Google acquisitions demonstrate why unicorns are doomed

At Post Seed, John Doerr of Kleiner Perkins explains the basic math behind the unicorn problem

Most people in the technology industry now know a unicorn as something far from mythological.

Today there are nearly 150 of the strange creatures, defined as a private company with a valuation over $1 billion.

Many unicorns are household names, like Uber the ride-hailing service, Airbnb the home-sharing service, and Snapchat the last giant social media sensation. Some of them are less well-known simply because they’re not consumer-focused; but their investors value them at the same sky-high valuations as their B2C peers.

While it might be dandy to have so much money flowing into so many companies, superficially, many people have begun to wonder whether these high valuations are going to end up being a problem for those companies and their investors.

At Post Seed last week, John Doerr of Kleiner Perkins Caufield & Byers explained the “basic math” behind the unicorn problem. Google, he said, has acquired one company a week for the last five years. (I’ve reached out to Google because I’m having trouble confirming this precise figure, but we can definitely say the company purchases more than one company per month.)

But, Doerr continued, there have only been five instances where the company paid more than (or close to) $1 billion for an acquisition.

Here they are:

• $12.5 billion, Motorola Mobility, August 2011: Marking its most expensive acquisition ever, Google paid $12.5 billion in cash for mobile technology company Motorola Mobility. Feeling pressure from Microsoft and Apple, Google was transparent about the motive behind the purchase: it needed Motorola's patents to defend against anti-competitive litigation. Google sold Motorola Mobility to Lenovo in January 2014, but they held on to a couple thousand patents.
• $3.2 billion, Nest Labs, January 2014: Google’s last big acquisition occurred almost two years ago with the purchase of home automation company Nest Labs for $3.2 billion in cash. The company produces “smart” thermostats, smoke alarms, and other home devices. One of the most lauded companies in the maturing "Internet of Things" (IoT) space, Nest has grown from 280 employees to over 1,100 in the past year.
• $3.1 billion, DoubleClick, April 2007: One of the earliest unicorn acquisitions for Google arrived over eight years ago with the payment of $3.1 billion in cash for Internet advertising service DoubleClick. It's hard to question the sense in this one. For Q3 2015, Google's total advertising revenues amounted to $16.8 billion, or almost 90% of the company's total revenues for the quarter.
• $1.65 billion, YouTube, November 2006: This was huge news nine years ago. At the time, the $1.65 billion all-stock purchase of YouTube was the most expensive for Google in its eight-year history. Though the undisputed king of video sharing for several years, YouTube has seen increased competition from not just standalone sites like Vimeo and Dailymotion, but also social networks like Facebook, Twitter, and Snapchat building their own in-house video hubs.
• $966 million, Waze, June 2013: Just looking at the above list, one sees that Google acquisitions are either extremely obvious business decisions (Motorola Mobility, DoubleClick) or somewhat left-field leaps into new categories (Nest Labs, YouTube). Google's $966 million cash purchase of traffic sharing service Waze leans more to the former, as it helps bolster Google Maps with more sophisticated traffic data.

While exiting through an initial public offering (IPO) is possible, it’s far more likely for companies to exit through acquisition. Given that Google has only paid more than $1 billion a handful of times--and the most they’ve ever paid was $12.5 billion--one must wonder what’s going to happen to the nearly 150 companies valued that highly.

Sure, there are other big companies out there and even bigger acquisitions that have taken place (Dell buying EMC for $67 billion, Avago buying Broadcom for $37 billion, Facebook buying WhatsApp for $22 billion, etc.), but these are incredible, rare moments, not regular occurrences.

So, as Doerr hinted at Post Seed, do “you expect there’s going to be a great coming disaster” like the dot-com bubble in the 90s?