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Acqui-hires is an aberration that will go away once the bubble bursts.

So the Duke Law Journal actually wrote a research paper on acquihiring:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2040924

The summary:

Acqui-hiring makes no financial sense to the buyer and it might not even make sense to the entrepreneurs to “leave money” on the table by compensating investors since they could easily bail.

Basically acqui-hiring is the result of Goodwill and too much money. Big tech companies have tons of money, entrepreneurs who join big companies are getting fat signing bonuses, so why not let the investors have a piece of it too.

After the bubble bursts, this period of hubris will be noted by this ridiculous concept of an “acquihire”

  • Aquihire is not a foolish move on behalf of a company that can afford it. The only people that suffer is the consumer or the entreprenuer. You look too narrowly. If a big tech firm takes over a small one with hungry, I mean hungry founders that have a piece in what they succeed in, it’s the smartest thing a firm can do especially when approaching a bubble. Here’s why – 1) the founders are relentlessly innovating because they are focused on just that, not their livelihoods. 2) they help the true innovators and talent weather the bubble storm so they can live to fight another day. 3) the buy into an innovator is often lower than waiting for them to build a product and get it to market. So why or how can the entreprenuer/founders suffer? 1) they can become Tame or domesticated if they aren’t really creative and hungry for the next and the next. 2) they can lose creativity if not given enough space to innovate. How does the market suffer? just 1 way – less competition, higher prices.

    if there is a bubble coming, they are great. If not, who cares. Either way, it’s always in the buyers favor, even more so when they give the founders room to innovate and are able to keep it affordable for the marketplace.

    So where does that leave the original investor? They should get a cut, especially if they brought the buyer to the table.

    Reply

    • They “should” get a cut.

      That’s the operative word. Goodwill. Financially it makes zero sense. You only care about goodwill if you’re feeling generous. And you feel generous because you have too much money.

      When lean time comes buyers will resort to what they’ve always done before. Poach the teams and let the startup die. The investors get zero.

      It’s not just my opinion. The authors agree as well.

      Reply

  • I am so sick of the crying wolf going on with trying to bring on a bubble bust. If these people had been on their game at the time, they would know that now is different from the 2000 bust. Way different. First off, the companies that flamed out fastest lost the moment someone else duplicated their exact model. second, there was no money EVER going into the company, but flowing like water out. Third, it was funded by banks predominately. Lots of “millionaires” then if you only looked at them on paper, but no money. NONE!!! They even bought mansions to live in with zero furniture. The “founders” then were about the quick buck and living high on the hog, which is not what the current tech founders seem to be about (of course, there are exceptions). Let me give you the main way that tech bubble busted, if you had a product, you would pay affiliates, say $10 to get people to sign up. Who doesn’t want free money, so those people signed up to get the money, but they rarely, if ever, converted to paying customers. See what’s wrong with that idiotic model. Think Pets if you are trying to figure out what company started the crash.

    Reply

    • ” If these people had been on their game at the time, they would know that now is different from the 2000 bust. Way different”

      Unfortunately the only thing that has remained constant in bubbles since the 1600’s is that some people believe that “this time is different”.

      Reply

  • There is nothing wrong with acqui-hires per se.

    It’s not the investment type itself that determines failure/success. Your statement “makes no financial sense” is just wrong, of course it makes financially sense to have the best people on board.

    Good engineers -> good product -> people will like it more than bad products -> more $$$ compared to worse products

    You will always need the good developers at the very bottom. Any hype, marketing, sales can NOT compensate the lack of having a good product. Companies like Google know that and that’s why they have a very nice work environment.

    Reply

    • You missed my point. They could’ve poached the highly qualified team by just giving them huge signing bonuses. No need to buy a dying company just to pay off investors and shutting it down.

      The act of paying off investors is stupid, wasteful and unnecessary and the only reason for that is generate a lot of expensive goodwill.

      Reply

      • You are making the assumption that a large signing bonus is greater than the equity win from an acqui-hire.

        How big a bonus are we talking? The average acquihire – at least in some segments – works out to roughly $1.5M to $2M per employee. 10% of a 10 person company thus nets $1.5M to $2M.

        I dunno about you, but I don’t hear of too many signing bonuses in that category.

        Secondly, you completely ignore several other issues:

        1) Poaching. Someone you poached once is as easily poached elsewhere

        2) A number of people, myself included, HATE working for a large company. All things being equal – unless I can expect much MORE guaranteed money working for a large company, I’d go with the startup. The acqui-hire example above makes for a difficult cash comp.

        3) You’re also treating employees as lego blocks. Sometimes that works, but sometimes what you need is a team – one which is already up and running and functional, as opposed to the All-Star NBA teams that used to lose to talented but cohesive national teams in the Olympics.

        Reply

  • I think the paper glosses over a number of the possible reasons for acqui-hires.

    1) A number of people with talent aren’t content to work for salaries. They want upside, and so they go to startups. A large established company has much less upside in comparison.

    2) Even should the startups not succeed (note: I don’t say fail, there is a difference), the equity in the startup may not be fully vested. Even if founder equity is vested, it is common practice to place retention terms on newly acquired employees. Thus the acqui-hire is not just a way to get talent, but to keep it.

    3) And in line with above – the purpose of an acqui-hire is not necessarily positive. The acqui-hire may be to keep a team out of a competitor, it might be to destroy a potential competitor, it might be to buy up some chunk of a rapidly developing space so that the acquiring company can consolidate consumer base, etc etc.

    4) Financially – the difference between tangible assets and acquisition price can be of significant value to a company that is profitable.

    Reply
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