by Nestor E. Arellano

There’s usually a lot of media hoopla, happy dances and high fives following announcements of a big biz acquisition of a promising tech industry startup.

The general perception is that a company that has struggled to develop its product and get it to market is finally getting the recognition, backing and mega bucks it deserves to get its game to the next level. In many cases, the reality is a business to which an entrepreneur had poured his heart and soul to, is most likely being closed down.

For many large conglomerates acquisition is not so much about getting its hands on technology as it is about a tech talent grab.

Nestor Arellano

Take the case of Summify, the Vancouver-based social summarizing tool purchased by Twitter last month. Summify is cool. It connected all your social networking feeds such as blogs, Facebook and Twitter. Then it automatically summarizes which content and updates are most relevant to you.

When Twitter bought the company they actually bought the team behind it. Co-founders Mircea Pasoi and Christian Strat and three engineers were reported to be on their way to San Franciscoto work at Twitter’s head office.

We’ve heard no complaints from the company’s founders. Summify investors are happy about the purchased. But basically, Summify has been blown off the map. The company used to have an iPhone app, but now Summify is no longer available in the App Store. Summify also stopped accepting new users soon after the acquisition announcement.

The same fate is shared by Gowalla’s founders and some members of its team who have gone to work for Facebook after the two-year-old location-based social network was bought by the social media giant. Both Gowalla and Facebook’s Places (the company’s own location-based check-in service) competed with Foursquare. It might appear that the Gowalla purchase was meant to cover a hole in Facebook’s lineup after it had phased out Places following dismal adoption rates.

But again the focus was on the talent behind the company. 

“We’re excited to confirm that Gowalla co-founders Josh Williams and Scott Raymond, along with other members of the Gowalla team, are moving to Facebook in January to join our design and engineering teams…While Facebook isn’t acquiring the Gowalla service or technology, we’re sure that the inspiration behind Gowalla will make its way into Facebook over time,” read a statement from Facebook obtained by the online news organization Talking Points Memo

Google Inc., whose  recent acquisition binge includes Motorola and Toronto-based mobile music app PushLife, has been doing this for sometime of course. After snapping up VoIP telephony service Gizmo5 in 2009, Google, some two years later, announced it was shutting down the company. Ergo with Aardvark, the social search service Google purchased for $50 million in 2010 and closed in 2011.

Of course acquisitions also provide major benefits to the entrepreneurial environment:

  • Acquisitions create repeat entrepreneurs – Founders of tech startups lucky enough to cash in their chips for an early exit can get back in the game with a new idea of company.
  • Investors get positive returns – Investors in a startup end up pocketing positive returns for their investment. Acquisitions can be deemed as a reward to startup founders and capital investor which hopefully will be encourage to plunk in more money on promising small companies.
  • Canadian startups get more capital – For startup that don’t get closed down by their purchasers, acquisition could be a quick way to get financial backing which they can’t obtain otherwise.
  • Entrepreneurs benefit from mentorship – Operators of fledgling tech companies can benefit from the knowledge and mentorship they get from larger companies that gobble them up.

Related story – UPDATE: Toronto-based Dayforce to be acquired by Ceridian

Despite these pluses, I can’t help but think that the buy-and-close scenario is a bitter sweet experience for the startup founder. In one hand, you get the affirmation that your ideas and your labour are worth major moolah. On the other hand, you are watching over the disintegration of something you had nurtured to fruition – albeit you’re doing it with a few millions in your pocket.

The dirty downside to startup snap ups is that in many cases these acquired companies are not allowed to grow. The small companies are typically early stage firms that still have small customer bases and revenues.

In most cases, they are not being bought because of their technology but rather because the large companies buying them have hit a rough patch in their tech talent pool. Farmville owner Zynga for instance found a quick way to boost its mobile app development capabilities by purchasing Toronto mobile app developer Five Mobile. The Five Mobile founders have now joined Zynga Toronto.

By nipping small businesses in the bud, the growth of a tech industry middle class is curtailed. Buy-and-close strategies prevent startups from flourishing into the next OpenText or successors to this country’s Nortel and RIM.

Furthermore, the practice contributes to the bleeding of  talent from the country. When local startup founders close up shop and take their tech teams with them south of the border to work for their new owners, guess who ends up losing tech talent.

 

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