The 'Startup Boom' is a disguised jobs fair for big corporations

http://www.zdnet.com/blog/foremski/silicon-valleys-dirty-little-secret-the-startup-boom-is-a-disguised-jobs-fair-for-big-corporations/2138

by hkarthik • 14 years ago

158 82 14 years ago

zdnet.com

coryl• 14 years ago

Just one $25 million payday from the sale of a startup will more than cover an Angel investor’s loss from a hundred dud $25K investments — which is a loss of just $2.5 million. The risk to reward ratios are off the charts, which is why so many want to be Angels.

Sure buddy. A $25m payday means you have an 8% stake in a startup worth more than $300m. And as we all know, $300m+ acquisitions happen every day, right?

But hey, who needs to understand business or technology when you're a writer.

ericd2• 14 years ago

Your sarcasm is misplaced. That scenario doesn't need to play out very frequently at all to make that math work out very well in your favor. Those specifics aren't quite right, but it demonstrates a valid point. If 1/500 are massive hits, you're still ahead.

His point doesn't quite fit with his theory that everything's a big talent acquisition conspiracy, though, since those are usually much, much smaller. Unless that was your point?

ookblah• 14 years ago

But I feel like it isn't 1/500. Maybe on the order of like 1/5000... Think about how many companies apply to just one program like YC at any given SEASON. And this is just one program. When you factor in the other ones like TS, AP, 500 Startups how many years did it take for the first Heroku to come out. And then these guys are considered the "best" at picking and cultivating startups. Think about all the crap other angels have to probably go through.

They might be ahead but I don't think it's that easy.

meterplech• 14 years ago

I am honestly not sure, because the author is using some serious fuzzy math, but I don't think that's what the article is saying. 100 dud 25k investments means a loss of $2.5 million. I think it is saying that if one company you invest in sells for $25million and you have a 10% stake you have covered your $2.5 million loss on 100 bad investments. That's clearly missing the point that a 25k investment is pretty much never going to grant you 10% of a startup these days... When you factor in dilution/etc... the risk/reward ratio gets a little less obvious.

dasil003• 14 years ago

> My advice to young engineers is don’t worry too much about your business idea and bootstrap your own venture with three pals.

The first rule of selling your startup is don't act like are looking to sell your startup. If your startup has no chance of making any money, why would a big company pay you anything more than market salary to work for them? If you want to get paid a lot for your startup you have to be seriously invested in it for the long-term, or at least look like you are.

This guy has a point or two, but I wouldn't be taking engineer career advice from him.

batista3• 14 years ago

If your startup has no chance of making any money, why would a big company pay you anything more than market salary to work for them?

Because, as TFA says, they don't buy your startup for its business potential, but for the proven engineering talent.

geofflewis• 14 years ago

This is one of the most ignorant, poorly written articles I've ever seen on Hacker News. it doesn't belong here.

corford2• 14 years ago

It may not be a conscious conspiracy by the big boys but the reality of the startup scene isn't too far from what he describes.

Edit: I'd also say that a certain section of startups are in on the game too - how many startups can you recall where their sole raison d'être and exit strategy was to be acquired by Google, Facebook or Apple? The dropboxes and facebooks of the startup world are much more rare.

lallysingh3• 14 years ago

Indeed. A lot of it comes from the lack of other exit-options. Large companies aren't cool anymore, so nobody wants their startup to become one --- that's just a means to the end of a big payout. Getting acquired is substantially less work than being a full-on success, and avoids a lot of the drudgework of the middle/large-stage parts of a company's lifecycle.

