Buying Talent by Buying the Business

The most valuable resource for many companies, of any age or size, is not capital. Or cash. Or patents, ideas, or their brand.

It’s talent.

Especially for the innovative and high-tech companies that see growth through new products or services that don’t have close substitutes, it is the individual employees that are central to this purpose. Companies like Google, Facebook, and the other innovative high-tech giants of Silicon Valley crave both brilliant technical talent and the entrepreneurial inspiration that is the cultural ancestry of these companies. On a panel with other tech giants, Google director of corporate development Dave Sobota said “there’s a continuum of deals, none just for talent, but in a way, all of our deals are talent deals. Talent deals are a horribly expensive way to get talent–10 to 100 times as much as we’d pay a recruiter. But it’s a necessity.”

In recent years, the way these companies collect the type of talent that allows them to continue to be the creative and innovative trailblazers has shifted. While they continue to attract the best from the Ivy League grads of the world, the past decade has seen the rise of the acqui-hire to fill talent needs at these companies. An acqui-hire happens when one company purchases another company, usually one much smaller and younger, for the explicit purpose of bringing some number of the employees on board to work at the purchasing company.

Entrepreneurial companies are often the targets of these acqui-hires, although they also occasionally engage in acqui-hires. In fact, some entrepreneurs start their company with the goal of being acquired or acqui-hired by one of the tech giants. So what do acqui-hires do for both the acquirer and the acquiree?

A More Efficient Hiring Process

Normally, when firms are looking to bring in new talent, they either poach employees from other firms or dip in the unemployed labor force. All forms of talent acquisition involve some risk. But the type of talent that high-growth companies need to fulfill their potential may not exist or be available for hire. Individuals with talent targeted for high-growth companies are quite valuable and the companies that employ them want to retain them.

With an acqui-hire, the acquiring firm gets the talent they want. They don’t have to settle for the best available on the market, or an inexperienced recent graduate, or wait for an individual to leave their current company. The people they acquire are the best match for the project or jobs they need done. Not only do the people best match the jobs, but the acquirer gets the benefit of knowing that this team already has proven that they can work well together. This is key because more and more, significant scientific and innovative advancements are accomplished by teams working together (Jaravel, Petkova and Bell (2015)).

The Right Kind of Acqui-hire Target

Acqui-hires also can be the specific goal of an entrepreneur. As a previous Growthology post explained, entrepreneurial exit isn’t always a bad thing. While entrepreneurs and investors of a startup company see the best case scenario as the development of a startup into a high growth company, becoming the target of an acqui-hire is more palatable than strict business failure. 

Acqui-hires generally happen to a relatively homogenous group of firms. Generally, this is a very young tech company that often hasn’t raised any money beyond their seed funding, if they’ve raised any investment funding at all. The companies that fit this profile are in a sweet spot--old enough to prove that the team can do great things, yet young enough that it has done very little, and small enough that its obligations to its investors keep the deal financially palatable.

The other characteristic of firms that tend to acqui-hired (and this is not by any means a global characteristic) is that these startups aren’t on a path to explosive growth. Many of these companies, according to a lawyer experienced in acqui-hire deals, “… won't be able to raise another round of financing, and they'll need an exit strategy or they need to shut down.”

Silicon Valley Social Norms

While not all acqui-hire deals occur in the home of tech giants Google, Facebook, and Twitter, their general structure may be dictated by the legal and employment environment that exists there. California famously doesn’t enforce non-compete agreements. And companies in Silicon Valley are known to dislike poaching employees. So how did this come about?

John Coyle and Gregg Polsky of the University of North Carolina propose that these employment norms have morphed Silicon Valley and other industries that are hungry for talent and inspiration into an environment where acqui-hires make sense.  One benefit of acqui-hires over pure poaching is that in acqui-hires, investors do return a larger portion of their original investment than in liquidation. They also claim that the entrepreneurs prefer acqui-hires over other means of employment transfer for a multitude of reasons. For companies that are failing, acqui-hires tend to save face and preserve reputation. One investor told them:

“It’s a lot cooler to say you ‘sold’ your company even if everyone [that is, all the investors] lost money than to say your company was an utter failure and you put it into liquidation proceedings and grabbed a nice offer from Google.”

While this post has focused mostly on the positives of acquihires for acqui-hirers, and the entrepreneurs they acqui-hire, it’s not clear that acqui-hire deals are wholly beneficial for everyone. It’s possible that acqui-hires decrease entrepreneurship by collecting some of the most promising serial entrepreneurs inside corporate structures. There is also a question of how the incentives change for investors when acqui-hire deals may be an entrepreneur’s true end goal.  Do acqui-hire deals erode probabilities that a new competitor will arise in a given industry? I look forward to seeing research efforts devoted to these and other questions about the practice of acqui-hires.

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chris jackson

Chris Jackson

Chris Jackson is a research assistant in Research and Policy for the Ewing Marion Kauffman Foundation, assisting in the understanding of what policies and environments best promote entrepreneurship and education in the pursuit of economic growth.