Does it always pay to be the market leader upstart?

Today, two Techstars companies were acquired, MadKast and Intense Debate. Techstars is the Y-Combinator-like incubator program that gives small seed stage investments to take young entrepreneurs and their ideas from an idea in most cases, to a full-fledged prototype. Both upstarts barely got off the ground before they were acquired, a strong testament to the Techstars network, and the value add of the startups themselves.

One of the intersting things that I’ve started to notice lately is that the supposed market leader wasn’t the one that was acquired. I’ve seen this with Jaiku and now with Intense Debate and Madkast. For Intense Debate, Disqus was seen as the market leader among the Techmeme crowd, followed by JS-Kit. Disqus seems to have quite a bit of the A-list crowd installing their comment plug-in to enhance their community. Rarely have I heard much about Intense Debate, other than the mentions that they are the “other” company in the space. To be fair, they are very, very early in the process, and they don’t have the VC endorsement that Disqus has, with Union Square Ventures. I would probably install one on my blog, but I don’t get enough visitors to even warrant that : ) 

The interesting thing about Automattic’s (makers of WordPress) purchase of Intense Debate is that conventional wisdom says that you acquire the market leader, and that the entreprenurial team should aspire to be the market leader in their space, even if that means the only way to do that is to raise boatloads of money. But what additional value would Automattic have received by acquiring Disqus?  They would have probably paid an order of magnitude more for Disqus than for Intense Debate, in my opinion, just in the same way Google would have paid substantially more for Twitter than for Jaiku. Disqus has the VC investment, so they’re probably looking for a more substantial return on the $500M investment they received, whereas Intense Debate has just $15M in funding (from Crunchbase). If Intense Debate was acquired for a couple million bucks, or even a couple million bucks cash and stock in Automattic, it would be a nice return on investment in a short amount of time. Something they can throw in the bank, earn a little interest, and think about their next startup, where they can get boatloads of funding, because they were previously successful in a startup in a short amount of time. Maybe then it makes sense to try for the home run after having some personal financial security.

Perhaps this is the anomoly more than the norm, but for first time entrepreneurs against better funded competitors, perhaps the next strategy is just to continue to create substantial value, keep expenses low, reject large capital infusions, and create an awesome product. On the flip side, if I were Automattic, it makes perfect sense to acquire someone like Intense Debate, where I have the distribution model to make their plug-in more widely distributed, instead of paying 2 to 3 times what I would have paid Disqus. Instead, I use that extra money to help the newly acquired team figure out ways that redefines it’s product, to encourage people to switch from Disqus to Intense Debate/WordPress.

It’ll be interesting to see if this trend develops more in the future, but it appears that entrepreneurs have many more opportunities to be candidates for strategic acquisitions, if they minimize the capital they take, at the expense of not being able to increase headcount and potential distribution channels. I wonder if someone has a chart that illustrates for every dollar in VC they raise, what is the corresponding pay-out they’d need in a liquidity event to earn the same amount without VC. If the founders of Intense Debate all received a million bucks from Automattic, how much would they have had to sell for if they had raised a million bucks? Would the market have even tolerated that type of expected payout? I know you can do the VC method to back in to this number or some simple back of the envelope math, but it would be interesting to see a chart that showed the direct relationship.

Is a platform really a platform, if you deny harmless apps?

On of the interesting developments over the weekend, was of Fraser Speirs, developer of a Podcasting  application, for the iPhone application directory, a listing of downloadable applications to go directly on the iPhone and iPod Touch. 

Fraser writes that the Podcasting application he created, “would allow one to update podcasts directly on the device over wifi. I sync my iPhone to my Mac Pro – should I have to go home to put a new episode on my iPhone? I’d buy that app in a heartbeat.” Apple essentailly denied the application because it competes with Apple’s podcasting platform and as expected, Fraser is pissed off that it was denied. In addition to the countless hours spent on this application, the opportunity cost of developing something else, and any costs he incurred of creating it, my major takeaway is that Apple has taken a hard stance on what will be listed in the Apps Directory. This isn’t preventing apps like the $1,000 featureless application or an application that comprises user security or showcases people getting stabbed.

This is something that may have been innovative that may have created significant value add to the users. Isn’t that the whole reason the App store exists? Isn’t the app directory free R&D for Apple? 

In my mind, having an open platform accomplishes a couple of significant goals:

• Free R&D so developers can engage and cater towards the long tail, people that Apple may not dedicate resources to because they aren’t a large demographic
• Create an ecosystem of innovation for people outside of Apple’s headquarters; people that can see opportunities outside of the establishment
• A farm system to acquire talent and value added applications (See Friendfeed’s acquisition of Benjamin Golub, creator of a popular Friendfeed API application and founder of RSSmeme)
• Get the early adopter crowd supporting your mission
• For Apple, it’s just another reason to have people buy more iPhones/iTouches (and eventually MacBooks), which is their major source of revenue.

As Arrington mentioned today, there isn’t going to be a mass exodus from the Apple iPhone platform. The iPhone platform is one of the most viral platforms that any of us has ever known, on pace for over a billion applications downloaded in the near future. With Apple and the rest of the bigco’s opening up and conquering more and more territories (and spaces), it will be interesting to see what verticals they will jump in to, and preventing any competition from getting any traction. If Apple launches a killer bookmarking tool, will they kill the Evernote application? Or will they get grandfathered in? I’m being highly sarcastic here, but wouldn’t it have been a better PR move to acquire the podcasting platform for a couple million bucks (if it was even that good where Apple had to worry), something that’s a rounding error on Apple’s quarterly statements?  That way, everyone gets excited and thinks that their app may be the next to be acquired, and they focus on creating value for the platform, and improving on Apple’s current model. It’s easy to say from my vantage point, but I hope Apple doesn’t take the early Myspace route and block applications left and right, something Myspace was notorious for, until they were forced to change. 

Google Chrome: Evil?

Last night, there was quite the buzz in the blogosphere over Google Chrome, the Google, open-source browser that is going to compete with Internet Explorer, Firefox, Opera, and Safari. There are all types of opportunities that everyone see where Google can (potentially) add value, in conjunction with their other applications, cloud computing, and search engine monster. In just over 24 hours before Techcrunch scooped the screenshots, there were over 1,000 stories within 24 hours, without anyone being able to download it (although now you can download it at google.com/chrome).

Although some are less than impressed with this release, and I am in agreement with Hank’s take on this. Despite this, I must say that there is something else that concerned me about this product release.

Google is the classic “frienemy”, but always seems to escape that bad PR that should come with competing against business partners. For those of you that do not know, Google has just re-signed a three year partnership deal with the makers of Firefox to be the default search bar on their browser. In the past, Google has been the major revenue source for Mozilla. Were they aware of the Google Browser when they signed this deal? Can they be trusted?

The New York Times today has an article on Google’s frienemy status, and I just don’t know how they avoid any negative PR for slowly turning into the monster that competes with all of their product partners, something that Microsoft has always been unable to do. I guess classifying it as “open-source” will make everyone feel that Google isn’t directly competing, but we’ll see how long this happens. I don’t know if Google Chrome is evil, but it sure shows me that Google is slowly assembling a massive army to be the backbone of the internet. Google Chrome is a purported Web operating system, so let’s see how much development they have six months from know. Even their supposed Wikipedia killer, Google Knol, seems more and more like a spamfest than an actually replacement for Wikipedia. Chalk this up to the big-hype, let’s see how this goes category.