How stealthy money affects technology

By my count, around 70 storage start-up companies were acquired in the past year. That is quite a few acquisitions, although not as many as in some past years. A surge in acquisitions always leads to contemplation about upcoming opportunities for other companies to reach their exit goals. There are different types of acquisitions, which usually depend on the stage that the acquired company is in. While thinking about who could be next, there are basically three types of acquisitions to consider:

1. Technology acquisitions. Some startups begin with new technology and get to a point to prove the technology either by demonstrating it to customers or acquiring paying customers. If the technology shows value, an established company may want to acquire it to fully develop and market the product rather than invest to develop the technology from scratch.

2. Business acquisitions. If a company has reached a maturity level with the product and shown it can grow a business around it, an established company may see an opportunity to fill a hole or add a complementary product to its portfolio. These are usually the larger value (billion-dollar plus) acquisitions that are talked about for years after they have been completed.

3. Competitive acquisitions. These are deals where a vendor eliminates a competitor by absorbing it. The acquiring company will usually deny that is its motive, but these transactions often end with the acquired technology discarded within a few years.

The reason a startup gets acquired often depends on what stage it is in. It could be in the early stage with A and B round financing, delivering their product at the C round, or using money in the D round and beyond to push the product to success. The ability for a startup to be acquired changes with time and the amount of investment.

While there are always surprises, right now the number of companies likely to be acquired seems small. That leads to another discussion about the number of new startups that we will see in 2015. I know of personal acquaintances and industry veterans who have left their companies in the past year and are working in early stages of creating startup companies that should surface this year. These companies are considered in “stealth” mode and require funding to get to point where the ideas are fully formed, an early prototype created, and the core team assembled. From this point, more traditional funding sources can be explored. The stealth mode companies are interesting because they will be the ones to look at for technology acquisitions or the next major successful product.

The number of stealth companies appears low today. The money invested in them may be well spent. Let’s hope that money is not diluted by the price for further investments and the good, new ideas can be realized.

(Randy Kerns is Senior Strategist at Evaluator Group, an IT analyst firm).