Back a dozen years ago (omg, has it really been that long now?), you'd IPO and use all that new money to hire people to take care of the actual business management for you. A founder could get back to hacking on new, fun stuff, or let his board bribe him to step down :-)

hkarthik• 14 years ago

I debated not submitting it, but I thought the idea warranted some discussion. Seems like every other day I read about a startup with a free service shutting down because they were bought by Facebook, Twitter, or Google.

rgrieselhuber• 14 years ago

Why is he being downvoted? This is seriously one of the dumbest articles I have ever read.

ahoyhere4• 14 years ago

He's being down voted because it's so easy to call something "ignorant" without backing it up. Just like it's easy to call something "one of the dumbest articles" without backing it up. No argument, no proof, no reasoning… down votes.

mayop100• 14 years ago

I agree.

sbisker• 14 years ago

I didn't read the article, but...the intelligent discussion around it meant that I didn't have to waste my time reading what sounds like a lousy article. Had I found this article on my own, I would have both had to suffer through the article and been deprived the intelligent teardown of it we get here. That alone makes me glad it was submitted. (Only half kidding here.)

patio11• 14 years ago

This would be a very penetratingly insightful criticism if you had never heard of Airbnb, Dropbox, Twilio, etc etc. Some people at the current classes of YC and 500 Startups may well find themselves working for AmaGooBookSoft in 4 years, and may that be a happy outcome for all concerned, but you've got to torture the math to come to the conclusion that hiring acquisitions are where most of the money is changing hands.

That said, it totally makes sense for AmaGooBookSoft to pay at least some engineers amounts of money which historically were not awarded to technical employees. This should be priced into everyone's expectations, startup-affiliated or no.

nelsondooley• 14 years ago

It's an interesting point he makes, but you're right, he has no numbers to back it up. Doesn't anyone keep data startups and acquisitions?

patrickk• 14 years ago

Crunchbase has a section on acquisitions. Never used it personally though.

http://www.crunchbase.com/acquisitions?page=1

jpdoctor• 14 years ago

> Doesn't anyone keep data startups and acquisitions?

Pretty much all of the M&A guys have a column in the table which lists $$/head.

The number is in the nosebleed sections of valuation lately, as near as I can tell. I doubt it will end well.

mechanical_fish• 14 years ago

Yeah, I was kind of enjoying this oddball view of the universe, however much handwaving it required, until we hit the last paragraph, where the author tried to address the phenomenon of startups that actually work out:

It’s from among those ugly ducklings that the swans of the new age emerge: FB, Goog, Twitter, Yahoo! and others — no one wanted them at first — then they couldn’t get enough of them.

There is only so much handwaving that one can get away with. "Ugly ducklings" that "no one wanted"? You just can't pretend that existing companies didn't, e.g., know that Facebook was worth serious money, pretty quickly. They offered Zuckerberg real money for Facebook. According to a book quoted by this extremely-irritatingly-formatted article at Business Insider, the buyout offers started four months after Facebook started:

http://www.businessinsider.com/all-the-companies-that-ever-t...

And Dropbox? Everyone and his brother has dreamed of buying Dropbox. The most famous rumored suitor is Apple:

http://www.macrumors.com/2011/10/18/dropbox-indeed-balked-at...

batista3• 14 years ago

This would be a very penetratingly insightful criticism if you had never heard of Airbnb, Dropbox, Twilio, etc etc.

i.e "if you had never heard of the 1% of exceptions to your rule...".

scarmig• 14 years ago

The real question, I think, is when investors are figuring out whether to go into the startup scene, what are the dominant influences on their decision?

If there's a long tail of Airbnbs that drives most of the expected profits generated by an investment strategy, then the status quo understanding of things--buy a bunch of lotto tickets, and make a bundle when one hits the jackpot--is probably an accurate representation of the market strategy.

If the median investor isn't going to make any money from getting a big hit, though, it's a different story. Most value is going to come from talent acquisitions. In which case, the article is right, and the incredible sea of funding available today is effectively a pooled set of resources by big corporations that are funneled to VCs in exchange for recruitment and building of effective teams. Which would make VCs the best-compensated HR managers in history.

