Perhaps the most dangerous saying in economics is, “it’s different this time.” However, in the technology industry today it may, actually, be true. With the emergence of the Internet and wireless broadband networking, the technology industry has witnessed a dramatic shift in the economics of product development. Over the past 15-20 years, the table stakes of needing multi-10’s of millions of dollars to develop the next platform (hardware and software) has shifted to a world in which a few engineers with a great idea, a fast Internet connection and a dog can change the world. That was certainly the case with Google when Page and Brin were at Stanford, Facebook when Zuckenberg was at Harvard and Twitter as it transitioned from podcasts to microblogging in its early days. I suspect it will be true for the rest of the decade.

The primary reason that the economics have changed is that most of the innovation is now occurring above the IP layer. For the non-engineers, software has always been the secret sauce in technology innovation. Hardware may get much of the attention, but software is what engages the user. For most of the life of technology, software engineers had to develop their software directly for a specific hardware platform or network architecture, slowing its development and limiting its addressable market. With the advent of TCP/IP, the ubiquity of the broadband networks and the fast adoption of standardized mobile device operating systems, software engineers can almost assume away the entire hardware layer. For the first time in 20 years, software engineers can singularly focus on writing software that engages users.

As a result, technology acquisitions have never been easier to execute or make successful because the post-acquisition efforts now focus on leveraging the new technology and accelerating customer traction rather than on platform integration. Sure, not all software has been coded in the same high-level programming language, but increasingly all software will reside in the cloud and integrating technology will be significantly easier than attempting to merge software and hardware systems designed in the past.

And we have seen it in the numbers. The top ten digital media and Internet-based companies have acquired more than 180 companies in the past 24 months, more than any other period in the history of technology.

Technology companies acquire other companies to obtain one of three assets: engineers, technology and/or customers. Interestingly, each asset class drives a higher acquisition value and most, if not all, recent technology acquisitions derive from the desire to garner one of these three resources.

Engineers: talented engineers are rare and difficult to recruit. Acquiring engineers can often be an effective recruiting strategy, particularly if one can buy a team of engineers that has demonstrated an ability to work together effectively in a specific area of technology. It turns out that most recent technology acquisitions are, in fact, nothing more than bulk-recruiting of engineering talent and are referred to as acqui-hires as a consequence. The financial aspects of these transactions generally represent nothing more than a hiring bonus for the key employees.  

Technology: technology that works is like poetry that captivates. It is elegant. And it is valuable. Technology that brings value to customers is scarcer than engineers, even good ones, and generally drives a premium in the acquisition market, particularly if the acquirer can leverage the technology in its company or with its customers.

Customers: engaged customers are the Holy Grail in any business. Acquiring customers in technology is harder than finding talented engineers or developing technology that works, and a company with engaged, repeat customers will drive the highest acquisition value in today’s capital markets.

If you really want to get rich in the tech world these days, drive your company’s strategy up the value ladder – get a great team of engineers, develop kick-ass software and engage customers, ideally lots of them. Your efforts will be worth millions if you successfully execute on this strategy.