The Top 10 Acquisitions of All-Time

Hey, Acquired listeners. We recorded this episode a few weeks ago in what already feels like a very different era. Obviously, we live in a whole new world now with the spread of the novel coronavirus and the global health, economic, and frankly, emotional fallout as a result. Yeah. In that vein, we have a few announcements to make. First and most importantly, we're thinking about all of you right now and in the weeks and months ahead. Many of us know people who've lost their jobs or businesses already or even worse, whose families have been affected.

And that's likely just going to grow significantly in the coming weeks. We want you all to know that Ben, myself, and the whole Acquired community are here to support each other. It's true. And related to that, we are going to make some changes for now to both the community and the Acquired show itself. As for the show, we'll share more in the days ahead. On the community side, we're changing a few aspects of our Slack to help us all do everything that we can to support each other right now.

You'll find all the details in the announcement that we've pinned to the general channel. And if you haven't joined our Slack yet, now is a great time to do so. You can find a link on our website. We think it's especially important to find ways to try to be together right now virtually, even when physically we have to be apart. Yep. One other thing, I'm a believer that when you have a voice, you should use it.

And David and I are fortunate to be able to talk to all of you. So in this time, we are here to tell you to stay home. Most of you who listen to the show are already doing this, but we figure if we can touch just one person, we can make a difference. Social distancing really works and has saved countless lives in countries across the globe. If it's not bad in your city yet, be the reason that it won't be.

We promise you will look like a hero later for reacting early and reacting quickly. And of course, go pick up some takeout food from local restaurants you love. Amen on both of those. Finally, one last thing. Some of you might be wondering why, despite everything we're saying here, we still decided to release this episode right now. We thought about it a lot and we decided to go ahead, one, because even with everything going on, we think the world does still need some entertainment and most importantly to laugh.

And some of the things that we say in here are pretty funny now in retrospect. Two, though, we also thought it was a good reminder that even as tough as things are and are likely to get right now, at some point things will return to normal again. And it will seem completely normal to debate the top 10 acquisitions of all time. So hopefully this will be a little reminder of that. Yep. Well, thank you to everyone for being on this journey with us.

Stay safe and healthy. We will get through this together. And now on to the show. Welcome to Season 6, Episode 3 of Acquired, the podcast about great technology companies and the stories behind them. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. Today, we are tackling an episode to cover the question we get asked most. What are the best acquisitions of all time and what can we learn from them? So today, here it is.

The Acquired Top 10. Acquired Top 10. We figure we're over 100 episodes in now. It's time for Greatest Hits album. Yeah, listeners, the idea originally started as a blog post, which you can find linked at the top of the show notes. But we wanted to do an episode with really more of a director's cut of the list and how we thought about each one. And since even though there's lots of numbers involved, it's not quite an objective exercise.

We reserve the right to Greatest We See Fit. As always. All right, a few announcements before we dive in. First, we had a great limited partner episode this week with Hamilton Helmer. And you can listen to a segment of it attached at the end of this episode. For those who don't know Hamilton's name, he is the author of Seven Powers, which David recently described to me as the best business strategy book out there. Now, David is in good company here, getting high praise from strategy master Reed Hastings at Netflix, Daniel Eck at Spotify, Peter Thiel, and many, many more.

So we had to, of course, have the author on the LP show. Now, if you want to go deeper on company building topics, you can become an Acquired Limited partner and get access to all the things that come with that by clicking the link in the show notes or going to Acquired. And all subscriptions come with a seven-day free trial. Hamilton was fantastic. Indeed. Super fun. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Lagora, the agentic operating system that is redefining how the world's best legal teams work.

Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Lagora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months.

They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Lagora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

And they recently launched Lagora agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And Lagora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Lagora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time.

Lagora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months. Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time. Or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at lagora.com slash acquired and just tell them that Ben and David sent you.

All right, David. How on earth are we structuring this episode? Well, instead of history and facts, we're going to replace that with notes and methodology today. It must be two things coupled by an and in the middle. Exactly. Ampersand, not an and. Ampersand. Oh, is it an ampersand? Do you know they're not interchangeable? Really? Yeah. Whoa, that's shocking to me. This is like little known nerd facts. So I'm not going to get this exactly right, but it is when you are coupling two things together rather than when you are using and in the way that you sort of would in a sentence format.

It's like compound sentence as a conjunction and whatnot. Yeah. Okay. That makes sense. That makes sense. Yeah. I also, it has a cousin called et cetera. And there's a crazy, you can go sort of research the evolution of this glyph. But if you think about the and sign, the ampersand sign, not the big curly one that looks like an S, but sort of the smaller one that has two curly things on the side. Yeah. Yeah. Yeah.

It's actually an ET. Oh. And so it sort of comes from the same root as et cetera does. I think we could have a whole spinoff podcast about this. I think so too. Origins of odd typography and linguistics. All right. Well, back to the lecture at hand. So first off, we thought about all acquisitions out there in history. We didn't necessarily limit ourselves to just the technology universe, as you will see as we go through the list here.

But the big caveat is it's based on kind of what we know in our universe and our experience. So there may be ones out there that, you know, we didn't identify that we slipped. We thought a little bit about some of the Berkshire Hathaway acquisitions. Obviously, they are fantastic. But by some of the criteria that we look at, don't quite compare to what we have on our list. So big caveat that we may be missing some.

And obviously, please write in if you have super interesting ones. And we'll have to just cover them on the show in the future. Yes, please. Also, the acquired Slack at acquired.fm would be an awesome place because I think this one is going to be a good fodder for community discussion. Yeah. Okay. So that's caveat one. Caveat two, enough time has to have passed since the acquisition that we can make a definitive call. So we're not going to be talking about like Visa's acquisition of Plaid here or Credit Karma or anything that just happened, you know, in the last few weeks or even in the last couple of years.

We need to be able to say definitively what the outcome was here. Yep. Another thing is it must be a majority purchase. So there are many amazing pickups of minority shares in companies, better known as investments. Yeah. But, you know, one listener... Tencent, NASPERS, or NASPERS Tencent comes to mind. Yeah. One listener pointed out Liberty Media buying, what, 40% of SiriusXM, which is now worth over, I think, $20 billion. $20 billion. Yeah, that was incredible. I remember being a media investment banker, investment banking analyst on Wall Street at the time, and seeing this happen and just being like, Pfft, SiriusXM?

My dad listens to SiriusXM. That's a dumb idea. These guys are going to go bankrupt. And, yeah, that was why I'm no longer a media investment banker. Yeah, just a world-class podcaster instead. Another one. This represents a moment in time with company market capitalizations as of the end of March 3rd, last night when we compiled a lot of this data in the midst of the U.S. Democratic primary, coronavirus, and everything else going on in our macroeconomic world right now.

And so this, you know, episode may not be the exact order that we would rank it five years from now, even one year from now, even six months from now. So it definitely represents a moment in time, though I think directionally correct for a while. Yeah. This episode, we may actually be the actual music that is playing on the Titanic while deck chairs are being rearranged. But we'll see. Hopefully not. Oof. Yeah. Well, as you know, on Acquired, the way we issue a grade is using this criteria.

How good of a use of capital was it for the big company to buy the small company? So, of course, the way we ended up ranking our list, best we can tell, is what is the absolute dollar return in value to the big company from buying the smaller one? So, in other words, if I have a company worth a billion dollars, like Acquired, and I buy David's piddly little startup. Only a billion? David, your little startup's worth a dollar.

And I pick it up for that. And my company then later becomes worth two billion dollars by integrating your product. We would look at this as an acquisition that added nearly a billion dollars of value. And that's sort of how we would rank it score. $29,999,000. So, value added minus the acquisition price, because this is going to be important in a couple of days. It's a fair point. Last thing is, in cases where, or at least the last notes of methodology that I have, in cases where the acquired company's product ended up becoming a component of a larger product within the acquired company, we thought of some sort of subjective discount of, like, in our estimation, what percentage is this acquired company's product responsible for the success of the ultimate product?

Yeah, you could imagine if you bought maybe, like, a way to make chips, or maybe a programming language, or something like that. Where are you finding those examples? You might say that that's not responsible for all of the company's future value, or even all of that product line's future value. Yep. All right. Now, with all that out of the way, I think it's time to actually start moving through our top 10, and, dare I say, our top 15.

Actually, 16. Ah! Adding too many to the list here. Well, we're only going to rank the top 10, but we have some honorable mentions to start with. First, and most aptly given recent acquired history, we would be completely remiss if we don't mention WhatsApp on this list. And by estimating, as we talked about on the show, on the episode, definitely one of the best acquisitions of all time. However, by our criteria, where we are looking at revenue and market cap contribution to the parent company.

Oh, I don't think we said. So the way we tried to estimate market cap contribution of the acquired companies into the parent companies was via the percentage of revenue that that company is now responsible at the parent company, and then what the revenue multiples of the parent company are. We totally recognize that a lot of these companies don't trade on revenue multiples. They trade on free cash flow basis, but we can't get the cost structures of the acquired companies anymore.

So this is the best we could do. Yep. Again, I think it's directionally correct. And the fun part about getting to do a show, that's kind of the director's cut here, is we can talk a little bit, especially in Playbook as we get into it, and hem and haw a little bit about ones that we were too generous on or not generous enough by just thinking about it as revenue contribution to the business. So by our screen, you know, WhatsApp essentially generates zero revenue for Facebook, so they're not going to show up on the list.

They were far lower than 16, if you... But definitely deserve to be mentioned. For sure. For sure. It's funny how that one's a, I don't know, six-year-old acquisition that's still in camp too soon to tell. Yeah, serious. Well, we know that it was a, as we talked about, not too soon to tell on the defensive move front. Right. Too soon to tell on the revenue front. Yep. All right. Well, coming in at 15th, or I guess our first of our honorable mentions coming in, an episode that we have not yet done yet, but a couple of listeners, especially recently, have been suggesting in the Slack that we try it.

So that is VMware being acquired by Dell EMC. First acquired by EMC, and then later EMC was, of course, swallowed up by Dell. This one is super interesting. You know, EMC acquired VMware for $625 million. VMware currently is doing right under $9 billion in revenue. Now, EMC acquired 80% of VMware. So VMware has always had this public stub that trades publicly of the rest of the equity. Super, super interesting, though. The only reason this is so far down on the list is because of all the complicated EMC Dell stuff.

