HPE is buying Cray for $1.3 billion

HPE announced it was buying Cray for $1.3 billion, giving it access to the company’s high performance computing portfolio, and perhaps a foothold into quantum computing in the future.

The purchase price was $35 a share, a $5.19 premium over yesterday’s close of $29.81 a share. Cray was founded in the 1970s and for a time represented the cutting edge of super computing in the United States, but times have changed, and as the market has shifted, a deal like this makes sense.

Ray Wang, founder and principal analyst at Constellation Research says this is about consolidation at the high end of the market. “This is a smart acquisition for HPE. Cray has been losing money for some time but had a great portfolio of IP and patents that is key for the quantum era,” he told TechCrunch.

While HPE’s president and CEO Antonio Neri didn’t see it in those terms, he did see an opportunity in combining the two organizations. “By combining our world-class teams and technology, we will have the opportunity to drive the next generation of high performance computing and play an important part in advancing the way people live and work,” he said in a statement.

Cray CEO and president Peter Ungaro agreed. “We believe that the combination of Cray and HPE creates an industry leader in the fast-growing High-Performance Computing and AI markets and creates a number of opportunities that neither company would likely be able to capture on their own,” he wrote in a blog post announcing the deal.

While it’s not clear how this will work over time, this type of consolidation usually involves some job loss on the operations side of the house as the two companies become one. It is also unclear how this will affect Cray’s customers as it moves to become part of HPE but HPE has plans to create a high performance computing product family using its new assets.

HPE was formed when HP split into two companies in 2014. HP Inc. was the printer division, while HPE was the enterprise side.

The deal is subject to the typical regulatory oversight, but if all goes well, it is expected to close in HPE’s fiscal Q1 2020.

VMware acquires Bitnami to deliver packaged applications anywhere

VMware announced today that it’s acquiring Bitnami, the package application company that was a member of the Y Combinator Winter 2013 class. The companies didn’t share the purchase price.

With Bitnami, the company can now deliver more than 130 popular software packages in a variety of formats such as Docker containers or virtual machine, an approach that should be attractive for VMware as it makes its transformation to be more of a cloud services company.

“Upon close, Bitnami will enable our customers to easily deploy application packages on any cloud — public or hybrid — and in the most optimal format — virtual machine (VM), containers and Kubernetes helm charts. Further, Bitnami will be able to augment our existing efforts to deliver a curated marketplace to VMware customers that offers a rich set of applications and development environments in addition to infrastructure software,” the company wrote in a blog post announcing the deal.

Per usual, Bitnami’s founders see the exit through the prism of being able to build out the platform faster with the help of a much larger company. “Joining forces with VMware means that we will be able to both double-down on the breadth and depth of our current offering and bring Bitnami to even more clouds as well as accelerating our push into the enterprise,” the founders wrote in a blog post on the company website.

The company has raised a modest $1.1 million since its founding in 2011 and says that it has been profitable since early days when it took the funding. In the blog post, the company states that nothing will change for customers from their perspective.

“In a way, nothing is changing. We will continue to develop and maintain our application catalog across all the platforms we support and even expand to additional ones. Additionally, if you are a company using Bitnami in production, a lot of new opportunities just opened up.”

Time will tell whether that is the case, but it is likely that Bitnami will be able to expand its offerings as part of a larger organization like VMware.

VMware is a member of the Dell federation of products and came over as part of the massive $67 billion EMC deal in 2016. The company operates independently, is sold as a separate company on the stock market and makes its own acquisitions.

Bubble-driven boom in M&As hides steep costs long-term

Driven by ultra-easy central bank policy, global merger and acquisition activity is exploding. The value of transactions in the first eight months of 2018 reached $3.3 trillion worldwide, a 39% increase from 2017, and the market can expect another record-setting year in 2019. What does this mean? The data suggests that optimism about the efficacy of M&As has never been higher. Businesses are increasingly looking to M&As as the way to grow.

Growth is good, but growth can also be cancerous. Financial and strategic calculus may suggest a perfect fit between two companies, but that calculus is mostly irrelevant to the long-term success of an M&A transaction. What looks on paper to be a perfect fit ends up in protracted conflict arising from a mismatch of cultures, values and ideologies. Those intangible factors are often only obvious in hindsight, and it is tempting for decision makers to ignore them because of their very intangibility; after all, if it is not part of the model, it cannot possibly exist, right?

Most acquisitions fail. That is the sobering reality. 

Issues of high executive turnover, labored transition periods and lowered production standards arise when businesses either jump into a deal too quickly or leave internal disagreements unchecked for too long. It is not a secret that M&As have drawbacks, and a lot of ink has been spilled outlining the potential pitfalls of mergers and acquisitions. For a lot of companies, staying private and addressing issues internally is the best path to steady growth. It may not make for a bold headline or improve a company’s financial valuation, but there are real benefits to avoiding M&As altogether.

Facebook’s WhatsApp and Instagram acquisitions will rank among the most successful in all of tech. Yet, even with that success, issues of culture and values have come to the fore longer term.

