After traveling to Utah to view the annular eclipse in November, an experience that was absolutely incredible, both because of the eclipse itself and because of the people with whom we shared it, Lenore and I knew we had to travel somewhere to view the great North American total eclipse of 2024. After looking at cloud coverage maps, it didn’t take long to make our decision: we needed to go to Durango City, Mexico.

Now, despite being a location of deep and fascinating history, beautiful architecture, and delicious food, Durango isn’t exactly a common tourist destination, which means, in the past, traveling there would have been a bit challenging. Fortunately for us, ten years ago a brand new highway was opened that connects Mazatlán to Durango, turning what was once a 7 to 8 hour journey across a highway colourfully referred to as The Devil’s Backbone into a 3-4 hour trip through 63 tunnels and across one of the highest cable-stayed bridges in the world.

Realizing this, we came up with our plan: we’d fly into Mazatlán, spend a couple of days there, and then take a bus to Durango the day before the eclipse, tour around that afternoon, view the eclipse the next day, and then return to Mazatlán the day after and enjoy a few more days of sun and sand before flying home.

I would’ve never guessed that bus trip would turn into one of my favourite memories from the trip. And not for the reasons you’d expect.

The tech company lifecycle

Schematically, the life-cycle of a technology company has traditionally followed the following rough trajectory:

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1. Come up with idea
2. Get funding
3. Grow business
4. …
5. Exit

Before the folks in the back object, yes, I realize this is an incredibly simplified model. The transition from step 1 to 2 often never happens at all. Steps 2 and 3 are not so much linear steps as repeating cycles of growth and investment. And before step 5 ever happens, the vast majority of startups outright fail.

But, schematically, this captures the essence.

In those early stages, the typical sources of funding come from individuals or organizations with a single primary goal: to make money. The deal is fairly straight forward: An investor identifies what she believes is a promising company. She’s impressed by the idea and the team and she believes that there’s real potential for the company to grow and succeed. Recognizing the potential, she and the owners of the company strike a deal: she’ll provide the company with money, and in exchange she’ll receive some ownership stake. Her expectation is that, over time, the company will increase in value, as will her ownership stake, and so at step 5, she’ll be able to cash in that stake and make a profit.

Critically, these financially motivated investors have one goal in mind: to see the value of the company increase. Now, that value can take many forms: cashflows, intellectual property, talent, sales channels, etc. But so long as there is a viable path that ends with the investor selling their stake and making a profit, they’re happy. This is known as the exit.

But exit it must. After all, the investors aren’t in it for charity. They’re in it for profit, and at some point, they gotta be able to cash in their chips.

Now, by and large, the motivations of the investor and the motivations of the company are aligned on a primary goal: to make the company more valuable<footnote about “valuable” doing a lot of work in this sentence>.

That’s not to say there isn’t conflict. The founder, who is passionate about his idea and his team, might want to grow the company, while the investor may want to minimize costs in order to maximize the runway and reduce the chance that her ownership stake could be diluted in a subsequent funding round. The founder might find himself wanting to pursue a half dozen new ideas, each of which might have some promise of success, while the investor might prefer to minimize her risk by focusing on a known, proven idea.

But, fundamentally, the goal of the founder and the investor are basically the same.

But what does an exit look like?

Well, the archetypal exit, the one that I suspect most people imagine, is the IPO: that moment when a private company transforms itself into a public one, at which time those investors can sell their stakes on the open market, hopefully for a nice, healthy profit.

But going public is far from the only way to exit, and in fact the less common one. Taking statistics from S&P:

Global M&A activity and equity issuance fell sharply in 2022 after reaching some high marks in 2021, according to S&P Global Market Intelligence’s newly released Global Q4 2022 M&A and Equity Offerings report. The total value of global announced M&A fell 35.8% year over year to $2.983 trillion, while the total value of global equity issuance plummeted 66.6% to $351.76 billion.

So in what was a down year across the board, M&A activity still dwarfed IPO activity by many multiples.

In the past, these acquisitions would typically involve one technology company swallowing up another one, though these days, thanks to the decline of the IPO, we’re also seeing the rise of refinancing deals among private investors who are stuck holding onto older, mature, private companies. But in either case, the investor is able to cash in by selling their stake to the acquiring firm.

The balkanization of tech

One thing you might immediately notice about the life-cycle of a small tech companies is that only in a fraction of cases do we end up with large companies. Rather, as has been discussed endlessly, large tech companies have used acquisitions as a way to eliminate competition and monopolize whole markets. Folks familiar with this issue will likely immediately think about the then-Facebook acquisition of Instagram, a purchase that, even at the time, set off alarm bells amongst competition advocates. But that acquisition is only the most visible of what has become a trope in the valley: start up a small company, get some seed funding, then show enough potential to be acquired by Google or Facebook. Lather, rinse, repeat.

In fact, it’s likely that many of the products that you, dear reader, are most familiar with are the product of an acquisition. Google, famously, acquired a large number of its tent pole properties: DoubleClick YouTube, Android, and Google Docs, among many many others.

There are many motivations for a technology company to acquire another. I suspect the first thing that folks think about is something like those aforementioned Google acquisitions: one company buys another because they want to add their distinctiveness to their own.

However, there are many other motivations. There’s what folks in the business refer to as the acquihire: one company buys another, not for their technology, but for their team.

Perhaps the startup possesses some other unique IP–patents, trademarks or brand awareness, etc–that the acquirer is interested in. This is often the playbook of patent trolls, who acquire a company’s IP in order to engage in frivolous lawsuits, but it’s just as commonly done by large companies looking to build their own arsenal of patents, often for defensive purposes.

But these days, with companies like Google and Facebook throwing off gushers of cash, we’ve increasingly seen what I think of as the catch-and-kill acquisition. In this case, the acquirer seeks out potential competition and acquires them only to shut down their operations<insert footnote about Notion acquiring Skiff), thereby eliminating possible competition and protecting their monopoly position.

Regardless of their motivations, the end result is big technology companies getting bigger by killing off smaller players in the space.

Neo-antitrust

The origins of antitrust

The Bork decision

The revival/reinvention of antitrust as a market structural issue

Scrutiny on big tech acquisitions

The strategic investor

Microsoft/OpenAI deal

Strategic investors aren’t

Unaligned incentives