We'll get into when we do this episode someday. Dell is actually trading in the public markets at a significantly lower value than what their stake in VMware is worth. It's crazy. It's completely nuts. I think we saw this with that holding company that owned part of... What episode was that? Where there was like a nine-person holding company based in... Oh, it was Altaba. Altaba, that's right. Owning the stake in Alibaba. Yeah. Where it actually traded lower than what their percentage of Alibaba was worth.

We thought that was crazy. I mean, the discount... And again, we haven't done all the math here and know the whole corporate structure and everything. But with that caveat, the discount at which Dell is trading on the public markets simply to the 80% they own of VMware, which is also publicly traded, is astounding. Yeah. Yeah. So on the one hand, it's a cheap way to pick up some access to VMware. On the other hand, the way the stock market is sort of behaving, they're putting a massive, massive discount on it for its lack of being able to escape out of Dell.

Yeah. So, yeah. Okay. Next, we have our near and dear to our hearts, both a heartbreaker and our very first acquired episode. Pixar. Pixar. So in 2006, Disney, which at some point we got to cover Disney on this show, you know, David? Disney bought Pixar in a landmark $7.4 billion deal. And I thought this one would be a lot higher. Sure. But we'd like to walk you through sort of how we did the math on this.

And the absolute dollar return that we're looking at that, you know, from a bunch of our estimates and this methodology is about $2.3 billion to Disney's market cap. And the way we sort of thought about that is Pixar is basically good for a film a year. Yep. And as much as I wanted to do this by summing all of the profits or maybe abstracting one layer up and summing all of the revenues from all their films, really the right way to think about, especially as we're thinking about contribution to market cap, is how much revenue of Disney's annual revenue are they responsible for every year?

Yeah. Which is effectively one film's worth. Yep. Now, what is one Pixar film worth in revenue from its sort of worldwide gross after release? It's about a billion dollars in the success case. You look at The Incredibles 2 or Toy Story 4, each brought in right around a billion dollars. Because of our Disney episode, we know that you make about twice as much from perks and merch as you make from the film itself, or at least the division as a whole does.

So we felt it was reasonable to say triple the amount of money that any given film gets from the box office to sort of its total revenue contribution to Disney. And you get about $3 billion. And so contributing about $3 billion in revenue per year to Disney out of their close to $70 billion market cap. $70 billion revenue. Sorry, $70 billion in revenue. You get to just under $10 billion in market cap contribution from Pixar. But of course, they paid $7.4 billion for it.

So when you net those two out, you get incrementally about $2.3 billion in market cap contribution from Pixar. This, you should also note, is our lowest annualized return out of anything from the entire list with about 2% per year since this was a 10-year-old acquisition. Sorry, a 14-year-old acquisition. We're going to have some more discussion in grading about this one. Okay, next on the list, another fun episode from Acquired's History, our first big independent live show, Venmo.

Pick up by PayPal in 2012 for $26 million. PayPal was recently announced doing about $300 million in annual revenue. Or sorry, Venmo doing about $300 million in annual revenue within PayPal. You do the math and that nets out to market cap contribution within PayPal of about $2.5 billion. Not bad for buying it for $26 million. Yeah, and of course, this went through Braintree, so it was $26 million that Braintree bought it for, and then less than a year later, that was picked up for $800 million.

But sort of rolled that $26 forward since that is the isolated number for Venmo alone. Now, David, I will say, still not profitable. Indeed. But, you know, not a part of our analysis here. Profits? Profits? What are you talking about? We care about revenue here. Unacquired, no. But they do, it is worth noting that they did give guidance that they thought this, by the end of the year, Venmo would be a profitable unit. So that's an interesting, interesting update to our Venmo episode.

Yep. Next, we have Bungie. Near and dear to my heart. My heart played so many, so many sessions of Halo over the years. Microsoft's pickup of Bungie in the year 2000 for an estimated $30 million. Now, this one was really interesting to think about because the Halo franchise in total has generated about $5 billion in revenue over the life of the franchise. And, of course, Microsoft got that IP as part of the acquisition. But you also got to think about how many Xboxes did Halo sell?

And no Halo, what would have happened to the Xbox franchise? The Xbox franchise generates about $11 billion in annual revenue for Microsoft. We estimated current market cap contribution of that $30 million Bungie Halo pickup in 2000 to be about $8 billion currently. It's funny, like this is an honorable mention that doesn't make our top 10 list, but like, oh my God, getting that thing for $30 million, even with all the work they poured into it afterward, was a frigging steal in order to bootstrap the Xbox business.

Totally, totally. I mean, it was the killer app. Yep. Speaking of killer apps. Yeah. Yeah. P.A. Semi. So, long, long time listeners of the show will know that we did an episode early on with Apple's 2008 purchase of P.A. Semi, which at the time was working on very advanced... Arm infrastructures. Yeah. Yeah. And developing IP for new chips that they didn't manufacture. They like... Fabulous semiconductor. Yep. Many, many firms these days outsource it. But it seemed not contrarian, but a little odd for Apple to be buying this sort of like researchy CPU, you know, company.

Yep. This was right after the first iPhone had come out. Yep. People were confused. And they paid a bunch of money, too. I mean, it was $278 million. So, this isn't like some of our other ones that were like tiny little pickups. And Apple's market cap back then, let's just say they weren't a trillion plus dollar company. And so, you know, this is a decent size bet for them. But as we know today, the iPhone being as differentiated and creating as magical of an experience as it does is in many ways attributable to Apple making their own silicon, which of course all started with P.A. Semi.

You also look at Apple's innovations in silicon elsewhere. So, in their wearables division, being able to do the W series chips for, you know, the AirPods and the watch. The... What is the... There's the W chips and then there's another one. There's so many. There's like an S series of chips, I think. Yeah. Even actually, I think the Touch Bar has its own... That's right. ...arm CPU in it, which probably is attributable to P.A. Semi. And of course, all the rumors are...

These are... These have been rumors for years, but the rumors are this year maybe or next year, we're going to see ARM-based and P.A. Semi technology-based MacBooks. Yep. So, this is like the hardest thing to figure out. And this is probably the most fun thing to sort of debate on this show or at least in this format. How do you account for something like this that is necessary but not sufficient to create the product line that they have today?

That if you look at the revenue contribution of the iPhone, the iPad, and the wearables division, which are all sort of made possible by Apple making their own silicon, it's $188 billion a year in revenue. So, necessary but not sufficient. So, what do you do? Well, David and I took a little bit of a hack job of estimates here, but basically what we said is, look, you can probably say 25% of iPhone revenue is attributable to making their own silicon.

Yep. iPhone and wearables and iPad, like that's 25% of the differentiation. Yep. Is from the chips. 5% then, we further discounted that and said 5% of making their own silicon is attributable to their acquisition of PA Semi. So, what that basically says is, well, let's take all that revenue and go grab 1% of it. Yep. And I promise we didn't come up with that 1% number. We first came up with this 25% and then that 5%.

We love false precision here. It is false precision at its finest, but that gives us the funniest metric of all time that acquired should probably trademark, the discount adjusted current market cap contribution. Eat that community justice, Eva. And we look at that as contributing about $11 billion to Apple's market cap, which of course is a nice 36% annualized return, absolute dollar return of over $11 billion, but somehow still not making our list. Just missing the top 10.

My God, is this a gilded set of acquisitions that we've got in the top 10. All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF. Then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore. Yep.

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All right. Should we move into the official top 10? Yes. Okay. Coming in at number 10, what we and I have sometimes referred to on the show as the best media acquisition of all time. Turns out it's not. There's going to be one that's above it coming later in the list, but Disney's 2009 acquisition of Marvel. This was just brilliant. Who would buy some defunct comic book company? That's IP is already basically leased out to everyone and cut up 11 ways for 10 years.

Totally. Well, I'm going to talk more about this in playbook. But, you know, Marvel was, I can't remember exact, but sort of like going on a, you know, 70, 80 year old company. It was a very old company at this point. It'd been around forever, of course, you know, Marvel Comics, one of the pioneers of the comic industry. But Marvel Studios and Iron Man, the first film out of it, had only launched a year earlier. So it was actually pretty early in this part of the market for Marvel.

So Disney, of course, paid $4.2 billion to acquire all of Marvel in 2009. Which, of course, is $3 billion less than Pixar. Yes, $3 billion less than Pixar. So for Marvel, we did essentially the same thing as we did with Pixar. But you'll note with Marvel, as opposed to Pixar, where they're cranking out one feature length film per year. With Marvel, they're cranking out multiple feature length films. They're cranking out TV series. They're cranking out action figures.

They're doing comic books, of course, still. All sorts of stuff. So we took their revenue since the acquisition. We did that on an annualized basis. We applied the same 2x multiple for Parks and Merch that would apply to the content revenue that they're creating. Yep. And that revenue that you mentioned at the beginning there, we are only taking their films revenue. That's what we had access to. Yep. Yep. So you do that, you get between $6 to $7 billion of annual revenue contribution from Marvel to Disney.

Out of $70 billion in total revenue. Which is fascinating. So it's basically more than twice as much revenue per year from Marvel than it is from Pixar. I mean, 10% of Disney's revenue by this estimation coming from Marvel. It's crazy. Crazy. We may not be correct on that, but like... It's a reasonable swag. Yeah. Yeah. So if you look at, you know, I just want to do this comparison to Pixar. Like they're making over twice as much money per year.

They paid almost half as much for it originally. And they did it three years later. And so it's sort of this like every lever that you have the ability to sort of pull and make this one a better acquisition, they did. So if you just look at the stats, we have an absolute dollar return market cap contribution minus the price they paid for the acquisition of over $16 billion on Marvel. Incredible. Fantastic. Not quite the Incredibles, but even better than the Incredibles.

Also coming in, right around $16 billion of an absolute dollar return is Google's acquisition of three companies, WhereTo, Keyhole, and Zipdash. The Google Maps suite. Yes. Around 2004 to create the Google Maps that we know of today. Now, estimates are that Google Maps does about $3 billion in revenue. This mostly comes from the sponsored products that you see that are basically the ad units that are shown on Maps. And the Maps API revenue, I believe. That's right.

Yep. That's right. So bought for $70 billion. $70 million. Sorry. But gosh, the orders of magnitude here. This one's a hard one to do because you just keep forgetting commas everywhere and sets of three zeros all at the same time. Bought for $70 million, doing about $3 billion in revenue 16 years later. So we looked at the current market cap contribution of about $16 billion to Google's near trillion dollar market cap. That kind of pencils. I mean, if you think about it, like, is it...

