Since 2010, Silicon Valley--the mecca of tech businesses--is home to a growing trend. Larger tech companies are buying smaller startups, but with a twist: They aren't looking to buy the intellectual property, the products or even the customers of the acquisition target. Rather, they want key employees.
In the last couple of years, tech giants such as Facebook, Google, Twitter and Zynga have used a method referred to as acqui-hire. "Acqui-hire relates to transitions. Companies aren't interested in the business assets--the goal is to acquire the software and engineering talent," says Eric Hagen, a Los Angeles-based attorney and partner at in the law firm of McDermott Will & Emery LLP. Hagen, who is also an adjunct professor at Loyola Law School, works, specifically within the realm of patent litigation and trade secret litigation, and he also manages IP portfolios of several start-up companies.
Why Not Hire Developers, IT Workers, Engineers Outright?
What's driving the acqui-hire trend? "Litigation risk doesn't seem to be a factor in the method," says Hagen. For the tech companies, it's a win-win situation. They acquire the products, patents and employees. That said, it would also negate the possibility of legal issues from noncompete clauses, trade secrets and intellectual property (IP) litigation.
The acqui-hire method also saves companies seeking IT talent the entire courtship process of trying to poach talent. They don't have to offer tons of money or special perks to get the desired employees. It can also prevent existing teams from feeling under-valued when a new person comes in the door making more money than they do.
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For startup founders and venture capitalists, the payoff is more tied to the bottom line. "When a startup is at the end of its financing and not making profits, acqui-hire is a good way to save face," says Hagen. Entrepreneurs and venture capitalists get to say they were bought by (insert tech giant name here) as opposed to having to close its doors "There's a certain amount of cachet that comes along with being purchased by a large Silicon Valley tech company," says Hagen.
The typical targets of these buy-outs are, "smaller, startups that are lean and mean," says Hagen, "with a small group of engineers that have worked together for a decent amount of time and have a good team dynamic."
The past couple years have seen a few high-profile examples: Recently Kevin Rose's Milk app development team was bought by Google (who outbid Facebook). Google killed Milk's projects and then put the team promptly to work on Google+. It was later learned that Google kept only the design team because it had plenty of engineers.
Earlier this year, Twitter purchased a startup as part of a strategy to grab its developer talent. Whisper Systems was bought in part to get Whisper founder Moxie Marlinspike, an expert in secure sockets layer (SSL) and Whisper Systems' roboticist Stuart Anderson.
Another example includes Facebook's acquisition of Gowala, a social networking site akin to Foursquare. Shortly thereafter Gowala shut down it services leaving only an emotional note saying goodbye. Other acqui-hire targets include Hot potato and Drop.io.
Even as far back as 2010, it was a clear plan for Facebook, as evidenced by Mark Zuckerberg's comments at a Y Combinator Startup School, "Facebook has not once bought a company for the company itself. We buy companies to get excellent people."
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Where Is the Acqui-Hire Going?
In the long term, no one can be sure, perhaps the teams acquired using this method will go on to create new and amazing innovations. In the short-term, it seems that end-users are the ones who lose. Many customers come to love programs, apps and websites--many times becoming dependent and engaged in them, only to have the carpet pulled out from underneath them when their services are killed or watered down after an acquisition.
Currently, Hagen says, there is a certain cachet attached to this. While it seems more like an HR method, what happens when people start thinking that these startups that are being bought up are, in fact, failing businesses? If that type of stigma is attached to the acqui-hire method, entrepreneurs and venture capitalists may think twice.