The “Build It/Flip It” Bubble Discussion

Great post from Ross re A Flip/Flop Bubble of Microventures? in which he “attacks” the concept of startups launched and bankrolled by former “bubble entrepreneurs” for the sole purpose of flipping them to large established players.

[…] there are a ton of former entrepreneurs getting back in the game these days. The lure isn’t just that markets are opening again. A mindset is developing in the valley that you can and should develop startups for quick flips. If you have your own cash, you can seed a play like this yourself, filling a targeted niche — both in product, market and engineering expertise. I even heard of a major portal getting into seed funding to encourage it. Perhaps this whole thing was started by Google’s micro-acquisitions. I don’t have any data on this trend, as it is the most private part of equity, but it is the talk of many a Silicon Valley coffee shop.

I’ve always believed the VC No
of “is it a product, or a feature” is lazy thinking. All great products
start as features and great teams evolve them with a mission in mind.
The flip approach avoids this entirely. Just focus on the feature.
Think for a minute how inefficient a market can be when the spoils of a
previous bubble can be invested by seeding flips targeted to buyers
instead of companies targeting real customers with real business models. […]

That discussion is not new, and as I wrote quite a few times, I just don’t see how you can successfully build a company to flip it and make reasonable money doing so (reasonable meaning that the founders end up with windfalls of at least several million dollars) — and not just a cool sign-on bonus (which is the case in micro-transactions like the ones Ross is referring to).

What we have seen in the past few months are early takeouts of promising companies that had assets, talents and buzz that justified for their acquirers spending tens of millions of dollars (Bloglines, Flickr, …). In some cases, a choice was made by the founders to get cash now, and scale the company leveraging much larger footprint and resources, as opposed to playing optionality, accept the dilution of VC financing rounds, and have a go at it alone.

I would venture that you can’t build a company solely with the express intent to flip it, because you can never plan where your potential acquirers will be in their own development as you are “getting ready” for a take out. Not even mentioning the fact that if you don’t have more than one company interested in what you have, negotiating the price becomes challenging… if ever you get there in a first place.

Built to last, with the option of an early take-out, is where I see opportunities.

I disagree on one point though: “[…] and the amount of creative destruction this (building to flip) could incent […]”. So many innovative technology or concepts remain at feature stage, meaning they can never be turned into a product or a “real” company, that allowing their inventors to reap some (limited) rewards through such an exit is actually not a bad thing. Better for a technology to get some usage by a large company than accumulating dust (or being “mothballed”).