Late-stage executive churn

In 2003, the Harvard Business Review looked at executive churn within targeted companies. It reported, “On average, about a quarter of the executives in acquired top management teams leave within the first year, a departure rate about three times higher than in comparable companies that haven’t been acquired. An additional 15% depart in the second year, roughly double the normal turnover rate.”

Upon further research, the Harvard Business Review survey found that “executives continued to depart at twice the normal rate for a minimum of nine years after the acquisition.” If we look at a company like Facebook, the Harvard study’s churn timeline doesn’t seem so far-fetched.

Back in 2012, Mark Zuckerberg was unjustly mocked for what was then an unthinkable $1 billion bid to buy Instagram. Five years later, Instagram was seen as perhaps Facebook’s most successful acquisition. Then, from disagreements with Facebook and the urge to start something new, Kevin Systrom and Mike Krieger, the co-founders of Instagram, exited the company at the end of last year. Nicole Jackson Colaco, Instagram’s director of Public Policy, left the company in early 2018. Around the same time, Keith Peiris, Instagram’s AR/Camera product lead, moved on as well. According to TechCrunch, “Instagram’s COO Marne Levine who was known as a strong unifying force, went back to lead partnerships at Facebook. Without an immediate replacement named, Instagram started to look more like just a product division within Facebook.”

Growth is good, but growth can also be cancerous.

Loss of autonomy — and even the perceived loss of autonomy — can be a prime driver of executive churn at targeted companies. In 2018, Facebook also lost Jan Koum, a board member and the co-founder of WhatsApp, the company Zuckerberg acquired in 2014 for $19 billion. Many speculated that Koum’s departure came after concerns about data privacy and Facebook’s advertising model. In either case, Koum’s departure was born out of concern for his company’s ability to function autonomously within Facebook — a concern, we’re learning, that was justified.

What we see here is the exodus of key decision-makers at two targeted companies. With Instagram and WhatsApp, Facebook is now left to move these properties forward without the help of critical executives who know the products they created more intimately than their acquirer ever could. It’s yet to be seen how much and in what ways these personnel changes will hurt Facebook’s bottom line. Facebook is still reporting substantial revenue growth year-over-year, but these recent departures make for a cloudier outlook. Keep in mind that WhatsApp and Instagram would count as major successes.

Righting the ship

Fortune ran an article in 2014 outlining some of the problems with acquisitions. One of the companies they reported on was Aptean, a roughly 1,500-person business software company formed in 2012 from a merger of CDC Software and Consona. Both CDC Software and Consona were the product of several previous acquisitions. The company had become a daisy chain of acquired businesses strung together under one name.

According to Aptean’s own chief architect, “The result was 30 companies that were really never integrated with each other. We had 30 vertically organized separate companies doing their own things, with their own tools. Everything from HR to software delivery and launch was in the hands of the product teams. There were attempts to try and solve that but there was really no interest.”

Aptean, like so many other companies, was not prepared for the herculean task of retraining and acclimating hundreds of workers. It can take years to onboard new teams, requiring long adjustment periods for employees who need to learn new systems and management styles. According to Forbes,”Worker experiences can vary dramatically even if values are aligned. You can speed up assimilation with focus, resources, support, communication and transparency, but it still takes time.”

Early M&A struggles can be managed, but it takes recognition at the point of conflict.

Acquisitions are often initiated to solve a problem then and there, so long acclimation periods require time most businesses don’t have or are unwilling to give. Aptean was willing to put in the work to shore up foreseeable issues that come from a business model built on mergers and acquisitions. If there’s one thing to learn from Aptean it’s that early M&A struggles can be managed, but it takes recognition at the point of conflict to enact a plan to remedy the situation.

One fairly recent M&A that has received a lot of attention is Amazon’s purchase of Whole Foods. If we look at Whole Foods one year after the acquisition, a familiar narrative to Facebook and Aptean arises, only now Amazon and Whole Foods have the added challenge of competing in the retail space while maintaining customer satisfaction.

Growing pains

Similar to Instagram and Whatsapp, Whole Foods was a big fish in a big pond that has been swallowed by a blue whale. To what end? As The Wall Street Journal points out, “More than a dozen executives and senior managers have left since Amazon acquired Whole Foods last year, according to former employees and recruiters steering them to new jobs.”

There appears to be little harmony between Amazon and Whole Foods right now, and the bruises are already showing. Whole Foods may be reporting a 19% rise in sales year-over-year, but customers are complaining about the quality of their produce. Businesses are weary of steep price hikes for prime shelving space, and perhaps most concerning of all, Amazon — the blue whale — isn’t getting the return on its investment.

Late last year, Forbes ran an article about the Amazon-Whole Foods deal, writing, “Amazon, even after acquiring Whole Foods for $13.7 billion in 2017 and offering two-hour grocery delivery service, is finding little success in the grocery business.” It may be that Amazon’s plans for Whole Foods are far-reaching and require several years to fall into place, but just like Facebook, the company is encountering problems now that if gone unaddressed could jeopardize the viability of the acquisition. Bloomberg reported that, “The number of Amazon Prime members who shop for groceries at least once a month declined in 2018 compared with 2017… The drop was surprising given the company’s Whole Foods investment and expansion of two-hour delivery service Prime Now.”

