Are Tech Giants Killing Innovation With The 'Acqui-Hire'?

06/10/2011 02:26 pm ET | Updated Aug 10, 2011

It's hard to talk about a tech bubble these days (and it's hard not to talk about a tech bubble these days) without spending some time ranting or raving about the latest trend in talent acquisition: the so-called "acqui-hire," which occurs when a tech company is perceived to be buying a young business not for its products or its customers, but for its talent. The products, if there are any, are often scrapped just as the golden handcuffs are slapped on the startup's founders and key personnel.

Google, Zynga and Facebook have made headlines for their recent "acqui-hires," sucking up engineering talent like Mega-Maid in Spaceballs. When six-figure salaries straight out of undergrad, state-of-the-art equipment and free haircuts aren't enough to attract top talent, just go buy a company with some smart people and add them to your payroll, the thinking goes.

But when you break it down, the per-head cost of these types of acquisitions is typically $1 million or more. And that doesn't take into account the many hours of market analysis and due diligence performed by the acquiring company's corporate development team, along with the commensurate legal and transactional costs that go into even a small deal.

Established companies acquire other businesses to grow their revenue, lower costs, enter new markets, or add on strategically important features, products or services. Growth companies are no different. Rarely, if ever, does a company set out to purchase another just to acquire a person or a group of people, like a head-hunter or a recruiter would do.

I spoke to a friend who works in corporate development for one of the most acquisitive companies in Silicon Valley. He said that his employer does not set out to acquire specific people. Rather, they work with their own product teams to identify strategic market or technology areas of interest or of importance. They then look to see what companies are innovating on the cutting edge of those spaces. Sometimes the target companies are so young that they don't even have a commercial product yet, but they are making a name for themselves at trade events and on the fund-raising circuit. If they do have a product in the market, it's rare that the acquirer can integrate it with its platform in a cost-effective way or at the scale required by the acquiring company. So it gets chucked. But the ideas that drove the product remain.

The ideas -- not just the people -- are getting acquired. While ideas are hard to separate from the people who create them, it's easier to reconcile the aforementioned math when you're talking about the value of ideas. Instead of "acqui-hires," they're really "innovation-quisitions."

And despite being a recently-coined term, this is not a new trend or a sign that the tech apocalypse is upon us. For decades, businesses have bought up teams as a way to add capabilities and accelerate entry into strategic and growing markets, according to Brad Wertz, President of interactive agency Rosetta. He should know. Mr. Wertz has been acquired not once, not twice, but four times in the last five years. He ran Xteric Technology Group, a Cleveland-based IT services company that was acquired by interactive agency Brulant in 2006. Brulant was purchased by Rosetta two years later. And Rosetta was purchased just last month by global creative powerhouse, Publicis Groupe. According to Mr. Wertz, acquisitions of teams are typical to accelerate entry into new markets where the target company contains people with talent and experience in the desired sector.

Young tech companies are a growth engine of our economy. Groupon alone is hiring 125-150 people a month in only its third year in existence. Can it be good for our country's innovation when these young companies are swallowed by bigger, more established market leaders before they can even launch their new technologies? Are today's innovators selling out too quickly to their deep-pocketed tech overlords who can't seem to hire (or retain) people the old- fashioned way? I don't think so. And neither does Mr. Wertz. "If anything," he says, "it spawns more innovation by motivating people to create new ideas with the promise of a nice pay-day."

In the larger, but still nimble environment of an acquiring company, newly acquired innovators can have access to far greater resources and a larger customer base through which to accelerate their innovations. However, if the environment at an acquiring company doesn't encourage innovative thinking and entrepreneurial action, the acquired talent is sure to chafe and quickly churn out.