The Ethics of "Acqui-hires"

September 28, 2012

Credit: pierre bédat (CC)

DAN BOBKOFF: Say you just spent the last couple of years building a startup in Silicon Valley, and then your phone rings.

GABOR CSELLE: In comes Google and says, "How about we pay you a nice amount of money"—

DAN BOBKOFF: Google wants to buy your company. But there's a catch. They don't really care about your product. They just want you and your team.

JOHN COYLE: It seems a little bit crazy to buy an entire company just to get the services of one or two people you really believe in.

DAN BOBKOFF: But that's exactly what's happening. Big names like Google, Facebook, and Twitter are swallowing up startups just to hire their developers. It's happening so often now that someone coined a term for these talent acquisitions: the "acqui-hire."

I'm Dan Bobkoff. On this edition of Just Business, we ask two people who know acqui-hires well, why would a tech giant have to buy a whole company just to get its workers? There's a lot ahead, so stay with us.

Welcome to Just Business. My introduction to acqui-hires came when Google bought a small company called Sparrow. I use Sparrow's email app on my iPhone because it has a lot of nice features. I even paid a few bucks for it. But after Google's purchase, it became clear that Sparrow wasn't long for this world. Strange, right? Why buy the company then?

In a few minutes, we'll hear from an entrepreneur whose own company was acqui-hired by Google. He says the acquisition was probably the only way Google could have hired him at that point.

But, first, John Coyle. He's an assistant professor of law at the University of North Carolina. Earlier this year he co-authored what's likely the first academic paper on acqui-hires.

Now, in other industries it's not uncommon for one company to poach workers from another. Coyle wanted to know why Silicon Valley firms were bothering to acquire the startups outright. In the paper he lays out three main reasons why this is happening.

JOHN COYLE: The first is a desire on the part of the engineers to maintain a good reputation with the investors who had backed their venture. If they get acqui-hired, the investors get something. If they just leave to go work for this new company, the investors get nothing.

The second is a loyalty. These entrepreneurs—these investors believe in them. They gave them this money. They believed in their idea. To just leave them high and dry really smacks of disloyalty.

The third: It's a whole lot cooler to be able to tell your friends that you sold your company to Facebook or Google than it is to tell your friends, "Yeah, I abandoned my investors and my co-founders, and I went off to work for this new company."

So those three factors together go a long way to explaining why you're seeing these acqui-hires.

DAN BOBKOFF: A lot of this seems to be about just looking good, keeping up appearances.

JOHN COYLE: One of the benefits of the acqui-hire is that you can go into the bar with your friends the day after the deal closes and tell your friends, "Hey, I just sold my company to Google." That's going to go over really well. People are going to be really excited for you. That story is going to go over a lot better than going into the bar and telling your friends, "Hey, you know what? Google called me. I'm going to work for them now. I'm going to leave the company that I founded and leave my friends and my investors high and dry. I'm going to get this great new deal at Google. Isn't this great for me?"

That story is not going to play as well. People aren't going to be quite as impressed by that.

So I think there really is this great cachet. There is this sense of success that attaches to selling your company in a way that doesn't necessarily attach to just leaving to go work for a bigger and larger company.

DAN BOBKOFF: You write in your paper that a lot of the motivation for these deals is for engineering talent. Why do the companies like Google, Facebook, and Zynga have to go to such extraordinary lengths just to attract them?

JOHN COYLE: One thing you have seen a lot of in recent years in Silicon Valley is an extraordinary growth in the number of startups that are out there. There are two reasons for this. The first has to do with the rise of cloud computing. Cloud computing has made it cheaper and easier to launch a tech startup than ever before.

Second, there is just a lot more money running around Silicon Valley looking to be invested in good ideas, from angel investors and from venture capitalists. So you're seeing many, many more startups being funded today than in the past. These startups hire engineers. Then, when these large technology companies are looking to hire engineers, they're all working for these startups. One way of extricating the talent from these startups and bringing them over to work for these larger companies is to acquire the startup.

