With Washington watching, will Facebook and Google keep buying startups?


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Lackquisitions

A consensus is emerging in Washington: Big Tech is too big, and lax regulators helped it get that way. Facebook and Google bulked up with their acquisitions of Instagram and YouTube, and now they’re untameable.

The last time American antitrust regulators lasered in on a big tech company — Microsoft, two decades ago — Silicon Valley cheered. And certainly there will be some who applaud Mark Zuckerberg and Larry Page getting their comeuppance. (Yelp, for one, has been talking about the evils of Google since as long as I can remember.)

But if antitrust enforcers really slow down tech’s startup-acquisition machine, there may be unintended and far-reaching consequences — good for some, bad for others.

For the past decade or so, Big Tech has offered a safety net for startups: If you have well-connected founders and a decent bench of engineers, someone will buy you just to get its hands on your employees. And if you have a social-networking app with a glimmer of a following, all the better: Facebook will snap you up just to shut it down.

It’s a heads-you-win, tails-you-win scenario that has had venture capitalists and startup founders breathing easy. There’s always a Big Tech bailout waiting in the wings.

The New York Times recently reported that Facebook passed on the acquisition of Houseparty, maker of a group video chat app, over concerns it wouldn’t get past the antitrust cops. Epic Games, the maker of popular video game “Fortnite,” bought it instead. It’s a rare turnabout for a company that bought would-be rivals Instagram and WhatsApp and tried to buy Snapchat maker Snap Inc.

Google seems to have been less active in acquisitions recently, aside from its $2.6 billion Looker deal. But it got away with plenty. Besides YouTube, it got to buy DoubleClick and AdMob to beef up its online advertising services without much fuss.

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The logic of these acquisitions is two-fold: They’re sometimes called “acquihires,” short for “acquire-hires.” Big tech companies can’t hire fast enough, so buying companies for their teams is a tool for mass recruitment. And there’s strategy, too — mostly about strangling potential competitors when they’re too young for anyone to notice or complain.

So what does it mean if antitrust cops put the brakes on this acquisition gravy train? For the truly brave entrepreneurs willing to compete with the giants, it could be a good thing, since they may face less pressure from investors to sell out.

But it’s also possible that investors will do the rational thing and be less willing to back startups. Roelof Botha, a venture capitalist at Sequoia Capital — which profited handsomely from this trend, having backed YouTube, Instagram and WhatsApp — explicitly mentioned the possibility of selling YouTube in his memo pitching the investment to partners.


I remember watching in a small room in a downtown San Francisco high-rise as Instagram co-founder Kevin Systrom testified at a Department of Corporations hearing about his startup’s sale to Facebook. Because Instagram’s 19 shareholders were all in California, only state officials, not the Securities and Exchange Commission, needed to give it clearance. After some brief remarks, regulators declared the transaction “just, fair and equitable” — and Systrom, much wealthier, would spend the next six years in Zuckerberg’s service. (He quit Instagram in October to pursue flying lessons.)

A less acquisitive valley would be a big change from the past decade. It will probably cause some serious recalculations in South of Market and on Sand Hill Road. Will it result in a healthier tech sector? That’s the big and unknowable question.

— Owen Thomas, othomas@sfchronicle.com

Quote of the week

“What Twitter represents is spiritual to me.” — Jack Dorsey, to fitness podcaster Rich Roll

Coming up

Cisco, which just reported layoffs to the state of California, reveals its earnings Wednesday.

What I’m reading

Luke Kurtis spent $15,000 on Apple services over the past 11 years. When the company locked him out of his Apple account, it was all worthless. (Quartz)

Roland Li reports on Square’s future neighbor in Oakland: an outpost of Shake Shack. (San Francisco Chronicle)

Nitasha Tiku on Google’s employee revolt. (Wired)

Tech Chronicle is a thrice-weekly newsletter from Owen Thomas, The Chronicle’s business editor, and the rest of the tech team. Follow along on Twitter: @techchronicle and Instagram: @techchronicle





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