Acqui Hiring: Is it A Boon or A Bane for Indian Start-up?

Learn the pros and cons of aqui hiring for a startup.


Hiring can be a taming task for any organisation. Choosing a right candidate or team can not only boost up the company’s revenue but can give a mileage in the long run. One such process of hiring is called acquihire. Also known as talent acquisition, the merger and acquisition (M&A) buzzword acquihire is the process of purchasing one company by another for the sole purpose of retaining the business’s employees. Here the purchaser does not have an interest in products, services or assets of the acquired company, rather in its employees. It is most likely that the purchaser discontinues the products and disposes of assets of the acquired company.Acqui Hiring is most common when particular professions and skill sets are in high demand, especially within the technology sector. Similarly, acquisition can be attractive to the start-up, as well as, when the business doesn’t take off in the way it was planned. A carefully selected acquihire may have a staff that matches the purchaser’s requirements or has special qualifications or status that will give the purchaser a competitive advantage. Let’s put it in this way, an acquihire is basically purchasing a team of smart people, which are mostly engineers, who have worked together successfully and know what to do, hoping that they might expand and accelerate the buyer’s business. 

There are many companies, which do not want to recruit inexperienced teams, rather they rely heavily on finding the best, proven and most skilled team members. Acquihiring gives that mileage to companies, as it is a de facto one-stop shopping process that fast-tracks the hiring process. In some cases, the buyer will not have to retain existing products or services or even continue the operation of the company. The acquihire reflects competition for talent through acquisitions in today’s hot technology market. 

People Matters

The term acquihire has been applied generously to describe acquisitions of companies with pre-existing businesses ranging from scant to significant. Acqui Hiring is often seen in mature technology companies as well as venture capital backed start-ups. In an often-repeated quote, Facebook Chief Executive Officer Mark Zuckerberg famously said: “Facebook has not once bought a company for the company itself. Facebook buys companies to get excellent people.” With this thought process, the social media companies have been characterized by rapid change in the technology industry and the explosive growth of new household names in social media and cloud computing, large-cap public companies and venture-backed companies alike have competed to amass critical talent.

Many start-ups see it as a way to quickly acquire proven talent. Acqui Hiring is increasingly common in the tech sector, where certain types of skill sets, such as specific computer programming knowledge, are hot and in short supply. Through acqui hiring, it is possible for large tech companies to bypass the potentially long process of finding and vetting new tech savvy employees. Additionally, acqui hiring provides companies with a degree of proof that a given group of employees work well together and can handle a particular job. In the year 2019, more than 75 percent of acquihires were made by Indian start-ups, 14 percent by global multinational companies, and 6 percent were made by Indian multinational companies. Clearly successful start-ups have found acqui hiring to be an effective way to get access to new-age talent.

‘‘

Recruiting should be viewed as business partner, someone who is critical to the success of the business.

- Mathew Caldwell, Head Of Talent, Instacart

By considering acqui hiring, start-ups can immediately get access to an experienced and proven team. Areas that generally involve cutting-edge technology, where time is considered a crucial thing, choosing acqui hiring can give any company an extra mileage that wants to stay ahead of the competition. The teams acquired through acqui hiring can be immediately put to work developing a new or existing product within a company. So, the talent acquired isn’t necessarily dispersed throughout the new company. Some of the talent-driven transactions done globally include Twitter’s acquisitions of Summify and Posterous. Google’s acquisitions of Milk and RestEngine. Facebook’s acquisitions of Lightbox and Glancee and many more. Similarly, some of the recent acqui hiring here in India are Urban Ladder, Swiggy and RailYatri.

Is Aqui Hiring a Right Move?

Well, every coin has two sides! Acquihires present challenges for venture capital investors, who invest in start-up companies based on longer-term investment goals. Acquihires often represent a truncated company life, coupled with the promise of a pay out and incentive rewards for the management team under a different umbrella. This situation can create conflicts between the interests of investors and the founder team. A buyer uses an acquihire to grow technical staff in a more meaningful way than traditional hiring methods. 

The buyer might have a specific project or task in mind to be accomplished by the acquired team, which may or may not relate to the target’s activities. In any event, the buyer is looking for a cohesive group that has proven its ability to work together, combined with technical prowess and a good culture fit. The business success of the target is secondary at best in the acquihire. A lack of revenue, market traction or other typical barometers of success do not necessarily equate to a lack of creativity, intelligence or ability to design and build a product.

The buyer’s primary concerns are post-closing employee retention and the potential for contingent liabilities of the corporate entity that would have been avoided by simply hiring the target’s employees. In acqui hiring, the buyer is motivated primarily by the talent of the seller’s employees rather than by its operating business or technology, which may still be under development. Also, it is important to note that in an acquihire situation, the acquired company is often shut down. This factor, of course, is far different that it would be in a standard acquisition.

