The LinkedIn acquisition is great news for tech startups. Here’s why.
Aside from taking the wind out of the sails of Apple’s WWDC conference, Microsoft’s acquisition of LinkedIn marks the second >$25B transaction in 2016 (there were 13 in 2015) and is huge news for tech startups of all stripes.
Is this an indication that the sky isn’t falling in Silicon Valley? Let’s take a look at this big play in SaaS software (yes, SaaS — LinkedIn has a premium subscription model) by the numbers.
This massive acquisition is a far cry from the jitters around LinkedIn’s $11B loss in market value just a few months ago. The fallout of that announcement reverberated throughout the Valley, creating investor and founder uncertainty without a whole lot of solid reasoning behind it other than “mega money isn’t being thrown around in such an insane manner anymore.”
When I interviewed Tomasz Tunguz in April, he appeared to be the lone VC voice of optimism amid the “why-are-there-no-IPOs” panic in Silicon Valley. He had good reason to be: he was looking at the data.
“There’s been a big correction in SaaS valuations, but business is still growing,” he told me then.
“There’s no apparent slow down the buyer demand. There are certain categories, like sales and marketing technology, where there were 500 vendors two years ago, 1,000 a year ago, and around 2,500 now. That’s an over-supply problem, which is not a bad thing!
“A lack of demand problem is a totally a different story, because then there aren’t enough buyers for your SaaS product. Now what ends up happening is there’s just a ton of competition.”
“Startups are dragging prices down, and they’re just taking some of the pie that’s growing.”
There’s so much more investment benchmarking going on today than there was a decade ago — more than even five years ago. Investors today really know what’s going on, Tomasz told me, yet Microsoft’s largest acquisition is already drawing bewilderment — especially in light of the fact that their LinkedIn shares were purchased at a 50% premium.
Even then, cynicism can’t erase almost $40B in SaaS M&A since January. SOMEthing is driving this M&A activity. Here’s how Tomasz explains it:
This acquisition will have three implications for startups. First, the transaction informs future M&A multiples. Second, the acquisition has the potential to upend the CRM market. Salesforce + RelateIQ and Microsoft Dynamics + LinkedIn. Two leading CRM products with some form of intelligent data entry (at least, that’s the vision I presume).
And that raises the question, Will being a CRM system of record without intelligence be enough to succeed? Third, this likely removes LinkedIn from the buyer segment of the M&A market as the company works through its sale.
Valuation multiples are higher because M&A activity is picking up. This is great news for any startup. With nearly $40B in SaaS M&A so far this year, 2016 is shaping up to be the best year for SaaS M&A ever.
The big question(s) now will be around who’s next? Twitter’s share price has ticked up in response to the news. Other likely tech M&A targets are going to be the cause of much chatter and speculation in the weeks and months to come. (And oh hey, Bitcoin is rallying as well.) Pandora? Zynga? It’s suddenly an exciting time for startups again.
Check out the full interview with Tomasz Tunguz and much more at The Signal. Thanks to Tom Tunguz for his excellent posts that inspired this piece.
(Photo by Flickr user dbgg1979, made available under an Attribution 2.0 Generic license)