I could maybe even make an argument it should be a little higher. Than 1.6% of the value of the company? Totally. Totally. So when you look at... Similar to Marvel, you look at the absolute dollar return. It was about $16 billion. The funny thing is, if you compare another... There's another number we sort of have here that's interesting to compare. The ROI multiple. So what's the return on the invested capital there? With Marvel, it was $5.

With Google Maps, it was $242. Yeah. This is where... Okay, we'll talk about this in Playbook and Grading more. But you can become a little myopic as invested. You focus on return on invested capital or cash-on-cash multiples or whatnot. And that's nice. But it's paper money that feeds your family and pays the bills. And at the end of the day, $16 billion is $16 billion. Whether it's a 240X ROIC or a 5X ROIC, it's still $16 billion in incremental dollars.

Everything else is a vanity metric. Yep. And speaking of those vanity metrics, we are going to publish this whole table. So if you click the link in the show notes, you can go check out, with probably some false precision, all the numbers that we came up with across all of these different measures. Well, next on our list, next highest on our list... And what are we at? That was number nine. So we're here at eight. The actual best media acquisition of all time.

We're going right back to our friends at Disney, actually ABC Capital Cities. The acquisition of ESPN, 1984. Is this the oldest? This is the oldest acquisition on our list. Acquisition price of just under $200 million. ESPN currently is contributing over $10 billion in revenue to Disney through, obviously, advertising revenue and subscription fees. And including ESPN Plus in there now, too. Just incredible. This, even though this acquisition happened in 1984. 1984. Generated, by our estimation, over $30 billion in absolute dollar returns.

$166 ROI multiple. We also calculated the annualized return to just try and adjust for time here a little bit. 15% annualized return since 1984. That is just incredible. That is like Berkshire Hathaway levels of return by an acquisition within a company. Yep. Yeah. If you found a financial advisor who could figure out how to guarantee you a 15% annualized return for... For... What is this? 35 years? For... What? 1984. I was born in 1984 and I'm 35.

There you go. Yeah. That would be... I'd happily pay whatever they need for the cash in their management. I'll pay the management fees on that. Absolutely. All right. Moving on to number seven. The mafia. Yeah. eBay's acquisition of PayPal in 2002. And David, as you say, the mafia, it is not just for all the future value that would be created by all those founders starting every company from Tesla to Yelp to... To LinkedIn to you name it.

Wild group. But actually, the value of PayPal growing inside eBay was frigging crazy. So, the way that we did this one, because eBay actually did spin PayPal out in full... In 2015. In 2015. In 2015. I think... 15? Is that right? Yeah. I think it was the last one. 15, 16, somewhere in there. This is the only one where our sort of... We have exact numbers. We do have exact numbers and we know an exact annualized return and we're not pegging that to the market cap today, but rather the actual spin out.

So, when they did spin it out, the market cap of the independent PayPal entity was $47 billion. Now, in 2002, they bought the company for $1.5 billion. So, no analysis needed. That was $45.6 billion of an absolute dollar return for eBay shareholders. A 28% annualized return. Just an unbelievable job of picking something up. Relatively on the cheap. Both doing a nice job integrating it with PayPal to create new, dare I say, synergy value. And, of course, betting on a trend that was internet payments and being spot, spot on there.

Yeah. Now, we're going to start to get into some of the real fun stuff. I mean, not that all these aren't fun. The next one. This acquisition was so incredible that the company that bought it bought this little company back in 2005 has now fully changed its name. Even though this was a large public company buying tiny, tiny little company, the company is now called the name of the little company. We're, of course, talking about Priceline's acquisition of Booking.com.

And Active Hotels, as we discussed about on the episode with Drew. It was that those two companies together, even though Booking was the larger at the time and is still the larger, $135 million in 2005. Booking.com, as best as we can tell, separating out what the core booking and Active Hotels revenue is within now the Booking Holdings, right? Booking Holdings. It's no longer the Priceline Group, but Booking Holdings. Booking Holdings is over $10 billion in annual revenue contribution.

The company does about $15 billion in revenue. At least $10.8 comes from what they call the agency revenue, which is basically Booking's original business model. There's even more. Yeah, there's even more in there. There's sort of other segments of their revenue that Booking also contributes to, but we were conservative in our analysis here and basically said, let's just call Booking.com's contribution here the agency revenue. So responsible for over two-thirds of Booking Holdings revenue now. And as David mentioned, $10 billion.

So that translates to an absolute return of just under $50 billion. Here's the crazy thing. You know, we were talking about annualized return with ESPN a minute ago. 35 years of 15% annualized return. Here we're talking about 15 years, so not 35. They got a long way to go to get to 35. You know what the annualized return on this one is? I'm not looking at my screen, so I don't know. 48% annualized return compounded for 15 years.

Man. Insane. That is a good acquisition. The other fun one about this is I think all the rest of them that we're going to mention come up very, very commonly in conversations where people say, what's the best acquisition of all time? Actually, I think number two is going to be a surprise for people. It was a surprise for me. Okay. Fair. But yeah, with booking, it's one that I think people don't realize. Still don't appreciate. Yeah.

You know, the booking is, I haven't checked the latest market caps, but I remember back when we did the episode. Booking holdings is worth roughly by market cap several multiples of Airbnb, several multiples of Expedia. I mean, Expedia is a $13 billion company right now, market cap. And what's booking? Booking is 70. Now, of course, we're doing this in the middle of the coronavirus outbreak. So the bookings, all travel companies, you know, market caps have been taking a big hit.

But still, I don't think, particularly people in the Seattle area don't appreciate how much larger booking is than Expedia. Yeah, absolutely. This was, you know, I mean, again, like what happened says it all. Like the company is now called booking holdings. Very true. Okay. The next one, number five. Next is next. How come I get both of these ones? So number five, Apple's 1997 acquihire of Steve Jobs. Greatest acquihire of all time. And all of the incredible technology that comes from Next.

That's the thing. It's not just Steve Jobs with Next. Right. So this one had to be in there, right? Because Apple is a $1.4 trillion company now that certainly would not be but for the next acquisition. So this is another situation where we have necessary but not sufficient. So Apple makes this move, gets Steve Jobs back. They also get the sort of new and blooming object-oriented programming. Yeah. The Objective-C language and runtime next step, which turns into Mac OS X, which then gets refactored into iPhone OS, which then became iOS, which then forked to iPad OS, which then forked to watch OS.

So for as much as we wanted to attribute value to the hardware from PA Semi, the software in all of Apple's, you know, everything that is Apple today. Comes from Next. Yeah. It is not. Don't forget. Gershwin and Copeland and all these machinations of. Oh, man. Copeland. Machinations? I don't think I know that word. Of Mac OS 9. Machinations. Machinations. Progressing through. It was, nope, new thing based on next step, you know. Don't forget, they also got the cube.

They also got the cube. They also got the cube. So, of course, how do we value this one? So what we basically said, so first of all, the acquisition price, $429 million. Again, big freaking pickup for Apple. You think about 1997, that much money for them. Huge bet. Huge bet. The funny thing is, the company wouldn't do literally any of the revenue of the $260 billion in revenue that they do today. Zero. Without that acquisition. But of course.

Look at all their business lines. All the iOS business lines. iPhone, iPad, wearables. None of that. Mac, none of that. Services, none of that. Yep. Everything. Yep. Yeah. So then how do we do the math here? So what we basically just kind of like squinted at is we said that the discount for future dependency, so this discount that we apply where we're basically saying what percentage of the product that ships today came from outside the assets acquired, we're going to say it's about 95%.

That's necessary, but far, far, far. 95% from sufficient. And so we take a 95% discount on Apple's current market cap today. Now, here's the crazy thing. Oh, what's 5% of Apple's market cap? Some tiny number. $63 billion. Providing us with an absolute dollar return of $62.5 billion that are very squinty math here, but honestly, it's hard to come up with something better would yield for Apple buying next. Yeah. Okay. Number four. Just a hair's width outside of our top three, but absolutely just...

This is... Well, we'll get to... We'll reveal what it is. This is going to win the prize for ROI multiple here by a long, long shot. We are talking about Google's 2005 acquisition of Android for $50 million. Which one of the things this points to is how you can get these gigantic multiples from early stage investing. Yeah. I mean, when you say this one wins the award for ROI multiple, what I really hear is must have been a really cheap pickup price.

Yeah, exactly. Well, exactly. Exactly. But again, like you can't eat ROI multiple. So that's why this is number four and not number three, two, or one. But still a monster. Okay. Android, $50 million to buy this thing. We tried to think about how do you account for what Android's current revenue contribution is to Google? And of course, Google is not helpful to us at all in this segment that when they report Android revenue, they report the search revenue that is generated from people searching on Android phones, which is like not really how you'd want to do this.

You really want to think about like, yeah, that's Google search. Yeah. That's not like Android. Google searches were going to happen somewhere anyway, whether they had, you know, the Android or not. So how should we think about this? Well, there's one, there's one piece of the revenue that is actually the much, much easier part, which is Google Play Store revenue. Yep. That is fully attributable to Android. That was going to happen, you know, like there's no, there's no sharing of that.

It's like no Android, no Google Play Store. Yep, exactly. The other component, which is a little bit harder to sort of squint at. Is what we call traffic acquisition costs. So it is reported that Google currently pays Apple about $9 billion a year in order to keep Google as the default search engine on the iPhone. That is an insane, insane number in their cost structure. And so one big thing that we sort of determined on the episode with Android, in addition to the Play Store, how should you think about the value of Google creating Android in-house?

You should think about it as money. They don't have to pay anyone else for that traffic because if they own the operating system, then they can for free keep Google as the default search engine. And so the way that we went about that is we compared the amount of money that is spent on the iPhone through, you know, the App Store to the amount of money that is... Sort of purchase intent. Exactly. That would be monetizable search traffic.

Exactly. To the amount of money that is spent on Google's Play Store. Apple makes about twice as much money as Google does on the App Store versus the Play Store, which kind of gives us a sense of there's... If you think about gross purchase intent or basically the value of the traffic on iPhones, it's about twice as much as the value of the traffic on Android phones. And so that's sort of how we backed into let's add another $4.5 billion in quote revenue per year to Google for owning Android.

