Investors Don’t Like Acqui-hires

Sarah Lacy wrote about acqui-hires this weekend on Pando Daily. She got some things wrong.

The main problem is her argument doesn’t work on its face. The logic breaks.

She says that all the interested parties love acqui-hires – entrepreneurs get an easy out, buyers get engineers, and investors get a free pass.

But she also says acqui-hires have to stop. In the world she’s describing, which is a three party circle jerk, I don’t see where the pressure would come from to stop them.

In reality investors don’t like acqui-hires at all. An acqui-hire is marked down as a “fail” in the books. In almost every case we’d much rather have the entrepreneur keep fighting for a win even at very long odds.

That being said, we don’t complain about them or try to stop them. But some investors do and will. That’s why there has been academic and legal interest in finding ways to plan ahead for acqui-hires in financing documents.

The idea would be to make them less attractive to entrepreneurs, or at least to give investors a bigger piece of the pie when they happen.

As investors, we never see an aqui-hire as something like getting our money back when we buy a lottery ticket. Like I said above, it’s just a loss. If every company we invested in did an acqui-hire our fund would perform terribly and we wouldn’t be doing this for very long.

Sometimes a company is just done and an acqui-hire is the best solution for them. But most of the time companies still have a fighting chance, and an acqui-hire is just the easy way out.

The article that needs to be written is how many entrepreneurs today expect an automatic Hollywood ending to their startup. No one is preparing them for the extremely hard times ahead, and they seem to be going in blind.

Nick O’Neill also has a good rebuttal.

17 thoughts on “Investors Don’t Like Acqui-hires

  1. That last paragraph is the truest statement I’ve seen all week–that is the story the needs to be written (or written again). Who cares about acqui-hires? It seems like it’ll all work itself out. A bigger issue is entrepreneurs flooding certain already saturated markets with new startups…how many social marketing, ad network, big data management, or crowdfunding ventures are really going to make it?

  2. that academic paper on acquihires is one of the most interesting startup-related things I have read recently. everybody should read it.

  3. Stuart says:

    Hi Michael,

    Question, I fully understand the power law of returns but I am still a little unsure of how acqui-hires are a completely terrible deal for investors. If a portion of your portfolio companies that would have usually gone completely under, manage a 1x return isn’t that slightly beneficial? It’s now an exit that you wouldn’t have usually achieved. You can now re-invest in another company and have another shot. What VC dynamics am I not taking into account?

    • Michael Arrington says:

      Hey Stuart, The confusion is how you’re phrasing the question – ” If a portion of your portfolio companies that would have usually gone completely under.”

      If a company is going out of business, a 1x return is certainly better than a zero return, although it is only marginally better, nothing like a real win. But the problem is when a company that still has a chance of winning big calls it quits. Maybe without the acqui-hire backup plan they would have kept fighting, and something awesome could have happened. There are countless examples of companies coming back from near death to a big win (Draw Something is a very recent one, Apple is a famous one). Sometimes people give up too early. And those unrealized wins can kill a venture fund.

      Also, don’t forget that for the most part you can’t reinvest funds. Once a return comes in you distribute that back to investors (with some exceptions). So the 1x is locked in, and that’s a going out of business rate of return.

      Make sense?

  4. Joshua Bolin says:

    If I may be so bold, acqui-hires are perfect for the ecosystem. If your company has been disolved and you are now just a cog at some corporate factory code monkeying away I would raise doubts as to how pure of an entrepreneur the team was in the first place.

    This does nothing but seperate the wheat from the chaff. Excuse me – those who are seeking a job and those who are not. It is resume building not business building.

  5. Yeah, Sarah is misinformed. I never heard of any investor who I know that didn’t mark all their “acqui-hires” or small exits as a failure.

