Shoudn’t Startups Be More Than A Segue To a Google Or Facebook Job?

Startup Acquihires—the Latest Alternative to Monster.com?

It sounds insane doesn’t it? The very idea of starting a company with no goal beyond making it an attractive target for acquisition is anathema to me, and for what … a job! Are venture capitalists and angel investors complicit or victims themselves? Let’s be frank, there is a case to be made for both scenarios. The investor is counting on a sale or an IPO to achieve a return on investment. Perhaps the more important question is, “What is the impact of the acquihire phenomenon?”

What is an Acquihire?

Acquihire and its variations, acqhire, acq-hire, acqui-hire and acquihire, all refer to a relatively new phenomenon in the tech industry. The term (coined in 2005 by blogger Rex Hammock) is widely in use, but Microsoft Word is still reporting all versions of the term as misspellings (very annoying). I even see the neologism ‘manquisition” used in its stead. Easy to perceive as sexist, I seriously doubt this word will gain traction. In simple terms, “it refers to a larger company acquiring the desired talent of a smaller company (frequently a startup) by purchasing the company.” Not infrequently, the larger company has little or no interest in the actual products of these startups.

From the acquirer’s perspective, it is a means to an end. For the acquired, it may or may not have been an objective.

Acquihire Pros

As a master of the obvious, I can tell you that the most significant ‘pro” for the acquiring company is that it gets what it wants and what it wants is almost always talented personnel. Make no mistake; the acquihire trend is not unique to the technology sector. For example, a major insurance company recently acquired a lesser firm for the express purpose of assimilating its sales force.

Acquiring proprietary processes and/or patent rights is another positive outcome of the acquihire event. A recent instance is exemplified by Facebook”s acquisition of Face.com for its facial recognition technology.

Acquihire Cons

The acquihire has, for lack of a better term, certain anti-Darwinian connotations. Natural evolution of the acquired company is precluded by the very act of acquisition. As a result, potentially, innovative products can fail to reach fruition or be lost completely, especially when the goal is to acquire key people rather than the ongoing enterprise. You can read several examples of this in Harry McCraken’s revealing post.

When a company that fails to thrive is acquired, the natural course of events (sometimes failure) is interrupted by way of the acquisition, possibly allowing the “genes of failure” to live on in the new host. This may cause repercussions for the acquiring company in the future.

Acquihire’s Effect on the Acquirer

Non-organic growth is decidedly one effect on the acquiring company, delighting shareholders and potential investors alike. All too frequently, existing synergies force the involuntary separation of personnel. An often-overlooked result is the increased costs incurred by the acquiring company. These costs are the result of separation packages and in the extreme, lawsuits and other burdensome actions.

Other consequences may include the failure of the acquiring company to achieve its potential organic growth because of distractions associated with the acquisition.

Acquihire’s Effect on the Acquired

A lot depends on how the founder(s) conduct themselves during the process. If they approach the deal in a self-centered manner, they may find it extremely difficult if not impossible to attract investors in the event they want to try another startup. Investors talk among themselves, share ideas and experiences.

Keeping the ‘team’ involved and communicating honestly and openly with investors is the best and approach.

Acquihire’s Impact on Venture Capitalists and Angel Investors

Investors of all stripes can find potential returns negatively impacted by premature acquisitions. Let me clarify, premature for the investor. Products and innovations do not achieve their potential and returns suffer. On the other hand, if the investment is toilet bound, it could be a godsend for the investor. In most cases, investors get their money back in an acquisition and maybe a little more.

The intelligent approach for the investor would be a thorough vetting of the founder(s) with regard to this scenario before funding.

Does the practice deserve support or opposition?

I am ambivalent on this point, recognizing both upside and downside scenarios for investors and founders alike, but as Fred Wilson says,

“The tech industry eats its young. It’s just the nature of the business.”

Given the opportunity for adequate safeguards to be addressed in the course of negotiations, as a practical matter, the acquihire scenario is a non-event … except for that annoying natural selection issue.

  • De Jold

    Very informative. Basing on Fred Wilson’s opinion, the Tech industry behaves like a cannibal. Does this phenomenon have a positive or negative effect on the industry? I’ll have to throw back the question at you.

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