Adeo Ressi: There’s a Liquidity Crunch and It’s Acquirers’ Fault

Corporate giants from Apple to Google, as well as other deep-pocketed companies, had better spend more of their historically high cash reserves buying startups and soon, or the startup ecosystem is doomed to implode.

So goes the controversial argument of Adeo Ressi, a serial entrepreneur who may be best-known in Silicon Valley for launching TheFunded.com, the site where entrepreneurs anonymously rate venture capitalists and other investors.

Ressi has plenty of reason to be thinking about exits. In 2009, he launched the for-profit mentoring program Founder Institute, an organization that charges students an average of $800 $1,495 for 16 weeks in exchange for company-building exercises and advice from successful founders. The entrepreneurs who participate agree to contribute 3.5% of their company to a pool whose returns are then distributed to the Founder Institute, to the mentors who volunteer their time, and to the graduates themselves.

Ressi tells me Founder Institute has already helped launch 807 startups in 50 cities. And 45% of those companies have received outside funding, mostly from angel investors. Of that group, 7% have raised venture funding. Another 10% have closed down.

That’s a lot of companies out of just one accelerator program, of which there are now more than 150 in the United States, based on some estimates. Still, Ressi doesn’t believe that there are too many startups with too similar ideas receiving too much funding from too many angels. He instead likens the startup ecosystem to a “house of cards that will collapse” if the business development departments of major companies don’t “adapt.”

Here’s the problem in his view: Deals such as Yammer’s $1.2 billion sale to Microsoft last year and Tumblr’s recent $1.1 billion sale to Yahoo are fine, but they represent old-school thinking in that both Yammer and Tumblr were larger companies with sizable employee bases that had raised a decent amount of venture capital at specific valuations. They’re the kinds of companies that “development guys at larger companies” know how to acquire, he says.

Far more confounding to acquirers, says Ressi, is the now typical “company that has raised $2 million over two rounds from angel investors and with a team of five people is building a business on a scale that used to require many more resources and people. [Acquirers] worry that if they buy the company for $25 million or $50 million or $100 million and one of those five people leaves, a big chunk of money has just walked out the door with them.”’

Whether corporate M&A units are truly confused is debatable. Google, for example, has acquired hundreds of companies since its founding, from its $12.5 billion purchase of Motorola Mobility in 2011 to the $10 million acquisition of fflick, a site devoted to reviews and news of films based on information collected on Twitter, that same year. This April alone, it nabbed the Seattle-based natural language processing startup Wavii, for which it reportedly paid about $30 million, and Behavio, a three-person, mobile-data company started by MIT Media Lab alums.

Yet even Google – which Ressi places above any other tech company in terms of acquisitions strategies – isn’t doing enough, he says. For one thing, it often allows splashier startups to land in the hands of competitors, giving them an edge. He points to Yahoo’s high-stakes gamble on Tumblr, calling it the kind of deal that “suddenly has everyone looking at Yahoo like a legitimate, relevant player. Suddenly, it’s, ‘Yeah, I could talk to Yahoo.’ Even with CEO Marissa Mayer at the helm, that was not the case a month ago.”

More important, Ressi says, the companies that can afford to acquire startups should do so to protect the ecosystem that is right now thriving around them.

“Look at the facts,” he says. “You’ve got a ton of small companies that have consumer and business mind share. And you have a ton of large companies seeking relevance that have a ton of cash.” If the big companies would shift a “little bit” more of that cash toward acquiring more of those small companies, it would “create more liquidity and a more sustainable growth pattern.”

As for the obvious argument that enterprises like Google, Apple, and the like aren’t in the charity business, Ressi says that while there “may be some truth to that,” spending too conservatively is short-sighted and could prove crippling.

“If the gravy train stops, if the startup movement derails, those big companies will get hurt alongside the small companies and their investors,” he says. “I don’t know if it’s 5% or 10% or 20% [of large companies’ revenue], but the reality is that a lot of [the large companies’ business] comes from [small- to medium-size businesses], including startups. If they collapse, everyone will suffer. There will be blood in the water.”

(Correction: This story originally stated that the Founder Institute charges students $1,495 for a 16-week session; according to the Institute, that price is for San Francisco students only.)

For a list of 10 Founder Institute companies to receive institutional funding, along with details about those financings, please see the story on Venture Capital Journal. (Subscribers only.)

Image courtesy of Founder Institute.

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4 Comments

  • I’m in agreement with Ressi on several points. Seems that large companies have not been acquiring enough given the quality of startups and availability of capital. Sure, it’s nice to see some of those startups grow up into influential standalone companies. But that obviously doesn’t work for everyone.

  • The underlying assumption in this article is severely flawed. Start-ups should grow up into self-sustaining, revenue producing businesses. Otherwise they will die. To blame larger corporations for not buying your start-up reeks of entitlement. If your whole reason for starting or investing in a start-up is to do a quick flip in 2-3 years, you need to examine your reasons again.

    • Abhijeet is right. Plus it’s not necessarily in the best interest of these bigco’s to see a thriving start-up ecosystem. Innovation represents a threat to their profits. They’d much rather just compete with each other than with each other + 1000 startups. Remember the goal of capitalism is to get to monopoly state, and pretend you’re not a monopoly (as Peter Thiel would say).

  • When start ups create products with real market demand, the companies will get the attention of market incumbents. The excess of available capital, ease of creating new toys, and low alternative costs has resulted in too many start ups with too few sustainably valuable products. Companies that cannot attract sustainable market demand – either from the end customers or from prospedtive corporate acquirers – should die. Who said all of these start up are entitled to an exit?

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