companies to get excellent people.” These are called “acquihires” (IP asset class). While he has in the past deployed people from acquired companies in new roles for Facebook, his current position on buying the company for the talent seems less urgent and less pronounced.
Valuing Your Business to Sell
Don’t be drawn in by the tech sector’s gyrations, but don’t undervalue your company either just because it’s not in the billions. Learn from the Amazon, Facebook, and Twitter, all of which are continuing to place value on marketplace business assets as a means of growth, diversification and profit. Getting to know the different aspects of valuation is the best way to create your own selling strategy, and to come out on top when it comes to price.
It’s ok to be put off by these sky-high prices and valuations, but what can you learn from it? In any sector, marketplace intelligence is important. If your company is for sale, who are the likely buyers and why? What are the marketplace conditions that go with price setting, value and utility? And if an unsolicited offer is made for your company, your marketplace intelligence should answer the question…why now? Why my company? And is the offer a fair one?