Is The Google Exit Strategy Good for Innovation?

Dodgeball is a social text-message location service. Imagine that you show up at Paddy Mac’s Shamrock Station and the scene sucks because no one’s there. So you send a text-message to Dodgeball, and all your friends get text-messages telling them that Paddy Mac’s Shamrock Station is where the action’s at. The next thing you know, all your friends are there with you, and hey, it’s still a sucky fake Irish pub, but hey, at least, you’re not drinking alone like that bitter-looking guy over there tossing back double whiskies like there was a prize at the bottom of the bottle.

That’s pretty much what Dodgeball did in 2005 when Google bought them in 2005. It’s also pretty much what Dodgeball sill does. (Digression: I wrote “Dogeball” at first, which I suppose is the Venetian version. Your friend the Doge is at Piazza San Marco. Why not stop by and say hello? Everybody loves the Doge. He’s got that great hat. Maybe the goal of Dogeball is to be the first to knock it off his head.) Dodgeball’s founders got fed up with trying to get things done inside of Google, so they quit. They’ve both taken jobs at other mobile/social startups. If they’re right, Dodgeball today is far less exciting and valuable than it would have been had Google not bought it.

Thus: What is the net effect of the sell-to-Google exit strategy on innovation?

These are just preliminary thoughts, but here goes. Assume that the relevant market is overshadowed by a cash-rich but slow-moving diplodocus. Its gigantic bulk and tiny braincase make the diplodocus terrible at creating innovative products. Instead, its best strategy is to wait for someone else to create something clever and then buy out the results, probably by overpaying like a midwestern tourist in a bazaar. Once in-house, however, the product will stagnate. It will never get any better; it may well get slightly worse.

One effect is that the diplodocus is a startup-killer. The founders and VCs may make out handsomely, but innovation at the acquired firm is dead dead dead. Tall poppies are cut down in their prime. But wait, you say. Doesn’t the reward from getting bought out act as an incentive to invest in startups? The VCs will pocket some of their profits but then plow the rest back into new ventures, and just look at what happened to the Dodgeball guys—it didn’t take all that long for them to go back into the startup labor pool. So yes, we will see greater investment in startups.

That greater investment might or might not translate into greater innovation in the public’s hands. Here are two stories. On the first story, what matters is idea generation. Everyone in the world can see what Dodgeball was making, and the acquisition didn’t hurt. Dodgeball may be gone, but the basic idea is now in the public domain. Someone else will take up the ball and run for the actual touchdown.

On the second story, ideas are a dime a dozen, but it’s execution that counts. Dodgeball is a nice toy … for hipsters. Maybe if it’d been left alone, it would have turned into something actually useful. The presence of the diplodocus creates a perverse incentive to build a system with high buzz for a fast flip, rather than building a system that would make a difference to Joe Q. Public. (Second typo alert: I first wrote Joe Q. Pubic, which almost got through the spell-checker because that’s a word, too. Actually, maybe Joe Q. Pubic is right. It would explain a lot about American politics and culture. More sex! How else are we going to sell Social Security reform to Joe Q. Pubic? We need to convince him that our plan is the only way he’s still going to get laid when he’s 70. I’ve got it! We’ll explain that we’re raising the retirement age because American workers are “standing tall for longer and longer” at their jobs!)

I suspect that the first story is more accurate, if only because the diplodocuses of the Internet world pay orders of magnitude more for companies that have managed to scale up their userbase. Startups that can really execute on their ideas often do. That point raises the question of the timing of the big sell-out. If the goal is to extract the most money from the diplodocus, you’d try to sell when you were sitting on unfavorable private information. Nothing explicit, like you’re about to be sued; they’ll find that out during the negotiations. More like “We’re out of ideas,” or “This isn’t fun any more,” or “The hipsters have stopped talking about us in their hipster bars.” Something you know and the diplodocus is too out-of-it to figure out. If that’s the case, than many start-up sales will take place just after the period of greatest innovation, which would be exactly when the tall-poppy effect is least harmful.

In any event, between this news and Google’s recent announcement that it plans to buy DoubleClick (a terrible name for an online advertising company, let me note, since you single-click on web ads), I have this sinking feeling that Google has jumped the diplodocus.