Kiko and Building versus Buying

Here’s one more example of startups and intellectual property: this summer, a startup company called Kiko decided to throw in the towel, and they did it by putting the company’s assets up for auction on eBay. The shareware site Tucows bought it for $258,100. What’s most interesting about this is that the sale occurred in a very public manner, and the winning bidders have described in detail why they bought it. For the purposes of my discussion about startups and IP, I think this is the most interesting part of their analysis:

It was clear from their posts and such that Justin and Emmett were no longer passionate about the calendar space and were excited to do something else. They felt, and we agree, that this was worth much more with them along for the ride. Probably by a factor of ten. It would have then attracted a completely different type of buyer. We would not have paid that premium for the people. Not that they aren’t worth it. Just that our financial calculus was different. This probably kept some of the natural buyers out of the process.

We also did not need a huge base of retail users. They are nice and we will provide them with a great home but if this had been much of a success outside of Mike’s 53,651 it probably would have attracted more financial buyers or domainers and the price might have ended up more than we were willing to pay. It is worth noting here (and we also talk more about this in the podcast) that there was clearly interest in the domain name and the traffic. We will certainly monetize that as it is a space we know well, but we also may choose to sell the name off as it is not core for us. Either way it is another place where we, more than most/all other buyers who would be interested in the calendar functionality, will be uniquely able to take advantage of the assets.

This is interesting because this gives us a rare opportunity to guage the value of a company’s bare code without the staff, customers, and other assets that usually accompany it. Both Kiko’s founders and Tucows seem to believe that the code is valuable–$258,100 is obviously not pocket change–but that a functioning company is worth an order of magnitude more.

This is also interesting:

So why didn’t we build it? Well the short answer is we have so many things to do in general and so many exciting things to do with email in particular that it was just not going to be possible until at least Q2 of next year and even then the plan didn’t really excite anyone around here. It looked sort of like the next-gen of our current offering. Had this not come up we would have probably stayed the course and looked to catch a break. When it did, we quickly went through a simple calculus.

The Important Question: What would we pay to have a kick-ass AJAX-based calendar available now? When I am dealing with quick, complicated decisions I really like to boil them down to a simple abstract construct. Yes there are a huge number of shadings around that question but at its simplest that is the essence of the decision. What was the value to Tucows of the time and the certainty? Of being in the market with this functionality six to twelve months earlier than otherwise? What was the value of having it be good for sure? Even if we threw it away in six months (not that we plan to do that)?

What I can tell you for certain (and you’ll be able to hear more details in an upcoming podcast) is that it was more than we paid!

I think there are three lessons here: first, it’s not so easy to “take any ideas revealed” by small companies and “implement them.” It requires a couple of man-years of work by a good engineer, and after waiting a year or more, the end result may or may not be as good as the original.

Secondly, although intellectual property is a valuable asset, it’s a small fraction of the value of a successful company. Smart employees and loyal customers tend to be worth an order of magnitude more.

Finally, I think this has particular relevance to the software patent debate: the theory behind patents is that it’s often much cheaper to re-implement someone else’s groundbreaking invention than it is to develop the invention yourself. But in this case, at least, that wasn’t the case. As far as I know, Kiko didn’t have any patents, yet Tucows still found that buying Kiko would be cheaper than hiring somebody to build a clone of Kiko’s software. I think that this is true of software more generally: the hard part of software development isn’t coming up with the broad ideas that are covered by patents, it’s all the messy implementation details that are covered by copyrights.

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