In the short-term, we see that shoppers at Whole Foods are unhappy, vendors are feeling pinched and Amazon is losing money to Walmart and Kroger and Target (businesses with more physical stores to service online orders). Looking ahead, Amazon’s plans for Whole Foods are ambitious, and with proper management of these early issues, this acquisition could prove beneficial to both companies, but only time will tell.

The perks of going it alone

An overwhelming majority of companies that engage in M&As are public. The reason for this is because public companies are accountable to their shareholders, who demand revenue growth year-over-year. The fastest way for a business to demonstrate growth and reinvest capital is to acquire another company. When financial valuations, shareholders and exit strategies are top of mind for a business, little attention is paid to company culture.

Good company culture is becoming harder to find as businesses increasingly turn to M&As to solve their problems.

Now consider a private company that avoids M&As. Over time, that company can benefit immensely from its autonomy. Money that would have otherwise been used to buy a competing business can be reinvested into R&D and far-reaching growth projects that may not suit the revenue timeline of a shareholder. Executive turnover is lower, which leads to lower churn, company-wide. These benefits contribute to company culture. Demonstrating good company culture means that employees stay longer and are given the opportunity to work on projects that excite them. Good company culture is becoming harder to find as businesses increasingly turn to M&As to solve their problems.

Look before you leap

Ultimately, expectations and creative control have always loomed large over the fate of any merger or acquisition. It is natural for a business to want to absorb the brain trust of a competing company. Buying out a business to integrate its products into your suite can be a sound financial practice as well. But when things go south — whether that be through executive churn at the targeted company or problems with integration — people rarely point to the baked-in complications associated with M&As as a responsible party.

With each acquisition, a business may be forfeiting a part of its core DNA. There are issues of long-term employee retention and ideological compatibility that weigh heavy on any M&A. What’s more, acquisitions can require 10-year implementation plans (or longer), but with such a high turnover rate, it becomes incredibly difficult to make the transition work.

In the abstract, warning against these issues can come off as patronizing. But with this year expected to bring more M&A activity than 2018, the best way for businesses to assess the merits of a merger or acquisition tomorrow is to study the troubles befallen many high-profile companies today.

Microsoft delves deeper into IoT with Express Logic acquisition

Microsoft has never been shy about being acquisitive, and today it announced it’s buying Express Logic, a San Diego company that has developed a real-time operating system (RTOS) aimed at controlling the growing number of IoT devices in the world.

The companies did not share the purchase price.

Express Logic is not some wide-eyed, pie-in-the-sky startup. It has been around for 23 years building (in its own words), “industrial-grade RTOS and middleware software solutions for embedded and IoT developers.” The company boasts some 6.2 billion (yes, billion) devices running its systems. That number did not escape Sam George, director of Azure IoT at Microsoft, but as he wrote in a blog post announcing the deal, there is a reason for this popularity.

“This widespread popularity is driven by demand for technology to support resource constrained environments, especially those that require safety and security,” George wrote.

Holger Mueller, an analyst with Constellation Research, says that market share also gives Microsoft instant platform credibility. “This is a key acquisition for Microsoft: on the strategy side Microsoft is showing it is serious with investing heavily into IoT, and on the product side it’s a key step to get into the operating system code of the popular RTOS,” Mueller told TechCrunch.

The beauty of Express Logic’s approach is that it can work in low-power and low resource environments and offers a proven solution for a range or products. “Manufacturers building products across a range of categories — from low capacity sensors like lightbulbs and temperature gauges to air conditioners, medical devices and network appliances  –leverage the size, safety and security benefits of Express Logic solutions to achieve faster time to market,” George wrote.

Writing in a blog post to his customers announcing the deal, Express Logic CEO William E. Lamie, expressed optimism that the company can grow even further as part of the Microsoft family. “Effective immediately, our ThreadX RTOS and supporting software technology, as well as our talented engineering staff join Microsoft. This complements Microsoft’s existing premier security offering in the microcontroller space,” he wrote.

Microsoft is getting an established company with a proven product that can help it scale its Azure IoT business. The acquisition is part of a $5 billion investment in IoT the company announced last April that includes a number of Azure pieces such as Azure Sphere, Azure Digital Twins, Azure IoT Edge, Azure Maps and Azure IoT Central.

“With this acquisition, we will unlock access to billions of new connected endpoints, grow the number of devices that can seamlessly connect to Azure and enable new intelligent capabilities. Express Logic’s ThreadX RTOS joins Microsoft’s growing support for IoT devices and is complementary with Azure Sphere, our premier security offering in the microcontroller space,” George wrote.

Salesforce is buying MapAnything, a startup that raised over $84 million

Salesforce announced today it’s buying another company built on its platform. This time it’s MapAnything, which as the name implies, helps companies build location-based workflows, something that could come in handy for sales or service calls.

The companies did not reveal the selling price, and Salesforce didn’t have anything to add beyond a brief press release announcing the deal.

“The addition of MapAnything to Salesforce will help the world’s leading brands accurately plan: how many people they need, where to put them, how to make them as productive as possible, how to track what’s being done in real time and what they can learn to improve going forward,” Salesforce wrote in the statement announcing the deal.