Because it's basically costs they don't have to pay to anyone else. Yeah. So how do you... Here's the surprising thing to me, though. The total number that we come up with revenue contribution for Android is right around $13 billion, right? Yep. $13.5. $13.5 billion. So $4.5 of that we're attributing by our flawed methodology here, flawed in some way, we don't know a way, to search. I realize this. There's so much revenue in the Play Store. Like, it's so big now, even though the iOS App Store monetizes more and is worth more.

Google is going to do, by estimates, Google did about just under $30 billion in total gross merchandise value in the Play Store last year in 2019. They take a 30% cut of that. You know, we're slightly under $10 billion in, you know, super high margin revenue to... To Google. Basically infinite revenue, infinite margin revenue to Google. That's incredible. Yep. Yep. Yeah, listeners, we'd love to hear your thoughts if you have a better way of thinking about Google's sort of revenue contribution.

We fully recognize that this cost saving is different than revenue. We also fully recognize that taking a ratio of the App Store's earnings and sort of using that as a ratio of traffic acquisition costs... We may be vastly underestimating search value here. It's true. And of course, the $9 billion number that they pay to Apple is not a Google disclosed number. That is a reported number. And so, yeah, we'd love to have more conversation around that.

So, we net out all this when you... Current market cap contribution taking out the $50 million acquisition price of $77.68 billion in absolute return on this acquisition of Android, which represents an ROI multiple of 1,555x compared to a 5x for Marvel. And a nice little annualized return of 63%. Oof, man. 63% over 15 years. Now, of course, that's not hard cash like booking, which is the 48% annualized of like, yep, that's like... You can take that to the bank.

Yep. But still, got to rank this one super high. All right. Well, our Google streak continues. I'm just going to continue for a little while here. Number three, Google's 2006 acquisition of YouTube, which I think the Acquired podcast called this a C when they did that episode. Those guys are morons. Yeah, they definitely need to revisit this one. Definitely need to revisit this one. Consider this a primer on our revisit. So, big acquisition price. I mean, this is a $1.65 billion acquisition.

And in 2006... For a year-old company. For a year-old company that was basically incubated inside Sequoia. Yeah. So... Actually, it is, I believe, still to this day, the only publicly available Sequoia investment memo out there. Because, of course, it was part of Discovery and the YouTube Viacom lawsuit. Yep. We'll link that in the show notes. If you're listening to this show and you find this interesting, you will, like, love geeking out over this investment memo. It's awesome.

I think this was Rulof's first investment at Sequoia. I mean, it's really, it's like remarkably cogent for someone's first successful investment memo. Yeah, you know, it's better to be lucky than good. He's good, too. So, Google finally did us a favor and broke out YouTube in its most recent earnings. A fast-growing revenue segment of $15 billion a year. I've got lots of comments on this, but I'm going to hold it for our playbook section. We're going to do a little more analysis.

But you look at the acquisition price of $1.65 billion, now doing $15 billion in revenue. Google total is doing about $160 billion in revenue. So, that comes to a market cap contribution to Google's trillion dollars of $86 billion in market cap contribution for YouTube. Which, of course, then is an $84 billion absolute return on Google's cash. We're just getting into silly numbers at this point. Yeah, if you can get a 52x ROI multiple on a billion and a half dollar investment, you're doing pretty good.

Doing pretty good. There's lots more I want to say here about cost structures. We'll hold this one for the end of the show. But, all right, number two. I was shocked by this. I'm just shocked. We have not covered this as an episode. I mean, listeners, you're listening along. What would you think number two is going to be? This is not what you think it's going to be. And you probably know what number one is going to be based on the number of times we reference it.

So, what is two? Yeah, what is two? Okay, so, big caveat here. We haven't done this episode. We need to dig in more. This episode is, like, coming right up to the top of the list now of, like, we need to do the work here. Another Google acquisition. And let's pause. It's another Google acquisition. So, listeners, take five seconds and think about, like, what else did Google buy? 2008. That's when it happened. Double click. Like, man, I was, like, Ben, when you first put this on, like, the first draft of our list, I was, like, double click.

Come on. No. Like, that's not, like, yeah, I mean, there's revenue and stuff in there. But, like, a bunch of that was already in Google. And then we did other stuff. And so, we almost took it off the list. You know, and then we went and we actually, like, dug in a little bit. And we're, like, wow. No. Double click contributes. The former double click assets now contribute a massive amount of revenue to Google. You know, Google Ad Manager, that business line and the business unit that it's within, which is almost all double click and AdMob.

They acquired AdMob in, when was that? 2012? Well, maybe. Somewhere in there for $750 million. So, you put those two together, that's about $22 billion of revenue within Google today. Now, obviously, that's not search revenue. That's, like, display revenue. Right. But that's revenue. Listeners, the way to think about this is, of the sort of two big Google ad segments, and we're excluding YouTube here, and there's the stuff they own. So, there's search engine ads that come up, and that used to be called AdWords.

It may still actually be called AdWords. I think they just changed it to Google Ads. Google Ads. Okay. And that's the larger segment. And then there's this other still very large segment that's the stuff they don't own. So, the ads that they're showing on other people's websites, which used to be called AdSense. Yeah. And that predates the DoubleClick acquisition. And that's why, initially, I thought, like, oh, yeah, AdSense has been around forever. That wasn't DoubleClick. Yeah.

But AdSense, that product line is actually quite small these days. Almost all of what is in, what are they called now? It's, like, Google Network ads or something like Google Network advertising, maybe something like that. Almost all of it is DoubleClick and AdMob. It's wild. And so, of course, this requires a much more nuanced understanding of sort of the digital ad-serving ecosystem. And, you know, understanding DoubleClick for publishers and understanding what's an ad network versus, you know, DoubleClicks.

Is it a DSP? Well, there's, like, yeah, there's DoubleClick for publishers and then there's DoubleClick for advertisers. And that's, you know, I believe, again, we're not ad tech experts, but I believe that's, like, the standard, you know, rails that all kind of third-party ad tech runs on these days. Yep. I know every publisher for sure still has DFP as the sort of main container that all the ad networks plug into on their site. So the TLDR on this one is they created an unbelievable amount of value.

It's still massively value-created for Google and we're excited to do an episode on it. Yeah. So they bought it for $3.1 billion in 2008. The current revenue contribution of this segment within Google is just a hair under $22 billion. Multiply that out by the market cap and you get $126 billion in market cap contribution. Net out the acquisition price, $123 billion in value creation. You know, anyone should be trepidatious spending $3 billion, but when you have any sort of guess that $103 billion could pop out the other end, or I guess $126 billion could pop out the other end, have a little more faith.

All right. Well, number one on our list. No surprises here. The king. The king. The goat. So after three Googles in a row, we have Facebook buying Instagram. In 2012, they bought it for a billion dollars. Recent estimates say that there's about $20 billion in revenue that comes from advertisers going into the very same portal on Facebook that they use to buy Facebook ads and instead buying Instagram ads. Or in addition, probably most often. Yep. So Facebook's current market cap, around $540 billion.

They do about $70 billion in revenue. So 20 of this 70 comes from Instagram. And that's nuts. Two-sevenths of Facebook's revenue is Instagram. Yep. So not ridiculous to say that they contribute somewhere around $150 billion to Facebook's current market cap, which, you know, let's just round and say somewhere around $150 billion in absolute value return. Nuts. And you think about how recent that was, too, 2012. That puts it at an 88% annualized return for Facebook. Yeah.

So on our whole list, this is the highest annualized return. Now, only eight years, but still eight years of annualized return of 88%. Wow. 88% compounded annualized return. There's nothing more to say. These percentages really force you to understand. For folks who aren't used to looking at, like, IRRs or, you know, annualized returns, like, you'll notice, like, even the best one isn't 100%. And so it really forces you to sort of, like... Think exponentially. Think exponentially, which humans are bad at.

Yeah. Well, it's, you know, there's the Warren Buffett and Charlie Munger re-quote of, I believe it was Albert Einstein, that said, compounding interest is the eighth wonder of the world. Like, if you can compound something at 88% per year for even just eight years, you get the greatest acquisition of all time. It's true. So we're going to do a little bit of a modified version here of acquisition category. So, David, how are you thinking about this?

So I went through our top 10. It's only the top 10 that qualify. And I categorized for me. This may be slightly different than what we did on the episodes of the show. Maybe different than what you think. Each, I categorized each real quick. So Instagram, I said business line, double click business line, YouTube business line, Android product. Next, people plus technology, booking.com business line, PayPal business line, ESPN business line, the Google Maps suite, I said product, and then Marvel business line.

So of that, we have two products, one people plus technology and all the other seven business lines for me. Wow. You agree? Yeah. I would not change a single categorization there. Did you call Instagram a product or did you call it a business line? I called it a business line. That's maybe somewhat debatable. It was not generating revenue when they bought it. I think it's a product that plugs into Facebook's existing business line. Yeah. That's debatable on that one.

I could see that. That kind of straddles the line. Yeah. Because we define business line as like it is a, if not sustainable, then having a path to sustainability business on its own. Right. Yeah. So like booking.com, of course. ESPN, of course. Yeah. YouTube, of course. Was YouTube generating ad revenue when they sold? I guess that's not that important. No, but it's pretty safe. In the same way that Instagram would have implemented some sort of ad product.

Yeah. Wouldn't have been successful, as successful because it wouldn't have been aggregated on the back end with all of either Google's existing advertisers or Facebook's existing advertisers. Whereas I think like Android is definitely a product because, you know, Android got integrated into so much. What are they going to Windows style sell licenses to the OS? Right, right. Like it wouldn't have worked. There's no way Android's business model could have existed except within Google. And same with the suite of Google Maps acquisitions.

Like that was not, where to was not going to build, they were building Google Maps, so they weren't going to build the business of Google Maps. Right. It's funny. So I generally agree with your thesis that the dominant tech theme here is business line acquisitions. And if you had asked me 100 episodes ago or 110, you know, when we started the show, like, what do you think your takeaways might be? And I think we had this categorization thing within the first few episodes.

I don't think I would have told you that the most successful ones would be the business line acquisitions. Yeah. Well, it kind of makes me think it's kind of a justification for venture capital for me, right? Like, because I know you could maybe make an argument that what these some of these super, super successful acquisitions that our business lines are is just like, oh, well, the parent company, the bottom of the kind of like a venture capitalist.

Like they funded Google funded YouTube for a long time and YouTube turned out to be an amazing business. And it's a separate kind of standalone business. You could say the same thing about Instagram. I think probably Zuck and Facebook, you know, we'll talk about in just a sec about acquisition philosophies of different companies. I think that's kind of how they think about things like the Facebook, quote unquote, style acquisition of we're going to buy you and we're going to leave you alone.

