The Google Effect: Suppliers Beware

An interesting trend is taking shape within the world of venture capital and web 2.0 startups. During the last bubble, the liquidity event everyone hoped for was the IPO. Now it seems to be an acquisition by Google. Though IPO’s may be on the horizon, who else besides Google is really in acquisition mode and what does this mean for innovation suppliers?

With Google as the one primary buyer in the market, startups will increasingly face the same problems felt by suppliers of Walmart: Google now has the power to command favorable pricing from suppliers. The latest example is Jaiku. I have heard a lot of folks question why Google didn’t buy Twitter – it’s a better service with more users, right?

The answer is simple – Google went with the less expensive option. Because technology is more and more a commodity, Google’s engineers could clone Jaiku into a Twitter clone — if they wanted to. Since Google already has the community/user base, the only real difference separating the two is price. Twitter being VC backed, means it’s the more expensive buy and why buy expensive things when you don’t have to?

In my opinion, the real fear of web2 CEO’s without a strong monetization models should be copycat products. Specifically, copycats that get acquired because you’re too good — that is, expensive. Similarly VC’s should be leery about funding weakly monetized companies (even with tons of users) because copycats can be acquired cheaply and switching costs are so low. While the market has largely knocked pursuing patents, it is clear to me why designing a product with protected IP should still be at the forefront of startup’s minds.

If Google remains the only big-gun buying in the web 2.0 market, then the play has to be a sale to Mountain View…barring a major ipo resurgence. This kind of Walmart power in an unprotected (no patents) and weakly defended marketplace (bootstrapping) will likely result in interesting strategy deliberations for startups and their investors.

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