It was a logical acquisition on many levels. In addition to being built on the Salesforce platform, the product was sold through the Salesforce AppExchange, and over the years MapAnything has been a Salesforce SI Partner, an ISV Premier Partner, according the company.

“Salesforce’s pending acquisition of MapAnything comes at a critical time for brands. Customer Experience is rapidly overtaking price as the leading reason companies win in the market. Leading companies like MillerCoors, Michelin, Unilever, Synchrony Financial and Mohawk Industries have all seen how location-enabled field sales and service professionals can focus on the right activities against the right customers, improving their productivity, and allowing them to provide value in every interaction,” company co-founder and CEO John Stewart wrote in a blog post announcing the deal.

MapAnything boasts 1900 customers in total, and that is likely to grow substantially once it officially becomes part of the Salesforce family later this year.

MapAnything was founded in 2009, so it’s been around long enough to raise over $84 million, according to Crunchbase. Last year, we covered the company’s $33.1 million Series B round, which was led by Columbus Nova.

At the time of the funding CEO John Stewart told me that his company’s products present location data more logically on a map instead of in a table. ‘“Our Core product helps users (most often field-based sales or service workers) visualize their data on a map, interact with it to drive productivity, and then use geolocation services like our mobile app or complex routing to determine the right cadence to meet them,” Stewart told me last year.

It raised an additional $42.5 million last November. Investors included General Motors Ventures and (unsurprisingly) Salesforce Ventures.

Accenture announces intent to buy French cloud consulting firm

As Google Cloud Next opened today in San Francisco, Accenture announced its intent to acquire Cirruseo, a French cloud consulting firm that specializes in Google Cloud intelligence services. The companies did not share the terms of the deal.

Accenture says that Cirruseo’s strength and deep experience in Google’s cloud-based artificial intelligence solutions should help as Accenture expands its own AI practice. Google TensorFlow and other intelligence solutions are a popular approach to AI and machine learning, and the purchase should help give Accenture a leg up in this area, especially in the French market.

“The addition of Cirruseo would be a significant step forward in our growth strategy in France, bringing a strong team of Google Cloud specialists to Accenture,” Olivier Girard, Accenture’s geographic unit managing director for France and Benelux said in a statement.

With the acquisition, should it pass French regulatory muster, the company would add a team of 100 specialists trained in Google Cloud and G Suite to the an existing team of 2600 Google specialists worldwide.

The company sees this as a way to enhance its artificial intelligence and machine learning expertise in general, while giving it a much strong market placement in France in particular and the EU in general.

As the company stated there are some hurdles before the deal becomes official. “The acquisition requires prior consultation with the relevant works councils and would be subject to customary closing conditions,” Accenture indicated in a statement. Should all that come to pass, then Cirruseo will become part of Accenture.

Competition policy must change to help startups fight ‘winner takes all’ platforms, says UK report

A independent report commissioned by the UK government to examine how competition policy needs to adapt itself for the digital age has concluded that tech giants don’t face adequate competition and the law needs updating to address what it dubs the “novel” challenges of ‘winner takes all’ platforms.

The panel also recommends more policy interventions to actively support startups, including a code of conduct for “the most significant digital platforms”; and measures to foster data portability, open standards and interoperability to help generate competitive momentum for rival innovations.

UK chancellor Philip Hammond announced the competition market review last summer, saying the government was committed to asking “the big questions about how we ensure these new digital markets work for everyone”.

The culmination of the review — a 150-page report, published today, entitled Unlocking digital competition — is the work of the government’s digital competition expert panel which is chaired by former U.S. president Barack Obama’s chief economic advisor, professor Jason Furman.

“The digital sector has created substantial benefits but these have come at the cost of increasing dominance of a few companies which is limiting competition and consumer choice and innovation. Some say this is inevitable or even desirable. I think the UK can do better,” Furman said today in a statement.

In the report the panel writes that it believes competition policy should be “given the tools to tackle new challenges, not radically shifted away from its established basis”.

“In particular, policy should remain based on careful weighing of economic evidence and models,” they suggest, arguing also that “consumer welfare” remains the “appropriate perspective to motivate competition policy” — and rejecting the idea that a completely new approach is needed.

But, crucially, their view of consumer welfare is a broad church, not a narrow price trench — with the report asserting that a consumer welfare basis to competition law is able to also take account of other things, including (but also not limited to) “choice, quality and innovation”. 

Furman said the panel, which was established in September 2018, has outlined “a balanced proposal to give people more control over their data, give small businesses more of a chance to enter and thrive, and create more predictability for the large digital companies”.

“These recommendations will deliver an economic boost driven by UK tech start-ups and innovation that will give consumers greater choice and protection,” he argues.

Commenting on the report’s publication, Hammond said: “Competition is fundamental to ensuring the market works in the interest of consumers, but we know some tech giants are still accumulating too much power, preventing smaller businesses from entering the market,” adding that: “The work of Jason Furman and the expert panel is invaluable in ensuring we’re at the forefront of delivering a competitive digital marketplace.”

