2015 was a year to forget on the tech exits front. IPO and M&A activity last year was tepid, but the biggest casualty of 2015, perhaps surprisingly, was the acquihire.
Acquihires, for the uninitiated, were defined in the Tech Acquihire Report as:
…when a struggling company (generally an early stage startup) is acquired primarily for its talent. Instead of buying the company its products, or potential financial contribution, acquirers are purchasing teams of smart people (generally engineers) who have a history of working together with the hope that dropping in these teams might accelerate and advance their own businesses.
For startups that are not successful (or not successful enough) and who may be hitting the Series A Crunch, the acquihire offers a nice alternative to death – often also called a “soft landing”. It lets the company’s investors, if they have any, recoup some or all of their money and might give founders/the team a bit of money, a job and options/bonuses in the presumably more valuable acquirer and ability to brag about being acquired (and not just another failed startup).
Acquihires are not where F.U. (“fuck you”) money gets made (translation: no unicorns here). At the end of the day, they are a much better alternative for both investors and founders who can now talk about their startup that was acquired and leave with something versus nothing.
2013 and 2014 were the apex of the acquihire trend.
Two factors helped drive the growth of the acquihire: An explosion in seed financing to startups whose growth and business prospects ultimately didn’t warrant future investment (leading to the proverbial Series A Crunch), coupled with an insatiable desire by large corporations for engineering talent. Mostly, it was these seeded companies that became acquihire targets.
During the time when the acquihire was part of the zeitgeist, a team of talented engineers could presumably swing for the fences as part of their startup and if it didn’t work, they could count on landing in a big company hungry for engineering talent. Acquihires — which were largely a Silicon Valley phenomena — became a sort of “golden parachute” or severance package for founders that minimized the perceived risk of starting up.
Founders and corporations wondered how to value acquihires (see Quora).
For the curious — according to Jason Lemkin, the formula was $1-2M per top engineer/product person vesting over 4 years.
Of course, not everyone was as bullish on the acquihire. Mark Suster of Upfront Ventures penned a post on the downsides of acquihires.
Suster argued that the founders acquired in these deals don’t stick around, and that perhaps even worse, the deals are bad for company culture. He wrote:
You have been at Google, Salesforce.com, Yahoo! for years. You have worked faithfully. Evenings. Weekends. Year in, year out. You have shipped to hard deadlines. You’ve done the death-march projects. In the trenches. You got the t-shirt. And maybe got called out for valor at a big company gathering. They gave you an extra 2 days of vacation for your hard work.
And that prick sitting in the desk next to you who joined only last week now has $1 million because he built some fancy newsreader that got a lot of press but is going to be shut down anyways.
What kind of message does that send to the party faithful who slave away loyally to hit targets for BigCo?
I’ll tell you what is says.
It says if you want to make “real” money – quit.
But the appetite for engineers and the positive sentiment for this “HR recruiting hack” was strong in 2013 and 2014. And no company was more active than Yahoo! — the leader/innovator in the acquihire movement.
But the beleaguered company has pulled back in 2015.
Sarah Frier and Selina Wang of Bloomberg highlighted Yahoo’s complete shift away from acquihires, writing:
In 2013 and 2014, Yahoo was the top technology company conducting acqui-hires, an industry term for acquisitions done primarily for the talent, according to research firm CB Insights. Yahoo was tied for third in 2012, Mayer’s first year at the company. In 2015, Yahoo has disappeared from the list entirely.
And Yahoo is not the only active acquihirer who has pulled back in favor of old-fashioned recruitment as Frier and Wang of Bloomberg highlight:
The excitement surrounding talent acquisitions has dissipated throughout Silicon Valley, not just at Yahoo. Active acquirers, such as Apple, Facebook, Google, and Twitter, have started to pull back on buying for talent, CB Insights said. U.S. talent acquisitions have declined 48 percent this year from a peak in 2013, the firm’s data show. CB Insights compiled the information from company reports, which wouldn’t include undisclosed purchases or those not classified as talent acquisitions.
And the slowdown in acquihires was not limited to just Yahoo. Among the big corporate acquihirers of Twitter, Google, and Facebook, there has been a slowdown in acquihires and M&A activity overall across all of them. And even later-stage startups who were acquiring younger startups have pulled back, as can be seen below.
From acquirer analytics, below is Google’s acquisition trend. And below that is Facebook’s. Both slowed in 2015.
One area where acquihires may still be in favor is when startups are acquihiring other startups. The most notable player here is Dropbox as can be seen below.
But after shuttering one prominent acquired startup (Mailbox) and as they figure out how to grow into their decacorn valuation, Dropbox has also eased up on its talent acquisition activity.
Overall, however, startups acquihiring other startups has been the “bright spot for acquihires” through Q3’15 as unicorns have been flush with cash (hell they’re even doing VC investing in other startups too). The pullback in financing to these unicorns that looks likely when the Q4’15 numbers come in may hurt this activity going forward. Even if the startup acquihiring continues, the merits of trading your current startup for a tiny slice of highly illiquid, highly risky, unicorn equity is questionable.
Ultimately, the idea of acquiring talent to get technical and entrepreneurial magic to infuse the parent seemed at least potentially plausible when the movement started, but the acquihirers seemed to have moved on.
Startups in 2016 should brace for a more discriminating and difficult financing environment. And the lack of the Silicon Valley severance package via acquihire looks to be another headwind they’ll face in the New Year.
Find companies running out money whose talent you can poach by creating an account on CB Insights below. Or just get our list of dying early stage tech companies.
Credit: Soft landings image.