Well, it's kind of like what it would be like if you're operating as a standalone venture backed company. Yep. It's a great point. You know, it's funny as you talk about the companies that show up here and then we're drifting into playbook and themes here a little bit. Notably missing is Amazon. Yeah. Nowhere in the top 15. I mean, you've got Microsoft, Google, Facebook, Apple. Yep. You don't have Amazon. Yeah. Well, OK, let's talk about this.

So the other thing I wanted to talk about in category section is use this to talk about the acquirers. Let's talk about each of these. So maybe can we start with Google? Google has four of the top 10. Yeah, it's amazing. Like, I mean, people know, like I think, yeah, Google's like, you know, well, like this is Google has the best M&A track record in history. Right. Like, yep. Four of the top 10. And three of the top four.

That's pretty good. And they were in a bidding war for that for Instagram. So that's right. That's right. Could have been four of four. It could have been it could have been four of the top four and five of the top 10. You know, if you think about Google, you know, maybe Eric Schmidt, I can see this, but like Larry and Sergey, you don't like they don't scream like M&A genius to me. Yeah. Yeah. I mean, I was tempted to blame it on the sort of M&A spree that they were on in this sort of like late.

You get enough shots on goal, you're going to hit some winners. Yeah. But like those ended up being the sort of like 20 to 100 million dollar pickups. They were doing a bunch of YC companies, a bunch of Google alums. Those were echo hires. They were just buying. Yeah. Like these were bets. I mean, if you look at 1.65 billion, you look at 3 billion. Like these are these are big strategic bets that they were making out of the company, you know, in what, 2005 and six.

It's not like I mean, how much was Google worth in 2006? 1.6 billion was very real money. I remember my investment banking interview. One of my interviews was the Google YouTube acquisition had just happened. And the question was, what do you think about this? And I remember saying like, oh, man, they spent so much money. This seems crazy. Yeah. Well, here. OK, here is my sort of thesis on it is when you say like Larry and Sergey don't strike me as M&A geniuses.

Obviously, Eric Schmidt was very active in the company at this point. Was he CEO? He was CEO during all of these acquisitions, I think. So, you know, very seasoned executive there, technology executive. But the way I sort of think about Google is at their founding, they were tech geniuses. They figured out something very disruptive, but didn't really realize it. They didn't know what to use it for. This sort of like as Doug Leone said, it took them a couple of years to figure out.

They knew they had something. Yeah. But exactly what it was, they didn't know. And they kind of fell backward into a business model. Yeah. They kind of like realized that, oh, my gosh, this thing that we're doing by having the fastest and most accurate search results with the lowest cost structure because of our distributed compute infrastructure. Like, oh, my God, we can do that thing that Overture is doing and have incredibly high margin, incredibly defensible revenue.

Yeah. Oh, OK. I guess we'll start doing that. They didn't invent that. But then I think the thing that they did realize was the power of that. And then, like, I think it's a billions quote that Bobby Axelrod says, when you have an advantage, press it. Yeah. And I think they became very good at figuring out, hey, how do we leverage our existing strategic position to just widen the moat and create more business lines or create things that just add tremendous high margin revenue to our existing business lines?

Here's something interesting, though. Like, all of these fantastic acquisitions happened 10 to 15 years ago for Google. So, no, you could argue, as we said at the top of the show, we're not going to include recent acquisitions in this because it's too early to tell. So maybe Google has made some recent acquisitions that are going to turn into this. But I kind of don't think so. I think two things happened to Google, maybe three things, in the period after when they were making these incredible acquisitions.

One, Facebook showed up and started making some of these acquisitions. So, like, whereas before, Google was kind of the only scale tech acquirer. Now, all of a sudden, Facebook's on the scene. And there's tons of alumni at Facebook from Google. I mean, the whole Facebook ads team was the original Google ads team. I mean, Cheryl moving over. Yep, yep. So, Facebook gets Instagram. Facebook gets WhatsApp. You know, Facebook gets Oculus, which obviously, of course, is not on this list.

But, like, you know, it was a big bet to make. You know, you should be making these bets. It's like, take away here. Playbook, you know, Newsflash, make these bets. Two, though, maybe in response to that, Google starts shifting to this strategy of, like, oh, we're going to build stuff in-house with, like, Google X and whatnot. And I just don't think that works as well. That's a good point. You know, I see sort of the rationale.

But, like, the incentives are wrong. You know, if you're an entrepreneur and you're going to build a company, you're, like, going to be all in and aligned. If you're making a Google salary and you're building a company, it's not – it doesn't work the same way. You sit here the day after Waymo finally took external capital. Right, right. I mean, maybe Waymo will become this. But, like, anyway, that's two. And then I think three related to both of these was the leadership change at Google.

You know, Eric Schmidt steps back. Larry Page becomes CEO. Kind of what I said. Larry and Sergey both, like, incredible entrepreneurs, incredibly, you know, stewardship of Google and everything. But this isn't their MO, you know, making these acquisitions. Yeah. Yeah, Google X is in very – I mean, I don't know as much lore around the founding of Google X. But it does strike me as trying to recreate the conditions upon which Larry and Sergey invented Google Search.

Yeah. I'm sure there's many business school professors who study this professionally. But it strikes me that you can kind of do that once. And then when you hit your tipping point and what you need to do is grow and defend, M&A is a much more high likelihood of hit rate strategy than trying to replicate those initial conditions. Which brings us to, I think, the next company to talk about, which is Facebook. Yep. Yeah. So I thought coming into this that my takeaway would be that Facebook is the greatest acquirer of all time.

Well, they got number one. Yeah. Locked down. And ultimately, the value from number one over, like, as it continues forward in the future may actually prove that nothing else matters. Power law. Yeah. Number one beats two through ten combined. Yep. Maybe. Maybe. But at the end of the day, there's two very different – like, holding my comments about online advertising, there's two very different modalities. Of sort of this traffic. There's intent-based and then non-intent-based. Or I don't know what you call Facebook, but messing around on your free time-based.

Yeah. Yeah. Yeah. They both serve an incredibly different and incredibly powerful purpose. And they haven't really stepped on each other yet. Mm-hmm. Like, they've tried in different ways. Google Plus tried. And actually, Facebook hasn't launched a search engine, even though they index most of the web, which is kind of interesting. Interesting. I do think both of those will continue as independent, enduring juggernauts because they serve very different purposes for the types of advertising that they serve people and the moment in which they catch them.

Yep. Yep. It's interesting to think about, like, you know, Facebook is – we were just talking about Google and this era of – this incredible era. And then sort of seeding that – definitely not intentionally – to Facebook. But Facebook is also kind of like – they haven't made acquisitions like this in quite a while. I wonder if that's because the venture capital industry is so – has been so robust over the past few years. Like, where it used to be, like, oh, yeah, Facebook wants to buy you for a billion dollars, a couple billion dollars, $20 billion.

We have a small fund. That sounds great to us. Now you can raise money at $10 billion valuation. So – Yeah, that's a great point. Yeah. Interesting. One of my big tech themes is, like, oh, my gosh, these have all happened largely in the last 20 to 25 years. And based on your comment there, it may be the case that there was a 20 to 25-year window where the best M&A of all time existed. Yeah. And if this ability to both stay private longer and raise huge amounts of capital and there are people with huge funds to support you to do that or, as you said, robust venture capital infrastructure, like, maybe we don't see this kind of thing as much anymore.

Because if YouTube was started five years ago, actually what would happen is it would be a competitor to – Facebook. Facebook at this point. And it would be a large independent company. I mean, TikTok is the sort of what would have happened otherwise if YouTube was 10 years later. Well, now that's – So I was going to say it's both of what would have happened. It's a counterfactual and a counterfactual to a counterfactual is in that they bought Musical.ly.

Musical.ly is too early to tell if that's going to make the list. But it could. There's a world in which it could. And that's a recent acquisition. Super. It makes me very glad that we broadened, acquired from just acquisitions to, you know, first IPOs and now just great technology companies. Because, yeah, the era of these type of acquisitions may be – it's never going to be over. But, like, that fertile window from, you know, 2005 to 2012, I don't think it's going to come again.

Yeah. Like, you needed the right overlap of a technology wave and a capital wave. Yeah. And I think the interesting thing about the technology wave is these are all internet companies. And so you alluded to this at the beginning where you said, hey, we are going to cover non-tech companies too. And we're thinking with a lens of covering non-tech companies. But when you think about it, software being distributed over the internet. Zero marginal cost. Yeah. Like, holding my comments about YouTube, like, you look at Instagram's gross margins, right?

Like, they don't have to pay anything for the content. The advertisers are all aggregated anyway from their big stable with Facebook and even more people coming for the combined Facebook and Instagram. And the bandwidth cost to serve it out to the billion-plus users on the platform now – Not zero, but – Not zero, but much, much lower than, you know, the revenue that they're generating off of this. So – Well, it's not just cost structure. But it's also, I think, maybe even more important in why, at least by our, you know, bias lens, we kind of only had tech and a few media companies in here, is just the ability to scale.

If you're making widgets, you can't go from a million people buying your widgets to one out of every two people in the world buying your widgets within 10 years. Unless you're Apple. You just can't do that. Yeah. Well, yeah. Unless you're Apple, I guess. Yeah. That's a fair point. So there's margin, there's scale, and there's defensibility that all sort of come – I mean, you're not going to unseat Instagram at this point. Yeah. Try a SnapMite.

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Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI control tower. Yep. AI control tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent visible and secure in one place. And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise.

The workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security. ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates. And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company.

But the question is, who's managing them all? So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out ServiceNow.com slash acquired and tell them that Ben and David sent you. So let's go run through quick the other big tech companies. So Apple's on this list. But it's interesting. Apple's just whole approach and MO to this is so different. You know, they make hardware, right? Like they buy components.

Apple buys small technology companies from time to time. It's always their comment. We thought about that as a name for the show originally, right? That's right. Glad we didn't do that. Yeah. Microsoft. What do we think? So they have none in the top 10. We've got Bungie as an honorable mention. Yep. Microsoft famously bungled M&A for most of the Balmer era. Yeah. Which is interesting given they had such a robust team. They had probably a bigger, more robust team than, than, but maybe they overthought things.

