Acquihires From 2005 to Today: From Hype to Pragmatism

By on January 19, 2016

Acquihires are a recurring lightning rod in Silicon Valley. From million dollar packages for engineers to secretive soft landings, these peculiarly Silicon Valley transactions are shape-shifters, changing to the tastes of various parties at different market conditions. Like a political issue that draws passionate debate, acquihires are represented by icons that stand in for larger issues, even if the icons aren’t always accurate—such as engineers getting million dollar packages or young 20-somethings driving fancy sports cars.

This article analyzes the history and context of acquihires as a way to explain technology mergers & acquisitions and Silicon Valley’s startup ecosystem. By doing this, we’ll also explain where acquihires are today. Acquihires haven’t gone away, contrary to some reports, and still happen. But their purpose and prices have changed significantly, as the market and industry have changed. While they were once hyped in the media, now they are largely out of sight.

Far Reaching

Acquihires can best be understood as a function of Silicon Valley’s tech startup and angel and venture capital system. They touch many parts of Silicon Valley: big name tech companies and small startups, venture capitalists, wealth creation, entrepreneurs’ reputation, public relations, and deal making.

Since 2005 and especially since 2008, the growth of seed funding has generated a massive ecosystem of seed funded startups.[1] Today, the growth of sites such as AngelList has made raising seed funding more accessible than ever. There were 976 companies seed funded in 2014, per CB Insights, compared with 309 seed deals in 2010 (Seed funding dropped in 2015 , but remains much higher than in earlier years). Meanwhile, there has been much less growth in Series A and B funding, which has left a gap for seed startups. Even without the growth in seed funding, there is a whittling of seed-funded companies as venture capitalists pick off the cream of the crop for larger funding rounds as they bet on the next “unicorns.” While seed startups search for funding, there is simultaneously a shortage of top engineering talent in Silicon Valley. As a result, large companies are in search of top talent through acquihires, which gives companies the opportunity to scoop up top talent, for a relatively cheap price.

Benefits

The benefits of acquihires for sellers is that startup founders and some portion of their employees (often not all) can join a larger company and receive some cash or equity compensation, which can be a signing bonus, retention package or other package. Also, importantly, the founders can then say they were “acquired by Google” or some other large company. In addition to potential tax benefits, this is a face saving measure. It gives them cultural capital, and a leg up in starting a future startup. This is an important marker of success in this entrepreneurial ecosystem, even if a founder’s colleagues know that the startup essentially failed.

The benefits for buyers are threefold: first, they can can hire a large number of engineers quickly. This is no small achievement for companies with large product roadmaps, or for their recruiters, who have marching orders to hire dozens if not hundreds in the next several months. While an acquihire is rarely simple, the work that goes into it can be justified by the addition of a top team. Secondly, an acquihire brings a team that already has worked together. So they should be able to work together well and quickly get up to speed on a project. That kind of team can take much longer to build when hiring individually.

Third, as will be discussed below, prices have fallen dramatically for acquihires and have been down for some time. So, some large companies have realized that, if executed right, an acquihire can bring in top talent at a relatively cheap price. These teams can be acquired at prices that are not much more than what the individual hires would have cost through a traditional hiring or recruiting process.

Hiring Problems and Perception Issues

So what are the potential problems with acquihires? The main arguments: First, they’re bad for buyers: Acquihires don’t solve the talent problem for a buyer, particularly in the long term. Top entrepreneurial talent will leave as soon as they can, some argue. While it’s true that entrepreneurial talent may leave, there are many that have been acquired and stayed under the right circumstances. Facebook and Twitter, for example, have been successful in keeping some of their top acquired talent.

Secondly, according to some, existing employees at a buying company get resentful of acquired startup employees making tons of money to do essentially the same job. This can incentivize existing employees to leave to work at a startup. This scenario is possible. But not acquiring any companies seems unrealistic for most fast growing companies. Instead companies can have strong incentive programs for existing employees. A company doesn’t have to choose between these options.

