Talent Acquisition vs. Business Acquisition

Over the years I have been lucky to meet many smart people. I consider myself even luckier by the fact that many of them have become my friends.

If you are engineers, or worked at a startup or a similar environment before, you are probably aware that the 10:1 employee is not a myth. A 10:1 employee is that employee who performs like ten others. They code faster, make less mistakes, design smarter solutions, solve problems better, the customers love them, and they are as flexible and artistic as can be. To put it shortly, they are super-persona of sorts. For the mathematically inclined, if we assume an average person has an output of 10 units, and assume that 95% of the population perform at most 50 units (5:1), then the probability of a person being a 10:1 employee is less than 1 in 10,000. (I cheated a little on the math, don't kill me). When I say "smart", I mean 10:1 "smart".

The interesting thing about smart people, at least in the business world, is that the fact they are rare yields a high premium for their services. In other words, companies are willing to pay a lot to hire them or receive their services.

During the last year, roughly 5 to 10 of my smart friends have approached me all with a similar story, albeit in completely different industries - they started a small business, typically a technology services company, or a bootstrap technology startup. The business started growing and attracting attention, customers and even initial income. Roughly after a year, when the company typically has 2-5 employees, my friends were approached by one of their customers, partners, or just a big company.

Initial relationships with those companies typically turn into a joint project, or some form of a contract, but after some time, a VP typically appears and says: "What would you say about us acquiring your company?"

Typically, at this point, shy smiles appear on my friends' faces, their eyes sparkle, and you can almost see the $ signs change into staring ??? signs, I ensue to explain.

A (technology) business, in its essence, has four sources of value:

  1. Capital - If the company has lots of cash, its value is at least as the amount of the cash it has.
  2. Human Capital - The company's employees, especially in technology startups and services companies are what makes the company valuable. Without them, even the most advanced technology cannot function.
  3. Technology - Good candidates for acquisition should have good/unique/innovative/sophisticated products and technologies. They are not necessarily rocket science material, but they are better/more impressive than what internal engineers at the acquiring company can produce or have time to work on.
  4. Customers - This is the business part. Except for the cash, if a company has a lot of customers, preferably the paying type, the company's value increases by orders of magnitude.
Every day we read news about "small" acquisitions of startups for sums of anywhere from $5M to $30M and up. We almost never read about the more common type of acquisition - a talent acquisition.
Since large companies are large, they many times have problems finding and convincing talented people to join them. Recruitment is hard, and in addition, you never know what you get when some employee with unknown exact history arrives. Another issue is compensation - even if an employee is a 10:1 employee, typically firms will not want to pay them ten times above the average employee.
For this reason, startups serve as a screening ground of sorts. Larger companies get to experience interaction with the startup's founders, and sometimes the small number of employees. They get a good feeling of which ones are experts and which ones are not. When they are convinced of the quality of a team, the rational next step is to try to have them work for the larger company, and acquisition allows the company's management to justify paying a premium for the talent.
The issue arises when the acquired company is in an early enough stage that it has virtually no "business", but only "talent". The acquisition offers, in those cases, are typically much lower and are contingent on the acquired employees working for the acquiring company for a significant amount of time. In addition, the acquiring company many times completely ditches the technology, and reassigns employees to other projects. In that case, the acquisition is clearly a "talent" acquisition.

My entrepreneurial friends are many times dismayed by this process. They do not want to sign up for some job in a big company, while stopping to work on their baby product, and receiving a significant, yet non life changing sign-up bonus.

And this is where my story ends with a moral - if you are an entrepreneur (or even just any business owner), and you hope one day to cash on your investments in your company, make sure not to confuse between the appearance of a business, and a real business. Decide on day one what your goal is, and build your company towards that goal. If you are seeking a quick "talent" acquisition, try to emphasize the talent in your firm and create marvelous products. If you would like to build a business, try to make sure there are customers involved, and a significant number of them.

2 replies on “Talent Acquisition vs. Business Acquisition”

  1. On another perspective, when you've acquired talent from your human capital, then business acquisition follows. With a higher job satisfaction of the human capital, everything else follows. To maintain this, balance between work and leisure is highly desirable as well as fringe benefits that other companies do not offer. One of the great fringe benefits is the army novated leases on cars. This can be applied to top performing employees to encourage the others to follow suit.

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