Are You an Acqui-Hire?

There has been some criticism of Yahoo’s acqui-hire strategy. There are those who believe that it clearly sends the wrong message to existing staff. Rather than work for a meager salary, one should simply quit to become part of the acqui-hire bandwagon. Yes, that is clearly the advice that staff should follow for the right reasons.

Contingent workers are becoming the norm in the US. It is estimated that 50% of the workforce will be contingent workers by 2020. The trend is that there will be fewer full time employees and most workers will be self-employed and have multiple clients to make a full week. Workers have nothing to lose by going out on their own and potentially a lot to gain. Will everyone win the lottery by selling their company? Of course not, but we should look at business ownership for what it is.

When a startup is acqui-hired, there are assets other than the people that are transferred. These assets could be servers, and patents among other things. The buyer is getting a complete company as part of the deal. The technology may be integrated into the buyer’s offerings or it may simply be shut down. In the latter case it is clear that the acqui-hire was purely for the talent and not the technology; however, the assets still have value and can remain on the buyer’s balance sheet continuing to add value.

A commodity small business such as book keeping or project management is less likely to have patents, lots of source code, and tons of servers. That does not diminish the value of what they have to offer. The value of the owner’s investment is different, but not less. Most small businesses will not have an early exit strategy. Instead they become lifestyle businesses that will maintain the founder for many years.

When starting a small business, the founder must consider what the exit strategy (if any) will be. A business is a form of investment in terms of time and capital. Since a business is an investment we should consider the various types of investments in one’s time to illustrate the various value propositions.

  • Employee – employees can be seen as investment-grade bonds. Investment-grade such as high rated corporate or certain government bonds are considered a safe investment for the long-term. They tend to pay very little interest, but it is unlikely that the investor will lose their capital. Working at a traditional day job is a low risk opportunity because the employee has little to no capital invested in the business.
  • Commodity Business Owner – this class of worker represents the next and most common step in entrepreneurship. They can be seen as high yield bonds. High yield bonds do pay more, but they have a higher probability of losing money. This represents the higher professional rate that a commodity business owner can charge. The downside is there is volatility risk such as lack of steady work that the Employee (investment grade bond) does not face. There is also the possibility that the investment in the high yield bonds could be worth less than the initial investment. This would occur where the business fails and is worth cents on the dollar in liquidation when the owner shuts down.
  • Acqui-Hire Business Owner – the acqui-hire business owner invests time and energy with the expectation that the sale of valuation will increase in the future. The acqui-hire is like an equity investment. The value is based on the appreciation of the asset and the expectation that someone will pay more in the future than the previous investor.

Most entrepreneurs will set out to be the commodity business owner. While it does not have the safety and routine of being an employee, it does have the potential to be a medium to long term investment in one’s time and energy. In the world of bonds this is referred to as the hunt for yield. All things being equal, an investor will sell a bond and replace it in a portfolio with a bond that pays a higher yield. A commodity business owner will replace lower paying customers with higher-paying customers. It does lack the excitement of being an acqui-hire, which is the equivalent of seeing a stock portfolio double, triple, or more. On the other hand it can be the best of both worlds in terms of having an easy to manage investment strategy.

How The Rich Create Jobs

After hearing a caller on Sean Hannity’s show profess that the rich never create jobs, I began to think about how this applies to the younger generation.  Being born into Generation X gives one an interesting vantage point.  We were born after the Baby Boomers and entered the work force knowing that layoffs are normal. The working relationship is no longer about loyalty, but to the benefit of the worker or the employer.  According to a friend who works in HR the mentality has gone from working for one or two companies for life to the average Generation X worker staying at one job for 5 years and upwardly mobile workers only staying for 2 years or less.  This frustrates Baby Boomer executives who expect people to stay under their hire for 10-15 years. If Generation X frustrates the Baby Boomers, what does Generation Y do?

One of the biggest problems that HR executives have encountered with Generation Y is that they don’t want a job.  At first one may think that they are bigger slackers than GenX who defined modern slacking.  Actually this is not the case.  The biggest problem facing HR executives is that GenY has entered the professional workforce as freelancers while still in college.  A large number of these young ambitious people already have Limited Liability Companies or Corporations they’ve started while in college.  One complaint that HR executives hear is that taking a full time job means only 2 weeks of vacation and you have to show up for work every day even if there is no real work to do.  GenY wants to be able to take 6 weeks off at a time if there is no work to do.

For those who have not experienced the bureaucracy of an extremely large company it is possible for there to be no work for anyone to do.  If you’re a software engineer you can’t start work on a project until sales has settled on a price with the customer.  That can take 2-4 weeks.  Then the lawyers take another 2-4 weeks to agree on the contract.  Then purchasing has to buy the equipment for the project, that has its own sales and lawyer cycle.  During that time there is nothing to do for the workforce because you don’t have a customer to bill the work to, or you don’t have the equipment to actually do the work.

The end result is that getting a job for GenY means not taking a salaried position with a company full time, but working for themselves.  If they don’t “get a job” then how do the rich fit into this?  That’s the next stop in our education about how the world works today. 

Angel Investors are individual rich people who invest their own money into other people’s businesses.  Venture Capitalists on the other hand are companies who manage a pool of money and invest into companies.  Usually that pool of money is from a group of individual angel investors.  These are the rich people that create the jobs for GenY.  Angel investors can contribute a small amount in the four digits all the way up in to the tens of millions of dollars.  If you ask a friend or relative to buy a portion of your lawn service or convenience store, they are an angel investor.  Many people in GenX and GenY whom I have worked with on launching their business ask the question early on, “Who can we find to give us money and how much can we sell our idea for?” 

For example, lets look at advertising firm trueAnthem.  I picked them because they were the most recently listed in CrunchBase, a database of start up companies that tracks investment and other facts.  They received $2 million in angel funding on 7/28/08.  They have 10 employees.  If they pay each employee $50,000 per year, they can afford to pay salaries for 2 years and still have $1 million left over for office rent and other expenses, assuming they make no money.  They managed to survive long enough to receive another $2.88 million in Series A financing at the end of 2010.

What happened here is a rich person gave someone a job by providing $2 million in start up capital, who then hired a several employees.  In the world of GenY, to say that a rich person never gave you a job is inaccurate. The average person may believe that because a wealthy person did not hire them directly they did not get a job from a rich person.  Once you follow the money trail it usually leads back to someone with extra money to spare.   In a future article I will cover why taking money from a rich person for a job is better than going to the SBA or your local bank to get a loan.