DAN BOBKOFF: Is this just a Silicon Valley thing? Does it happen anywhere else?

JOHN COYLE: It's largely a Silicon Valley thing. Most of the acqui-hire deals that we heard about happen in Silicon Valley. Increasingly, though, we're seeing that there are startups based in Austin, Texas, or Boston, Massachusetts, or New York, New York—there are startups there that are being acqui-hired. So it seems as though, even though this started in Silicon Valley, maybe nowadays you are seeing an expansion of this phenomenon to other parts of the United States. Who knows? Maybe going forward, you'll see more of these deals elsewhere.

DAN BOBKOFF: What are the characteristics of most of these deals?

JOHN COYLE: There's an enormous range. The most common time to see these deals happen is right after a seed round of funding, which is when the initial investment goes in, or after a Series A, which is the next round of funding.

In terms of their size, it's very hard to know. These are all private deals, so there's not a lot of great data about this. A number of the people we interviewed told us that they have seen these deals range from $200,000 all the way up to $50 million. One person we interviewed estimated that the median acqui-hire was probably somewhere between $3 million and $6 million. That's the range. It's very hard to know for sure.

DAN BOBKOFF: Do we know how many deals there have been in recent years?

JOHN COYLE: You know, it's very hard to quantify. Again, these are all private deals. They don't typically publicize. They're smaller deals. Even when you have public companies that are buying these startups, they are not necessarily reporting them on their public filings.

DAN BOBKOFF: Isn't there something kind of ridiculous about this? It seems like such a crazy thing to buy up whole companies just to get their staffs. Are we going to look back on this in a few years and say, "Wow, that was a crazy time"?

JOHN COYLE: Yes, absolutely. I think there is something excessive about this. It seems a little bit crazy to buy an entire company just to get the services of one or two people you really believe in. But on the other hand, in Silicon Valley they say that having one or two extraordinary engineers is just almost priceless, that these guys can do just amazing things, and that being able to bring those people over to work for you at the cost of buying a startup—that might very well be worth it. Certainly a lot of large technology companies have concluded that it is, in fact, worth it. That's why they are doing these deals.

DAN BOBKOFF: What about us? Is this bad for consumers?

JOHN COYLE: It certainly can be bad for consumers, in the sense that you are describing, where certain apps that you like very much may be shut down when the company that produces them is acqui-hired by a larger technology company. On the other hand, these tech companies are bringing these engineers over to design new and exciting products for them. It may be that in the long run these new products they will work on, working for, say, a Google or a Facebook, will be more popular and even more beneficial than the apps they worked on before.

DAN BOBKOFF: And you had your own experience of this as a consumer, didn't you?

JOHN COYLE: Yes, sure. I'm happy to give my little anecdote on this. Back before the Kindle app was in widespread use, I downloaded and read books on an app called Stanza. Stanza was then acquired by Amazon. Amazon effectively stopped providing updates for Stanza because it wanted to encourage people to use their Kindle app instead—all of which is great, except for the fact that my Stanza app can no longer play the books that I purchased to read on it because my iPhone updated its operating system and that sort of threw a wrench in the gears. So I have all these books that I've paid for that are great books that are basically just sitting on my iPhone useless, because I can't actually read them.

DAN BOBKOFF: One thing all this makes me wonder is, isn't there a chance that the next Twitter or Facebook could be acquired very early on in its life and then we'll never have the next big thing?

JOHN COYLE: That's certainly possible. I wouldn't say it's incredibly likely, for the following reasons. If you have a superstar company that's got success written all over it, those founders, they know what they've got, for the most part. Their investors know what they've got, and if they need funding to keep the company alive, that funding is going to be forthcoming. In an acqui-hire there's not any funding in most of these cases. The alternative to the acqui-hire in most cases is just to shut the company down.

So the odds are—I mean, it's conceivable that some of these companies would be the next big thing if only they got a little bit more money, but these guys are pretty smart. They're pretty good at spotting things that are going to work, and at this point they have had enough information from the company's lack of traction so far that this probably isn't going to work.

