Oh, look, Facebook acquired another company. Must be Friday.
It’s fashionable to bitch about valuations, but it’s acqui-hires that are quickly becoming the payday lending schemes of the startup world. I can understand why companies resort to them in a market with a shortage of tech talent, just like I could understand how someone takes out a loan at 20 percent interest when he has to pay a hospital bill, his paycheck is a week away, and he doesn’t have any other option. I could understand the urge to acquihire in the late 1990s, when Cisco was going apeshit with the strategy, and I get it now that Facebook does it seemingly every week.
And as I’ve written before, Facebook is better than most at sucking this talent in and repurposing it to work on necessary parts of the social network monolith. But there’s a reason you only see this volume of acqui-hires in the frothiest point of a cycle by companies so big they can afford to make mistakes.
Like payday lending, growing your team via acquihire doesn’t solve the underlying talent problem. Namely, that there’s not enough talent on the market, because everyone thinks he or she can be an entrepreneur. Not enough people moving to the Valley or coming out of school want to work at companies other people are starting, because it’s so easy to start their own.
And why should they? They get funded, and if their idea fails their investors help orchestrate a soft landing. If Facebook buys them they may get more stock than if they’d just been hired by the company in the first place, and — even better — they get a symbolic win in their entrepreneurial careers. “We were acquired by Facebook…” they get to put on their next investor PowerPoint. Yeah, them and about a thousand other startups we’ve already forgotten about.
And what’s worse: Those acqui-hired employees are likely not to stick around, now that they’ve had a soft landing and a win on paper. They’ll spin right back out and do it again.
Companies acquire teams because it’s easier than hiring five or twenty-five engineers on the open market. But in doing so, they only encourage more young hopefuls that there’s no risk in starting a company, and the cycle perpetuates. Big companies can’t continue to complain that everyone thinks they can start a company, when they reward those entrepreneurs by purchasing them as their companies are going down. That’s like trying to cure a hangover with more drinking. It may work right now, but in the long run they are just making it worse for the whole ecosystem.
In fact, the system doesn’t just self perpetuate. The flywheel gains more steam, the more acqui-hires there are. It not only sends a continual message to entrepreneurs that, no matter what, you come out on top when you start something — it sends the message to investors that there’s no risk in backing them. It doesn’t matter that investors rarely make anything from these deals, because frequently they don’t lose anything either, or they lose very little.
I heard a great metaphor for it this week from a VC: It’s like buying lottery tickets. You may know you have a tiny shot of getting the winning numbers, i.e. backing the next Facebook or even the next Instagram. But the promise is so great, you buy a few tickets anyway. Half of Nevada runs on those little three words that burrow into the wistful human brain: Maybe this time… The way most people seed invest isn’t much different. If there’s the possibility of failure, that’s OK, assuming it’s not your mortgage you’re gambling with. Irrationality is what makes the Valley function.
But imagine if you didn’t win the lottery, but you were allowed to go back to the store and get your dollar back. Or 75 cents of that dollar back. Or even 50 cents. You’d probably buy even more lottery tickets. Not only are you dreaming this might be the big winner; now there’s no risk to playing. You are playing with the house’s money. Put another way: It’s like betting on black, red hits and you get to keep your chips anyway. That’s what is happening in the Valley right now in the socio-loco-mobile space.
Let’s call these deals what they really are: They are companies whose products didn’t work. I don’t say that to be mean. Great ideas don’t work all the time. I wake up in a cold sweat most nights worried that the world doesn’t actually want hardcore journalism in blog-form. There’s luck, execution, market timing and competitive dynamics all playing into whether companies succeed or not. There are a million gut calls you have to make everyday, and you have to make them quickly. This isn’t easy. It isn’t supposed to be. The odds are supposed to be stacked against you, or you probably aren’t doing something very meaningful.
Allowing entrepreneurs — and their investors — to save face by saying they were “acquired” instead of failing is nice, but it’s a bit like the pre-schools where everyone wins a trophy for showing up. And the macro-cultural ramifications are just as bad. I fear that these acqui-hired entrepreneurs will become the Millennial equivalent of our ecosystem.
A rational economy would let these companies fail, and then everyone could fight to hire the talent. Start a bidding war. Hell, overpay for them. Give them credit for having had the guts to try and fail on their own. But why the ruse of buying the company? Especially in cases where not everyone is given a job at the acquirer.
People keep hoping the woeful performance of Facebook, Groupon, and Zynga will cram down valuations and the ability for anyone to raise cash, giving the ecosystem a much needed reality-check. But as long as there’s no risk of failure, it’s like that lottery ticket vendor offering refunds. There won’t be a correction, at least at the seed level.
Everyone loves to say that Silicon Valley’s great strength is an acceptance of failure. But the truth is we’ve become a place so incestuous, where the system is so rigged with the familiar players who control the bulk of the money that no one actually allows anyone to fail outright anymore. If they fail, they fail slowly and painfully. (I’m looking at you, Digg.) Or they pivot and raise more money over and over again. (I’m looking at you, Seesmic.) We’ve become a place that pulls off a bandaid by tweezing out one arm hair at a time, wailing about it and icing down our arm before tweezing out another. You know what they did back in the Robert Noyce days? They ripped off the damn bandaid.
It’s a cliche for a reason: Failure is good. It means that success (read: an acquisition) actually means something. It means that when an entrepreneur takes a check from an angel he is terrified that it might not work out. It means when people quit their jobs to go to work at a company they better believe in what that company is doing. It means that when an investor writes a check there’s no insurance policy — he has to really believe in this idea. It means there’s no security net.