It's a couple of things. Well, actually they all stem from the same thing. It's Microsoft's culture. Either the not invented here syndrome just crushed anything that came in to the point where they weren't going to play nice. Right. Or Microsoft bought a quantitative. Like at the same time Google bought DoubleClick and like. I mean, that's the counterfactual. Yeah. Or the crony culture or the cronyism that emerged from the culture there. People would make these acquisitions for political reasons within the organization and then refer to point one for wouldn't end up playing nice when they tried to get integrated.

Yeah. And I think, frankly, like for as dominant as Microsoft was and as much as the culture helped them get to that position, I think it was pretty value destructive for being able to grow meaningfully through M&A. Yeah. Yeah. That makes sense to me. Under Satya now with the new Microsoft, obviously Microsoft is, is Microsoft the current, currently the largest company in the world by market cap? It's up there. Yeah. I don't know. I think they may be above Apple now.

I do know that their stock went up 50% between December 30th, 2018 and 2019. Wow. Wow. So obviously Satya is doing an incredible job leading the company. It would be interesting. Given we were just saying the era of the great golden age of M&A may be over. If it weren't over, though, would Microsoft and can Microsoft even in this era make some, some. I mean, you look at like what? Minecraft. Yeah. Yeah. What else have they bought in the last few years?

Well, they bought LinkedIn, of course. LinkedIn. LinkedIn's never going to qualify because it was already so large. So large. Like so much of the value had already been created. Yeah. Which to your point, like this sort of like robust capital environment, although LinkedIn was the same era as Facebook. It was, but they went public. They were, LinkedIn went public right before Facebook and they were kind of the first, there was a huge drought of tech IPOs after the financial crisis and LinkedIn kind of broke the log jam.

Anyway, the only other one I want to mention, you know, that we have to, Disney. Got two of the top 10 media company, you know? Yeah. So I've had this like blog post that I've wanted to write for a long time that might be just better as an LP show, but what is the same and what is different between content and software? Yeah. Because both are, I mean, if you look at software, it's really just content.

Like it's, I mean, it executes. Yeah, it is. It's content. But it's copyrightable, you know, it's words-ish. And it's a set of instructions that is processed by some brain, just like an essay is. And so it has the same characteristic where you create it once and then you can create an infinite number of copies. So zero marginal costs. This era, it has basically the same distribution costs as software does. Putting 4K video out there, obviously, is a little bit more expensive to host and distribute YouTube than other forms of, you know, than SaaS, for example.

So there's like these things that are the same, but then the things that are different are like you have to create the constant next thing in content in the way that you don't in software. I mean, you need to maintain it and stuff. But like- Right, right. When was the last time Slack added a new feature that was meaningful to your life? Right, right. Never. But like if you're- Whereas we go three weeks without making an episode and we start getting like really antsy.

It's nothing. It's like what Doug Leone say, like without the next great investment, we just got the chickens in the back. 20 chickens running in the back. And that's how it feels. I mean, that's the difference between- We gotta start using that line more often. That's a really good line. Totally. I mean, it's the difference between sort of building an enduring thing that has a snowball effect and grows over time versus, you know, having to start from square one each time.

Yeah. So to me, it's like the reason why these content things are on here is because they have zero marginal and low distribution costs. Yeah. So they can sort of have this high gross margin characteristic. Yeah. Where you sink a ton of money into making it and then you can amortize that over tons and tons and tons and tons of people. But the reason why they're not in the top, you know, one, two, three, four, five.

Yeah. And the reason why Pixar didn't make the top 10 is because it's all about your next hit. That's so funny. And like, just riffing on this for a minute, Pixar didn't make the top 10. Marvel and ESPN did. Marvel and ESPN are more predictable and repeatable than, you know, Pixar is dependent on the brain trust coming up with something great every year. Yeah. And sometimes they don't. Whereas, you know, ESPN, like sports are going to get played every day of every year.

That's true. The content kind of creates itself too. And with Marvel, like the depth of the bench and existing library is like, yeah, you got to make good content and movies got to be good and whatnot. But like, you're taking a lot less risk than you are on like, okay, brain trust, go make me something good, you know? Yep. Yeah. That's a great point. Yeah. Okay. Playbook. Yeah. Can we talk about the fact that the top three are all online advertising?

Yeah. Let's talk about that. This is my, what I think you're going to say is also my number one theme here. Yeah. I mean, there's a few different ways to attack this. One is a defensibility perspective, which I think is interesting. Like once you already have all the advertisers and you already have all the users, it's a far cry to ever break that bond that's created. And so the other side of that coin is being anti-competitive.

So, you know, the fact that our top three are all online advertising network effect businesses that were bought by other online advertising network effect businesses, like that may pay some credence to the drum that Ben Thompson has been meeting around. Do we need a new regulatory framework for the internet? New way and I trust. Yeah. Regulation. Yeah. So hugely, hugely value created for the companies that bought them. Open question of whether it's net positive for the world for this combination to exist.

Yeah. What other angles do you have on this? So my angle on this, I agree totally with everything you said. My angle on this though, certainly for this insight that the top three are all online advertising markets, but also the whole list and all the honorable mentions, this comes back to me like this is another beat yourself over the head with a hammer moment of like, you want to build a big company, target a big market.

You know, like you're not going to build a big company if you don't target a big market, you know, and there's lots of big markets out there, but, but this top three all being online advertising, you know, like think about it for a minute. Online advertising is probably the biggest market in the history of markets. So it's interesting. Advertising all up, at least in the U S consistently tracks as 1% of GDP. Yeah. Now, okay. You could argue that, um, residential real estate is larger.

I'd buy that argument, but those two, I can't think of anything bigger because like advertising and online advertising, like you're taking a, a, a vague on everything that is sold. All of you get a big on the economy. You're getting a big on the economy. Yep. And, um, and so like, it's so big that it can support the three biggest acquisitions of all time. I think, yeah, I don't know if you should say it's like, if you look at household consumer spend, there's like a big chunk, I think like 30% is like their housing and then like 10 to 20% is their car and like 10 to 20% is food.

So like, I guess the, what I would say. Think about all of those, even housing advertising. Right. Zillow. Yeah. But I guess the point I'm making is like, maybe it's the single largest high margin addressable market by a number of consumers perspective, but from an absolute dollars perspective, I bet those other markets are, are larger. The only difference being one, you actually have to do the hard stuff, like bringing, making the food, bringing the food, whatever it is, cars, you know, making margins, um, segments like online advertising knows no segments.

Everybody has a social network account. It's crazy. Um, and, and ease of scale. Yep. So like, I don't think the amount of revenue available in online advertising compares the, on the amount of revenue available in residential real estate. However, the reason these market caps are the way that they are. And the reason these multiples are the way that they are is gross margin, lack of segmentation and ability to scale characteristics. Yes. Now what we're talking about at the end of this episode with, you know, in our clips with Hamilton, as we talked about in the whole episode with him, the mistake that VCs always make is you only look at market size.

That's only one half of the equation. The other half of the equation is your ability to create defensibility within that market. Yeah. And we haven't talked about that on this episode. This is not the time and place for it, but, um, you know, all of the top companies on this list were able to do that. The other two quick kind of sub bullets of that, that I want to say are one. If you look at all these acquisitions on the list with a couple notable exceptions, double click being a really notable one.

These acquisitions were done early in that particular markets development, uh, in the life cycle of the market. And, um, you know, Hamilton also talks about this, like it's the, the growth phase of a market. That's when you can create power. You can create defensibility if you wait too long, you can enter markets later, but you're never going to dominate a market. Uh, if you enter later now, double click is interesting in that Google bought that in 2008.

I think double click was founded in 1995. Um, so that was that, but you could argue that was an evolution of the market anyway. And then my other sub bullet is like, if this, if you're big game hunting, you know, if you're big elephant hunting, uh, price doesn't matter, you know, bring a big gun. You can spend 1.65 billion for YouTube and like still end up number three on the list. All right, David. So in this final section, most commonly known as grading in every other episode, we're going to use this to sort of talk about things.

Me, we might want to adjust in this list, acquired adjusted ranking, acquired adjusted ranking. And we're not going to actually change the rankings at all, but there's some things like you can't serve all masters and there's some masters we didn't serve, namely profit contribution, um, you know, gross margin, strategic value that, that deserve to be talked about here. Like WhatsApp. And so this is sort of our opportunity, I think in, in, in this to grade. Are there entries on this list that we're like, I, you know, maybe that should be higher or lower.

Yeah. First, let's just talk about how unbelievable Instagram is again. So Instagram, Can we make it higher than number one? There's a defensibility amazingness to it that, that I think gets harped on over and over and over again. There's another thing that is, they don't pay the creators for the content on it. Like Instagram generates $20 billion in revenue from content that they get for free. It's incredible. Yeah. It is like, and the content is like, what's interesting, you know, we're going to talk about YouTube in a sec.

They got to pay for the content. They got to pay the creators. Then you look at like Facebook, like, Oh, Facebook gets their content for free. But the nature of the content on Instagram is like super high. Like it's art. Like there's, there's high, like that content has value. Whereas like the Facebook content, does that have value? If it does, you know, like me typing out a status update, you know, like whatnot. You've been on Facebook in a while.

It's kind of the same as Instagram. It's videos. Oh, is it? Yeah. Well, I don't think I've been on Facebook. But like, you know, professional photographers and brands and people creating incredibly, They're putting their content for free. Yeah. Highly produced content. Yeah. That they could, you could go spend a million dollars to make a film that you release on Instagram for free. Like crazy. Crazy. A million might be high, a hundred thousand. So then compare that against YouTube where of course they pay something like half of their revenue out to creators.

So when Google says we generated $15 billion in revenue in our YouTube segment last year, it's like I would, there's an argument about if that's even revenue. Yeah. And, and like they, they chose to report it as revenue and have a higher revenue, lower gross margin percentage business line there rather than, I think what you could have done is said, you know, we have seven, eight billion in revenue. This is GMV. Exactly. Yeah. That is what it is.

It also, YouTube is serving 4K content. And so their bandwidth and hosting costs gotta be, I don't know, at least meaningful. Three ish billion dollars and YouTube's I'm sure I'm sure, or Instagram's I'm sure are high too, but you think about the, the level of compression that people are totally happy with on a mobile screen, on mobile screens. And the fact that like, Oh, they haven't released an iPad app. I feels of course like they're, they're, they're resource constrained, but like, gosh, you, you might want much higher quality stuff if you're having it shipped down to a, you know, retina iPad pro.