  6. Dave McClure says:

    agree with mike, altho the statement is a bit strong… in most cases, it’s not that investors “don’t care” in the absolute sense, rather it’s that it falls into the bucket of “much lower priority” than 1) other companies which are growing / executing, or 2) shiny & new investment opportunities, or 3) crisis / emergency / crazy shit that founders call us up about and ask for help, or 4) raising money for our own funds, or even 5) plenty of other shit that occupies our time and attention.

    while most investors do want to be helpful, a possible talent acquisition is usually still some amount of effort and negotiation for an uncertain outcome with modest return potential. if the founders or acquirers are motivated, then it can work… but if either side isn’t really that interested, usually it will fall apart, and even if it doesn’t the recover of capital is modest.

    ultimately, if the founders decided to call it a day and take a small talent acquisition, there’s nothing wrong with that, and most investors don’t/won’t block it — but at the same time, they have effectively failed at the agreed mutual objective of achieving a notable return (at least 3-5x on the low-end, ideally more like 10-20x or more on the rarer high-end), and as such it’s only to be expected that most VCs will focus on higher priority items.

    we do our best to help companies complete talent acquisitions if that’s what they want to do, but usually we’d prefer if they keep aiming for larger outcomes. but then again, we aren’t driving the car, and we respect the decision of any founder to do the right thing for their team, employees, and shareholders.

    on the flip side, I’d hate to think founders are doing talent acquisitions as a way to pimp out their resumes if they aren’t really psyched about the acquirer. it’s a pain in the ass to try and pull one of these deals together, and if you’re not ready to live with your partner for at least a year or more, then it may be a star-crossed marriage from the very beginning.

    as I tweeted a few weeks ago, I sure as hell hope no founder out there feels like they owe me something so much that they’d serve a year in hell (or purgatory?) for some bullshit acquisition that nets investors perhaps 10-20 cents back on the dollar (or even up to 1x). it’s just not worth the hassle. go take a few months off, and come back and try again.

    to the man in the arena, we salute you… but aim for the brass ring, not the side door.

  7. I don’t think many entrepreneurs are starting startups with getting acqui-hired as an aspiration/fallback, maybe people are starting to and that’s the point of the article?

    I know a couple of early stage investors are pushing for like 1-3x liquidation preferences and if you’re in line with most entrepreneurs’ thinking, then I don’t think many give a shit about that. If you’re taking money from an investor and not seriously thinking that you can make them back $3million off a $1million investment, then you’re probably heading down the wrong path in taking funding.

  8. technito says:

    Mike, I think there may have been a subliminal message that sarah was trying to get at which in my interpretation seems to be that the ecosystem isn’t performing up to par and this was her attempt at diagnosing why.

    I feel her opinion holds merit, but the complimenting culprit to her stance which was likely overseen due to subjectivity, is the possibility that maybe this is an inadvertent result of the culture created through the consumption of tech media– which is a click driven ecosystem. Because this is the case a much greater frequency of startups will be covered– which means even if the startup is doing nothing new and the technology is rather unimpressive, if they at least have a brand (and investors are well aware of this) attached to it they will get coverage.

    The bills need to be paid, I understand– but it’s just unfortunate that when this is done at such a frequency, potency is diluted and the inadvertent result is a greater likelihood the companies that are doing more dynamic things fall through the cracks– creating a lower standard to aspire to that isn’t producing optimal results to what the space is capable of.

    I talk about this more in depth here: http://technitoblog.com/?ref=8UClQ

    I’d love to know your thoughts about this.

  9. Bruno Pedro says:

    Reblogged this on Bruno Pedro and commented:
    Interesting thoughts about acqui-hires.

  10. Peter Urban says:

    I think one key point is that acqui-hires are an anti-pivot “device”. If a startup team has a chance to get snuffed up by some big co and pocket a bunch of $$ and / or equity, they probably won’t rock their brains as hard to re-invent themselves and head for a more promising direction before it’s too late. Twitter is a great example. Not that their team would have wanted / needed an acqui-hire but (assuming a young team in place) their 180 from podcasting to what is now twitter would have not happened if goog would have assimilated them for their raw talent.

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