The chancellor said that the government will “carefully examine” the proposals and respond later this year — with a plan for implementing changes he said are necessary “to ensure our digital markets are competitive and consumers get the level of choice they deserve”.

Pro-startup regulation required

The panel rejects the view — mostly loudly propounded by tech giants and their lobbying vehicles — that competition is thriving online, ergo no competition policy changes are needed.

It also rejects the argument that digital platforms are “natural monopolies” and competition is impossible — dismissing the idea of imposing utility-like regulation, such as in the energy sector.

Instead, the panel writes that it sees “greater competition among digital platforms as not only necessary but also possible — provided the right policies are in place”. The biggest “missing set of policies” are ones that would “actively help foster competition”, it argues in the report’s introduction.

“Instead of just relying on traditional competition tools, the UK should take a forward-looking approach that creates and enforces a clear set of rules to limit anti-competitive actions by the most significant digital platforms while also reducing structural barriers that currently hinder effective competition,” the panel goes on to say, calling for new rules to tackle ‘winner take all’ tech platforms that are based on “generally agreed principles and developed into more specific codes of conduct with the participation of a wide range of stakeholders”. 

Coupled with active policy efforts to support startups and scale-ups — by making it easier for consumers to move their data across digital services; pushing for systems to be built around open standards; and for data held by tech giants to be made available for competitors — the suggested reforms would support a system that’s “more flexible, predictable and timely” than the current regime, they assert.

Among the panel’s specific recommendations are a call to set up a new competition unit with expertise in technology, economics and behavioural science, plus the legal powers to back it up.

The panel envisages this unit focusing on giving users more control over their data — to foster platform switching — as well as developing a code of competitive conduct that would apply to the largest platforms. “This would be applied only to particularly powerful companies, those deemed to have ‘strategic market status’, in order to avoid creating new burdens or barriers for smaller firms,” they write.

Another recommendation is to beef up regulators’ existing powers for tackling illegal anti-competitive practices — to make it quicker and simpler to prosecute breaches, with the report highlighting bullying tactics by market leaders as a current problem.

“There is nothing inherently wrong about being a large company or a monopoly and, in fact, in many cases this may reflect efficiencies and benefits for consumers or businesses. But dominant companies have a particular responsibility not to abuse their position by unfairly protecting, extending or exploiting it,” they write. “Existing antitrust enforcement, however, can often be slow, cumbersome, and unpredictable. This can be especially problematic in the fast-moving digital sector.

“That is why we are recommending changes that would enable more use of interim measures to prevent damage to competition while a case is ongoing, and adjusting appeal standards to balance protecting parties’ interests with the need for the competition authority to have usable tools and an appropriate margin of judgement. The goal is to place less reliance on large fines and drawn-out procedures, instead enabling faster action that more directly targets and remedies the problematic behavior.”

The expert panel also says changes to merger rules are required to enable the UK’s Competition and Markets Authority (CMA) to intervene to stop digital mergers that are likely to damage future competition, innovation and consumer choice — saying current decisions are too focused on short-term impacts.

“Over the last 10 years the 5 largest firms have made over 400 acquisitions globally. None has been blocked and very few have had conditions attached to approval, in the UK or elsewhere, or even been scrutinised by competition authorities,” they note.

More priority should be given to reviewing the potential implications of digital mergers, in their view.

Decisions on whether to approve mergers, by the CMA and other authorities, have often focused on short-term impacts. In dynamic digital markets, long-run effects are key to whether a merger will harm competition and consumers. Could the company that is being bought grow into a competitor to the platform? Is the source of its value an innovation that, under alternative ownership, could make the market less concentrated? Is it being bought for access to consumer data that will make the platform harder to challenge? In principle, all of these questions can inform merger decisions within the current, mainstream framework for competition, centred on consumer welfare. There is no need to shift away from this, or implement a blanket presumption against digital mergers, many of which may benefit consumers. Instead, these issues need to be considered more consistently and effectively in practice.

In part the CMA can achieve this through giving a higher priority to merger decisions in digital markets. These cases can be complex, but they affect markets that are critically important to consumers, providing services that shape the digital economy.

In another recommendation which targets the Google -Facebook adtech duopoly, the report also calls for the CMA to launch a formal market study into the digital advertising market — which it notes suffers from a lack of transparency.

The panel also notes similar concerns raised by other recent reviews.

Digital advertising is increasingly driven by the use of consumers’ personal data for targeting. This in turn drives the competitive advantage for platforms able to learn more about more users’ identity, location and preferences. The market operates through a complex chain of advertising technology layers, where subsidiaries of the major platforms compete on opaque terms with third party businesses. This report joins the Cairncross Review and Digital, Culture, Media and Sport Committee in calling for the CMA to use its investigatory capabilities and powers to examine whether actors in these markets are operating appropriately to deliver effective competition and consumer benefit.

The report also calls for new powers to force the largest tech companies to open up to smaller firms by providing access to key data sets, albeit without infringing on individual privacy — citing Open Banking as a “notable” data mobility model that’s up and running.

