Chapter 1: The Evolution of Acquihires

The acquihire market for early-stage startups has dramatically transformed. In the past, many believed that a fallback plan could be to sell to a larger startup or a public company for approximately $1.5 million per engineer. This was particularly true during the early mobile and iOS development days when securing top-tier technical talent in a nascent company essentially created a baseline for acquisition outcomes. My experience spans both sides of these transactions—acquiring startups at Google/YouTube and investing in high-caliber technical founders. Occasionally, one would even be fortunate enough to receive stock in the acquiring company, which led to pre-IPO equity in rapidly growing firms like Pinterest and Facebook.

Launching our venture fund, Homebrew, allowed me to formalize and expand my insights into successful exits. While the potential for acquihires alone is insufficient to justify venture funding—our objective is to succeed!—there are scenarios where investors view these situations as positive options. In our initial years, we actively assisted teams in finding suitable placements when their independent ventures didn't pan out. This resulted in two successful intra-portfolio acquisitions, where one team was acquired by a larger startup we had previously funded (Chime and Bowery Farming were the acquirers), along with numerous other transactions. It was a classic win-win-win scenario: founders found new homes often with retention bonuses; employees received job offers; and we recouped capital that, although it might not follow a power law return, allowed us to reinvest in new ventures or support our existing portfolio. For a small, two-person fund, I believe we adeptly navigated this process when necessary!

However, I'm here to tell you that the landscape has shifted significantly.

Chapter 2: The Current State of Acquihires

In 2023, with few exceptions, the traditional model of acquihires is largely defunct. Most potential acquirers, large or small, are not expanding their headcount budgets. Those that do often prefer to source talent from the open market rather than going through the complexities of an acquisition. With cash in short supply, it’s unlikely that it will be injected into cap tables (preferred or common shares often leave deals empty-handed). In fact, some acquirers have even requested that startups relinquish their remaining cash to alleviate the salary burden they would assume. As a rule of thumb, I typically refuse to give up cash in acquisitions where there is limited reciprocal value. Additionally, when stock is offered to existing shareholders in lieu of cash, it's at inflated 2021 valuations, buried beneath preference layers.

Despite this, we remain committed to assisting founders in these scenarios, but we aim to set realistic expectations and work collaboratively with other investors. My personal guideline is to ensure that if there are cash reserves or valuable intellectual property within the company, we act as responsible stewards of those assets. However, when it comes to the future well-being of the founders and their teams—specifically, whether they genuinely wish to join the potential acquirer—their opportunity costs and overall happiness become paramount. No founder should feel obligated to endure four years of onerous earn-outs simply to yield a few cents on the dollar for their venture investors.

In such times, different strategies may be required, potentially moving away from the notion that “companies are bought, not sold” (which holds true when a startup possesses optionality or competitive offers). My somewhat unconventional recommendation is for more founders to publicly declare their intention to seek a new home when pursuing this outcome. Crafting an engaging post or presentation outlining their situation, the team's unique strengths, and the challenges they have faced in securing additional capital could attract potential acquirers (who knows, you might even receive some funding offers). This could serve as a litmus test—if you can’t compellingly present your case publicly, I doubt you’ll magically resolve it in a private, closed-door negotiation, particularly in the current market.

Are there downsides? Emotionally, perhaps. However, the reality is that "this didn't turn out as we hoped" is a common refrain in the startup world, so it’s best to embrace it.

Will announcing your search for a potential acquirer diminish your negotiating power? Not really, especially in this market. The only way to negotiate effectively is by having a Best Alternative to a Negotiated Agreement (BATNA), and I believe this approach will enhance the chances for 80% of companies in similar situations. Start by discussing your situation with a few promising contacts, but don’t hesitate to cast a wider net if you're not gaining immediate traction.

A venture capital firm with an operations team could develop a template for this process—simplifying it for founders and normalizing the approach to eliminate any stigma. Instead of spending your last quarter searching for elusive opportunities, create a strategy to attract them. If you see any Homebrew portfolio companies trying this approach over the next year, I’ll be sure to share the outcomes! Good luck; the landscape is tough right now.

In the video "What does your startup need to know about acqui-hires?" industry experts discuss the critical considerations for startups contemplating acquihires, including strategic positioning and market dynamics.

The video "Breaking Down Acquihire Deals: What Every Startup Founder Needs to Know" provides an in-depth analysis of acquihire agreements and what founders should keep in mind when navigating these deals.