Yahoo's Entrepreneurial Capacity

Attending local Silicon Valley events always seems to provide great fodder for articles and conceptual gymnastics --

I attended an SVASE event last week – “Startup Founders – New Kids on the Block” – where Eric Marcoullier, Founder & CEO of Gnip, served as one of the panelist. Eric developed MyBlogLog (I'm a member) which sold to Yahoo! for $10 million back in January 2007. After less than a year, Eric left Yahoo! and is now in the process of launching Gnip, a stealth company that no one seems to know exactly what it does.

Could this showcase the pending problems that Yahoo! might have with its acquisition spree over the past few years? Yahoo’s strategy has been to acquire new technology companies and then fold them into their product and service offerings. To account for the prices that they pay for these companies, the “Goodwill” account on Yahoo’s Balance Sheet continues to grow – a practice that I’ve recently criticized. When a company’s accounts for intangible assets by using the “Goodwill” account, those intangible assets may include the future innovation and development that the acquisition’s management and employees with bring with them. Advocates of overpaying for an acquisition will often defend the price paid by infusing the argument with the future intangibles yet to be realized.

Entrepreneurs inherently dislike the bureaucracy and structure of a large corporate organization. So what happens when these unrealized intangible assets disappear when key managers decide to leave the acquiring firm? When key managers leave the acquiring firm in short order, then the expected future benefits from those managers are lost.

(Sidenote #1 - Gary Becker, Nobel Prize-winning economist for contributions to the concept of Human Capital, estimated that human capital represented 70-75% of a company’s value.)

(Sidenote #2 - this is one of the reasons that acquiring firms will use its own equity shares in acquisitions instead of cash – the equity paid to the target firm managers can be spread out over a period of time to increase retention of the acquired managers and key talent.)

When Yahoo is purchasing new technology companies such as MyBlogLog, they are attempting to buy “entrepreneurial capacity” that otherwise doesn’t exist organically within its own corporate structure. The struggle that acquiring firms face is that increasing entrepreneurial capacity, according to Becker, is accompanied by “significantly rising costs and that the “accumulation of human capital is not instantaneous” (from Becker’s book - “Human Capital”). If ineffective incentive programs are implemented, this purchase capacity flies out of the window as the key managers walk out of the door.

If other key managers like Eric are walking, so too are Yahoo’s "Goodwill" assets.