Seems like sour grapes to me. If the startup is only worth pennies on the dollar, why should the investors get more than fair market value? This seems an awful like new city bankers who are all in favor of unrestrained free market capitalism, until their ox gets gored, at which point they are first in line for a government handout.
tl;dr Acqui-hires are are turning into just hires. Companies just want the talent from failed start ups. The acquirer lowballs cost of buying out equity and but keeps high retention comp to employees. In short term this is good for start up employees, but writer argues this will hurt seed ecosystem because investors don't like being burned.
Maybe VCs should be more selective about who they give their money to. I'll get downvoted for this, but it seems 90% of funded start-ups don't deserve the mass funding they deserve (a portion of it sure, but the hundreds of thousands to hundreds of millions in VC $? no).
You are making an assumption that VCs believe all their investments will turn a profit, which in most cases isn't true. You invest in fifty startups, twenty lose money, twenty break even, ten make stonking, huge amounts of profit that cancel out your losses and leave you with a nice pile of cash left over.
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.
Oh for sure, there's definitely a market for the ones you know will fail ... but I'm one of those "take calculated risks instead of just risks". Of those 20 that failed, I wouldn't be surprised if you could have guessed 10 would have failed, and of those 10 making it strong, maybe guess 2-3 would have done well, with everything else up in the air (luck, market, timing, and a billion other factors you couldn't see) ... but even then, I would ask the person managing the fund, "why would you invest in those 10 you knew would fail?". I guess for my, I'm more aligned to the "directed funding" rather than a more "spray-and-pray" approach.
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.
The startup idea failed and the founders do not have another idea / the seed investors do not want to give the founders any more money than what's already invested. So then you should let the markets decide what the price of the assets are. The assets of the idea and the assets of human capital.
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.
I agree with the author, but I feel they should not be in this position to begin with.
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.
Except, in the case of an acquihire, there is no "acquisition", per se. If 500 startups were to block such a deal, then the founders/employees could simply fold up shop and go to work for the new company.
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.
> 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?
It sounds like this is a side effect of the "at-will" employment model, then. Do any venture firms' threat models account for this by promoting contract employment all the way to the top?
Actually I have been at events/panels recently where even top tier VCs were complaining about this--being stiffed in acqui-hires especially when life changing money is on offer if the execs just go along with the acquirer's designs.
These statements need a whole lot more clarification
->"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.
