Why Acquihires Almost Never Work
(or, Why You’re Yelling at Your Refrigerator)
After almost 20 years in corporate and business development I have seen more acquihires than I want to admit, either as a founder in the companies being acquired or as a big tech company acquiror. And the sad reality is that acquihires almost never work.
Let’s imagine a product executive that just launched a smart refrigerator. She’s received customer feedback that it’s having difficulty hearing instructions in noisy kitchen environments.
Human:
“Hey Refrigerator, remind me when we are running low on beer.”Refrigerator:
“I’m sorry, what would you like to be reminded about?”
Is the solution out there?
For the next release, the company needs better AI-based language recognition. However, the internal engineering team has been unable to deliver this. So, to stay on track, the product executive asks their corporate development department to purchase a small company that would give them the team and technology they need.
Corporate development scouts the available graduates from incubators and early-stage VC portfolio companies, and finds a startup with voice recognition technology that works in noisy kitchens. They negotiate a deal and buy it.
Problem solved, right? Sadly, wrong – for three reasons.
The tech doesn’t fit
It is virtually impossible for a free-range startup to have serendipitously developed code that snaps into the proprietary (and often non-public) architectures of their acquirors.
In fact, everyone is telling developers to innovate, differentiate and build ‘moats’: all of which create major integration gaps. The startup’s developers find they must rewrite most, if not all, of their code in order to make it work with their acquiror’s systems.
The product executive is left waiting for the solution to be integrated. She misses her shipping window, and loses ground to competitors.
The terms become complex
For a startup, time is money, and smart startups raise the maximum amount in order to reach launch velocity. That money comes with entanglements like liquidation preferences.
Let’s say the startup had previously raised $12M, and corporate development offers a purchase price of $18M. A 1X liquidation preference means that the original investors get all of their money, while the founders split what remains. Furthermore, as the valuation of the business has declined since the funding round, common shareholders now have worthless stock options.
To make the deal happen, the acquiring company has to come up with extra money, so that the founders and employees don’t quit. Negotiation and complex diligence slows the process down, and the cost of the acquisition balloons. The product executive can only hope that when the dust settles, enough value can be realised on time. Which leads us to the last problem.
The team loses motivation
When talented entrepreneurs take the leap to found a startup, they hope for large financial returns, career advancement, and to see their code in production. When they are acquihired, most end up not achieving any of these goals.
The deal we are discussing will not make them billionaires, and other than some of the founders, not even millionaires. Their career path descends from the C-suite to mid-level development in a big company. And all of their code is scrapped. It’s not surprising that several talented founders (with vested shares) left before the acquisition closed, while those that survive the transaction leave too, once their lock up is over. The company never realises long-term value from the deal.
As a result, the pace of innovation within the company did not greatly increase, and soon decelerates once more. The improved speech recognition module is eventually delivered, but two years after the product executive needed it. By this point, the company’s customers and the market have moved on.
Human:
“Hey Refrigerator, order us more beer.”Refrigerator:
“I’ve set a reminder to order more beer.”Human:
“No, order more beer NOW!”Refrigerator:
“Reminder to order more beer cancelled.”
The Made-to-Order startup™
Acquihires almost never work because companies will never find a perfect-fit startup – it doesn’t exist. Hidden in the tech, terms or team will be issues that decrease value while increasing time and cost.
But XLIO can deliver the perfect-fit startup – because we create it on demand for the acquiror. We start with the acquiror’s technology problem, then build a startup from the ground up to solve it, drawing on a global network that lets us access entrepreneurial-level coding talent. We take on the risk and cost, and the buyer acquires 100% of the team, technology and IP on attainment of the specification at a pre-agreed price.
Because our startups are made to order:
The technology is pre-integrated into the company and ready to deliver value from Day 1.
The terms are simple, the cap table is clean, diligence is minimal, and cost is reduced.
The team has known the end goal from the start. They understand their incentives, they’ve looked forward to joining the company, and their code will actually be used.
In short, we make acquihiring work by reverse-engineering the process.
The end result is that product executives achieve their roadmap, corporate development close better deals faster, and customers finally get their beer.
