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December 18, 2005


Peter Rip


I have to disagree with the premise that companies' and VC's decisions are based on the same process.

Pre-revenue acquistions place a much higher emphasis on people than markets or technology. This is because people are fungible and can be (and usually are) re-directed to an "integrated" version of the original vision. Public companies buy pre-revenue companies because their public stock options usually make it unattractive to entrepreneurial talent. They pay $15-30M valuations to effectively give these people cheap (unvested) stock or stock equivalents and not screw up their internal hiring guidelines. I am sure you have heard of the $1M-2M/engineer algorithm. This is just the most unabashed version of the process.

Criteria are more similar to VCs in acquisition of post-revenue companies because now earnings diluition/accretion proxies for VC ROI. Even then there is a 40-100% "control premium" which is due to the buyer's desire to potentially re-direct the people. This is part of why acquisitions usually don't work. Entrepreneurial people eschew the buyer's control.

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