A Perfect Storm for Acqhires

Back in 2005 PG wrote a prophetic (or obvious) essay titled Hiring is Obsolete. The name says it all, but the theme revolves around the following quote:

Often big companies buy startups before they’re profitable. Obviously in such cases they’re not after revenues. What they want is the development team and the software they’ve built so far. When a startup gets bought for 2 or 3 million six months in, it’s really more of a hiring bonus than an acquisition.

Google pulled back the covers on their 2011 deal activity yesterday and, given PG’s piece, it should come as no surprise what we saw. Google is on a torrid acquisition pace racking up 57 completed transactions this year.

There were 3 larger buys this year: Zagat, Daily Deals and ITA, but there is a more interesting story falling out of the remaining numbers. From Dealbook:

Beyond those three transactions, Google largely focused on completing smaller transactions of $10 million or less. The remainder of its deals, 54 in all, accounted for about $502 million.

That would put the average price for the vast majority of their acquisitions at just over $9M dollars. In modern parlance the term for these are Acqhires.

And as the Google number suggests, they’re a growing trend.

But, Acquihires aren’t just for BigCos anymore. This morning Brad Feld put out a call for potential acquisitions the private companies in his portfolio are looking to make:

Several of the companies I’m an investor in are significantly building out their iOS and Android development teams. They are looking for acquihires of up to teams of five. If you are a partner in a small iOS or Android development shop, are tired of doing custom projects, and want to join a fast growing VC-backed startup, drop me an email.

We’re seeing this across our portfolio as well.

The good news is that as the costs for starting a company have dropped and access to seed capital has increased the risk profile for starting a web based company has changed dramatically. This has created an unprecedented amount of startup activity over the last few years. The challenge for BigCos and growing startups is that many of the most talented potential hires are becoming founders instead of employees.

We discussed a bit of the impact this surge has had via the metaphor of a pig passing through the python in the funding environment. The flipside of this bears out in the Google number as well. The abundance of startups means there will be scarcity of both talent and classic venture level returns. As Albert pointed out in his post from a few months back:

Because the cost of getting started is now so low, there are many more companies being started to do more or less the same thing. That significantly reduces the likelihood of any one company being the one that achieves these high value exits. If your top-end valuation is 10x what it might have been in the past but there are 10x more startups being created to go after the same opportunity, then these two more or less offset each other.

It’s not necessarily a new frontier we’re entering. The current environment is simply turning up the volume on what has been happening for some time. And it’s only going to get louder. So BigCos and scaling startups, with increasingly valuable equity, are enjoying a perfect storm for acqhires.