Acquisitions are somewhat passé. Acqui-hiring is in. Global behemoths will scout for start-ups in niche domains that make for a strategic fit, with the chief intention of lapping up their talent.
“MNCs (multinational companies) looking to buy in India will tread the path of WalmartLabs, and not Walmart,” said an expert referring to the two “acqui-hirings” WalmartLabs, the technology arm of US retail giant Walmart, made last year. It acqui-hired Appsfly, a developer of micro apps and a machine learning start-up called Int.AI. This marked a radical shift from the $16 billion buyout of Flipkart by Walmart.
“There is a difference between ‘acquire’ and ‘acqui-hire’. Acqui-hiring is done when the buyer values the team and their talent more than the business they have built. This usually happens at a not-so-desirable valuation. Acquisitions, meanwhile, happen when the buyer values both the business and the team. This happens at a much better valuation,” says Aprameya Radhakrishna, CEO and co-founder of Vokal, a digital agency specialising in mobile apps.
Thus, global buyers will think wisely and invest smaller amounts in buying upcoming start-ups. Like WalmartLabs, Google acqui-hired Halli Labs in 2017, which was a newbie start-up focused on building deep learning and machine learning systems. In 2016, Apple had acqui-hired a data mining and analysis start-up called Tuplejump. All these start-ups were at a fledgeling stage when they were bought out by the MNCs.
According to Rabindra Shrestha, managing partner, Prestellar Ventures, a Singapore-based private equity firm, MNCs may acqui-hire very young technology start-ups that are often bootstrapped and at seed funded stages, as “such start-ups are in a sweet spot and are mature enough to prove that they can build capabilities, yet young enough with their obligations to keep the deal financially palatable to investors.”
In acqui-hiring, as opposed to acquisitions, the buyer buys the idea that the team can create an innovative and best-selling product, rather than buying the products currently stacked in the start-up’s portfolio, adds, Shrestha.
“People with relevant skills, their organisational design of work and cleanly laid out roles provide a fully functional team. Such a team would require less training and would be fit with technical capabilities. These employees, when integrated into the new parent, can hit the ground running for expansion and offer value for saving of time and effort,” explains Shrestha.
Start-ups in domains like internet of things (IoT), blockchain, 3D printing, predictive analysis, augmented reality (AR), artificial intelligence (AI), virtual reality (VR) and machine learning (ML) could be cherry-picked by MNCs for their niche expertise, feel experts.
Says Sanjeev Krishnan, private equity and deals leader, PwC India, “There are start-ups hubs in Bangalore, in Gurgaon where a lot of activity around big data, AI, ML is taking place. I won’t be surprised if acqui-hiring gains in momentum going ahead. Overseas companies will continue to show interest.”
Krishnan says acqui-hiring is good for the start-up ecosystem as it allows start-up teams to become a part of a bigger international setup.
Apart from getting a global backing, the start-up that is bought out gets financial benefits as acqui-hiring serves as a good alternative for liquidation. “Investors benefit from such exits. There are teams who develop new products/technologies and an acqui-hire enables them to cash out over a period of time and move on to their next big idea. This is particularly common among tech founders,” says Sushanto Mitra, CEO of Lead Angels, an angel network.
Apart from adding a pool of people with niche skills, acqui-hiring provides the acquirer with more big benefits. The buyer gets direct access to any special market intelligence or intellectual property (IP) that was created by the start-up, feels Mitra.
“Also in some cases, acqui-hiring is a great way to remove competition for the big firm that is buying out the start-up,” says Shrestha. Like Facebook acqui-hiring WhatsApp and Instagram, which not just added the niche offering to Facebook’s portfolio, but also instantly killed any competition whatsoever.
WHAT’S HOT
- Start-ups in domains like IoT, blockchain, predictive analysis, AR, AI, VR, ML and 3D printing could be cherry-picked
- Firms are mature enough to prove that they can build capabilities, yet young enough with their obligations to keep the deal financially palatable to investors are in a sweet spot