Third, acquihires perpetuate the lack of talent by making failure too easy by providing “soft landings,” the argument goes. But few of the thousands of entrepreneurs starting companies each year are doing so with a soft landing in mind. They start companies because 1) they have an entrepreneurial itch or work better in a startup environment; 2) they’re willing to take risk; and 3) they’re interested in a larger financial payoff. Soft landings do make it easier to take risk and start a company. But on the list of reasons people start companies, soft landings are low, if there at all. And even if this is a fallback option that entrepreneurs keep in their mind, is that a bad thing? Is it bad that entrepreneurs are incentivized to take risk to create and innovate?

Finally, some say acquihires are bad for the market and are just fake. Entrepreneurs shouldn’t be able to claim a victory by listing “acquired by Google” on their resume, when they were acquihired in a last ditch effort to save face before shutting down a company. This isn’t little league, where all sides of a  game get trophies, the argument goes.

This is about perception, which is important to founders, VCs and many others in the industry. Whether you agree with them or not, to eliminate the face-saving and resume-building and “branding” effects of acquihires (putting aside the other tangible benefits listed above) seems difficult without dispensing with the entire system of media, reputation and “branding” in Silicon Valley. That is, the tech industry’s many companies’ and venture firms’ generation of press coverage with the help of many public relations firms. To be “acquihired” is part—a relatively small part—of this much larger system. This isn’t a judgment for or against.

Each group is affected differently in acquihires: Venture capitalists, for example, are often loath to accept an acquihire. While investors get to claim their startup was “acquired by Google,” this can also mean they lose money. Sometimes VCs get pennies on the dollar for their investment or nothing at all, while an entrepreneur walks away with a nice employment package at an acquirer. Today, these kinds of situations are less common (and VCs can at least get their money back), but they still happen. Many buyers, even those who are known for offering these deals that cut VCs out, know that they should consider VC interests if they ever want to do a deal with those VCs again. Still, many VCs, who want to be known as “founder friendly,” will ultimately support an acquihire if it’s the best outcome available for the founders and team.

A related reason VCs dislike acquihires: they’re associated with entrepreneurs who just want a “quick flip” and are not building a company for the long term. In other words, founders just give up and don’t stick it out, but instead just opt for the easy acquihire. VCs are right to be concerned about this. But at the same time, founders can be trying to build a massive business and still come across a strong offer early in a company’s existence. There are often good reasons to sell at this point.

11 Years Later

The first use of the word “acqhire” (online at least) was on May 11, 2005 on Rex Hammock’s Rexblog, which coined the term to describe Google’s acquisition of the tiny two-person New York City social location startup Dodgeball. Hammock noted that a $62 billion company buying a two person company and asked, “isn’t that more like a ‘hire’ with a signing bonus?” The startup was otherwise notable because Dennis Crowley was one of the two founders who, after leaving Google in 2007, later went on to found Foursquare. (Language expert Ben Zimmer analyzed the origin of the term “acqhire” here.)

Google was known for acquihires in this period of rapid growth. (It’s notable that a number of Google corporate development executives have gone on to work at other fast growing Silicon Valley companies such as Square, Pinterest and Facebook, taking similar methods with them.) Not all of these early Google deals shut down the acquired product immediately, though many were shut down later.

The rise of Facebook brought the next large wave of acquihires. The New York Times in May 2011 chronicled the phenomenon of “acqhires,” the largest of which was Facebook’s  $47 million 2009 deal for startup FriendFeed, which was the equivalent of costing about $4 million per engineer. Bret Taylor, cofounder of FriendFeed, became CTO of Facebook, while Paul Buchheit, another cofounder and a key former Google employee, also joined Facebook. The story also cited Facebook’s 2010 acquisition of drop.io mostly just for its founder Sam Lessin, who went on to hold key roles at Facebook. Facebook’s head of corporate development pegged the price of acquihires at $500,000 to $1 million per engineer. Later, another notable deal was in March 2012, when Google acquired Milk, a small startup cofounded by Kevin Rose of Digg fame, and its team of designers at a substantial price.

This pre-IPO Facebook period was a key moment. The listing took place on May 18, 2012. In the lead up to it, Facebook was hungrily snapping up startups. At the time in early 2011, Facebook’s private market valuation was a staggering $50 billion, so the company had equity to acquire top talent.

