Startups And Established Players: A Virtuous Cycle
It might sound counterintuitive, but the large, well-established companies of today are a key contributor to our thriving startup ecosystem. There is a virtuous circle of innovation, investment, and mergers and acquisitions between established technology players and new entrants that repeats itself over and over, generating continued growth and innovation in the technology sector – and most important, benefits for consumers.
Step 1: New entrants look for funding and support.
Acquisition is the “top long-term goal” for 58% of U.S. startups, as shown in the Silicon Valley Bank U.S. Startup Outlook 2020 report.
Many tech founders look to acquisition as their ultimate goal, as it can allow their ideas and products to reach users more efficiently, highlights Jim Pethokoukis of the American Enterprise Institute. “For founders, future acquisition is often ‘the goal.’ Then the entrepreneur can go on to start another firm or become an investor in other aspirational startups working on risky new ideas. Same goes for the investors in the acquired firm. What’s more, these purchases are often ‘acquisition–by–hire’ situations where the prize is talent rather than the Next Big Thing. And when an upstart firm has a valuable idea, acquisition can be the fastest way for it to get to users.”
Step 2: New entrants become competitors themselves or are acquired and accelerated by large companies, scaling pro-consumer innovations.
Startups benefit from the resources big tech companies have to offer, says Makan Delrahim, former U.S. Assistant Attorney General for the Antitrust Division. “But just taking a look at YouTube. Back when they purchased YouTube, was it the robust content distributor that it is today, online? I don’t think so. Did it benefit from the technology and the resources that Google had in order to make it what it is? Yes, and that’s the efficiency that is positive.”
ByteDance founder Zhang Yiming was a former Microsoft engineer and now runs the world’s fastest growing social media network, writes Rebecca Fannin in Harvard Business Review. “ByteDance has a valuation of $78 billion ─ one of China’s 86 ‘unicorns’ in 2018. Its backers span top-notch venture capitalist firm Sequoia Capital China, Japanese tech conglomerate Softbank Group, U.S. private equity investor KKR, Chinese investment firm Hillhouse Capital and corporate venture unit SIG Asia.”
Large technology companies provide infrastructure and opportunity for smaller entrants, explains Dan Rayburn of Streaming Media. “Without YouTube being sold to Google, it would be out of business. The only reason YouTube is even around in the market to have the chance to turn a profit is because Google has deep pockets and is willing to lose a lot of money on a long-term bet.”
Consumers are the “true benefactors” of start-up acquisitions in the tech space, gaining access to new, innovative products, as noted by Will Rinehart of the Center for Growth and Opportunity. “The vast majority of acquisitions by large tech companies are made either for the tech or the talent of the target company, not to stifle a future competitor. Both parties benefit from these deals. Startups often have great ideas but lack the technical and marketing resources to bring a product to a wider audience. Large companies, on the other hand, have the resources and consumer base for a new product but often lack innovative ideas. Yet, the true benefactors of these deals are consumers who can now choose an innovative product that may not have existed otherwise.”
Step 3: Employees leave their large companies and start new ones.
Thousands of workers at large technology companies leave to bring their skills and knowledge to startups, according to research from AngelList. “AngelList says that several common reasons people make such a move are because they want:
— A role where they can have a bigger impact on the company.
— A chance to work with a new, cutting edge technology.
— To be an early employee (and equity owner) at the next tech giant.”
Tech companies are “a training ground for America’s most prolific entrepreneurs, who are creating the companies of tomorrow,” writes Christopher Fong in Morning Consult. “Over the last three decades, the U.S. tech sector has had one of the highest rates of new business formation and job growth in the world’s biggest and most diversified economy. More than 8,000 new companies attracted over $130 billion in venture capital financing in 2018, the highest sum in a decade. More than 80 percent of startups planned to add new hires to their payrolls this year. Tech-specific economic growth and job creation is driven largely by the research, development, and training provided by large U.S. tech companies.”
— Former Google employees have founded “over 2,000 startups in nearly every sector of the U.S. economy,” supporting continued growth and innovation in the technology sector and helping to maintain America’s competitive edge, says Fong. “Google alumni are also behind innovative startups like Blueberry Pediatrics, which enables parents to access pediatricians on their smartphones, and Aquabyte, which leverages machine learning to make fish farming more efficient and sustainable. These are just a handful of tech companies that might not even exist without Google’s vast investments in research, development, and training.”
Across the corporate landscape, more talented workers are leaving to pursue self-employment, write Eddie Yoon and Christopher Lochhead in Harvard Business Review. “What is striking is that these folks were not poor performers being forced out who started their own solo businesses out of necessity. Quite the opposite: all were star performers who chose to reject the traditional large company career path. All had discovered a relevant niche they were uniquely excellent at, and that they had more upside working outside of the constraints of one large company.”