Microsoft has acquired video search specialist VideoSurf for a reported $70m in what is the latest in a spate of startup takeovers.
A statement from the software giant says it plans to integrate VideoSurf’s technology into the Xbox 360 to improve the search function on Xbox LIVE.
Microsoft says the technology, when combined with a new voice search feature, will provide quicker and more relevant multimedia search results.
According to GigaOM, VideoSurf was founded in 2006 and has raised $28 million since then, from investors like former Vice President Al Gore, Facebook COO Sheryl Sandberg and SurveyMonkey CEO David Goldberg.
Venture capitalists (VCs) have a lot of money tied up in shares, so deals like the sale of LoveFilm to Amazon allow a healthy return and free up money to 'return the fund'; past performance is important when the VCs have to go out and raise more funds, especially in the current climate, and returns are only realised on sales.
While investors are looking to sell, technology giants are looking to spend cash supplies to stay ahead of the competition. Carter says Microsoft, Apple and Google are sitting on billions of dollars in cash reserves which puts them in a strong position to quickly buyout companies in growth areas.
Speed is everything when a particular market is getting warm, and it is obviously quicker to buy a startup with existing expertise than build your own presence.
Another factor may be the need to avoid paying hefty repatriation taxes, meaning companies would rather spend the cash overseas on a promising startup than lose the money by bringing it back to the US.
The flurry of sales has raised fears that we are in a new technology bubble, with companies selling for far more than their actual value.
This uncertainty can be seen in the volatility of share prices of recently floated tech companies like LinkedIn and Groupon.
Groupon’s IPO valued shares at $20 when it floated two weeks ago, but after quickly rising to around $26, the price has slumped this week and is now threatening to dip below the $20 mark.
Carter said the upside of Groupon's IPO, which got only a few percent of the company into public hands, is that initially demand outstripped supply and the price spiked.
The downside is that when the market has so little volume to trade market cap can change very quickly. He believes technology companies are being overvalued partly due to investors’ need to make a profit, but also because US companies are starting to believe their own hype.
“I think some companies are guilty of drinking their own Kool-Aid,” he said.
Large investments in startups, often used in attempts to grow the company quickly, drive up valuations as founders remain keen to retain control.
The knock-on effect is that the value of acquisitions and IPOs is driven up as large exits are required to satisfy investors and get them a return on their money, and while the technology giants are sitting on billions in cash, now is a great time to sell.
So while Microsoft’s acquisition of VideoSurf move may payoff in the long-run, and Xbox Live users will probably feel that anything that improves usability is worth the money, for now the buyout will add to speculation that we are in a new technology bubble.