And so I guess the, the macro point here is I think it's always worth comparing to similar companies like this, YouTube and Instagram. Instagram doesn't pay for a lick of their content. YouTube has half their, their revenue going out the door. And I think probably significantly higher hosting and bandwidth costs. Yeah. It's important to know too, like we, we're not going to do value creation, value capture on this episode, but they're like a bunch. We're not talking about like what's good for the world, what's not good for the world, like all this stuff.

I think a lot of arguments that Instagram is like bad for the world and like how it is right now. But purely as a shareholder from a like investor economic perspective, if I could hold shares in Instagram versus YouTube, I would put all of all a hundred percent of my dollars between those two into Instagram and zero into YouTube, even though I love YouTube burn. Well, it's just like Instagram is totally, it's everything we were just talking about.

Yeah. Yeah. The other thing that's worth talking about YouTube now that we've denigrated it is it is, is talk about the strategic value, which we didn't talk about anywhere in here. Yep. So YouTube is the second most, I think this is still true, the second highest trafficked search engine in the world. Yeah. And they're owned by the highest trafficked search engine in the world. And so it is worth in the same way that with WhatsApp, we said, was it worth Google or was it worth Facebook paying 20% of their value to go and make sure that their core isn't threatened?

It's hard to put a price on Google owning, also owning the second most valuable search engine in the world. Yep. So, you know, I think it deserves to be up there probably for that reason alone, albeit that's not how we made this list. Yep. Another one that I want to discuss here, and again, we're a little bit out of school because we haven't done the episode on it yet and we absolutely need to, is VMware. Like the only reason VMware is as low as it is, is because of this crazy thing going on with EMC and Dell right now.

Like to acquire 80% of VMware for $625 million, like, man, if I could go do that again, I would go like mortgage, you know, my house a million times over to do that. Like it turned out virtual machines were a thing. Big. And also reflects all the playbook we were talking about, like early in a big market, like also interesting that it's the, I believe, yeah, it's the only kind of enterprise company on this list. Oh, that's interesting.

When you're talking about attacking big markets, I thought that was a direction you were going to go earlier of like. Consumer is a big market. Yeah. Yeah. Double click is arguably. B2B. But it's serving the end customers, consumers. Right. And like, it kind of makes sense that the biggest companies would be consumer companies because the consumers. Businesses serve consumers. You know, you pay retail price for something. And then there's 11 businesses that are chopping up all the revenue that you gave to the retailer along the way to power the back end of the retailer.

And that all has to add up to less than what you bought it for. Yeah. Otherwise, you know, so they're losing the retailers losing money. And so it sort of makes sense that like the biggest companies would be consumer companies and the most successful acquisitions would be consumer acquisitions. Makes sense. But yeah, we didn't point that out before. Do you want to make your Pixar apology statement? Not apology, but your apology not in that you're sorry, but like a justification for Pixar here?

Of why it's all the way down at 14? Of why it's worth more than we say it is. Yeah. Yeah. Yeah. So there's there's a that's right. We talked about this last night. So Pixar, a thing that we didn't do is also count the Disney animations value that it created. Of course, every vitalization of the whole company. Totally. Like I think what's the phrase from the Eiger book? So with animation goes the company. Yeah. You know, Jeffrey Katzenberg did an incredible job with Aladdin and what Beauty and the Beast and Lion King.

Yeah. And then we had sort of him leave and then we had the Lilo and Stitch era and we had Tarzan and we had and those are the good ones. Yeah. Um, and so, you know, you have Disney animation falling off a cliff, which of course, so as with animation, it gives the company. Drives the flywheel of everything. And so in acquiring John Lasseter, Ed Catmull and the rest of Pixar, you know, they revitalized Doctor and like all the whole the whole brain trust.

Totally. They revitalized Disney in a way that it's it's kind of hard to put a value on. The easy way to put a value on it is just multiply the number of basically that that value that we said that it contributed by two and basically say because you get for every one Pixar movie you get one Disney animation movie. Exactly. And that's been largely true. They've both both studios have basically done one big mega hit per year.

Some sometimes they try to but sometimes you get frozen like it worked. You know, I and so I do go Ben, let it go. It's it's if we were considering sort of strategic value, then I do think you'd probably want to say Pixar contributed not what did what did we say three billion a year, but six billion a year, something like that. Yeah, but that wouldn't materially put it up with some of these other ones. It wouldn't, you know, software is hard to beat.

Yep. Any other any other comments? I don't think so. The only other cafe that we said in the beginning, I'll say again, we're probably missing some in here. So please write us in acquired fm at gmail.com. Join the slack. Hit us up in there. But I can't wait to do a double click episode. Yeah. And a VMware episode. Yep. Going to be super fun. I think this just pointed out the sort of need to do both those.

If not this season, then soon. Yeah. All right. Carve outs. We haven't done them in a while. Oh, we haven't done them in a while. I got to. So first is the piece of software, Todoist. I'm loving it. Me too. My to do list. Apple Reminders, just like I just finally couldn't take it anymore. It got buggy. It was so, so icky. And even though my whole life ran on it for years. So I tried a whole bunch of different, you know, options and finally landed on Todoist.

And I just love it. It's great. It's everything I want in a, you know, to do list minor, which sounds simple, but I manage my whole life on it. And I can assure you as someone who's built a to do list thing over the years is is, uh, it's actually harder. And this is any piece of software, but it's actually harder to make it feel simple than it actually is to make it feel jank.

Well, everything should be as simple as it can be, but no simpler, you know, Todoist does a really good job of this. The other one. What's the Hamilton quote? Simple, but not simplistic. Yes, that's right. Simple, but not simplistic. Which you'll hear from Hamilton in a minute here. My other carve out is, uh, you know, been a couple, I saw on the WhatsApp episode, your, uh, carve out was computer glasses. Yep. Um, our, uh, friends, you know, not a sponsorship, but, uh, at Felix Gray, uh, direct to consumer computer glasses brand fans of the show listened, reached out to us and, um, they sent us, uh, uh, pairs of computer glasses and I've been using them.

They're awesome. I love them. Like welcome to the party. I, and, and the best part is I finally, uh, I'm very lucky. My vision is normal. Um, but when I wear glasses, I look very erudite, but I was like, I'm not going to be that guy that wears like, you know, glasses that don't actually have prescriptions. It's just like erudite. Now I have an excuse to look erudite. I love it. I don't actually know what that word means.

Oh, you know, like, um, knowledgeable, intelligent. I see. I think you look that way anyway. Oh, thanks, Ben. All right. My carve out is the masterclass taught by dead mouse. So if, for anyone out there who's a masterclass subscriber, um, or wants to give it a shot, I, I spent a weekend, a couple of weekends ago, uh, doing the watching and then experimenting a little bit on my own with producing some music and watching the dead mouse class.

And it was awesome. It's cool that he agreed to do it. Cause with that many hours of just like somebody talking about their craft, you really get a sense of how his creativity works. It's interesting from a learning perspective, learning the software. It's interesting from watching the ways in which he is resistant to using, um, a lot of like out of the box software or cookie cutter loops. And he's like, it's a massive wall of things that he's actually plugging into and dials and doing it all sort of analog and then recording the analog sounds.

Acquired goals. Dude, it's, it's, it's really cool. And it's, it's really creative for anyone who sort of likes to watch the creative process and action. I, I highly recommend it. That sounds awesome. Whether you're an EDM fan or not. So can't, can't recommend it enough. Do you think, uh, D-Sol, uh, watched it and learned from it? DJ D-Sol? Probably not. I don't know if that guy has the kind of time on his hands. Yeah, probably not.

Yep. All right. Well, listeners, if you aren't subscribed and you like what you hear, you should. And this particular episode, uh, is different in that it has a accompanying blog post that we're going to publish sort of the full data table and a little, probably short paragraph on each company. We got to write it. So who knows exactly what it will be. But the hope is to create kind of the first, um, enduring piece of acquired, um, kind of acquired artifact, um, outside of just these hundred plus episodes that we've done that is, is a little bit more sort of referenceable and, and I think discoverable for folks who aren't, aren't already big fans of the show.

Feel free to, uh, click the link in the show notes to check it out, uh, to share it with your friends. And we'd love to have a conversation about it both on Twitter at acquired.fm and in the Slack. By the way, you can join the Slack, go to our website acquired.fm and there'll be a big button to get an invite to the Slack there. We have going on 5,000 people hanging out there. All sorts of great stuff going on.

It's true. Well, stay tuned after this for an excerpt of our, uh, our LP episode with Hamilton Helmer, who is the author of seven powers. If you'd like to become an acquired limited partner, subscribing gets you access to our LP show where we dive deeper into the nitty gritty of building companies in real time. To listen, you can click the link in the show notes or go to Acquired and get a seven day free trial for all new listeners.

With that, thank you to Silicon Valley bank and Wilson Sincini. And we will see you next time. See you next time. Welcome LPs. I am here in lovely Los Altos, California with a very, very special guest that we've been wanting to have on the show for a long time. Hamilton Helmer, the author of a book called seven powers, which is just spectacular and probably the best kept secret in Silicon Valley. We, and I first heard about your book on, uh, Patrick's invest like the best podcast on the episode with Keith or boy, where he said basically the same thing.

And so I ordered it on Amazon and I look at the blurb, uh, in the inside of the jacket, the people who agree that this is the best kept secret in Silicon Valley is the list of them is just kind of staggering. So Reed Hastings, who also wrote the foreword for your book, Daniel Eck, Michael Moritz, Peter Thiel, the former CEO of Adobe, Bruce, Bruce Chisholm, uh, Patrick Collison from Stripe, Daphne Kohler from Coursera, Jonathan Levin, who's the Dean of Stanford GSB, Pete Docter from Pixar who directed Monsters Inc.

And up and inside out the list goes on and on and on. Um, we are so excited to have you with us here to talk about the book, talk about your work. Um, and I would say, uh, we're, we're sorry to blow your cover, but it's sounding like that's a pretty well blown as a, no longer the best kept secret in Silicon Valley. I was going to say that, that the fact that it's the best kept secret says something about my acuity as a good marketer.

All right, listeners, now is a great time to talk about one of our favorite companies, Statsig. Yes, long time acquired partner. There is a reason why the best product teams at companies like OpenAI and Notion, Atlassian, Figma, Rippling, Brex, and more rely on Statsig, whether they are iterating on their core product features or shipping AI powered experiences at scale. Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly.