There's also no reason both can't be true. Maybe the majority of profits are generated by Dropboxes, but the typical VC understands that those are lotto tickets and is relying mostly on the latter scenario.

twakefield2• 14 years ago

Agreed. He should have read PG's YC Numbers [1]. The overwhelming majority of value in YC's portfolio comes from the top 10% all of which have likely turned down numerous acquisition offers. YC would much rather an IPO or late stage acquisition vs. acqui-hire liquidity event.

[1] http://ycombinator.com/nums.html

mgkimsal2• 14 years ago

so... wouldn't it make sense for the other 90% to be acqhired vs taking up space in the bottom 90% of the yc stable?

timr2• 14 years ago

"you've got to torture the math to come to the conclusion that hiring acquisitions are where most of the money is changing hands."

Wait...what? You're cherry-picking the top 10% of startups (maybe the top 1%), and criticizing this guy for torturing math? For every one Dropbox, there are perhaps a handful of others that get aqui-hired, and dozens more that just fail silently. That's just basic VC economics. Maybe the bulk of the money gets transferred to the success stories, but that's little comfort to the hundreds of pretenders to the throne who don't go anywhere.

TeachStreet is a perfect example -- I met Schappell a startup breakfast in Seattle shortly after he launched the site. At that same breakfast were at least a dozen other startup founders. I've followed many of them since then, and nearly all have given up (in fact, one of those founders now works at TeachStreet). Schappell made it to acquisition by a company for which he used to be a director. There are usually reasons that these things happen.

byrneseyeview• 14 years ago

Dropbox's last valuation was about $4bn, so if a "handful" of startups have talent acquisitions, which tend to be in the $5 to $50m range, that would confirm his argument.

philwelch• 14 years ago

It's somewhat disingenuous anyway, since Amazon, Google, Facebook, and Microsoft were all started within living memory, and Facebook hasn't even really exited yet.

d4nt• 14 years ago

This strikes me as no worse that the traditional approach of hiring recruiters and HR people to processes thousands of CVs and sit through hours of interviews.

The engineers have a route to distinguish themselves, they get well rewarded in the process, the big companies get the talent they want and society runs lots of experiments in the marketplace as a result.

Only only downside I can see is that a particular valuable service may get shut down, but at least the model has been proven and someone else in search of an idea could emulate it (think etherpad).

wtvanhest3• 14 years ago

The term "talent acquisition" has been applied to a number of startup successes over the past few years.

I question whether that is in part due to anti competitive agreements between Intel, Google etc.

If they can't poach each other's engineers, they must go somewhere else for talent. What better place than the most ambitious, intelligent group?

mseebach• 14 years ago

Uhm, why wouldn't they want to approach "the most ambitious, intelligent group" even without anti-poaching agreements?

As anti-competitive and illegal as the anti-poaching agreements are, they contain an important insight: These companies need to grow the total pool of people working for them to keep growing the sector. At the macro-level, it is perfectly in Googles interest that Apple grows, and vice-verse.

wtvanhest3• 14 years ago

The anti-competitive agreements pose a restriction on HR departments and there for the markets which force companies to look at startups for talent.

In order to get such talent companies must offer large payouts to founders since the next source for talent is a highly fragmented group and there for hard to target.

brown9-22• 14 years ago

This theory seems to assume that the startup founders have no say in being "talent acquired" by the big corporation.

Being angry at Apple or Twitter for buying a company and shutting down their operations seems misplaced - why not be angry at the founders that agreed to do this?

tsunamifury• 14 years ago

Important note: If you are a founder who has taken venture capital, you may not have a real choice in the matter.

brown9-22• 14 years ago

I am curious though how often the other shareholders are able to force the founders into a sale against their will. Is this common / documented? Seems doubtful that a Big Co would go into a talent acquisition if the talent wasn't on board.

hoodq19• 14 years ago

For as long as there have been acquisitions (at any scale), there's been anecdotal evidence that innovation quickly dies in the acquired company. One thing to consider is that innovation is not dying because the larger company is killing the acquired product but rather that its dying because the talent is being integrated into the larger company's priorities.

drblast2• 14 years ago

I fail to see the problem with this. Why is it bad to work for a large company?

