Established Companies Look to Startups for New Tech Growth

Major U.S. corporations are beginning to see acquisitions of startups as a way to purchase rather than develop new technologies, a major turnaround from many decades of avoiding Silicon Valley. Until recently, established manufacturers preferred to build their own new products or buy other deep-rooted companies. Then, in 2015, Ford Motor Company bought Chariot, a crowd-sourced commuter-shuttle startup for $65 million, signaling a change in strategy, not just among auto-manufacturers, on how to move into future technologies.

The Wall Street Journal quotes Ford exec John Casesa, who connected the company with Chariot, as saying that “we are in an era in our industry where M&A will be a frequently used instrument.”

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Other old-school firms that have acquired tech startups include Walmart, which spent $3.3 billion for Web discounter Jet.com; GM’s $3.3 billion expenditure for autonomous vehicle company Cruise Automation; and Uniliver, which spent $1 billion to acquire online razor purveyor Dollar Shave Club.

PitchBook reports that “non-tech companies spent nearly $10 billion buying venture-backed U.S. startups this year, nearly double the amount last year and the highest total in at least five years.”

More such deals are expected in 2017, “particularly given that funding is harder to come by in the private and public markets.” PricewaterhouseCoopers principal Barry Jaruzelski notes that “good software is ‘becoming the oxygen’ for established companies.” The result is that traditional companies and Silicon Valley types are now mingling in “conferences, networking events and office buildings,” and large corporations — including Campbell Soup, Kellogg, JetBlue Airways and Airbus Group — are establishing venture-capital divisions.

Corporations that acquire startups, however, are making “inherently risky bets that can be tough for shareholders to stomach,” WSJ notes, even as the same startups can help those traditional companies move into e-commerce at a much faster rate. KeyBanc Capital Markets analyst Jason Gere explains that, for established companies that buy startups, “generally speaking, you are overpaying for assets right now.”

“They’re hoping that what they’re doing is creating another avenue for growth,” he said.

Another option is to make “earlier bets on young companies,” says WSJ, which reports that 148-year old lawn products company Miracle-Gro recently purchased two startups in Southern California: Blossom, which aids in creating digitally connected sprinkler systems, and PlantLink, which makes sensors that tell gardeners when to water. Both acquisitions were under $10 million and saved the company “the headache of building products on its own.”