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Long-tail acquirers for medium exits (gabrielweinberg.com)
41 points by revorad on May 15, 2012 | hide | past | web | favorite | 12 comments

One aspect of gabe's otherwise excellent post that went unmentioned is the cultural issue associated with an acquisition of this sort.

For the acquired company to make a difference, it is going to need to be put in control of a large number of business processes. And for it to produce productivity gains, it will likely automate away many of the existing jobs at the acquiring company. Finally, if the acquired company is in fact a failing startup (as gabe postulates), it won't have a large team, or much revenue, or have proven itself against the acquirer in the marketplace.

These things will combine to produce intense and arguably justified political resistance at the acquiring company. The old guard there will see a bunch of young whippersnappers, who just became millionaires, without any revenue, who are coming in and expecting to tell them what to do when they are the ones who've been producing profit for this company for 20 odd years.

In this view, the only way this works is if it's a Mint/Intuit-type deal, where Mint crushed Intuit's online offering to such an extent that it gained respect within Intuit.

I should have made this more clear, but exactly as you say I had the Mint/Intuit deal in mind. I didn't include it because it was a software company acquirer.

In other words, the case I was thinking of for the medium exit was a success case not a failure case. The big co would take the success off the table and try to incorporate it into their internal processes.

I referenced an earlier post on the failure case, which was geared towards small exits for talent acquisition.

Interesting premise although I don't think this is playing out yet (my company tracks this data). That said, we do see lots of corporations entering the venture ecosystem which is probably a precursor to what Gabriel is mentioning.

That said, I do think @antrod's point that Gabriel references is somewhat flawed if I'm understanding his point correctly.

For a public company doing an acqui-hire, dilution would likely not come into play as the amount being paid is probably small (for the acquirer) and so EPS (earnings per share) dilution doesn't really become a factor. Of course, if the deal is larger, it does, but then it's probably not an acqui-hire either.

In terms of valuing on a EBITDA multiple, that may be the case for some companies, but I wouldn't underestimate the power of feeling like they (big co) might be left out from a coming boom or be disrupted as motivation to pay a price that is not strictly based on a financial ratio. I used to work in a big co in a previous life, and if they believe it's a burning platform need, financial constraints can and will be overridden.

The most interesting case study would be Home Depot's acquisition of Redbeacon. Does anyone have:

- acquisition price

- Redbeacon's # of employees

- Redbeacon's revenue

- reports from members of either team on how the integration is going? (this would be the most interesting)

The rumor I heard from trusted sources is ~90m

I'm curious on the financials behind the acqui-hire deals when the startup is only seed funded with little to no revenue. Valuations based only on the seed amounts and equity doled out seem too good to be true.

What kind of purchase prices do we see here and how much do the founders usually get? Would love to hear from members of the communities that have been acquired and are willing to share some numbers.

Acqui-hires by definition are not a purchase of the startup but of the talent.

What we've seen in talent acquisition valuations we've captured is the range is large ($2-$5M/engineer). While these numbers look very appealing, please note that many of these acqui-hires are paid for in part or in whole in stock which vests over time.

When the stock is coming from a publicly traded company, it is liquid and so has real value (once vested).

When the acqui-hire is done by a private company, and you receive stock, that stock is highly illiquid and the valuation is far from precise. And given market dynamics, that valuation could look very different by the time it vests.

What we've seen in talent acquisition valuations we've captured is the range is large ($2-$5M/engineer).

How much of that typically goes to the engineer? I imagine that a $20 million purchase of a 10 engineer company roughly works out to $2 million per engineer, but I imagine the founders and early investors would get the lion's share.

Unfortunately, don't know the answer to this as even getting the $2-5M number took us some digging. But your assumption is probably right and is only logical in that the "spoils" of an acqui-hire are not evenly distributed across the team.

It's unfortunate that there's not much info available yet, as I suspect most folks involved in these kinds of deals are tied up in non-disclosure agreements and need to wait for vesting options to expire before they can open up.

I look forward to finding out how the acqui-hires went in about 5-7 years, much like we're finding out about Flickr now.

Every company is not going to be doing software acquisitions. Regardless of if software eats the world. The premise of the article is wrong.

It will never happen for the same reason that every company doesn't employ an army of electricians and plumbers. The same applies for duct work, air conditioning, construction, architecture, food services, and on and on. Your average company also has no interest in running their own cloud setup, or data center; they'd much rather outsource that for all the obvious reasons.

Some extremely high percentage of companies will continue to outsource their software needs, exactly as is done today. There will be no broad based software acquisition binge. It's a very difficult world to specialize in, innovate in, and manage unless software and tech is what you already do.

>doesn't employ an army of electricians and plumbers.

But the whole premise of software eating the world, is its sooo prevalent, its not like hiring air-conditioning workers, its like hiring literate workers.

Writing code will be like writing essays at college and memos at work.

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