Is there a risk that the next Twitter could be acqui-hired and we'll never enjoy it? Sure. But I think that, for the most part, the likelihood that that's going to be the case—it's going to be fairly rare and fairly uncommon.

DAN BOBKOFF: How much are entrepreneurs thinking about the acqui-hires on the front end when they start a company these days?

JOHN COYLE: I think if you had asked me that question five years ago, the answer would have been that it really wasn't as much on their horizon. This wasn't something that was on their radar screen. I think nowadays founders are very aware of the fact that a number of small startups have been acqui-hired, and they are actually factoring this into their plans as they are starting their company. They're thinking, "Either this will be a huge success, it will go public, and I'll be acquired by a larger company, or potentially I'll be acqui-hired." This is something that founders are expressly thinking about and planning for when they are starting these companies up in Silicon Valley.

DAN BOBKOFF: Is there a backlash to all this? I've noticed, for instance, some companies posting publicly that they will never be acqui-hired.

JOHN COYLE: I think there is a sense among some entrepreneurs that the companies that are being acqui-hired aren't necessarily the best companies. I think there's a sense of resentment that certain startups that were hot or came to be perceived as these hot new things—they're the ones that get acqui-hired, even though their engineering talent may be perceived not to be as good as the engineering talent at other companies, and also just the fact that they don't think the products being put out by these companies are all that good.

So I think that, to the extent you see a backlash, it really is attributable to the sense that these startups that are being acqui-hired are the wrong ones, that if you really want to get the good ones, you should be acqui-hiring these companies over here. So, really, it's a critique of these large tech companies, that they are actually targeting the wrong startups.

DAN BOBKOFF: Is this even a good deal for the Facebooks and Googles that are paying for these startups?

JOHN COYLE: You would have to ask Google and Facebook to know for sure, but my sense is that they think they are getting their money's worth.

Here's why. One story that we heard when we were doing these interviews was that Facebook currently has, I think, the largest photo-sharing program on the Internet. It's larger than the next three or four combined. The entire program was written by two guys. Two software engineers at Facebook wrote this entire program that has been just enormously successful.

Having even a very small number of people who are really good software engineers, who can write the code, make it work, just really make it sing—that is worth an enormous amount of money to these companies. If they think that there is a startup that has two or three of these people working for it, spending $3 million, $5 million, $10 million to get them over to work for the big tech company—that's an easy call. They're happy to make those deals, because they think that these guys are really going to boost their bottom line in the long run.

DAN BOBKOFF: What is success? It seems that many of these workers don't stay at the company very long.

JOHN COYLE: It depends, I think is the answer. When these companies are brought on to work for the large tech companies like Google or Facebook, when they are hired, they will typically sign an employment agreement. They will also be given a restricted compensation package whereby they will get a certain number of restricted stock units or stock options or some other sort of incentive compensation, but they will vest over a period of three or four years.

They can leave right away—there might be problems with their doing that, but they could, in theory, do it—but they're incentivized to stick around by the fact that all of their comp, all the money that they are supposed to be getting as a part of this deal, won't actually come to them for a year, two years, three years after they set foot on Google's campus.

DAN BOBKOFF: Are acqui-hires here to stay?

JOHN COYLE: There have always been talent acquisitions in Silicon Valley. These have been around for a very long time. We're seeing a lot more of them now, and now they have this label, "acqui-hires," which makes it a little bit easier to distinguish the talent acquisitions from the regular acquisitions.

So, yes, I think these are going to be around for a long time to come. The only question is, will they be more; will they be fewer? It's very hard to predict. But I think that, as a model for acquiring talent in an environment where entrepreneurship is prized, where there are lots of startups, there are lots of chances to get your startups funded, you're always going to have startups employing very talented people, you're always going to have very large tech companies that are interested in having those people come work for them, and when you've got that world, doing an acqui-hire makes a lot of sense.

DAN BOBKOFF: John Coyle, thanks for joining us here on Just Business.

JOHN COYLE: Terrific. Thanks so much.

