Why Big Tech Companies Acquire Smaller Startups and Do Corporate VC Investment
So first a caveat: I know just enough about financial accounting to be dangerous. Second caveat: I’m way, way oversimplifying things.
But with that out of the way, let’s talk just enough about financial accounting to explain why Big Tech Companies both acquire smaller ones — and do corporate VC investment.
Acquiring Smaller Startups
Because in the short-term, it often costs basically close to nothing to acquire a smaller startup with cash on hand, or do a corporate VC investment.
- Big Tech Companies can acquire smaller startups with cash on hand
- Acquiring smaller startups has minimal financial cost in the short-term
Let’s take Salesforce as an example. It has basically $12.5 Billion in cash in the bank (cash, cash equivalents, and marketable securities) — and much more to come in accounts receivable, another $10.75 Billion.
Limitations of Cash on Hand
But here’s the thing: they can’t do that much with that $12.5+ Billion cash. For most uses, it’s sort of trapped there on the balance sheet.
- Salesforce has committed to getting to 30% operating margins
- Every dollar spent on expenses cuts into those margins
- Investments don’t directly impact margins unless the value declines
Benefits of Acquisitions and Corporate VC Investments
Investments and acquisitions have lower financial costs compared to other expenses.
- Investments don’t impact margins unless the value declines
- Acquisitions can be done with cash, minimizing dilution and direct financial impact
- Cash can be converted to other items on the balance sheet
Considerations for Big Tech Companies
No BigCo wants to overpay for acquisitions or corporate VC investments. They are playing a different game than others.
- Effective financial cost can be low or even zero if the value doesn’t go down
- M&A and corporate VC are ways to use cash without harming earnings
- Hiring engineers and other ongoing operating costs impact earnings immediately
Big Tech Companies strategically acquire smaller startups and make corporate VC investments to utilize their cash effectively without impacting earnings. By doing so, they can grow their business and expand their market presence.