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Is Acqui-Hire The New Exit Strategy For Startups?

Acqui-Hire

Suggestions for startups that are considering acquire-hire strategies

By Nancy Lin (Founder & Host, Business Reinvention)

The word in the Silicon Valley is that it is getting more and more difficult to raise money for Series A, even though seeding funding is still relatively easy to come by. For one thing, the number of startups has exploded, partly thanks to cloud computing and open source that help drive down the cost of running a new business. And yet the number of VC firms and the amount of money invested have dropped considerably.

According to the National VC Association, “Seed or early stage deals accounted for 53% of total deal volume in Q2, compared to 46% in the first quarter of 2012. … Investments in later stage deals decreased 10% in dollars and 11% in deals to $2.1 billion in the second quarter.” Earlier this month, I talked about capital-as-a-service in one of my articles.

Crowdfunding, revenue-based loans and other new financing models are coming to the market to help provide alternative funding options for entrepreneurs. But some startups that are struggling to raise additional fund and figure out the strategy to take the business to the next level may decide to exit using the acqui-hire strategy.

With the talent war for engineers and designers intensifying, large tech companies such as Facebook and Google are using acqui-hire deals to snatch up good talent that would have otherwise been hard to come by. During a panel discussion, Villi Iltchev of Salesforce, Philip Kirk of Cisco and Jessica Verrilli of Twitter shared their insight on the acquire-hire trend.

The number of deals is still relatively small. From each deal, the acquirer may get about 3 to 10 engineers. In most cases, the rest of team who are not technologists are let go.

The panelists offered suggestions for startups that are considering acquire-hire strategies.

Relationship Building

Most of the startups that were bought out with this approach had built relationship with the corporate development department at the large tech companies long before they decided to be acquired. Some of the startups were put on the radar via referrals by employees at the large tech companies. It is important for the startups to know who their natural partners or even competitors are, and build relationships early on.

Planning

Ask yourself what is most important to you before you start the process. Is it important to keep the team together? How important is it to keep the product or be assigned to an initiative that focuses on a particular area? Do you have an exceptionally talented team that would be very valuable to other companies? Have a conversation with your investors about different ways they can or expect to be paid off. Transparency is the best way to avoid mistrust.

Mental Shift

In many cases, the tech firms that acquire the startups are not interested in continuing to develop the product the entrepreneur had worked on and are only interested in acquiring talent. Giving up the product idea and putting the value mainly on the team can be quite a shift for the founders. Entrepreneurs should prepare themselves to manage the mental and emotional shift.

Integrity

Maintain integrity throughout the negotiation process will win you the respect of the buyer as well as your team and investors. Keep in mind that the tech world, especially the startup community, is close knit. Although most of the payout is designed to help the acquirer retain engineers, your efforts to address the needs of the investors and the other employees can impress the buyer and build good reputation for yourself which would be a valuable asset in the long term. Usually, only 10% of the proceeds go to the rest of the employees.

Flexibility

Be flexible with the process. The large tech companies that have track records of acqui-hires have built processes that are effective. Using the existing process can help accelerate the deal.

Maintaining reputation is important in the Silicon Valley which keeps all parties involved at check to make the most reasonable deal. Closing the shop graciously is just as important as starting the business with great passion.

Women 2.0 readers: What do you think of acqui-hire as exit strategy? Let us know in the comments!

About the guest blogger: Nancy Lin is Founder, Host and Producer for Business Reinvention. The show features business innovation and transformation stories. She brings to her show a strong understanding of business having worked for Yahoo, DHL, Johnson & Johnson and Pepsi in the US and international markets and driven strong growth with innovative business strategies. She is also an executive coach, a business consultant and the founder of Change Agent SF, which helps clients transform the way they look at their businesses and leadership.