DAN BOBKOFF: John Coyle is an assistant professor of law at the University of North Carolina. Earlier this year he co-authored a paper on the acqui-hire phenomenon.

One person who knows what an acqui-hire is like is Gabor Cselle. Google acquired his startup reMail in 2010. It wasn't the first time he had worked for Google. Earlier in his career, he had been an intern and then a software engineer with the company. But it was after leaving that role that he started reMail. To get a sense of why a founder would want to give up his baby, the product he created from scratch, I asked him about how reMail started. It was perhaps the worst time to start a business.

GABOR CSELLE: I went on a trip around the world, and I distinctly remember sitting in a hotel room in Bangkok turning on CNN for the first time in weeks and seeing that Lehman Brothers had just gone bankrupt. When I came back from my trip around the world, the funding environment had really broken apart.

So I started reMail based on very little funding, because very little funding was available at the time, did Y Combinator, which is a seed funding incubator program that helps entrepreneurs get started, and developed a series of products. The first two products actually were miserable failures and didn't really work out. The third one was a piece of software that was an app for your iPhone. You could download it. It would download all of your emails to your phone so you could search them really, really quickly and very powerfully. It became really popular with travelers, because you were maybe on the plane and you wanted to look up your hotel reservation or your rental car reservation.

It had become really popular, and I was thinking about raising more money and going for the big leagues, going for the $100 million exit. Google approached me and said, "You have interesting technology. You've worked here before, and we liked you the last time. Why don't you come back to Google and work on this exciting project?"

It sounded really exciting. I was also talking to a couple of other companies. But ultimately I was convinced that was the right choice and went for it.

DAN BOBKOFF: You were faced with a decision: Do you sell this company and go to work for Google or do you try to turn reMail into a really big company? What was the pitch from Google that convinced you to go work for them and not to try to stick it out with your own company?

GABOR CSELLE: At a startup, you work on projects that maybe touch tens or hundreds of thousands of people. Especially in the early stages, you don't have a lot of users yet. And then in comes Google and says, "You can work on new amazing features on Gmail, which has hundreds of millions of users, and anything you do will touch all these lives and maybe save people time or help them get through their workday faster."

I was always really, really interested in email. I wrote my master's thesis in grad school on email. I had worked on Gmail as an intern, way, way back just after it launched. I worked at an email startup called Xobni. That was really my passion, making communication more efficient and effective. If you can apply that many hundreds of millions of users, that sounds really exciting for someone like me.

Also a talent acquisition gives you some level of financial security, and that package was really convincing.

DAN BOBKOFF: When you were making this decision, what stage was reMail at? Was it at a stage where you had to get more funding? Do you think it could have succeeded on its own?

GABOR CSELLE: I think reMail could have succeeded on its own. It was at a stage where we were making just a little bit of money from selling apps in the app store. I was working on a new product that I was going to launch that was going to be a little bit bigger in scope than reMail was. I was going to raise funding for that. I was going to maybe raise a seed round or a small Series A.

In comes Google and says, "How about we pay you a nice amount of money, and you don't have to do all these things? You can work on something exciting." That sounded like the thing that I wanted to do.

DAN BOBKOFF: Why didn't Google just try to hire you, like any company trying to hire talented people? Why didn't they just try to woo you the old-fashioned way?

GABOR CSELLE: I don't think that startup founders generally would go for such a thing, because startup founders are very different people. You just decided to start your own company and to build your own product and to kind of make your own path through the world. You have left Google behind. In my case, I had left Google behind. For me, that was the past and it was a path that I decided not to follow. They came back and they said, "Why don't you come back to Google, and we'll give you this amazing project and you will get to work on this interesting thing," which, honestly, if you just come to Google fresh from college and you get hired, you don't get the chance to work on them.

DAN BOBKOFF: Was it very clear from the Google offer that they were interested in you, the engineer, not reMail, the product?

GABOR CSELLE: Yes, it was very clear. I think any Google acquisition has some level of product interest. They wouldn't acquire someone who worked on a not interesting product. But the talent is a bigger component.

