After any large acquisition, “bubble talk” begins immediately. The skepticism generally centers on why a certain company was acquired at such a high revenue or earnings multiple. However, what I find most interesting about this acquisition is not digging into the financial metrics but rather the story the acquisition price per employee tells about the tech startup ecosystem.
Popular wisdom says that when too much money goes after too few ideas, there is a bubble in startup land (the Silicon Valley version of Mo Money, Mo Problems). But capital being flowing into the tech sector in itself does not cause a bubble. Instead, I believe that crashes are caused by a dilution of talent. When a team scales, it becomes difficult to attract great people because there are only so many SUPER interesting roles, and so much equity to go around. Why should a great person take a less than amazing role at a pay cut with limited equity, instead of starting their own company or getting a brand name company on their resume? This only becomes exacerbated when there is an investment boon. As more startup capital becomes available, more companies are started. Talent is scarce, but companies are mandated to grow and have to put B players in A roles. This is also why so many great companies are started during a downturn (facebook, YouTube, etc.). Less capital means there are fewer startups which means talent is more concentrated. Money is definitely flowing into startups at the moment. So why do I believe this “bubble” is different?
My answer: each team member can have a larger impact on a company. WhatsApp had 55 employees and was bought for $19B. Instagram had 16 employees and was bought for $1B. SnapChat had less than 30 (approx.) employees and had a $3B offer. In each of these companies, founders and key early employees were not diluted in a greater pool of workers and they were able to maintain influence in a more nimble organization. Leadership is able to focus less on organizational design, HR, finance, sales, and other issues and more on forming an immensely scalable, powerful product. The following factors allow companies to have a greater impact per employee:
- Distribution: Getting your product in the hands of millions billions of users has never been easier. The App Store, Google Play, Social Media, and other channels are accelerating the impact quality has on customer acquisition. The cost of releasing your product to a very small number of people was astronomical just 10 years ago, let alone when Steve Case at AOL needed to print millions of CDs to get AOL and AIM messaging off the ground. In addition to the size of the network, the connectedness of the internet further reinforces tracking, optimization, and virality of services. Build a great product and get it noticed and it can really take off. Each and every day the market grows as more people come online. And to summarize an Essay by Paul Graham with the language of Gordon Gecko: “Growth is good.”
- Advent of the API: The proliferation of the API web services enabled the WhatsApp team to punch above their weight to achieve scale. These services created an effective network of engineers at other companies that were at WhatsApp’s command. Take payment processing as an example. WhatsApp was able to leverage the thousands of engineers at Google Wallet and Paypal to handle their payments infrastructure. Or look at Snapchat. Instead of building their own server infrastructure, they have built their service on top of Google App Engine. Thousands of other companies use AWS, Microsoft Azure, or other web infrastructure services. Hundreds of other APIs can be tapped into to accelerate development, but more importantly, they allow teams to stay small, nimble, and exceptional.
The WhatsApp acquisition highlights an extremely exciting trend in the startup ecosystem: more capital in the market means more companies are being started, but a stretched talent pool will not limit the creation of great companies like it has in the past. The API and distribution mechanics now enable great people to do more with less. I am in Marc Andreesen’s camp, software is eating the world, and I believe it is still only on its first course.
 much more data, albeit stale, on acquisition price to employees available courtesy of Wired.com here: http://www.wired.com/business/2012/04/opinion-baio-instagram-trend/