Dear SaaStr: Why do big companies buy small companies instead of competing?
Well, first of all, they often do both. They often start off competing, at least a bit. Salesforce paid $27 Billion for Slack. But that came years after they spent tens of millions on “Chatter”, a failed collaboration tool. Facebook competed with Instagram before it bought it. There are many examples.
But then why do they go ahead and pay up and buy a startup? 3 reasons:
- Time, and sometimes,
Any top-tier Big Tech Company can clearly compete with any start-up. Be under no illusions that they can’t. They can grab 5–25 or more extra engineers (unlike you, the BigCos have extra, talented engineers they literally can repurpose), use your app as a framework, and copy it. Absolutely they can.
The problem is:
- By the time they decide to copy you, do copy you, and launch … you are usually at least 2–3 years ahead.
- What they copy isn’t what you are building now, or planning to launch soon, but what you built 6–12 months ago. They start off way behind where you will shortly be.
- They don’t know the customers, or at least, the use case as well as you do. That also often leads to a slow start.
- If the business itself is different than their core business, they may not have the right leadership talent internally.
- It is hard to catch up in a niche once a start-up has achieved some escape velocity there. Already, you may have a mini-brand, and a stronger one than you realize.
So yes, in theory, “Build. Buy. Or Partner” is a set of options. But in reality, there is a clear ranking of which of the 3 is best for a BigCo at any given time.
If they are behind and want to catch up — then Buy is usually simplest, at least in the short term. It saves the most time.
If they aren’t sure what they want to do, and want to learn first — Partner is usually easiest.
And if it’s core to the business and they think they have time, Build is probably best. You don’t have to be first to market to win.
(Of course, buying someone else’s code base, team, baggage, etc. does come with a lot of taxes and soft costs).