Why Big Companies Buy Small Startups

Last month LinkedIn ($9.3 billion market cap) bought Rapportive for $15 million, which according to LinkedIn (naturally), has less than five people (LinkedIn Rapportive search). Rapportive, which is a great product that I use daily, is a dedicated Gmail plugin that takes the email address of the To: or From: address and shows social information like profile photo, recent tweets, links to Twitter/LinkedIn/Facebook profile, and more. It’s an awesome tool.

Now, why would LinkedIn pay $15 million cash for a Gmail plugin that on the surface looks like the LinkedIn piece could be written in one week by a talented developer?

Here are some reasons why big companiesĀ on occasion pay good money for small startups:

  • Time to market – Rapportive already has a raving fan base that loves the solid product
  • Talent acquisition – The Rapportive co-founders have built a killer product and likely have ideas for many more ways to make the product better with additional resources supplied by LinkedIn (or LinkedIn wants the talent to spearhead the development of a new product)
  • Competitive preemptive move – If LinkedIn didn’t acquire them someone else that’s trying to be more social (Google?) might pick them up
  • Cost of capital – If LinkedIn is sitting on a ton of cash or has a low cost of capital, which it does due to the large market cap and lack of leverage, putting the money to use immediately, even at premium, helps the company grow faster and create more enterprise value

With engineering resources scarce, and new product development tough (I’ve seen it fail twice inside a small company), big companies buy small startups to get a proven commodity that is already successful.

What else? What are some other reasons why big companies buy small startups?

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