Many company exits recently have been acqhires (that is, acquiring a company to hire the team, in the process shuttering the production). Just last week Summify was acquired by Twitter. VCs are many things and stupid isn’t one of them. The current talent shortage in the Bay Area means that they are sitting on a gold mine with all their underperforming companies. Suddenly there is a buyer for many of their investments if the VC gets into the acquiring business. Here’s why.
The cost of hiring a candidate is often equal to 6-12 months of salary for the candidate. There’s there search process, the cost of screening, interviewing, processing all these potential applicants. Then there are the fees to recruiters, referrers, etc… At Bay Area tech salaries, this can reach to a quarter of a million per hire. Then there is the risk that the hire will work out, that they will fit into the team, the corporate culture, that they will stay, that they can do the job. In a recent blog post, Peter Levine estimated that a good batting average for a great hire is 30%. So the actual cost for a great hire can easily reach $1M. For a team of 5, $5M to hire a great team that will work well together.
Look at this from the perspective of a VC. I have a great team working on a not-so-great product. I’ve a couple of million into this team and will probably have to wait 5 years if I’m ever going to see any of that money again. But right now, right at this very moment, I can sell this company to Twitter or Facebook or Google for double my money. These companies will feel they are getting a bargain. They are getting a proven team that can work together. And they don’t need to pay cash — they can use stock! The team they have acqhired are locked in for the next few years through a combination of stock options and buyouts. Unlike the VC, they won’t get their cut unless they agree to staying for a fixed term, the tech world’s version of indentured servitude.
So at least for the next year or so we will see the VCs pushing for more of these deals.
Have you been through an acqhiring? What were the circumstances surrounding it? We all would love to hear your stories in the comments.