What Is An Acquihire?An acquihire is essentially the acquisition of a startup primarily for its talent/team and may be some technology, rather than for its business or clients. The acquirer is typically a large company or a growth stage company and the target is typically an early-stage startup which might not be able to scale on its own or achieve product market fit. The appeal from the acquirer’s perspective is that they are able to acquire in bulk a team of engineers / skills relevant to their capability/domain gap. The appeal from the startup’s perspective is a ‘soft landing’ and ability to further their vision and/or have a financial upside, in addition to retaining their team and ensuring good salaries and future for them. The first use of the term ‘acqui-hire’ was introduced by Rex Hammock. He described Google’s acquisition as a two-person hiring with a signing bonus. He spelled it Acq-hire and defined it as a large company buying a small company which had founders as its only employees.
- Acquihire has zero valuation: Generally, the misconception among the buyers is that if someone is not doing well, wait till they get into distress mode and then take them for almost nothing. In the USA, for really good technology talent, buyers pay as much as $1 mn per employee to the selling company. The buyer needs to look at the value they can create (a) by jump starting an offering, new segment, new geo (b) by bringing in entrepreneurial talent that’s driven and can help change their culture as well. And, it should mean some tangible value that they should be willing to pay. The payout can always be structured to ensure that the team will stay and will remain motivated. The corollary is that the selling founders need to be willing to take deferred payout and also not wait till they get into distress mode. Sometimes, being part of a prestigious company and a great team can give you a lot more future opportunity than some upfront cash.
- Acquihire implies the selling company failed: While it is true that generally close to acquihire scenario means that you were not able to scale on your own or convince investors to give you money to scale up or achieve product market fit. But, that’s far from being a failure. The fact that someone wants your team and is willing to bet on your entrepreneurial or technology solutioning expertise means you have done some things successfully. In fact, ‘soft landing’ meaning finding a good home is generally seen as very positive when you do your next venture.
Importance of Acquihire from the perspective of buyer & seller
|Importance of Acquihire from the perspective of buyer||Importance of Acquihire from the perspective of seller|
|Requirement of highly-skilled professionals||If the company is running out of money and need to find a better place for its employees to go|
|Acquihire facilitates the acquirer to land a fully functional team which is already working on pipeline projects and with people who are much more experienced in that sector.||Seller’s vision can be better achieved within a larger entity. You can change the world bigger, better, faster with more reach.|
|The biggest advantage is that they are unlikely to require any training||Entrepreneurs also think of this as a safe exit and can now move on to bigger and better things.|
|Reduce time taken to develop a product||Can develop new product in better surrounding|
What kills a transaction?
If a buyer is engaged in acquisition conversation with an early stage startup, and is keen to acquire the team, many a times the transaction does not go through. Following are some of the main reasons:
- Valuation gap: as mentioned in the myths above, buyers at times assume that the seller is desperate so they can have them for zero or very low value. Buyers need to look for strategic advantages for doing an acquihire rather than purely hiring a few tech people. Sellers also need to look at being part of a more successful business and team, future upside and showing at least partial success by ‘soft landing’
- Cultural mismatch: yes, cultural fit is very important and something the both parties must gauge in the early part of their conversations. However, at times sellers assume that if the buyer is more conventional company or has certain perception from outside, as cultural misfit. At times, if the buyer is looking to change their own culture to make it more entrepreneurial or startup pace, then this may be a great opportunity for the selling founders to lead the change.
- Roles for the founders (Sellers): Let’s face it, most people have an ego and they look for a certain status or leadership role when thinking of a transaction. Most buyers should be cognizant of this fact and identify appropriate roles for the founders. The selling founders should also believe in their capabilities and at times they have to demonstrate for some time to take on wider responsibilities.
Acqui-hiring is more popular than one might think. The pie charts below demonstrate their prevalence in the past few years. Lot of these go unreported as they may be too small to report by the buyer.
According to Zinnov – a market research company: –
- As compared to 2018, the share of acqui-hires in the total number of Mergers & Acquisitions in India has increased from 10% to 13% in 2019. With more than 22% of the acqui-hired start-ups being deep-tech start-ups, it is evident that companies are looking to strengthen their tech capabilities. In fact, over the past three years, there has been a sharp increase in the number of acqui-hires
- In the year 2019, more than 75% of all acqui-hires in India were made by Indian later stage start-ups, 14% by Global MNCs, and 6% were made by Indian MNCs. Clearly successful start-ups have found acqui-hiring to be an effective way to get access to new-age talent.
Buyers are from all types of companies, from established players to late stage startups to early stage startups
Acqui-hiring is gaining popularity across the world
- In India,Acqui-hires mostly occurred in upcoming sectors like the \Things (IoT), the blockchain technology, 3D printing, predictive analytics, augmented reality (AR), artificial intelligence (AI), virtual reality (VR) and machine learning (ML) are cherry-picked by MNCs for their niche expertise.
- We analyzed 100 companies (randomly selected) and assessed Acqui-hire according To Skills
- Titan acquihires HUG Innovations, with an aim to strengthen its smart wearables division.
- Swiggy acqui-hires Bengaluru-based AI startup Kint.io
- Yuvraj Singh-backed Healthians acqui-hires Healthy Labs.
- Ola acquihires Pikup.ai, aims to develop deep tech solutions for mobility.
- Automation Anywhere acqui-hires product engineering startup Cathyos Labs
Are you an early-stage startup looking for a fundraising, partnership, or exit opportunities or a corporate or late-stage startup looking to acquire strategic small companies, you are at the right place. We are a digital investment banking platform, helping startups and corporates in M&A, partnerships, acquihires, and fundraise activities. Visit www.growthpal.com for more information or contact us directly at [email protected]. We will love to hear from you