“Open Banking provides an instructive example of how policy intervention can overcome technical and co-ordination challenges and misaligned incentives by creating an adequately funded body with the teeth to drive development and implementation by the nine largest financial institutions,” it suggests.

The panel urges the UK to engage internationally on the issue of digital regulation, writing that: “Many countries are considering policy changes in this area. The United Kingdom has the opportunity to lead by example, by helping to stimulate a global discussion that is based on the shared premise that competition is beneficial, competition is possible, but that we need to update our policies to protect and expand this competition for the sake of consumers and vibrant, dynamic economies.”

And in just one current example of the considerable chatter now going on around tech + competition, a House of Lords committee this week also recommended public interest tests for proposed tech mergers, and suggested an overarching digital regulator is needed to help plug legislative gaps and work through regulatory overlap.

Discussing the pros and cons of concentration in digital markets, the expert competition panel notes the efficiency and convenience that this dynamic can offer consumers and businesses, as well as potential gains via product innovation.

However the panel also points to what it says can be “substantial downsides” from digital market concentration, including erosion of consumer privacy; barriers to entry and scale for startups; and blocks to wider innovation, which it asserts can “outweigh any static benefits” — writing:

It can raise effective prices for consumers, reduce choice, or impact quality. Even when consumers do not have to pay anything for the service, it might have been that with more competition consumers would have given up less in terms of privacy or might even have been paid for their data. It can be harder for new companies to enter or scale up. Most concerning, it could impede innovation as larger companies have less to fear from new entrants and new entrants have a harder time bringing their products to market — creating a trade-off where the potential dynamic costs of concentration outweigh any static benefits.

The panel takes a clear view that “competition for the market cannot be counted on, by itself, to solve the problems associated with market tipping and ‘winner-takes-most’” — arguing that past regulatory interventions have helped shift market conditions, by facilitating the technology changes that created new markets and companies which led to dominant tech giants of old being unseated.

So, in other words, the panel believes government action can unlock market disruption — and it’s too simplistic a narrative to say technological change alone can reset markets.

For example, IBM’s dominance of hardware in the 1960s and early 1970s was rendered less important by the emergence of the PC and software. Microsoft’s dominance of operating systems and browsers gave way to a shift to the internet and an expansion of choice. But these changes were facilitated, in part, by government policy — in particular antitrust cases against these companies, without which the changes may never have happened.

The panel also argues there’s an acceleration of market dominance in the modern digital economy that makes it even more necessary for governments to respond, writing that “network effects and returns to scale of data appear to be even more entrenched and the market seems to have stabilised quickly compared to the much larger degree of churn in the early days of the World Wide Web”.

They also point to the risk of AI and machine learning technology leading to further market concentration, warning that “the companies most able to take advantage of [the next technological revolution] may well be the existing large companies because of the importance of data for the successful use of these tools”.

And while they suggest AI startups might offer a route to a competitive reset, via a substantial technology shift, there’s still currently no relief to be had from entrepreneurial efforts because of “the degree that entrants are acquired by the largest companies – with little or no scrutiny”.

Discussing other difficulties related to regulating big tech, the panel warns of the risk of regulators being “captured by the companies they are regulating”; as well as point out they are generally at a disadvantage vs the high tech innovators they are seeking to rule.

In a concluding chapter considering the possible impacts of their policy recommendations, the panel argues that successful execution of their approach could help foster startup innovation across a range of sectors and services.

“Across digital markets, implementing the recommendations will enable more new companies to turn innovative ideas into great new services and profitable businesses,” they suggest. “Some will continue to be acquired by large platforms, where that is the best route to bring new technology to a large group of users. Others will grow and operate alongside the large platforms. Digital services will be more diverse, more dynamic, with more specialisation and choice available for consumers wanting it. This could drive a flourishing of investment in these UK businesses.”

Citing some “potential examples” of services that could evolve in this more supportively competitive environment they suggest social content aggregators might arise that “bring together the best material from people’s friends across different platforms and sites”; “privacy services could give consumers a single simple place to manage the information they share across different platforms”; and also envisage independent ad tech businesses and changed market dynamics that can “rebalance the share of advertising revenue back towards publishers”.

The main envisaged benefits for consumers boil down to greater service and feature choice; enhanced privacy and transparency; and genuine control over the services they use and how they want to use them.

While for startups and scale-ups the panel sees open standards and access to data — and indeed effective enforcement, by the new digital markets unit — creating “a wide range of opportunities to develop and serve new markets adjacent to or interconnected with existing digital platforms”.

The combined impact should be to strengthen and deepen the competitive digital ecosystem.

Another envisaged benefit for startups is “trust in the framework and recognition that promising, innovative digital businesses will be protected from foreclosure or exclusion” which they argue “should catalyse investment in UK digital businesses, driving the sector’s growth”.

“The changes to competition law… mean that where a business can grow into a successful competitor, that route to further growth is protected and companies will not in the future see being subsumed into a dominant platform as the only realistic business model,” they add.

Okta to acquire workflow automation startup Azuqua for $52.5M

During its earnings report yesterday afternoon, Okta announced it intends to acquire Azuqua, a Bellevue, Washington workflow automation startup for $52.5 million.

