Last year corporate America went on a startup-buying spree. Non-tech companies alone spent nearly $10 billion on young, venture capital-backed businesses in 2016. These aren’t the conservative and clearly complementary acquisitions we’re used to seeing from corporations, either. These days large companies are increasingly partnering with, investing in, and acquiring startups that seek to disrupt their own core business—and doing so for a seemingly astronomical cost. However, large corporates don’t spend their money frivolously. Below, I look at three venture capital-backed upstarts that were worth every penny of their $1 billion-plus price tags, and consider what lessons they can teach other startups courting large corporate partners.
- Wal-Mart / Jet.com: At $3.3 billion, Wal-Mart’s acquisition of Jet.com in the largest deal to date for an online startup. That alone has made critics suggest that it’s a waste of money—i.e., how good of a deal are you getting if you’re setting the price ceiling? Furthermore Jet, despite its promised $1 billion run rate, is still burning cash and often not making a profit on sales.
What we miss when we focus just on those fundamentals is that Jet is a way for Wal-Mart to counter its greatest weakness and make a play against one of its strongest competitors—Amazon. Despite six decades of success as a brick-and-mortar retailer, Wal-Mart has consistently struggled to compete online. Wal-Mart’s third-party marketplace, of a 2013 vintage, has barely grown to 100 sellers.
Jet is not just a me-too competitor but a real innovator, incorporating dynamic pricing based on warehouse location into its model and incorporating the best of AI to ensure that the client experience is exemplary—a very different selling point than Walmart has traditionally focused on.
The lesson for entrepreneurs: Pay attention to the weak spots of would-be acquirers—what technologies do you have that they’ve been unable to develop themselves? If you can help them patch those holes, you will become a very attractive acquisition candidate. Also worth noting: though $3.3 billion might seem like a lot of money, at a $1 billion run rate, it’s just a 3x multiple—a perfectly reasonable retail acquisition.
- General Motors / Cruise Automation: Last spring, automotive behemoth GM closed on its $1 billion acquisition of Cruise Automation. The San Francisco-based startup develops software for self-driving vehicles, a technology that seemingly threatens GM’s core business as a legacy automobile manufacturer. But maybe more shockingly, GM paid all that cash for a startup that hadn’t even launched a product yet.
All the trials and triumphs of building a business – delivered to your inbox.
However, it might be said that GM didn’t really have much choice. Its competitors are working to develop new technology for autonomous cars—with Cruise, GM at least has a chance to beat front-runners like Google and Tesla to the punch. Before it pivoted to software, Cruise created a $10,000 retrofit kit that was supposed to make any car autonomous on highways (where a lack of pedestrians makes navigation simpler). Post-acquisition, Cruise is outfitting Chevrolet Bolt electric cars with autonomous driving equipment—though they remain secretive about what technology is actually been deployed.
Even with the program in its infancy, however, GM has high hopes. Last January it entered into a partnership with ride-sharing service Lyft that it hopes will result in a fleet of robo-taxis—a pilot program for driverless non-taxi cars to come.
The lesson for entrepreneurs: Don’t be afraid to compete with the big names in your industry—even if they have a head start. When Cruise was founded, Google had already been working on self-driving cars for a half-decade, which would seem to place upstarts at a disadvantage. But automakers are hungry to own the technology that they see as the future of their industry, and buying Waymo from Google is not an option. It’s no surprise that Cruise got such a high price even in a crowded field.
- Unilever / Dollar Shave Club: Dollar Shave Club made a name for itself as a cheaper alternative to store-bought razors, offering a delivery subscription for as little as $3 a month. When consumer goods company Unilever—maker of Axe body spray and Dove soap—purchased the company last summer for a reported $1 billion, some hailed the deal as a victory for the new wave of subscription-based ecommerce companies, which also includes Birchbox, Loot Crate, and Le Tote.
A brief look at Dollar Shave Club’s marketing materials makes it clear, however, that Unilever is investing in much more than an extensive mailing list. From the irreverent YouTube video it used to launch its brand, to the “Bathroom Minutes” magazine customers receive with their orders, the company deftly connects with the young men it targets. Large brands like Unilever tend to struggle with this type of direct-to-consumer brand building, especially when it comes to developing an authentic brand voice—a prerequisite for reaching social media-savvy Millennials. In a blog post, early investor David Pakman lauded Dollar Shave Club’s transition to “a trusted men’s lifestyle brand,” noting that its social-media-focused marketing campaigns were able to undercut incumbents focused on traditional media for a fraction of the cost.
The lesson for entrepreneurs: Marketing isn’t just an add-on. With millennials redefining how consumers respond to advertising, marketing can become a core business innovation if you do it right. Unilever didn’t pay 5x revenue for Dollar Shave Club’s ecommerce business—it paid that much for its proven ability to build an authentic new media brand.
