A few years ago, entrepreneurs had the same aspiring party line for investors and partners, “… and we’ll be acquired by [insert big tech giant here] within 18-24 months.” While Google and Yahoo did enjoy a nice startup-shopping spree back in 2013-2014, there’s been a fundamental shift in the acquisition landscape: the majority of major tech companies have slowed their M&A.
Year to date, Google has only announced six US-based startup acquisitions — down from 16 in 2015 and 35 in 2014. [Update: Google’s US-based acquisitions are actually now up to seven, with the Orbitera deal announced last week.] Yahoo, once lovingly referred to as a “soft landing” – or in extreme cases the “graveyard” for companies that couldn’t raise their next round – is now obsolete under Verizon’s reign. Meanwhile, Facebook has only publicly announced three acquisitions this year; historically it has purchased six (2015), nine (2014), and 10 (2013) companies. The odds of winning that lottery are slim when you’re one of thousands of startups vying for attention.
But in this new reality, there remains a group of stable, viable buyers: brands.
The rise of corporate venture capital has been widely covered. At the start of 2016, there were approximately 1,200 corporate venture arms (CVCs) and roughly 25% of all venture deals in Q2’16 included a CVC. These are often strategic initiatives intended to “future proof” the business, act as advanced R&D outlet, acquire new customers, or accelerate growth in emerging revenue streams.
Brands are not only investing in but also acquiring startups. We recently heard that Walmart is acquiring two-year-old Jet for $3.3 billion. This comes on the heels of another monster acquisition: Unilever made an unprecedented $1 billion acquisition of Dollar Shave Club, enabling it to combat P&G’s dominance in the shaving market while collecting unique consumer and data insights in the process.
Other brands are strategically taking advantage of the increasing number of fallen stars. For example, Bed Bath & Beyond, recently acquiring One King’s Lane. Once considered a darling worth almost $900 million, it was reportedly sold for pennies to the dollar, deemed “immaterial.” A similar story played out with Hudson Bay’s acquisition of Gilt (previously valued at $1 billion+, acquired for $250 million).
Large players in the fitness category have scooped up several companies to advance their businesses, too. Adidas acquired Runtastic for $240 million. UnderArmour acquired MyFitnessPal ($475 million) after purchasing MapMyFitness in 2013 ($150 million). Asics played catch-up, acquiring RunKeeper ($85 million), and Nike purchased Virgin Mega.
Prior to breaking out the checkbook it’s become common to invest and test-drive the relationship. This can enable brands to pilot, learn, and begin to understand new business models and customer behavior. Grocery delivery startup Instacart has continued to expand its relationship with Whole Foods, and GM’s recent $500 million investment in Lyft could be a nice signal of its final parking spot.
In financial services, while Citi invested a substantial amount in Square, Visa and American Express have a stake in Stripe. This disruption is impacting every vertical, and the exit values clearly have the ability to rival the previous “usual suspect” acquirers.
Helping to advance this trend, there are now several opportunities for brands to immerse themselves in the startup community and many accessible resources to get started, such as Crowd Company’s framework of 10 Types of Corporate Innovation Programs and “Avoiding Innovation Theater: 6 Decisions to Consider before Establishing an Innovation Outpost”. Players such as Evol8tion and Partnered have matured to foster these connections by helping companies navigate the startup ecosystem and recently launched Touchdown Ventures offers brands their expertise to manage an outsourced corporate venture arm.
With investors more focused on unit economics than on “growth at all costs”, capital will continue to be increasingly difficult to come by in the private market. In the coming months, unicorns looking to support unsustainable burn rates will need to cut costs, focus on profitability, raise additional capital, or find an exit. Between a weak IPO market and brands poised to spend their stockpiled cash, the trend of Fortune 500 buyers will continue.
These are my predictions for the next wave of brand acquisitions over the next 18 months:
- Zenefits and Salesforce, benefitting by expanding HR capabilities
- Lyft and GM, tying the knot assuming a healthy engagement
- Doordash acquired by a brand such as Walgreens or Target, advancing delivery capabilities
- Flipkart and Amazon, helping to expand to the Indian market
- Hulu and a major media company, such as Comcast or Time Warner to accelerate online growth
Brand innovation is alive, but embracing threats that could put them out of business – either by investing in or acquiring external companies that have a significant head start — could be a lifesaver.
Jessica Peltz-Zatulove is a Partner at KBS Ventures.