Actually, Google wanted me to come back as a product manager, because I had so much experience in email, rather than an engineer. So I got to lead a team and work with a number of really brilliant Google engineers, which also was a factor in my decision.

DAN BOBKOFF: So in a sense it's kind of skipping a lot of steps on the corporate ladder.

GABOR CSELLE: I don't know if there's really a ladder as such at Google when it comes to this stuff. It's a more targeted entry. It basically comes down to this. If you're an executive at a tech company and there is some new interesting technology that you want to build, you have two choices. You can either create a new team from your existing engineers and product managers and yank them off their existing teams, which they might not be very happy about, or you can acqui-hire a team that has built something in that space and provably has executed in that space.

Of course you're going to go for that if you find a great team to build that, because it's also a great financial deal for you—or maybe it's not a great financial deal for you, but it's a deal for you where you pay a little bit more than you pay your existing engineers. An engineer at a big tech company maybe costs the company about $250,000 a year, all in, between stock and salary and benefits. You acqui-hire someone, and you are talking about maybe 750K a year or something like that. That's not an eye-poppingly large number, which I think a lot of people expect to be traded in these circles.

That's actually a good deal for the company, too, because they get someone that has probably built something, a team that already works and can build the thing that you want them to build.

DAN BOBKOFF: When Google acquired reMail, it shut it down, right?

GABOR CSELLE: The product itself got shut down, because we removed the app from the app store. But we also decided that we were going to open-source reMail. You can actually go to Google Code and download an open-source version of reMail. Many companies have made versions of reMail that were slightly different and released them on the app store. I think there are about five or six reMail clones on the app store today. So the product lived on in some form.

DAN BOBKOFF: But did you feel like you were letting your customers down? You had tens of thousands of people who had paid a few bucks to have this product. You had invested your time. They had invested in you. Was that a hard decision?

GABOR CSELLE: It wasn't that hard of a decision because they already had the product, and reMail wasn't really a service. It was something that you could download and you could get on your iPhone. Once you had it, you still have it today. If you purchased reMail a while ago, you still have it.

DAN BOBKOFF: In general, though, do you think startups that have products in the marketplace that people are paying for—do they have an obligation to those customers when an acqui-hire deal is on the table?

GABOR CSELLE: Yes, absolutely. Of course, we care about our customers. We just spent so much time caring about our customers, and we had invested time and effort in communicating with them and figuring out what they really wanted. That's all a startup is about, that conversation with your customer baseWhat shall we build next? What shall we do next? What makes sense here?getting that feedback and getting those bug reports.

So I do think that you build an emotional bond with your customers.

DAN BOBKOFF: As an entrepreneur, you had just been working on this startup and you go to work for a big company—one that you already knew, but it must have been a real cultural change to go from the small startup world back to what has become a real behemoth.

GABOR CSELLE: Yes, Google is definitely a big company these days. But I think people who get acquired also are different people than the people already working there. You get innovators and you don't get operators. You get people that burn bright and that come in and they're starry-eyed, and they might not be really aware of the organizational structures and the organizational difficulties. They just want to build a great product.

Frankly, when I came back to Google, I also had a sense of obligation, because you get paid all this money and of course you want to exceed expectations; of course you want to build something great. I think a lot of people that get acqui-hired feel the same way.

DAN BOBKOFF: Do you feel like the people who are acqui-hired don't expect to stay long, but they maybe work harder and faster to get something done while they are at the big company?

GABOR CSELLE: Yes, definitely. I think a lot of entrepreneurs feel that the only thing they have in life is time and that they need to use that time to maximum efficiency. They will work as hard as they can to get as many things built as they can, in the least amount of time. We definitely all feel this incredible pressure to build something quickly and get it out. I think that's a shared trait among entrepreneurs.

Frankly, we also move faster than a lot of people in big companies who are a little bit more settled in. We put more stress on ourselves. We execute faster and then sometimes run up against hurdles because the world just doesn't want to move that fast sometimes.

DAN BOBKOFF: How long did you stay at Google?

GABOR CSELLE: I was there for two-and-a-half years.

