Recent acquisition activity in the social media space indicates that start-ups may be increasingly viewed as attractive asset targets. In other words, given that many of these companies generate little (and in most cases, no) cash, they offer little value to a prospective acquirer outside of their ability to enhance the buyer's IT strategy. The target may bolster the acquirer’s top line by providing significant cost savings, faster deployment of new business initiatives, and, in many cases, talented managers who are compelled to stay on as part of the deal.
Nokia's recent acquisitions of mobile software maker Cellity, microsocial network Plum, and social travel site Dopplr are examples of such a strategy. Nokia is clearly seeking to buy a social network infrastructure rather than build one organically. Whether this strategy is viable remains to be seen (analysts have referred to it as rearranging deck chairs on the Titanic), but it is clearly warranted given the competitive threat from RIMM and Apple. Interesting note: The language of the Cellity press release actually states that "Nokia and Cellity have reached an agreement for Nokia to acquire the Cellity team" (emphasis added). Cellity is going away, and apparently Nokia values the 14 member team at somewhere between $10 and $20 million.
Intuit's acquisition of Mint, also motivated by competitive concerns, is an example as well. Intuit clearly was not purchasing a set of cash flows with Mint. Rather, Intuit saw an opportunity to buy an asset in the form of Mint's user base which could then be monetized via Intuit's current platform offerings (and dispense with a significant and growing threat).
As economic recovery takes hold, the popularity of these transactions will likely increase as businesses seek to develop a social media infrastructure, whether for internal efficiencies or for external growth. This is both good news and bad news founders and investors. The good news is that a path to much-needed liquidity is now opening for start-ups without much hope for an IPO. The bad news: valuations will adjust downward as they reflect the difference between a cash-generating enterprise and one which adds value as a strategic asset. A recent extreme example: Shutterfly's acquisition of Tiny Pictures for $1.3 million in cash. Tiny had raised over $11.2 million, and just closed $7.2 in series B in February, 2008. This is clearly not a happy exit, and is a cautionary tale illustrating the risk of valuing non-revenue generating entities.
The upshot: Rather than rely on faith (and burn cash) waiting for a market to appear (not everyone can be Twitter), start-ups and investors would do well to consider positioning their companies as attractive acquisition targets from the outset.
