The End Of The Acqui-Hire?
techcrunch.com
techcrunch.com
You're right: 90% of funded start-ups probably don't deserve the money, and will fail to produce any return at all. That's part of the game. It is not always clear what exactly will make you billions until after it's big.
But then again, I don't invest in start-ups so my opinions and any advice should be taken with a huge grain of salt - my forte is software engineering, not finance and investing ;-)
To those downvoting, please explain your reasoning. I can't learn why my opinion is wrong with a simple downvote and no feedback.
Reports that the premium was less that 1/3 salary per FTE being offered by the "Acquirer".
That is, these so-called "M&A deals" were valued at <less than> a mass-head-hunting contract.
(That being said, the submitted article reads more like an OP-ED than a more mainstream piece of journalism.)
1) The investor can still say that they had an acquisition exit and make their portfolio seem better than it is.
2) If you don't have strong enough connections where the strategic players will throw you a bone for a long-lasting relationship with your fund then you don't deserve the bone.
3) Investors gave founders education but the founders also gave investors education that they can leverage lessons in future investments.
4) Investors frequently say that they're investing in people but at the end of the day, they investing in people to execute the good idea and they would not hesitate to replace another set of people to execute that good idea... so in essence, they're investing in a good idea. What kind of investing are you doing when you invested in a bad idea and expect to get paid PAR for making the wrong call. A zero downside early stage investing but 1000x upside seems like a fantasy market that, even if it lasted for a year or two, would have never worked out in the long-run.
VCs can ensure their money back using paperwork. 500 Startups' seed specifically says they can block any acquisition that lowballs 500. This is reasonable because they take the risk.
I was hoping for an interesting article about acqui-hire trends and predictions, but instead I got a complaint about VCs not getting paid back. A reasonable perspective, but not particularly insightful.
What the investor is failing to recognize, is that in the case of an acqui-hire, the company has failed - it has zero value, and needs to be shut down gracefully. A good acqui-hire ensure that customers and vendors are paid up to date, and the employees are given a new place to work.
This VC is confused as to the nature of an acquihire, and, furthermore, seems to be ignoring the fact that 99% of the return on their investments come from the two or three companies out of 100 that are very successful. The other 98 to 97 are just a cost of doing business, and worrying about getting back their "investment" on a company that has gone under is just a distraction from the real business of making sure that the two-three companies are very successful.
That, and why are they hoping to extract value from the learning experience of the founders to begin with? People working at many different companies usually learn lots of things and can increase their value just as much as any startup founders.
As an investor, can't you just ignore any hopes that you'll extract any value from an "acqui-hire" when you negotiate the valuation of the company?
->"The amount they were willing to pay beyond salaries and stock to those hired? About 10 cents on the dollar invested."
->" we’d receive less than a recruiting service that merely introduced the same level people in exchange for 30 percent of their first-year salary."
Funding a company's success is very different that just presenting candidates. With so many startups receiving large valuations and focus being on user acquisition, the return on on acquihire is probably going to be lower than expected.
If the startup were burning through their investment / bleeding money through losses why would a company think they need to recoup those losses for an investor?
Then there's the 30% fee calculation. This sounds like the author was simply comparing 10% for the aquihire vs. 30% agency fee. What should be compared is the % of total cash comp the team would receive as the fee. This goes back to the difference of funding a company vs. just presenting candidates.
Given the info of seven engineers:
- if each engineer is paid out 150k (fairly high end of market cash rate, not including stocks).
- then a 30% fee would be based on $1,050,000.
- in this scenario, any investor putting in more than $1,050,000 would receive less than the 30% agency fee. Given how much money can be poured into startups it's easy to see investors hitting the $3 million mark and only receive 10% on this deal.
Dear engineer, you are the product.
For example, "we get X% of the company for $Y, and if the founders get hired, Z% of their compensation for N years."