Is a Lack of Exit Options Killing Innovation?

By Kyle Austin

There was some great debate in the blogosphere last week on how a lack of exit strategies for start-ups, that need to return on venture money, is killing innovation. The debate was spawned by a post from Fred Wilson of Union Square Ventures. In his post Wilson opinions that the IPO market is currently closed, leaving only mergers and acquisitions as viable ways out. While this option is making Fred, a lot of other VC’s and entrepreneurs rich; it’s also a killer of innovation.

As Fred notes:

“We’ve sold three in the past couple years out of our Union Square Ventures portfolio, delicious, FeedBurner, and TACODA, to Yahoo!, Google, and AOL, respectively. Were we happy to take their money? Yes. Were we happy with the outcome? Yes. Were they good buys for their new owners? On the face of it, yes.

But if you look deeper, I wonder. Delicious grew nicely for a while under Yahoo!’s ownership but recently the user base has fallen off pretty dramatically. I double checked this chart in compete and alexa and they all show the dropoff. Well, what about FeedBurner? Clearly Google has done a good job with that acquisition. Well I am not sure. I don’t see any integration between Adwords and FeedBurner yet. I can’t buy FeedBurner inventory through Google’s text ad interface. I honestly don’t see any additional money flowing to me, the publisher of the feed, since the Google acquisition. There’s no way to know what the rate of signup by publishers has been since the acquisition, but I wonder if it’s increased much.

And TACODA? I know that TACODA had an incredible fourth quarter post the acquisition by AOL, blowing way past the numbers we were projecting in our annual budget. But in the first quarter, AOL fired Curt Viebranz, TACODA’s CEO, and many of the top members of the TACODA team are now gone from AOL. Another acquisition messed up.”

His basic point being that start-up services never reach their true potential once they are acquired. Umair Haque at Harvard Business Online added to these thoughts with his post later last week:

“Let’s revisit the spectre haunting venture capital. Why aren’t there more Googles? The answer’s very simple. Because every company that had the potential to be economically revolutionary over the last five years sold out long before it ever had the chance to revolutionize anything economically.

Think about that for a second. Every single one: Myspace, Skype,,, Right Media, the works. All sold out to behemoths who are destroying, with Kafkaesque precision, every ounce of radical innovation within them. Let’s replay the Google story. Google, despite serious interest from Microsoft and Yahoo – what must have seemed like lucrative interest at the time – didn’t sell out. Google might simply have been nothing but Yahoo’s or MSN’s search box.

Why isn’t it? Because Google had a deeply felt sense of purpose: a conviction to change the world for the better. Because it did, it held on and revolutionized the advertising value chain – and, in turn, capital markets gave Google an exuberant welcome.See the point? If all Larry, Sergey, and Google’s investors had wanted to do was to sell out fast to the highest bidder, they could have done so at any time. But they didn’t: they chose to revolutionize something that sucked – and so a tsunami of new value was unlocked. That’s how Google was made.”

So what current start-up(s) have the resolve to pass on a billion dollar short term exit strategy and the conviction to keep a close hold to the company mission statement(s) that they want to implore? I could probably count them with one hand. Entrepreneurs may fault impatient investors (But Wilson and other’s I’ve heard chat about the topic say that’s just a myth). The truth may be a more somber tale.

Whether it’s lack of faith in turning out consistent and predictable growth and earnings quarter over quarter (for years), that rightly shies then away from public markets, or a lack of a sense of business purpose to change the world that creates the itch to sell – today’s entrepreneur seems happy to “settle” for a quick payday, even if that means signing off on the slow death of the enterprise that they have shed blood, sweat and tears on.

That may make a lot of “us” rich but it doesn’t create game changing businesses. Further more when we turn to put on our consumer shoes we’re left with seeing our favorite applications and platforms slowly evolving into unrecognizable and disinteresting shells of their former selves under their new leadership. Or worse, we’re greeted with a combination of our favorite applications becoming a corporate mega-merger-smorgasbord.

NewsMicroHoo!OogleBook anyone? May the force be with you Mr. Zuckerberg.

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