All across Silicon Valley you can hear the cheering now that Microsoft, at least for now, has withdrawn its bid for Yahoo.
None of this has anything to do with any particular bad feelings toward Microsoft. Instead, it's all about the parasitical nature of the Valley's relationship with large companies. And if Yahoo is taken off the board by Microsoft then the number of large companies that can afford to buy small start-up companies is sharply reduced, which in turn lowers the premium that venture capitalists can command for small start-up companies.
This is crucial to investors at the moment because a lot of money has been poured into any number of so-called Web 2.0 startups. A lot of these companies are doing interesting things but at the end of the day the vast majority of them are really building features of what is somebody else's much larger offering. Usually that somebody else is either Google, Microsoft, Yahoo, News Corp or AOL. Therefore, from the perspective of the venture capitalists in the valley, any reduction in the number of large companies willing to buy small companies is really bad news.
This is particularly true now because most of the companies being funded in the Valley at the moment are being built to flip. Very few of them are being funded with any real intent of taking them public in order to building an entity that can be sustained on its own two feet.
There's nothing particularly new about that. The vast majority of the companies that Cisco has acquired over the years were basically started at outsourced research and development activities funded by venture capitalists. But given all the noise about the proposed deal for Yahoo, it is well worth remembering what self interest is driving a lot of the commentary around the deal.
Whether Yahoo's tock drops far enough to make it worthwhile for Microsoft to return with a hostile bid is anybody's guess. But what Microsoft has done is put a line in the sand about what it thinks one of the biggest properties on the Web might be worth. And if Yahoo is only worth so much, chances are people are going to start thinking about the relative worth of other Web 2.0 startups as a percentage of what Microsoft might have been willing to pay for Yahoo. And now as Yahoo's stock falls, the valuation of a whole other range of Web 2.0 startup companies is likely to decline with it.