BUYING THE COMPANY TO ACQUIRE THE TALENT
Oleg Gutsol’s photo sharing company, 500px Inc., made two acquisitions in 2012. In both cases, Mr. Gutsol was mainly interested in the personnel he was acquiring and the acquisition of technology was secondary. “We were interested in the people first,” he recalled.
Such deals, where the purchaser is solely or mainly concerned with acquiring talent, are called “acqui-hires.” Big Silicon Valley technology firms, such as Facebook Inc., Google Inc. and Salesforce. com Inc., are increasingly using acqui-hiring to satisfy their need for engineers, developers and managers.
In 2011, Facebook founder Mark Zuckerberg said many of his company’s acquisitions are motivated by a desire to nab “really talented people.”
John Coyle and Gregg Polsky, two law professors at the University of North Carolina, noted that the acqui-hiring trend is shaped by Silicon Valley social norms. “Software engineers will in many cases prefer an acquihire over a simple defection because they do not want to risk incurring informal sanctions,” the pair wrote in a recent study, alluding to the tech industry’s aversion to poaching and defections.
They also noted that acqui-hiring in Silicon Valley usually costs about US$1- million per engineer, although such deals can range from as low as a few hundred thousand dollars to US$50million or more.
Some venture capitalists have questioned the perhead payouts in acqui-hiring deals. Others, such as Dave McClure, the founder of venture fund 500 Startups, have criticized the value of acqui-hiring transactions for investors. “It is not what we are aiming for as investors,” he said in 2011.
Yet as Mr. Coyle and Mr. Polsky point out, many acqui-hiring deals involve startups that are about to flame out, usually because their cash flow is drying up. “In these situations, the acqui-hire is the only alternative to simply liquidating the company,” they wrote in a November article in the Duke Law Journal.
Although clearly a Silicon Valley trend, acqui-hiring is prevalent in Canada.
Mr. Gutsol’s 2012 acqui-hires consisted of Algo Anywhere, a fellow Toronto startup, and Pulp fingers, a company based in Strasbourg, France. Both companies consisted of two-man teams. The French team relocated to 500px’s Toronto office; the employees from the Algo Anywhere deal have since departed 500px.
“I would say one of them worked out really well,” Mr. Gutsol said of his foray into acqui-hiring.
“I had better hopes for the Algo Anywhere team ... I envisioned that they would take over some of the leadership roles within the company, which they did for a brief time, but then I guess their priorities changed and they moved on.” Defections are a risk for any company considering an acqui-hire. “And it’s more expensive to bring in people through this process,” Mr. Gutsol added.
Tobias Lütke, CEO and founder of Ottawa-based Shopify, whose software is aimed at online retailers, said his company has acquired two companies “just for the talent.”
The first was Ottawa’s Select Start Studios. More recently, it acquired Toronto-based Jet Cooper. The deals brought a combined 45 employees over to Shopify. Mr. Lütke said all those new employees are still with the company.
The benefits of an acquihire are clear, he said. You secure fully formed teams that can set immediately to work on big projects. “They have an extremely sophisticated repertoire for how they approach new projects. It buys you a lot of time,” he said. At Vancouver’s Hoot
Suite, chief executive Ryan Holmes views acqui-hiring as a way to infuse a growing company with much-needed talent and entrepreneurial vigour — something, he said, it can lose over time.
“You need to bring new leaders into the company all the time, and add fresh talent,” said Mr. Holmes, who has made one acqui-hire.
Flush with cash from a recent US$165-million funding, Mr. Holmes expects to make more acquisitions, some of which he said could “absolutely” be acquihires.