Microsoft announced yesterday that it would buy software development platform GitHub for $7.5 billion in stock. GitHub, a privately held, San Francisco-based code repository of open-source software projects, was founded a decade ago with the goal of facilitating collaboration between software developers. Since 2008, it has grown into one of the world's largest repositories of code. More than 28 million developers already collaborate on GitHub.
This is Microsoft's biggest proposed purchase since its 2016 acquisition of LinkedIn for $26 billion. It is bigger than the company's 2014 acquisition of the company behind "Minecraft," and even bigger the 2014 deal in which it acquired Nokia's mobile devices division. Analysts online claim that Microsoft's purchase price is around 39.5 times Github's estimated trailing 12-month revenue.
This baffle some observers, as it seems to suggest that startup acquisition price is directly correlated to revenues. That is generally true (i.e., more revenue generally means a higher acquisition price), but lots of things can impact acquisition price: most notably key performance indicators (KPIs) like the cost of customer acquisition, the lifetime value of a customer, month-over-month growth, strategic synergy, social capital, goodwill, brand loyalty, proprietary IP, and other factors.
But a startup, like a house, is valued differently by different buyers. Different buyers hold different assumptions as to what the startup's assets could contribute to the value of the buyer. So what other than KPIs can drive a higher acquisition price? A decade ago, Dr. Dave Valliere and I explored this topic in a research paper published in the Journal of Public Equity. It points to an additional source of price increases: the depth of the prior relationship between buyer and seller. Based on these findings, here are five things you can do today to make you business sell for more.
1. Build deep relationships with your supply chain.
You are part of much bigger ecosystem and part of a supply chain. Having a prior relationship with a startup drives the acquisition price up. This is because the buyer has closer ties to the firm, is able to better assess the value that startup contributes to the supply chain, and often has the same end user.
One of the more unique ways this was observed in our study was that when a firm has senior employees who have prior relationships with the future buyer, the acquisition price goes up. It is worth noting that Tom Preston-Werner, a GitHub co-founder, had prior dealings with Microsoft (his previous business, Powerset, was bought by Microsoft in 2005).
2. Increase your customer lifetime value by decreasing churn.
The more loyal your customers and users are, the higher the acquisition price. So instead of always looking for new users, invest time in keeping the ones you already have. There are several simple strategies for reducing customer churn.
3. Lower your cost of customer acquisition by using incentivized referrals.
To scale, you must make way more money from new customers than it costs to onboard those new customers. So lowering the cost of customer acquisition is always important. Try leveraging current users by establishing an incentive program for referrals.
4. Increase your social capital through brand enhancement.
In the internet age, your greatest assets are your users--specifically your "power users," also known as "superfans" and "influencers." You can empower your users to increase your brand footprint by letting them tweet and share over social networks. Power users create buzz for you. These are your most public supporters--the ones that help you out publicly and privately.
5. Sell based on what the buyer gains.
The most plausible answer to why Microsoft is paying so much for GitHub is because of what the latter can do for Microsoft. With control over GitHub, Microsoft will now be able to significantly influence the way the platform operates to its advantage, and get an invaluable overview of the projects being worked on across it. This data is incredibly competitively valuable to Microsoft as it tries to influence developers to adopt its frameworks, cloud infrastructure and software products.