Why Nontech Giants Are Buying Technology Startups

Large U.S. companies for decades have avoided buying Silicon Valley startups, instead building their businesses or products internally – or buying recognized companies. That’s changing rapidly. Wal-Mart Stores Inc. (WMT), General Motors Co. (GM), Unilever PLC (UN) and corporations have scooped up venture capital-backed tech startups to a total tally of almost $10 billion in 2016, double the previous year’s volume, according to the Wall Street Journal.

The forces driving this tech dealmaking are a slowdown in growth and the meteoric emergence of tech as a significant industry disrupter in the business eco-system.

Tech’s Allure to Corporate Giants

A prominent example of this trend is Ford Motors Co.’s (F)  $65 million acquisition of Chariot, a San Francisco-based commuter shuttle startup, in September. A staffer at Chariot told John Casesa, a Ford executive, that the company was “growing fast and had an interesting crowdsourced reservation model,” according to a December 30 article in the Journal. “We are in an era in our industry where M&A will be a frequently used instrument,” Casesa said.

Other corporate behemoths making forays into the tech space include Wal-Mart, which paid $3.3 billion to acquire Inc., a rival to online discount retailer and (AMZN). GM spent more than $1 billion to purchase Cruise Automation to advance the carmaker’s quest to build a driverless automobile. Unilever’s $1 billion purchase of Dollar Shave Club, which sells razors and other personal items by mail, is another notable example.

New Deals Ahead

And with the venture capital funding climate for startups expected to tighten up in 2017, investors and analysts are predicting a a host of similar deals for the new year.

Legacy companies’ interest in startups is illustrated by the rising number of large-company representatives attendance at Silicon Valley conferences, networking events and office buildings for new deals, noted the Journal. Campbell Soup Co. (CPB) and Kellogg Co. (K) are launching their own venture capital units to scope out new investments in the tech sector.

Startups a Tough Sell

However, the overpriced valuations of some startups can be a tough sell for traditionally risk-averse big companies. Yet some might feel they have no other recourse but to shell out large sums of cash for a tech acquisition to bolster their business.

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