“…valuations that are based as much on narrative as fact…”
“There’s a sucker born every minute.” -attributed to P T Barnum
In my 36+ year tech career, starting in silicon valley, I had a hand in acquisition due diligence or transition a few times, but mostly like the rest of us was a spectator, both of acquisitions and of mega venture investments.
One pattern I’ve seen is that most of the time the acquirer is paying a rational price for a revenue stream, a technology capability (or patent portfolio); but some of the time the acquirer is paying for a dream, for a hypothetical synergy of what the acquisition could become as part of the acquirer’s portfolio. More often than I’d like our industry to admit, that dream is woven by an extraordinarily skilled seller, and results in a rich seller and a total writeoff by the acquirer.
There is some “is the emperor actually wearing clothes” due diligence CEOs and boards should do when brought a dream: (1) show me the customers, (2) does this space already have entrenched players such that there is no possibility of what we’re buying ever getting dominant share, (3) what is the revenue ceiling of this space, (4) is this a transient or permanent opportunity, and are we valuing it as such, (5) what will the competitive and regulatory response be if we play out this dream?
Applying these tests, with all due respect to Gene Amdahl, Trilogy would never have been funded to the tune of a third of a billion dollars of venture capital in the mid 1980s; none of the useless .com companies would have been funded in the late 1990s; Cisco wouldn’t have moved into consumer products; NetApps wouldn’t have bought Decru (i was working on similar technology for a competitor at the time and took for granted everyone understood encryption boxes were a transient opportunity); and Facebook probably would have thought twice about Oculus’ valuation.
