Why do companies buy rubbish technology?
To protect the guilty I’m not going to name names, but when I saw an M&A deal last week for almost a quarter of a billion dollars for a firm that I consider poor in its space I could hold my peace no more.
The problem seems to be one of timing. New sectors to the technology marketplace open up all the time. Sometimes the early entrants to those sectors are outrageously successful, led by the smartest people on the planet, who figure out straight away the best way to solve a problem. Most of the time though there is a first mover advantage in gaining early market share, but a second mover advantage in doing things right.
Why then does good money go on buying bad tech (when presumably better tech could be bought for less from a startup company that hasn’t grown as large/expensive)? The obvious answer is that valuations come from revenue multiples, and reflect upon market success. But hang on a moment, the acquirers we’re talking about here are industry behemoths - they don’t need to buy their way into customers.
The comparison that I’ve used in the past is the humble internal combustion engine. For the first century that we had such engines fuel got into the combustion chamber using a carburettor. Carbs do a pretty reasonable job of mixing fuel with air, but if you’ve ever done any engine tinkering then you know that they can be somewhat fiddly to set up, and require some degree of ongoing tuning. These days you won’t find a carb on a new car engine, as they have been almost entirely replaced by electronic fuel injection, a system that requires much less set up and tuning as the electronics are self calibrating.
The acquisition that grabbed my attention last week was the equivalent of GM buying Weber just as Bosch were starting to move down market from range topping high performance specials (that would have special ‘injection’ or ‘i’ badges on the back). This is a big mistake, because technology that has a greater setup and admin overhead (like a carb) will also be harder to integrate into an overall product strategy. It might look like a good opportunity for synergy with professional services, but in the long run the market will move to the simpler, better automated product that requires less people to care and feed it.
A wise man once told me ‘there’s no such thing as a successful technology company, there are only successful sales companies, some of them sell technology’. He’s dead right, but my question here is why would successful sales companies prefer to buy a successful sales company with bad technology over a good technology company that hasn’t (yet) done so well with sales?
