A Look Back At Yahoo’s Flickr Acquisition For Lessons Today

Editor’s note: Tomio Geron is head of content at startup Exitround. This is part of a series on the tech M&A market. 

When Yahoo offered to buy Flickr in early 2005, co-founder Stewart Butterfield and his team had a tough decision to make. There were many reasons  to sell. But there were also many reasons to wait for a larger exit.

Today, deals like WhatsApp and Oculus to Facebook, as well as Nest to Google, can make it seem like massive exits are easy or common. But they’re often complicated and provide some lessons, according to Butterfield — now co-founder and CEO of Slack — and Cal Henderson who was head of engineering at Flickr and is now co-founder and VP of engineering at Slack.

Vancouver, Canada-based Flickr launched in February 2004 and started to take off in summer of that year, drawing the attention of Yahoo and other large Internet companies. While it held some meetings with these companies, the startup didn’t receive any offers.

But six months later, with usage doubling every month and showing no signs of slowing, Flickr started to talk to venture capital firms such as Accel Partners about a substantial funding round. Until that point it had received angel funding from Esther Dyson, Reid Hoffman, James Currier and others. It also began receiving real acquisition interest. Yahoo was the most serious, flying to Vancouver to make a full pitch to the Flickr team.

There were good reasons to take venture funding and keep going. The site was exploding in growth and had no real competition. Even the popular blog platform Blogger used Flickr for photo uploads on its site. In social networking, Facebook was still an on-campus phenomenon – so Flickr could have taken some of what Facebook eventually gobbled up with social photos.

But there were also compelling reasons to take the deal, as many of Butterfield’s advisers said. Yahoo was still the top search engine. And there wasn’t much confidence in consumer Internet startups, as many investors and entrepreneurs still had the dot-com crash fresh in their minds. There hadn’t yet been consumer Internet exits since the crash, with the exception of Blogger, which Google acquired in 2003 for a small sum. And the risks of some unknown financial crash seemed significant.

In addition, technology storage and bandwidth was expensive, and open source technology was not as mature as it is today. Flickr had to rack its servers and build much of its technology. Joining Yahoo would supposedly solve some of those problems. Flickr decided in January 2005 to take the Yahoo offer — reportedly for $35 million. There were too many compelling reasons to take the offer during what was still an uncertain time. Because it was early in the growth of tech startups after the dot-com crash, Flickr missed some of the up-tick in the market, as others sold for more when the market took off: Myspace sold to News Corp. for $580 million in July 2005 and later YouTube, which Google acquired in October 2006 for $1.65 billion in stock. “We definitely made the wrong decision in retrospect. We would’ve made 10 times [what we did]. But it’s not like I regret it,” Butterfield says.

How can something be a mistake and also be completely correct? The sale left potentially 10 times more on the table. But Butterfield doesn’t regret it because he believes they made the right decision knowing what they did at the time. And he and other team members have all gone on to do well at other ventures.

It was one of the first significant consumer Internet acquisitions after the dot-com crash, and it illustrates the tough decisions that entrepreneurs have to make — particularly when facing acquisition offers.

The Decision To Sell

Making a decision to sell is a tough call for any founder or CEO. Many have invested valuable time, money and energy for years. There is no simple right or wrong answer. Butterfield suggests that first-time founders with a strong offer from a good buyer — a similar situation he was in — should probably take it.

“I’d say most should take it. Everyone wants to be Zuck, keep independent and go all the way. But there’s only one Zuck or Bill Gates. It’s such an individual choice.”

For founders worried about being acquired by a big company, he says there are benefits to working at one. You can get access to many more resources from the acquirer to build the product, which can make it easier to just focus on building it. You can also gain much wider distribution from the acquirer to reach a broader audience for the product. And on a personal level, founders can gain liquidity for an illiquid asset – your private company stock.And no matter what, you should have many options even if you don’t like the big company.

That said, it’s not always easy for an acquired startup to integrate into a large corporation. It can be the toughest part of an acquisition. Many acquisitions fail to live up to expectations for both the buyers and sellers. “M&A in general is super dangerous,” Butterfield says. “There’s always a high risk.”

Flickr, which had seven people move to Yahoo, faced a number of issues. Many departments in Yahoo wanted to use Flickr photos for everything from dating apps to cars to maps. Much of Butterfield’s first year was spent meeting with different Yahoo departments while trying to keep Flickr focused on growing itself as a product.

For startup teams, this can be distracting from their focus on building a product. Often these discussions end up with the other department head telling the new startup team, “Tell us what you do and convert to our roadmap.” That can be a shock.

An acquired startup team also often has to deal with corporate politics, for example, with different VPs battling each other. The acquired team can get caught up in these battles, Butterfield says, even when the ultimate target of these battles is not the startup itself but some other larger goal.

The Difference in Today

Today, Butterfield is often on the opposite side of the table as a potential buyer of smaller startups. Slack just raised $42.8 million led by Social + Capital Partnership along with Andreessen Horowitz and Accel Partners.

While building Slack, Butterfield and Henderson took some lessons from their past startups. Previously, their team created Glitch, an online game that was well-reviewed but never took off as a business. The team shut down the game but the company (Tiny Speck) eventually became Slack.

The idea came from the team’s communication methods while building Glitch. Half of the Glitch team was in San Francisco and half was in Vancouver. The team had hacked together a way to communicate with messaging and file sharing on top of IRC. “We got to the end of the game and thought: whatever we do next, we want to use the same system,” Henderson says.

When looking at acquisitions, Butterfield generally looks for startups that can fill a need on his company’s roadmap in areas like communication, collaboration and scheduling. But Butterfield is operating in a different environment than the one Flickr was in at the time of its acquisition. In today’s market, startups are raising venture capital funding at high valuations with seemingly little trouble. There is also much more competition on the buy side from private companies with billion-dollar valuations, such as Uber, Dropbox Pinterest and Airbnb. “The challenge now is by the time it’s apparent something is a good idea — team or product — and successful, everyone is all over them,” Butterfield says.

The competition for acquisitions is similar to the competition for hiring, Henderson adds. Strong candidates have multiple offers with strong salary packages.

Meanwhile, founders see a big upside to starting a company with billion-dollar potential (realistic or not), so hiring companies have to pay up. “There’s some unrealistic expectations of how easy it is [to start a company],” Henderson says. “Even if they acknowledge how unlikely it is to succeed, they reasonably want to try it, because the upside is so big. If it doesn’t work they can go back to a big company.”

Butterfield’s biggest lesson learned for founders is to be clear about the post-acquisition terms. This still can’t guarantee everything will go as planned, but it can help. Both sides having a well-defined agreement about what will happen to the team and product post-acquisition is key. These are some baseline questions to start with:

• Is the acquisition going to be run independently?
• Will existing management remain in charge? If not, who will?
• What are the key goals/targets of the acquired team or product?
• What resources will be available from the acquirer?

If you just assume the answers to these questions and don’t agree, don’t be surprised if people aren’t happy with the outcome. And for founders, asking for a firm commitment from an acquirer on resources and timelines is key. While not always possible, the best way for a startup to become successful post-acquisition is to remain independent, he says.

Butterfield says there’s no magic bullet for a successful integration, but keeping clear on the many details can prevent a number of problems.