The fame and fortune that 17-year-old app developer Nick D'Aloisio won with his deal to sell his Summly mobile media application to Yahoo for $30 million was only unusual for the tender age of the London tech innovator.
Companies like Yahoo and Google have been buying technology companies from small entrepreneurs of all ages at a rapid pace over the past year, playing a growing role in a startup world that venture-capital companies once dominated.
The most active corporate buyers were the four leading social media companies. Facebook and Google each made 16 acquisitions. Groupon acquired 12 private companies and Twitter 10. Cisco, Oracle, Microsoft and Dell were also among the top buyers, according to private company data firm PrivCo's Tech M&A Research Report. Many of the deals were in the $30-million-or-less range.
The traditional path for companies that wanted serious money was to bring in private investors to fund operations until they could turn a profit and sell shares to the public. The startup-to-IPO period typically took three to five years.
New markets for tech shares. But that has changed with the emergence of secondary markets in which wealthy investors have been able to acquire shares of Facebook and Groupon ahead of their public offerings. Those companies had multibillion-dollar valuations and considerable amounts of cash well before their public floats.
Twitter, likely to be the next mega-IPO, already has shares trading actively. Twitter has been a big buyer of small companies with technology aimed at monetizing its tweets. Its secondary share valuation helps, as does its $1 billion in cash from earlier investment rounds, says Sam Hamadeh, chief executive officer of PrivCo.
Twitter's buying spree "underscores the new phenomenon of private tech 'startups' receiving multibillion-dollar valuations that allow them to buy companies even before any IPO," Hamadeh says. Its privately traded stock has given it added clout to buy technology and market share in social media or mobile. "Until the last two years, that was simply unheard of without an IPO to fill the company's coffers before it begins an acquisition spree," he says.
Fewer opportunities for smaller investors. One thing the acquisitions signal is that small investors will have fewer chances to participate in initial public offerings or early-stage growth of some hot companies. There are a few mutual funds made up of startups, such as Firsthand Technology Value Fund, a closed-end fund that invests in pre-public technology companies, especially clean energy ventures. GSV Capital is a publicly traded company that invests in startups. Trading has been volatile in both Firsthand and GSV, and both are down sharply over the past two years.
Open-end mutual funds, the type most people invest in, must limit their private-company purchases to 15 percent of their acquisitions, according to U.S. securities regulations. Some funds take positions in pre-public shares, including the T. Rowe Price Science & Technology Fund. A new law will expand small investors' access to private investing, exempting "crowdfunding" of companies seeking $1 million, but it has been tangled in regulatory review.
Wealthier investors can already buy non-public stock directly. People with $1 million in investable assets or $250,000-plus in income can buy shares of non-public insiders' stock on SharesPost and SecondMarket and other secondary markets. Twitter is actively traded there a year before its anticipated public offering.
Investors who want to buy into the apps action can also buy shares of the tech companies doing deals, though often the companies simply shut down the applications and instead use the talent of the acquired company to develop their own version. Yahoo did this with its $30 million acquisition of D'Aloisio's Summly, an application for mobile news summaries that had been downloaded 90 million times. Yahoo will put D'Aloisio's three-person company's talent to work on Yahoo applications.