A Time When Having No Business Model is a Business Model

The New York Times has a fascinating account of Google's purchase of Waze.  Waze does not make a significant profit.  The purchase by Google is clearly a strategic acquisition.  It seems increasingly common for large American technology companies to purchase small startups for incredibly high prices  for one of two reasons:

The startup provides an important technology missing from the company's portfolio.  This technology may serve a distinct, but important, set of customers (including developers); or the technology provides an important service for all customers.  An example of this would be Apple's acquisition of Siri in 2010, or Facebook's recent purchase of Parse.

Despite not having a business model (or at least a profit model) the startup has managed to attract a large base of followers.  This was the case with Facebook's purchase of Instagram in 2012, and Yahoo's purchase of Tumblr in 2013.  It was not as if Instagram held the keys to some incredible patented algorithm that Facebook's engineers could not figure out.  It simply had amassed a large amount of users in a space that Facebook was already interested in.  It remains to be seen in Four Square's case, if attracting a significant amount of loyal/influential users is as meaningful as the raw total number accumulated.

Anecdotally, it seems mindshare trumps niche when evaluating the size of these purchases.  The latter mentioned examples are an order of magnitude larger in dollars than the former.  Waze may check both the niche and mindshare boxes.

Of course, companies always made strategic acquisitions of unprofitable colleagues.  What is new is the incredible evaluations used when relatively tiny (but attractive) tech startups find their way onto the acquisition block.  This creates a whole new landscape for successful entrepreneurs to traverse.  One where acquiring users (or technologies) maybe ultimately as valuable as acquiring dollars.  So, perhaps it is not that these startups have no business model - it is just that they have no profit model.

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I teach Computer Science to college students, develop software, podcast, and write books about programming including the Classic Computer Science Problems series. I'm the publisher of the hyper local newsletter BTV Daily.

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Based on tdSimple originally by Lasantha Bandara and released under the CC By 3.0.