‘Acquihire’ is a term used to describe the act of a larger, more successful company buying a startup company that, while it may have developed good technology or has a great team, didn’t quite make it.
Why do acquihires occur?
It is a sad fact that, in the world of startup businesses, even some of the best teams that have built some really great technology won’t achieve the success they deserve. There will always be some companies that just don’t make it. This could be for a number of reasons, such as running out of money or not getting a good product/market fit.:
At this point, a bigger company might be considering expanding their own business. They will know that going out and hiring ten amazing engineers will cost them a lot of money. But if they see this startup that didn’t quite make it but has this incredible team, they might decide the most cost-effective and smartest move would be to buy that startup. That is known as an acquihire.
Often, it’s a dual acquisition, and the bigger company will also scoop up the technology that’s been developed along with the team. However, it’s usually not driven by that technology but by the people behind it. Simply put, the big company is buying the small company to acquire the people. That makes sense.
When does an acquihire typically happen?
Acquihires usually happen when the market is really hot, which subsequently makes it difficult to hire people. For example, the market from 2020 through to 2022 was a a particularly “hot” period. Now, in September 2024, that market has slowed down, and we are seeing fewer acquihire purchases.
Having said that, we do still see a decent number of them. Typically, they don’t have big outcomes but they are a way for a company to get a little bit of money back in order to return some to their shareholders. More importantly, an acquihire means the employees get to go somewhere. It means a nice soft landing for everyone.
While an acquihire generally isn’t a great outcome from an investor perspective, it does look good for the founder if they can get the company bought through an acquihire rather than just closing down.
How are acquihires structured?
An acquihire is typically structured as asset sale or asset purchase. This means the larger company buys specific assets, i.e., the team. They aren’t interested in taking on the liability associated with buying the whole company. Occasionally, when things are really hot and people are looking for some type of evaluation metric, there will be a specific figure such as $200,000 - $500,000 per engineer, for example.
Acquihires are good!
Here at Kruze, we think acquihires are one of the best things about Silicon Valley for a number of reasons. An acquihire shows:
- You’ve built a valuable company. An acquihire, even though it means your startup didn’t have a big outcome, shows you clearly built something valuable.
- You assembled a great group of people. The excellence of the team of people you built has been recognized by a bigger company, who wants to take advantage of that.
- An acquihire makes founders look good. It shows you were able to find a home for your employees as well as get some of the money back for your investors.
We really encourage companies not to simply just give up and close the company. If you know you’re not going to raise another round and that you’re not going to make it, but you have built something substantial, then try to organize an acquihire. Even in a down market, businesses are always interested in good employees.
If you have any other questions on acquihires, valuations, startup investing, or startup accounting, please contact us. You can also follow our YouTube channel and our blog for information about accounting, finance, HR, and taxes for startups!
