VC Perspectives

Although IBM in many ways looked like a more likely candidate, it now seems like Oracle instead will acquire SUN. Some questions immediately spring to mind:

• Why did SUN reject the IBM offer?
• What’s in it for Oracle?
• What will happen to MySQL?

As for the first question, I don’t think it was valuation. IBM offer is believed to have been around $6.85-7 billion and Oracle’s bid is supposed to be around $7.4 billion (or $5.6 billion net of Sun’s cash and debt). More important was probably the fear of SUN that the deal wouldn’t go through, because lack of commitment from IBM for example in case the deal would be subject to an antitrust review. More views on this question from Bloomberg.

As for the second question, Oracle is officially mentioning control of Java and Solaris as the main reasons, but I think there are a few more. The acquisition will help Oracle to really take on IBM as it can start offering integrated hardware and software solutions. Through the indirect takeover of MySQL, it also enables them to remove an important competitor while taking an even more powerful stab at IBM in the database market. Henrik Torstensson has posted a link to a good analysis by GigaOM of the acquisition.

As for what perhaps is the question closest to our Nordic hearts, Monty Widenius co-founder of MySQL offers some thoughts on his blog Monty Says. Knowing what problems SUN have had in integrating MySQL (and still SUN is a much more open source friendly and savvy company than Oracle), my feeling is that Oracle have a gigantic task at hand making the MySQL integration successful and I woudn’t be surprised if we will see many more MySQL employees leaving the company sooner rather than later. Maybe an opportunity for other open source companies to pick up some very talented people…

This week, Fredrik and I attended Riskkapital 2009, an annual event organized by SVCA covering the Private Equity industry (including business angels, venture capital and buyout).

During the event, I had the pleasure of listening to a very interesting presentation by Deborah Magid, Director Software Strategy at IBM Venture Capital Group, on how IBM works with acquisitions.

IBM has made 77 acqusitions since 2003 of which almost half were VC-backed. What IBM usually can bring to the acquired companies is increased reach, Deborah mentioned that their acquisitions generally double their revenue within two years. Almost all of the acquired companies were partners of IBM in one form or another but ranged from stealth projects to giants like Cognos.

For IBM an acqusition decision is very much about a build vs buy vs partner decision menaing that they are interested in acqusitions when it takes too long to build it themselves or when an acqusition can increase the strategic value more than a partnership.

Finally she gave some advice to entrepreneurs:

• Build the best company you can (good companies are bought not sold, and IBM only wants to buy the best companies out there)
• Hire the best people you possibly can
• Understand your market and your customer, and put the customer above all else
• Form strategic alliances. Don’t try to go into the market alone to get reach into the market

Wheras I fully second the three first points, I would like to issue a few words of caution on the value of partnerships from a start-up perspective.

Partnerships are only as good as the actual financial benefits they bring to both parties. Just adding a sales partner does not necessarily add value unless the partner actually works hard to sell your stuff (and remember that they probably have lots of other partners and usually some own products & services too).

They best way to build a good partnership is often to build it on actual business opportunities where the customer sees value in your product or even better if you have managed to close a deal under the nose of the potential partner. But it doesn’t stop there, to really get a partner promoting your products or services, you usually must put in a lot of effort in making life easy for the partner. This means training of sales reps, providing sales material and support, and being out there together with the partner selling (after all, who knows your stuff better than yourself).

So yes, partnerships can be a great way to scale up the sales and to increase reach (and in some markets you even need a partner to be able to sell at all) but it won’t just happen without lots of hard work and actual profits in the pocket of the partner.