Boosting Innovation with Acqui-Hiring

Monday, 02. June 2014

In dynamic, technology-oriented industries, innovation is an important, if not the most important source of competitive advantages. There are basically two ways in which innovations can arise: inside and outside the organization. The latter is usually done in the form of contract research, in cooperation with other companies, or through acquisitions of technologies and companies. A relatively new approach to boost innovation, however, which is gaining in popularity lately, is what is called “acqui-hiring.” It involves large established firms buying struggling startup companies not for their products but solely to recruit entire teams of young and creative talents.

The trend comes from the Silicon Valley, where large tech companies, such as Google, Facebook, Yahaoo!, Twitter, and Salesforce have been using acqui-hiring for several years to satisfy their need for engineers, developers, and managers. Facebook CEO Mark Zuckerberg has been widely quoted for saying back in 2010: "Facebook has not once bought a company for the company itself. We buy companies to get excellent people." According to a recent international study by McKinsey on digital strategies, companies from other industries are now beginning to follow this trend in order to better prepare themselves for the challenges and opportunities of the digital world.

What are the Advantages of Acqui-Hiring?

From the buyer’s perspective, acqui-hiring offers a number of advantages:

  • They get an intact, well-established team with a proven track record. Therefore, there is no need to develop team collaboration and cooperation. The company simply needs to provide the appropriate framework. As a result, innovation times can be shortened significantly and costs reduced. At the same time, new skills can be developed rapidly, so that companies in highly dynamic industries can adapt to changing market conditions more quickly.

  • In contrast to most traditional recruitment strategies, acqui-hiring enables large companies to hire true innovators and out-of-the-box thinkers. These tend to prefer the freedom of a startup environment over the constraints of established firms with their rigid organizational structures. Ironically, if they do apply with a large organization, most of them will be rejected because they are not considered to be a good “corporate fit.”

  • They get the CEO and his entrepreneurial and innovative thinking. Usually, the contract requires the CEO to stay with the acquiring company for one or more years.

  • Unlike with M&As, with acqui-hiring only the engineering and development teams stay on board while all other employees are let go. These smaller teams can be integrated into the buyer’s organization much faster and easier. As experience has shown, employee integration is one of the biggest challenges when it comes to takeovers.

For the struggling start-ups, acqui-hiring is an exit strategy. It not only allows them to avoid bankruptcy, but also makes the CEO and engineers look like they have successfully sold out their company and product. Investors benefit from acqui-hiring as well as by getting at least some of their money back. The actual losers of such transactions are the customers of the start-up company whose products and services are usually withdrawn from the market or no longer supported.

Success Factors

Compared to traditional recruitment methods, acqui-hiring comes with a big price tag. The costs are estimated to be one million dollars per engineer. To make sure that such an investment pays off in the long-term, acqui-hires should be closely linked to the company's strategic objectives. That is, the choice of the acquisition target should be given careful consideration in order to ensure that only those talents and skills are purchased that are actually needed to succeed in the future marketplace.

Another important prerequisite is the development of a retention plan for the acqui-hired employees. In addition to financial incentives, they should be given the resources and freedom necessary to embrace their new tasks. The challenge here is not to overstretch it antagonizing the old employees.

With the right strategy in place, acqui-hiring can be a win-win situation for both sides. It remains to be seen whether the trend will continue to prevail outside the tech industry and the United States.