Built to Flip - Where Do You Come Down?

Even so, we advised Hotmail not to sell when it did. In fact, in nearly every case, we strongly advise our companies against acquisition, because the upside potential is simply greater when a company stays independent. Hotmail has 50 million active subscribers: If it had remained independent, it would have a multibillion-dollar valuation today. Saying no requires dedication; so does persuading recent hires to turn down a quick windfall. Kana and Tumbleweed, two other companies that we funded, both turned down acquisition offers just before they went public. The founders of those companies absolutely want to change the world. We look for that kind of passion in every deal that we do. We ask founders, "Why are you doing this company?" If they say, "We want to build something that we can sell quickly," we'll walk away from a deal.

So, if venture capitalists aren't driving the built-to-flip phenomenon, what is? In part, it's the speed at which the Internet economy operates. Network effects -- the underlying driver of the Net -- allow you to spread like wildfire on the strength of an idea. Previously, companies had to endure long life cycles in order to achieve success. Today, a good idea can take off instantly. Hotmail expanded its subscriber base faster than any company in history -- faster than any magazine, any TV service, any similar medium that you can think of. It's now adding more than 200,000 subscribers a day. That's the rate at which an idea can change the world.

Accelerating this process is the practice of partnering, which has become ubiquitous on the Net. America Online, Yahoo!, and other companies partner like crazy, because the number of sites that link to them correlates with market share. That practice marks a huge change. In the old days, when physical products dominated the economy, geography determined the scope and strategy of most businesses, and the transaction costs of partnering were high. So companies integrated vertically in order to own more of the value chain. Henry Ford, for example, saw to it that his company owned everything from rubber-production facilities to car dealerships.

The Internet has driven down the cost of communications, making it easy to focus on a core competency -- and to partner for everything else. A business model can be surprisingly narrow and still be viable. Don't assume that a company with only one product or service won't be able to make it. The possibility that a new Merck or GE will emerge is much smaller than it was a generation ago -- and that's okay. Growth will emerge from an ecology of nimble, small businesses, not from sprawling corporate behemoths.

Established players are responding to that development with fear. Say that you're Eudora and you own the electronic-mail space: What do you do when, all of a sudden, you see Hotmail restructuring your business for you? In periods of rapid growth and technological dislocation, incumbents react with a vertical mind-set. "We have to own this space," they say. "We have to acquire it." Microsoft couldn't live in a world where Hotmail owned a critical piece of the Internet pie, so it paid a premium to buy that piece.

To the extent that flipping exists, that sort of acquisition mentality is what's driving it. We're in a transitional period when the IBMs of the world think that they have to acquire everything. And that effect is magnified by the tendency of traditional companies to identify startups as competitive threats before the financial community identifies them as suitable for public offering. The Internet economy is barely six years old, and lots of Net companies were started in 1996 or 1997. In most cases, that isn't enough time to go public -- but it is enough time for a big rival with cash to pick you off. That will change: This industry is like a pipeline-loading process that hasn't yet reached a steady state.

Certainly, there are people out there who just want to make a quick buck. That sort of thinking is shortsighted, shallow, and potentially destructive. As individuals, we must strive for excellence in everything that we do. Life is too short to sacrifice personal fulfillment for near-term financial gain. Always pursue your passion. Right now, the pace of life in the Internet economy is making it all too easy to lose sight of that principle.

But individual fulfillment is different from corporate fulfillment. Entrepreneurs must pursue their dreams, but that's no reason for a particular organization to expand forever. Each of Hotmail's founders and vice presidents has started a new company since the acquisition by Microsoft: Their identities were not tied to one corporation. "Sustainability," as we have come to understand it, is a misdirected notion.

Most entrepreneurs have a fundamental need for symbolic immortality. But the vehicle for expressing that need doesn't have to be a large company that carries the names of its founders into perpetuity. In the Information Age, more and more people will find fulfillment in the expression of their ideas through small organizations -- and in the dramatic impact that they can have at the product or project level. A good idea no longer needs the support of a corporate behemoth to change the world.

Contact Steve Jurvetson by email (sj@drapervc.com).