Google’s Dilemma: Buy Dropbox or Build Google Drive?
Before launching their cloud storage platform Google Drive last week, the company’s head honchos faced an interesting and common dilemma in the software world: Whether to build their own product from scratch or buy an established one.
While there are a number of sharing platforms out there — Sharepoint, Box, and OpenView portfolio member Central Desktop come to mind—it’s clear from the B2C focus of both products that Dropbox would have been the most likely acquisition target for Google to consider.
In understanding Google’s process, my hope is that expansion stage companies can better sway a larger company towards the decision to buy them out. Below are the questions Google, along with any other company facing this dilemma, likely asked themselves before making their decision:
Do we have the in-house talent to build it?
Very often, especially in tight technical job markets like ours today, acquisitions are less about the product and more about the talent behind it. Facebook, for example, is notorious for buying companies for their development teams, shuttering the existing product, and reassigning them. With arguably the deepest pool of technical talent in the world and a humming recruiting machine, however, Google likely didn’t see this as a major benefit of buying Dropbox.
How seamless would the infrastructure integration be?
A company with a ton of physical infrastructure could be a source of integration nightmares for the potential suitor. Since Dropbox runs on Amazon’s S3 cloud storage platform, the integration would have been seamless. This was probably slightly favorable to Dropbox’s chances of getting acquired.
Which Brand is Stronger?
With all due respect to Dropbox, which has built a stellar reputation in a few short years of operation, Google is pretty much unmatched in B2C products. I trust them to come up with an intuitive and secure product with great integration into my existing account.
How sticky are the company’s customers?
If the target’s product is deeply entrenched with their user base, it’s much more difficult to build a competitor. While Dropbox does have loyal customers (I consider myself among them), the freemium business model advocated by both Dropbox and Google actually encourages users to dabble in multiple products. If you, like me, are nearing your 2 GB limit in Dropbox, it makes sense to give Google Drive a try for free rather than paying for extra storage.
How fast is the market moving?
In a high-growth market with sticky customers, a company may prefer to buy an immediate presence rather than risk falling behind while they develop the product. The cloud storage market is growing very quickly, but because Google likely didn’t see Dropbox’s customer base as extremely difficult to penetrate, they were able to take their time building a competitive product without losing out on their market position.
What is our company culture?
Simply put, some companies prefer to grow by acquisition and some prefer to expand organically. Looking at Google’s acusition history, they’ve certainly been very acquisitive, but their purchases tend to be in the 10-100m range rather than the multi-billion dollar price tag Dropbox would likely fetch. Their one recent monster acquisition of Motorola Mobility was somewhat of a special case because of the company’s patent portfolio, which Google desperately needed. The jury is out on whether Google would feel comfortable bringing on that size of an integration project.
Because the logical answers to the above questions above fall pretty decisively in favor of building the Google Drive rather than buying Dropbox, the company’s decision isn’t surprising. But there’s another angle: How, as an expansion-stage company in search of an acquirer, do you help nudge a larger software company away from building and towards buying?
While a lot of the above questions are out of your control, some aren’t. For example, thinking about how to make your customers fiercely loyal to your product — even if the market is growing so quickly that competition isn’t your main concern — can go a long way toward discouraging potential entrants. Establishing your team as thought-leaders in the industry can also make the company more attractive from a talent acquisition standpoint. Finally, making your infrastructure as flexible as possible will reduce friction costs for a potential acquisition. While the end outcome often seems arbitrary, there’s a method to the madness of a software giant’s acquisition strategy.