If it’s too expensive to build it, buy it

Implications: As the VC market changes its model from IPO to acquisition, many funding firms have paused to catch their breath. The drawback is most acquiring companies have not lost their appetite for the hunt. This statement leaves one conclusion- be flexible in your philosophy or wait on the sidelines and miss some great opportunities.

Analysis:

IBM’s acquisition of Palisades Technology is a great example of how larger companies are thinking; if we don’t want to spend the time and money developing branching out, why not buy an existing company in the market space?  Over the past few years, this has been the prevalent thought in the private equity industry. The likelihood of an IPO is becoming slim; turn-arounds are abundant, but where do you go once the company has turned the corner? Acquisitions. Many companies experiencing organic growth are doing so through reinvesting in existing markets or product upgrades that replace two-year old sales.  By acquiring companies with compatible product sets, larger companies have the opportunity to increase their market reach while further expanding sales through sales synergies.  IBM acquires Palisades Technology, Google buys YouTube, and McAfee purchases Citadel Security.  All of these recent acquisitions alien in one strategy- we can either reinvest our operating dollars and time in developing a new market, or go after an existing company with proven success and a strong name.

Even though a rare IPO will capture headlines, private companies with an acquisition exit strategy will continue to grab VC firms’ attention…at least until the market has a proven IPO pricing model. With the pain of the .com burst still burned in investors’ memories, this could take some time.