An acquihire (acquisition + hiring) is when a startup exits to a company that’s primarily interested in the founders and employees, and not the technology, product or anything else.
Acquihires are most common with small startups that don’t get the traction they need to make it on their own or raise the necessary capital to keep trying. When a startup is failing (either tanking or “zombifying”), the founders look for someone to exit to. The alternative is shutting down the company and getting jobs (or taking another crack at it.) But exiting in an acquihire is often more rewarding financially and experience-wise.
Acquihires are definitely on the rise. And there’s been some rumbling amongst investors because more and more founders are selling fast, not going for broke, and the returns aren’t good. I’ve even heard the notion that people are starting companies with the intent of being acquihired; basically using their startup as a way of getting a great job instead of taking a more traditional route. Sarah Lacy from PandoDaily comes out and says that acquihires are a scourage and we should let companies fail instead of acquihiring them. You should definitely go read her post.
There are counterarguments too. Nick O’Neill writes a post titled There are Plenty of Failures in Silicon Valley, Thank You. Go read that too.
So what now?
If you’re starting a company to get acquihired, go for it.
Maybe it works, maybe it doesn’t (it likely won’t.) It’s your choice. I don’t think acquihires will continue at the pace they have (although le’ts be reasonable, most startups do fail, they’re not acquihired) –at some point there are just too many startups and not enough real acquirers. And most of those acquirers are in the Valley; outside of Silicon Valley very few companies are acquihired. I think a lot of founders assume an acquihire is fairly easy (it’s not) and that the minute they put out their shingle as founders they’ve massively increased their own worth in the job market (they haven’t.) But go ahead and start a company just the same, and if your goal is being acquihired, good luck to you. You’re free to do as you please.
As for investors, they should have great bullshit detectors.
Investors should be capable of detecting small ideas, feature startups, and founders that are more interested in jobs at Google, Facebook or elsewhere than building a sizable company. And if that’s what a startup looks like, don’t invest. Simple as that. But considering how many startups are getting funded, I’ve got to believe that investors are banking on a bunch of acquihires, whereas the alternative in the past would have been watching the companies shut down. At least now there’s a better chance of getting the money back or a small return.
Founders should be careful about raising capital if their goal is to be acquihired.
Maybe you can convince an investor that your idea is bigger than it looks and that you have giant ambitions. But when you “flip yourself” to get a job (+ some financial upside) and you leave investors holding the bag, you’re burning bridges for the next time around. It’ll be a lot harder to go out and raise capital for your next startup. And investors talk. You’ve been warned.
David Lee from SV Angel wrote a blog post about acquihires vs. soft landings recently that you should go read. He points out that it’s important for entrepreneurs to try and make their investors whole in an acquihire situation, even if the numbers aren’t terribly big. Employees too. I totally agree. “Don’t screw people” is generally good advice.
Personally I don’t have an issue with acquihires.
It’s a good way for large companies to recruit talent and handcuff them for a few years. It’s a good way for entrepreneurs to go through the experience of starting a company and selling it. And I’d rather see people start “small companies” and get acquihired than never take a shot at all. Even “mini-entrepreneurs” are better than “non-entrepreneurs” that have jobs in big, boring companies where they’re buried in cubicles somewhere doing meaningless work. The likelihood of becoming an entrepreneur at that point is rare; the likelihood of starting a second startup after being acquihired is much higher.