I have to say that Sarah Needleman at the Wall Street Journal is fantastic at picking up on trends in the startup world. Recently, in a September 12 article (“Start-Ups Get Snapped Up for Their Talent”), she talked about the latest frenzy in Silicon Valley: buying up talent from struggling start-ups for not very much money, at least in Silicon Valley terms.
Here’s how it works. Companies like Salesforce.com, Google, and LinkedIn are always in need of great software engineers, but they want people who can hit the ground running and have proven themselves with things they’ve already built. So they target start-ups working in areas related to what they do. These start-ups are beginning to get some legs but are either running out of money or need a boatload of new money to become viable. A company such as LinkedIn, which acquired mSpoke this way, sees the acquisition as a great way to get a team of engineers who are used to working together.
The new term of art for this approach is acqui-hire and it may be a bit one-sided when you look at who benefits. It’s clear that the acquiring company gets what it wants—the engineering team; but, it’s equally clear that investors and non-engineering team members get the short end of the stick. Typically, it’s only the targeted engineering team who is hired, leaving other founders out in the cold. For the investors, it’s also a bad deal (unless the start-up was on the verge of failure) because the dollar amount of the acquisition is generally relatively small. Yes, they get to say that their investment was acquired and that beats saying it failed, but when the dust settles, they may not be able to claim a big win.
And for the entrepreneur, it’s a real dilemma, especially if your company could potentially raise additional funding and grow. If you’re really an entrepreneur in temperament, an acqui-hire makes you a sell-out for a job in a big company. What’s worse, the investors that you tick off by giving them pennies on the dollars will not forget and the next time you try to launch something and need money, you may find that the VC community is very small but with very long memories.
It will be interesting to see how this new approach to acquiring talent plays out over the long term. It definitely feeds into the acquisition frenzy but at what cost to investors and entrepreneurs?