In a blog post announcing the news, Okta co-founder and COO Frederic Kerrest saw the combining of the two companies as a way to move smoothly between applications in a complex workflow without having to constantly present your credentials.

“With Okta and Azuqua, IT teams will be able to use pre-built connectors and logic to create streamlined identity processes and increase operational speed. And, product teams will be able to embed this technology in their own applications alongside Okta’s core authentication and user management technology to build…integrated customer experiences,” Kerrest wrote.

In a modern enterprise, people and work are constantly shifting and moving between applications and services and combining automation software with identity and access management could offer a seamless way to move between them.

This represents Okta’s largest acquisition to-date and follows Stormpath almost exactly two years ago and ScaleFT last July. Taken together, you can see a company that is trying to become a more comprehensive identity platform.

Azuqua, which had raised $16 million since it launched in 2013, appears to have given investors  a pretty decent return. When the deal closes, Okta intends to bring its team on board and leave them in place in their Bellevue offices, creating a Northwest presence for the San Francisco company. Azuqua customers include Airbnb, McDonald’s, VMware and Hubspot,

Okta was founded in 2009 and raised over $229 million before going public April, 2017.

SurveyMonkey acquires web survey company Usabilla for $80M

SurveyMonkey announced today that it has acquired Usabilla, an Amsterdam-based website and app survey company, for $80 million in cash and stock.

Zander Lurie, CEO at SurveyMonkey, said Usabilla filled in a missing piece in its survey toolkit. “A key product that we identified that we really wanted to add to the portfolio, which is really adjacent to our VOC (voice of the customer) solution is a website feedback collector helping people on the web or on mobile apps really understand what users are doing on their site,” Lurie told TechCrunch.

Usabilla CEO Marc van Agteren says his company is adding a complementary product to SurveyMonkey. “If you compare us to the SurveyMonkey enterprise solution where you create surveys that you need to send out via social media or email, our software sits on a website and instantly provides feedback,” he said. For example, if there is a bug on the page, the user can click the Usabilla tool, capture the area of the page that’s problematic as a screenshot, and send it with a comment to the website or app owner for review.

Conversely the website or app owner could display a question for the visitor to answer before he or she exits. This provides a way to get immediate feedback about design or why they are leaving without finishing a transaction, as examples.

Qualtrics, another survey company was about to go public last fall when it was acquired by SAP for $8 billion, but Lurie doesn’t necessarily see this move as a reaction to that. He said that today’s acquisition was really related to enhancing the company’s enterprise product.

As for Qualtrics, he says that with the acquisition, it is more aligned with SAP now and therefore really being marketed to SAP customers. He sees plenty of room in the survey market with customers of Adobe, Salesforce and Microsoft and others, whom he says probably aren’t looking for an SAP solution. 

With Usabilla, SurveyMonkey gains a stronger foothold in the EU as the company’s headquarters in Amsterdam will become the SurveyMonkey’s largest EU office. The transaction also adds 130 new employees to the SurveyMonkey family, bringing the total number to over 1000. In addition, it can now access Usabilla’s 450 customers, which include Lufthansa, Philips and Vodafone. Lurie said there is some customer overlap, but given that the majority of Usabilla’s customers are outside the U.S, there would likely be a net customer gain from the purchase.

SurveyMonkey was founded in 1999 and went public last September. This is the company’s sixth acquisition and the first in three years, according to Lurie. Usabilla was founded in 2009 and raised a modest $1 million dollars along the way.

The deal is subject to the normal regulatory approval process and is expected to close some time in the second quarter this year.

How to prepare for an investment apocalypse

Unlike 2000 and 2008, everyone in the startup world is expecting a crash to come at any moment. But few are taking concrete steps to prepare for it.

If you’re running a venture-backed startup, you should probably get on that. First, go read RIP Good Times from Sequoia to get a sense for how bad it can get, quickly. Then take a look at the checklist below. You don’t need to build a bomb shelter, yet, but adopting a bit of the prepper mentality now will pay dividends down the road.

Don’t wait, prepare

The first step in preparing for a coming downturn is making a plan for how you’d get to a point of sustainability. Many startups have been lulled into a false sense of confidence that profit is something they can figure out “later.” Keep in mind, it has to be done eventually and it’s easier to do when the broader economy isn’t crashing around you. There are two complicating factors to keep in mind.

You’ll have to do it with less revenue

In a downturn, business customers skip investing in capital equipment and new software. Likewise, consumer discretionary spending goes way down. The result is you’ll likely have less revenue than you do now. War-game a variety of scenarios — what you’d do if you lost 20 percent, 50 percent or 80 percent of your revenue, and what decisions would have to be taken to survive.

Sometimes capital can’t be had at any valuation

When a downturn comes, capital markets don’t soften, they seize. Depending on how bad a hypothetical financial crisis got, there’s a good chance that investors would close up their checkbooks and triage. If you aren’t one of your investor’s favorite portfolio companies, there’s a decent chance you may be left in the cold. Don’t even assume you’ll be able to close a down round. Fortunately, showing a plan with a clear path to profitability will allay investors concerns that you’ll need their capital indefinitely and make it more likely you’ll be able to raise.

