The truth behind the Flickr and del.icio.us acquisition

Everybody is watching Yahoo as they buy their way into Web2.0 with the acquisition of Flickr and del.icio.us and maybe soon Digg. People wonder what Yahoo’s strategy is with these acquisitions. We can all guess at the added value to their search engine, the future of tagging and how Yahoo has to buy it’s way into innovation to keep up with Google. And as with every acquisition of a smaller player by a bigger player there is the recurring ‘Buy or Build’ decision and discussion: ‘Del.icio.us only had 300.000 members!’, ‘how hard would it have been for Yahoo to build their own photo upload service?’ and ‘They would never buy Digg because they could build a system like that themselves’.

The truth is, I think, that Yahoo bought ‘Entrepreneurial Spirit’. Ok, these small companies also have some technology, a few members, a little revenue and great PR but that wasn’t the main reason to buy them. The truth is that big companies don’t innovate. They can’t. And I have a simple anecdote to prove this to you.

In 2003 I sold my small company (15 FTE) to a large company (18.000 FTE). They replaced me as the CEO and I worked as an advisor for a few months. One day I was on the phone with the new CEO and he sounded depressed. I ask what the problem was and he told me he needed 4 photo’s for a mock-up brochure for a pitch on wednesday. It was thursday when he told me this. He told me he asked for the 4 photo’s and was told it would take 10 weeks to produce them. I laughed and offered to get him the pictures by monday evening. ‘You could do that?’ he asked in disbelief. ‘Sure, no problem’ I replied. So I called a photographer and asked him if he could take the pictures for me on monday morning and what that would cost. He responded ‘For you, I’ll do them for free’ and I said ‘That is very kind but I’ll pay you €1000 anyway’. Then I called the best looking girl and guy I know and asked them if they would like to pose for me on monday. I’d give them €100 for their trouble. So on monday we did the photo-shoot, developed the photo’s, had them digitalized and I delivered them on monday evening. Then I send them an invoice for €2500 and kept the difference, about €1000.

So, the next week I had a meeting with the CEO of my old company and he kept thanking me for the photo’s. He pitched their product to the client and the client was really impressed with the brochure and the pitch and had signed the contract right away. The CEO was so happy I started feeling guilty about the €1000 I made on the deal. But then I asked him ‘So why did it took your company 10 weeks to get those photo’s’. He smiled and answered ‘They would have had to assign a project manager to it, he would have had to go find a photographer, set-dresser, make up artist, modeling agency and location scout and they would have hired a stylist too’. I was silent for a moment and then asked ‘Well, how much would that all have cost?’ and he answered ‘between €35.000 and €45.000′…

You can imagine I don’t feel sorry about the extra €1000 anymore. But besides being a funny story there is also a lesson to be learned here. While we were negotiating the price for our company they told us ‘This is a buy or build question for us. You do understand we have over 18.000 people working here so we could copy your concept within a day’. That sounded very real to us at that moment. In reality however a big company can’t do anything in 24 hours. It will take a week just to get a meeting with the first person of the 100 people you need to reach and convince if you want to do anything. And then there are budgets, targets and other projects that take up all resources or seem to be more important to the CEO or your manager.

So, back to Yahoo. What exactly did they buy? They bought Entrepreneurial Spirit. The spirit to think of something and just doing it. Even though it is a weekend, middle of the night or you haven’t checked with your boss yet. That is what they bought, and they admit it. Here is a quote from the december issue of Business 2.0 from an article titled ‘The Flickrization of Yahoo’. The quote is by Horowitz, Senior director of Yahoo’s technology development group:

‘”I met Stewart and Caterina and fell in love” Horowitz recalls. “It was beyond Flickr. I saw them as kindred spirits, entrepreneurs who could infect Yahoo with that small-company focus”‘

There you have it. I rest my case. This is the true reason Yahoo has bought Del.icio.us and Flickr.

So the next time a VC or potential investor asks you ‘But what about the big companies, why wouldn’t they just assign a few thousands programmers to this and blow you out of the water. They have 10.000 programmers!’ just send them a link to this story.