Often acqui hiring occurs with companies that are under stress and may go under. Typically, assets are purchased and existing employees are brought over to the new company. Your company usually is not being purchased and the corporate structure is frequently left in place for a variety of legal reasons such as liability.

For your employees, a new owner is one thing, but with an acqui hiring situation, pretty much everything changes. Many key employees may simply walk instead of making the transition to the new company. If you want an acqui hiring deal to go through, it will be necessary to pay careful attention to the responses of your employees. Acquihire situations can be highly disruptive. Your employees will likely be working in a different location, with potentially a different agenda and goals and under different management.

Deal Structure in Acqui Hiring

Acquihire deal structures can range from employment offers, where investors usually get some capital back to give approval and waive claims to full company acquisitions. This is when the acquirer wants the target’s intellectual property (IP) as well as the employees. An acquihire can strengthen a company and increase its earning potential. That’s mostly true since most acquihires are not expensive purchases for large businesses. This year, low-cost airline and air cargo operator SpiceJet acqui hired the team and technology platform of Travenues for an undisclosed amount. The Bengaluru-based airline technology company Travenues is a wholly-owned arm of online travel aggregator Ixigo, the AI-based travel app. Most of the acqui hired deals are for an undisclosed amount.

However, the rate for acquihires in Silicon Valley is $1 million per quality engineer. More established teams will earn more, but it is still a small amount of money to the largest companies in Silicon Valley. Major technology corporations like Twitter and Dropbox have performed acquihires to improve their worker base. HubSpot has done at least five acquihires. Alphabet, one of the most valuable companies in the world, has quietly performed dozens of acquihires, too. They understand the benefits of hiring full teams of employees to run specific projects.

However, there is no set rule for an acquihire. Usually, some combination of stocks or assets changes hands. Still, most of the purchase money goes to employees. Many of these agreements are light on terms since the true value is the employees, not the company. Buyers usually decide the cost of an acquihire on a per-head basis. What that means is the company pays a set amount per staff member acquired. The going rate is at least a few hundred thousand, sometimes as much as $2 million per person.

Risks Involved in Acqui Hiring

The start-ups that have made acquihiring can absorb experienced and already structured teams, however acqui hiring also poses a few risks. The acquirer needs to be wary of how the deal is structured and how the payments are rolled out to the investors and sponsors of the acquired start-up. The acquirer should engage a legal team to ensure that the board of directors face no liabilities from the acquisition. The founders of the acqui hired start-up would lose their exalted status and will have to adapt to the culture within the acquirer’s organisation. And again, this is one of the most complex steps as it requires the acquirer to make culture changes within their own organisation as well, to reap maximum benefits of fostering an entrepreneur and their team. 

Most people join a start-up to be a part of the thrill that it offers and not the stability that a good company could offer to them. They like that they do not have a schedule and that they do not know what they will end up doing for the business tomorrow. That is what makes them tick. Being acquired by a large multinational almost defeats the purpose for the team which likes to do things their way. Start-up employees, particularly non-funding individuals, have virtually no choice on who buys them. This lack of choice in organisational changes can be termed as an organisational mismatch. Further, these people are not scared of being on their own and starting something from scratch, the acquirer is actually looking at potential rivals in the future.

‘‘

Sourcing and finding people is the most important. You can’t recruit, message, or network with someone you haven’t found.

- Glen Kathey, SVP Talent Strategy and Innovation, Kforce

The big business should first determine if they run an entrepreneurial firm or do, they have a complex conservative hierarchy system. The point of turbulence regarding bruised egos should also not be missed, the smaller team who works in a niche area is now a part of the big pond where it has all these niche specialised teams working on the cutthroat technology of the future.

The point is to try and understand how both the acquirer and the target company works. And then try to acquire the target company. Acquihires can be highly destructive, the multinational and the young start-up may have different goals and visions. The employees may not be able to connect when they get acquired. The employees may not be able to fit into the corporate culture they have always wanted to escape and hence, work in a start-up.

Despite these challenges, the benefits of acqui hiring overshadow the risks. Acqui hiring is not only good for an organization’s talent base enhancement, but it can also help in transforming an organisation’s culture by bringing in the innovation DNA and entrepreneurial thinking.

Preeti Verma
Preeti Verma
An alumna of IIMC, Preeti writes on global and domestic business, life cycle of a business and its stages. Her fourteen years of stint includes The Economic Times, Business Standard, Financial Express, Tehelka, Businessworld and Times Internet.

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