Acquihires during this pre-Facebook IPO time were a high-end commodity, a product of an overheated market and highly capitalized buyers. While Facebook’s use of acquihires followed and continued Google’s approach, Facebook became more well known, whether true or not, for splashy deals paying high prices for acquihires—and made acquihires a more common term in the industry. Facebook needed top talent, particularly in the mobile sector as it transitioned to mobile. Meanwhile, others such as Google, Yahoo and Twitter were also trying to keep pace—by acquihiring top talent as well.

A Change in Use–and Perception

Today, some, have declared the “end of the acquihire,” citing a slowdown in these deals among Google, Yahoo and Facebook, three of the most active in this space from 2005 to 2012. But acquihires actually haven’t disappeared, they’ve just changed. Several things are going on:

First, acquihire prices have dropped—since the Facebook IPO, prices have come way down. Facebook’s appetite for acquihires has dropped since its IPO, as is common with companies after an IPO and after a period of rapid growth. Since its IPO, there have been few media stories about Facebook or anyone else doing acquihires with $1 million-per-head deals. The truth is, these high-priced acquihire deals were always fairly rare. Since 2012, they have become even more rare. So really, prices on acquihires have been lower since 2012. The “end of acquihires” if that means lower prices, has been here since 2012. Another reason prices have dropped? Besides, Facebook’s IPO, there is:

Second, buyers have become much more savvy about acquihires. They generally don’t see acquihires as Facebook saw them in 2011. Large buyers want to buy very specific teams with specific product skills. They don’t want to pay high prices and they know that there are enough startups looking for acquihires that they don’t have to overpay for them.

Third, as the same CB Insights report noted, large private companies like Dropbox, Pinterest and Airbnb have taken up some of the slack that previous pre-IPO companies filled with acquihires. There are a number of other large private tech companies that have used their valuable stock to snap up startups. This is an increasingly common tactic for a company seeking to grow quickly or consolidate a sector or market. If valuations of unicorns continue to drop as the market weakens, this may change, but up until now these companies have been quite active.

Fourth, as noted above, venture capitalists generally dislike if not outright oppose acquihires. They particularly oppose them if the founders and/or team walk away with cash and investors lose money. Investors will go along if all other options have been explored and/or the deal pays investors back at least some of if not all their investment dollars. As a result many founders are much more careful about taking an acquihire deal unless investors get substantial considerations.

Fifth, perception is still a major factor in acquihires. As a result, many acquihires are not identified as acquihires in news coverage—they’re often simply reported as $10 million or $25 million or $50 million acquisitions. Prices that are reported are often wildly inaccurate. So to accurately and precisely measure acquihires (which Exitround has been doing) is quite difficult. To say they’re gone, when the majority are not reported publicly in the media or anywhere else, is hard to believe.

Finally, as mentioned earlier, large buyers are still very active in looking at and consummating acquihire deals. Virtually every major tech company in Silicon Valley is still open to, if not actively doing, acquihires–with varying levels of interest depending on the sector and type of team. Very few will hear about a talented team on the market and say, “No, I won’t look at that.” There are so many startups that large companies know that there are many options for these deals.

Acquihires are a unique and revealing product of the Silicon Valley startup and venture funding system. Until another solution comes along, they’re a pragmatic part of the startup lifecycle, as entrepreneurs cycle through founding, building, selling and often, later, starting a new company. And perception is a key part of this system. Whether you think they’re good or bad, they show how much perception and reputation matters to every entrepreneur and venture capitalist in Silicon Valley, be it on social media, press or among colleagues. Silicon Valley is a place where “personal branding” is a thing discussed without irony. In this wider context, acquihires are considered a relatively modest and pragmatic measure that many take.

Meanwhile prices of these deals have dropped as their usage has changed over the years, from what were glamorous in earlier years to much more mundane and pragmatic in recent years. Interestingly, acquihires are a legal and transactional device, while also accomplishing a social goal, in a way that few other types of deals are in Silicon Valley. While successful venture rounds, M&A deals or IPOs evoke simple “success stories,” and “down rounds” or company job cuts or “shut down” stories are also relatively simple failure stories, acquihires are much more opaque and complicated. They have multiple, often conflicting parties (even among the same venture firm or startup or board), which is perhaps why they are so little understood, despite how often they happen everyday in Silicon Valley.

[1] What “small” is has changed over the years from a few hundred thousand dollars to now sometimes up to $2 million or more.

photo credit: rogerbarker

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