DAN BOBKOFF: At what point did you feel like you had to get out and start something new?

GABOR CSELLE: I had worked on Gmail for a while and then worked on Android as a product manager. I came to a good stopping point on one of my projects, and then I said I could either try to find a new project at Googlebut what I really wanted to always do was to build a big and fun startup. I felt that that was the time to leave and try again. And that's what I did.

DAN BOBKOFF: What was it like leaving? You had been brought on to do all these things. Was it hard for you to leave? Were people disappointed?

GABOR CSELLE: I think there's an implicit understanding that most startup entrepreneurs will go back to being startup entrepreneurs. I don't think people were surprised about either the timing or my departure. It felt kind of like the right point to leave.

I think what you do when you get acqui-hired is you're going back to build something with much more leverage. At a large company you have many more users. You have a much larger ability to build something and then get that in front of all these people and kind of prove out your ability for the world. Once you come back to the entrepreneurial game and you start talking to venture capitalists and you start talking to potential co-founders or potential employees, you have this incredible proof of your abilities, that you have done a startup before and it has been successful. That's just incredibly valuable.

DAN BOBKOFF: One thing I've heard from a number of people is that one of the reasons why acqui-hires have become such a big deal in Silicon Valley—a big part of it is just face saving, that a lot of these deals are companies that may not have succeeded or maybe would not get a next round of funding, and this is a way for everyone to look good. The founders can say that their company was acquired, the investors get their money back, Google gets talent, and on your LinkedIn profile or if you go to a bar and talk to other people in Silicon Valley, it all sounds great, even if your original startup wasn't going to make it. Do you think that's true?

GABOR CSELLE: I don't think that Facebook would acqui-hire a team that wasn't good and didn't bring them value. I don't think that Facebook goes out and says, "Instead of hiring you, why don't we acqui-hire you?" That's just not in their best interest. That's not how they are incentivized.

So I don't really think that's true. I think Facebook wants great talent; Google wants great talent; everyone in the game wants great talent. That is the currency of Silicon Valley. Great talent is hard to find. There's a boom going on here, and it's hard to get people to work for you. Acqui-hire is a way to incentivize people to come and work on something exciting and work really, really hard.

DAN BOBKOFF: So you don't think for founders of companies this is a sort of graceful failure or a nice way to exit, without having to go into too much detail?

GABOR CSELLE: It's actually an acquisition of your companyI think it's really hard to portray an acqui-hire as a failure.

One thing that has been happening is that funding has become vastly more available. If you're a startup, you can easily raise a million or two in seed funding today. You end up with companies that have a million or two in the bank and burn some of it, and then they might get to a point where they think, "Do we raise more money or do we exit the company?"

At this point, if you do an acqui-hire, you're not going to get a 2 times, 3 times, 4 times return on this money, because companies are incentivized to give the founders that they want to come work for them money, and not the investors. So there's a little bit of squeeze on the investor returns. But I think that some of that is also whining. Investors say acqui-hires are not a good deal for them, but they get a 2 times return, a 3 times return within a year or within two years. And that's actually, I think, a really great financial result.

DAN BOBKOFF: It's a lot better than liquidating, right?

GABOR CSELLE: It's a lot better than outright failure. I think that's part of the reason why it's hard to say that these are failures. If the investors get some return and the founders get to work on something great and a great company, I think an acqui-hire is a great deal.

DAN BOBKOFF: Do you think this phenomenon is here to stay?

GABOR CSELLE: Unless talent becomes more widely available or something structural changes where it becomes vastly less possible to do a startup, I don't think it's going to go away in the next couple of years.

DAN BOBKOFF: Cselle left Google three months ago. Since then, he has built a product called DrawChat. As the name suggests, it's an app that lets you chat with your friends by drawing instead of typing. He's thinking about what could be his next big idea.

That's it for this edition of Just Business. Special thanks to Jessica Naudziunas, Madeleine Lynn, and Terence Hurley for production help. Thanks to Tony Higgins for our music. And thank you for listening.

I'm Dan Bobkoff. Download us again next time.

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