Planning around these three realities — the need for profits, while experiencing dropping revenue, in a world where capital can’t be had at any valuation — is going to lead to unpleasant conclusions. A dramatically diminished business, major layoffs, and a decisive drop in morale are likely outcomes. Thankfully, you can take steps now to help soften the landing, or if you’re really successful, avoid it entirely.

Avoid “growth at all costs” mentality

Getting acquisition costs under control will help you in two ways. First, it’ll lower your burn rate. Chasing growth for growth’s sake is always a short-sighted decision, but especially during the late part of the business cycle. Avoid this even if you’re VC is encouraging it. Second, by carefully analyzing the inputs to your acquisition cost, it will force you to examine the dynamics of your business. It gives you an opportunity to decide if a poorly performing channel or lackluster sales reps are actually smart investments. Even cutting your payback period from 12 months to nine will provide an increased measure of visibility and control.

Increase the hiring bar

Instagram took over the web with a team of a dozen. Craigslist is a pillar of the internet with a staff of 40 employees. WhatsApp supported hundreds of millions of daily users with fewer than 50 people. Chances are you need fewer people than you think.

In his new book, Scott Belsky shares an algorithm he used building Behance into a $100M company — automate, automate, then hire. His point was that founders should encourage teams to push hard on improving processes and other labor-saving tools before adding more FTEs.

Don’t institute a hiring freeze or take other actions that might spook the staff, but do send the message that new hires should be the last resort, not the first response to a challenge.

Preach discipline — build it into the culture

Founders often try to change spending habits, and in turn culture, when it’s too late. Is there a fair bit of business class flying among the executive team? Do your employees stretch your free dinner policy by staying just past the dinner hour to take advantage of free food? At most tech ventures, everyone is truly an owner. Try to help the entire team to internalize that they are spending their own money.

Get to know your potential acquirers

The week the market drops 50 percent is not the week to start a M&A conversation. You should be getting to know the five most likely buyers of your company, now. Find out who the decision makers at each of the companies are and build relationships. Make it a point to catch up with these people at conferences and even consider sending them regular updates about your company’s progress (but not too much data). You’re not running a formal sales process, but helping build up the internal desire to buy your company if the opportunity presents itself. It may not be the exit of your dreams, but it’s nice to have options if you need them.

Jettison expensive office space

If you’re coming to a T-juncture regarding office space, you may want to prioritize price and lease flexibility over quality and location. I remember one of our offices at my start-up was a twelve month lease with 6 months free. The landlords were desperate, and so were we!

Front-load revenue

If you’re in the kind of business that will support annual contracts, figure out a way to offer them. Pre-sell credits to consumers at a discount. More fundamentally, think about how you might be able to adjust your business model so you can get paid before you deliver services. Plenty of viable businesses are asphyxiated by delays in accounts receivable, don’t allow your ambitions to be thwarted by accounting.

Diversify your customer base

One lesson learned in the 2000 bubble was that startups that serve other startups tend to be hit hardest. It’s important to think about how a downturn will impact your customer base. If more than 30 percent of your revenue comes from one industry (perhaps start-ups!), or heaven help you, a single customer, start thinking about managing risk by diversifying your customer base.

Raise a pre-emptive round (AND DON’T SPEND IT)

Topping up your balance sheet at this point isn’t a bad idea, provided you have the discipline to treat it as a rainy day fund. Communicate this rationale to your investors. It’s also important to use this moment to reflect on valuation. An eye-popping valuation will feel good when you sign the term sheet, but it’s going to feel like a millstone if the economy turns, and the market for blue-chip tech stocks drops precipitously.

Consider venture debt

Many VCs discourage venture debt. They’ll say “if you need more money, we’ll backstop you.” The problem is when things ugly, they may not be there. Debt providers are a good way to extend the runway. The thing is that it’s best to raise debt capital when you don’t need it. Venture debt can add ⅓ to ½ of additional capital to some funding rounds with minimal dilution and relatively modest interest rates. Do note that when things get bad, some debt funds can get aggressive so do your homework before taking the notes.

Don’t panic

It’s tough to predict the top of the market. CNN, Time, The Atlantic, The Wall Street Journal, and many others argued Facebook paying $1 billion for Instagram was a sure sign of a bubble — in 2012. Reputable commentators have claimed that we’re in a bubble every year since, see 2013, 2014, 2015, 2016, 2017, and 2018. Going into survival mode in any of those years would have been a serious mistake for most startups.

Still, we’re only two quarters away from marking the longest economic expansion in US history. The good times have got to end at some point. Venture capital is a hell of a drug and withdrawal can be painful. Keep in mind that there’s no correlation between how much a company raised and how well they did on the public markets. If you’re struggling to make your startup’s economics work, read up on dozens of “invisible unicorns” who show that you can get big without relying on outsized amounts of venture capital.

If your house is in order when the downturn hits, you may actually be able to grow through it. As unprepared competitors go out of business, you’ll find that talent is more plentiful and customer acquisition costs plummet. Some of the best companies have been founded and thrived in the worst of times — if you’re prepared.