The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next. Whether it's a feature tweak, a pricing change, a performance improvement, or an AI update like a model change or prompt adjustment, they're not relying on instinct. They're measuring what actually moved engagement, retention, and ultimately revenue. And as more teams build with AI, that learning loop becomes even more important.

Building with LLMs introduces non-determinism into your product experience. The same input doesn't always produce the same output. And behavior can shift in subtle ways in real world use. So doing offline evals will give you part of the picture, but you can really only understand the impact once your product is live with real users, and then you can measure how their behavior actually changes. It's very different than the way that you would ship features in a pre-AI world where you knew exactly what the software was going to do in production.

Yeah, exactly. So this is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved. The result is a tighter feedback loop and learning that compounds over time so you don't just ship more, you ship better. So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com slash acquired to get started.

So, okay, let's get into the fun stuff. Seven Powers, you know, when I read it, to me at least, the thing that was so enlightening about it was I see this mistake all the time in Silicon Valley and in venture investing of like everybody's like, tell me about the TAM, got to target their big market. But that's kind of only half of the equation of what makes for a great enduring company is targeting a big market.

Of course, you have to have a big market. But you also have to have, you know, what you call power in the book within that market. You have to have defensibility. You have to have, you know, something that makes your company and your business stand out. Can you tell us a little bit about how you define power and how you came up with it? Yeah, yeah, sure. So as I consulted with more and more companies, because I ran my own consulting firm for decades, three things started to become evident to me.

One was that really strong performance is persistent. If you look at Intel's results this year and Intel's results next year, the fact that they have high profit margins will probably be true next year. And it turns out there's a lot of empirical work that verifies that, that there's persistence. It's like the exact opposite of hedge fund managers year to year. Or mutual fund managers. You know, there's no persistence in mutual fund managers. Now, interestingly, as you probably know, there is persistence in venture capital.

Yes. And then the next thing, if you've done a lot of valuation work, I'm sure you've done a ton, and I've done a ton, and I've even taught it. What you learn is it's all in the future. Yeah. So if you take a company that's growing about 10%, do a standard valuation model, what you find is 85% of the value is after year three. Yeah. Right. So persistence and in the future. So that says that if you can understand the issues that drive persistence, you're going to understand what drives value.

Right. But then as I did more and more consulting work, another thing came into focus, which was that the path to establishing that kind of persistence is not linear. There's a step change. Yeah. So there's a period when a company can establish that, and that window often closes, if you will. And it's the kind of business that you are so familiar with. It's in the earlier stage. I think you called it in the book the takeoff phase of the market.

Takeoff phase, yeah. So if you think of a founder, there's this period where there's tremendous flux going on. They don't know who the customers are. Technology's changing like crazy. They have a wide variety of different types of competitors. And in that, there are all kinds of degrees of freedom about how you move. You know, the fact that people even talk about pivoting is just suggesting that it is possible, in fact, to pivot. Yeah. Ask Intel to pivot, and it won't happen very easily, you know.

And they've certainly been trying for a long time. So what that says is there's this moment. But then the problem is, from a strategist's point of view, is that all the information is changing so radically that the person or the group that has to process that is the founder and his team. Yeah. Right? And it's not hiring somebody like me and making a recommendation or strategic planning or something like that. It's actually processing all this time.

And as you move through space and time, understanding, okay, this direction looks a little better than that direction. Yeah. And Silicon Valley founders and the venture capital ecosystem identify, here's a big, large market opportunity. Hundreds of companies get funded and rush in. Right. And only one or two of them make it out. Right. And so it's these decisions that guide, you know, what's going to create power. That's right. That's right. And so what that said to me was that what people needed was not advice from an expert, but rather teaching to fish.

Trying to assemble a way of looking at strategy so that the people on the ground who are really making these decisions have a way of thinking about it that will, it's never perfect, but guide them in the right direction. But the problem in doing that for me was that providing a mental model like that, as I say in the book, it has to be simple but not simplistic. It's simple so that you can retain it, not simplistic so that it's relatively complete.

You don't miss a lot. That's a really high bar in strategy. And that's what took me so long. I mean, I wrote the book. It took me 20 years of writing it basically, you know. And Hamilton, I'll tell you, like, having read a bunch of business books and having an even larger pile of business books I've bought but haven't read and then probably even bigger than that of recommendations I've had but haven't made it to. There's so many different mental models for how to think about this stuff.

I will say, like, thank you for taking the 20 years to do it because the fact that there is a one-page reference card that sort of, like, assembles this whole thing, it actually does make it so you can reference the seven powers and sort of make decisions in real time. And it takes, I think, I've read the book very recently. I'm sure it will take me some time to sort of, like, make that system one thinking instead of system two thinking.

But it's certainly much more accessible than, I think, trying to weave your own fabric of lots of different theories. Let's talk about a few. We won't have time to go through all seven, but they're all fantastic. Maybe a good one to start with since most of our audience is in technology and most of those folks are entrepreneurs or aspiring entrepreneurs. Counterpositioning. This is such a fun one. I know it's your favorite power and particularly such a fun one because it's, in many ways, the most relevant for startups and entrepreneurs in a lot of markets.

Can you talk to us a bit about this? Yeah, yeah. I do have a special place in my heart for counterpositioning, I have to say, because it's so contrarian and I'm sort of a contrarian person, I guess. A counterpositioning occurs if a company comes up with a new business model and challenges often a powerful incumbent with it. But for the incumbent to mimic this model, they would incur or at least think they would incur so much immediate financial damage that they just say, I can't go there.

Even though maybe long term it would be good, they just can't do it. And that provides a powerful disincentive for them to respond quickly. And if something's happening in the kind of flux that you guys deal with very fast, responding late may mean that you don't do it. So I'll give you some examples. So Netflix versus Blockbuster. Late fees. Yeah, yeah, yeah. Late fees. So late fees accounted for half of Blockbuster's income. Netflix said we're not doing it.

And Blockbuster eventually mimicked Netflix. And who knows? But my suspicion is if they'd done it a year earlier, I'm not sure Netflix would exist. You know, and so and the place I got to kind of cut my teeth in this was I was a big investor, big for me, not big for them, a big investor in Dell in the 90s. Right. And my investment hypothesis was that Compaq couldn't respond quickly to them because Dell was going direct.

And Compaq had these lucrative arrangements going through stores. But there was nothing in the literature that sort of I kind of looking at as investor, I could see that was true. But, you know, why, you know? And so so that kind of got me thinking about it from sort of a ground up. And eventually I was able to to formalize it. Hamilton, one thing to push on there. So it seems like and I'm remembering from your book that the criterion are basically this new thing is both a good business, but net negative for the big incumbent because of the cannibalization that would occur.

Are there any other things you would sort of add to? Yeah. So so so there there are a few flavors of counter positioning. One is that is that it's a net negative and therefore because their current model is so lucrative that actually even if they did a net present value, they would end up with deciding not to do it, even though they'll eventually the business will go to the challenger. And these are not mutually exclusive. It's very often true.

I'd say almost always true that there is there's cognitive bias involved, which is that the the incumbent they've done just great. Their model has worked for years. I mean, Blockbuster saying, oh, you know, we've got all these stores, you know, people love it. They come in, they can browse, you know, what's wrong with that? You know, and they think they just and the idea of somebody doing this rough and ready group sending out red envelopes in the mail.

They say, what the hell? You know, they're that this is just not going anywhere. So they're very cognitively biased towards thinking that their model works. And then there are also agency issues, what economists call agency issues, which means that the the person who controls the business may not be and have a lot of interest aligned with the long term interest of the business. So so for example, CEO comp is often about, you know, this year's performance or the next few years performance.

And and so you you so to upset the apple cart for a gain that will happen four years out, you may say, you know, I just don't think it's really hard to do. If you are a hired CEO of a large, long lasting company, if you're not if you're a founder, then most of your worth is in the equity of the company. And so the long term matters. Right. It also reminds me, as you were talking, I hadn't thought about this, but obviously for startups, counter positioning can be great.

And Netflix is a fantastic example. But even remembering a blog post Bill Gurley wrote a number of years ago in the beginning of when Android was starting to take off. And I think the title of it was like less than free, the new like the most disruptive business model ever of, you know, you had Android, which was less. It cost less than free. Like they would pay you to use it if you're a carrier to put it if you're a handset manufacturer to put it on your phones versus like Nokia that's trying to make money or sell their stuff.

Like even as Google and a staff, because they had the separate business model of search, they're able to enter this adjacent market with a completely counter positioned business model. Right. Right. Right. Hamilton, listeners who have read the innovators dilemma, this is going to sound vaguely familiar. And like this would be the power that's sort of most similar to that concept. How do you think about in the same way that we asked earlier, what's the difference between power and moat?

How do you think about counter positioning relative to sort of that sort of grand theory? I recommend everybody to read that book, Innovator's Dilemma. It's a brilliant book, you know, and Christensen was just a scholar of innovation, you know, and deeply researched. I have great admiration for his book. But it's pretty different. So if you want to get sort of mathematical about it, there's a many to many mapping between the two concepts, which is to say that counter positioning doesn't imply disruptive technology and disruptive technology doesn't imply counter position.

Give you some examples. So I would argue that in and out burgers is counter position against McDonald's. There's no technology involved particularly at all, but it's counter position. So that's one case. And it's not disruptive in terms of Christensen's philosophy was low end. This is like a objectively worse product. Right Right. Right, right. And yeah, so you're going back to Christensen's original book, which I think is the more interesting one, where there's a product that kind of doesn't, you know, satisfy everybody.

I mean, you could argue that Tesla's first cars were like that. Yeah. Okay. And so and then the other the other direction is that if something is a disruptive technology, it may not be counter position. So that's straightforward. And the fact that they don't map to each other and the fact that power maps directly to value or there's a one to one mapping between power and value. It means that disruptive technology does not map to value.

And so as an investor, so and the simple thing about that is you can disrupt something and it can be a really lousy business. Yeah. Happens all the time. Right. You may not be able to realize you poison differential margins. Yeah. You poison the well, but there's no good endpoint for it. Or I think I mean, we may be overly quoting Gurley here, but I think I saw a recent tweet, something along the lines of there is an infinite amount of product market fit for selling dollars for 90 cents.

Yeah. Yeah. Yeah. Right. So, yeah. I mean, and you see this model all the time of so. Yeah. So just pricing something so that people are attracted to it and losing money is not there's no power there. Yeah. Thank you.