Since reading Mark Suster’s post, Explaining FNAC: Feature, Not a Company, I’ve been thinking about the concept of feature vs. company as well as Skype’s acquisition of GroupMe more. Then, finally, I think it clicked.
There are two things at work here: 1) Scale, which determines what is, and 2) Competence, which determines what could be.
Scale is the easiest to understand. A feature is small; a company is big. As Mark mentions in his response to my comment:
I think any time you have such a big & monetizable revenue stream you’ll always view less monetized portions of your business as features until such time as they add meaningful revenue. I saw this first hand inside Salesforce.com. The company I sold to them in its own right could be a company (we did what DropBox does) but inside Salesforce it has remained a feature since their core business monetizes so well.
In other words, Mark’s company became a feature because it was so much smaller than Salesforce.com. And frankly, when all these valuation numbers are flying around, it’s easy to forget the relative sizes of companies if you have no context.
The most recent number I’ve seen for GroupMe’s acquisition price is $43mm, or maybe as high as $85mm. Even Foursquare, which was recently valued at $400mm (5-10x GroupMe), is pretty small. When I put my investment banker hat on, even $400mm is microcap, meaning it’s the kind of company that would struggle as a hardly noticeable investment in public markets (hence little serious discussion of an IPO… to my limited knowledge). In contrast, Skype was acquired by Microsoft for $8.5bn, which is 20x Foursquare. Regardless of whether Microsoft overpaid for Skype, there’s no doubt that’s a real company.
However, the key for me is the second sentence of Mark’s response: “The company I told to them in its own right could be a company.” When it comes to scale, management/investor goals are more important than absolute numbers. Check-ins at Foursquare are certainly could be a feature (e.g. Places), but Foursquare is certainly working hard to differentiate as a sustainable business model.
With features, incumbents have an advantage because of established competencies; a company creates its own competitive advantage by developing unique competencies.
To illustrate my point, I’ll talk a little about an idea I’ve had for a long time – or rather, a problem I’ve had for a long time.
I travel a lot. My family is in Chicago, school is in Los Angeles, and summer is always somewhere different (last 5: New York, Shanghai, Chicago, Lubbock, and Palo Alto). Plus, my friends are all in college and travel all the time too. With a peer group as mobile as mine, it can be difficult to remember who is where – which means I often miss opportunities to catch up with friends when our cities finally overlap. My need, therefore, is very simple – something that organizes what geographic regions my friends are in, and for how long. I don’t need the granularity of Foursquare. I just want the general area.
This is a feature. Why? Because incumbents have an advantage based on data – companies like Facebook, Foursquare, LinkedIn, TripIt, etc. have easy access to the locations of your friends, unlike me or any other potential founder. In fact, Facebook might be doing something like this with Nearby. If someone tried to fill this gap with a company, they would be crushed once an incumbent became a competitor.
Although, to be fair, Arrived is working very hard to prove me wrong. And the rise of data as a service may eventually erode the incumbent advantage, leveling the playing field for new companies where once existed only features.
In this context, GroupMe is not just a feature. In my view, its acquisition by Skype does not trigger any significant incumbent advantage. (In consultant-speak, the only synergies I see are typical SG&A synergies, but nothing more significant than that.)
Scale, though important, is ultimately relative. Competence seems more robust – and I don’t think anyone is more competent in group messaging than GroupMe. But again, scale determines what actually happens, which means that while I maintain that GroupMe could have been an independent business, just like Mark Suster’s company, it is more likely that Skype incorporate GroupMe as a feature.