Do you know how ridiculously difficult it is to prove to an established business that "no, I don't have the specific experience you are looking for, but I can learn it in short order and I'll be one of your best employees," and then stand out from the 100 people behind you who say the exact same thing?

It's also ridiculously difficult for companies to figure out who the talented people actually are.

If you're really talented, what better way to prove it and lose nothing in the process? And what better way for a large company to get good people on board?

lrobb• 14 years ago

Selling a business for a payout is one thing... Starting a business just to get a job is kinda nuts. You say "lose nothing", but there's always a tradeoff..

rdl3• 14 years ago

Actually, it makes sense (especially if it is "start a business as a bootstrapped thing").

You get a nice cash bonus (even if you only net $50k, it's nice), AND you come in higher in position than a random hire, and you have a shot at a better company than you might otherwise.

It would be crazy to try to raise VC to start a business to get a job somewhere as an acquihire, but bootstrapped is entirely different.

AznHisoka• 14 years ago

Most people do a startup to get out of a large company.. not to get into a large company.

enjo• 14 years ago

In my experience most people involved in Startups are trying to make big money.

fasteddie31003• 14 years ago

Obviously not written by an entrepreneur. Some people can be satisfied by working for someone their whole lives, others can't.

drblast2• 14 years ago

It's not like anyone is forcing these people to sell the company. You have the option.

If you're a whole-hearted entrepreneur, then don't sell.

Otherwise, a startup is a great way to get some experience, prove your value, and get a great job afterward.

If the option to sell to a large company who wants talent didn't exist, the downside to startups would be significantly greater.

curtisholmes• 14 years ago

> A giant Internet company such as Amazon can leverage the output of a software engineer far more efficiently than a startup

Really? I doubt that. I would imagine software engineers could be much more efficient without the drag of a large company

DennisP• 14 years ago

I think he just means that code has more impact when you have ten million users than when you have ten thousand.

batista3• 14 years ago

A single, simple, frontpage change can mean millions of new revenue for Amazon, say.

It means squat in some obscure little startup.

_delirium• 14 years ago

On some things yes, on other things no. It depends mostly on whether the engineer is doing anything that benefits from significant infrastructure and an existing customer base. If you need (or could significantly benefit from) either of those, you might have more impact at Google or Amazon. For example, a data-mining idea might pan out better if you have: 1) google-sized server farms; and 2) a local mirror of the entire internet that you can run queries over.

arikrak• 14 years ago

Investors are often bothered by talent acquisitions since they get small returns when they're hoping for big winners. So that article's claim is probably false. However, I wondered why it was worthwhile for the big companies to acquire for talent, since they're paying a lot more than standard salaries for people who might leave after 2 years. The article claims they don't want the status quo disrupted, but that doesn't really make sense, unless the startup is creating a product that will directly compete with them.

wtvanhest3• 14 years ago

It is worthwhile for big companies to acquire talent because of the way investors in the public market value the stock of large companies. Investors don't care much about a few million spent on acquisition that happened 2 months before they get the earnings report. They care far more about future growth and how the company will achieve it.

kjhughes• 14 years ago

Foremski totally missed the real "dirty little secret" regarding acquisitions.

Acquisitions are really about control and ownership: Control of IP, control of customer relationships, control of planning, ownership of growth potential. It's placing a bet that ownership is strategically beneficial. Sometimes there's a defensive component.

"We bought them for their talent" is the cover story. It maintains the secrecy of the real value the acquirer believes it sees. It sounds better too.

And we tech folk eat it up. It plays into our egos.

But think about it. Technical talent is actually fairly fungible above a certain competency level. You know you or a handful of your friends could build most products you see. It's the decisions about what to build, how to build it, when it got built, and how the market responded that are all bundled up in a company's existence at a point in time. It's this bundle that's being bought. Not talent.

mgkimsal2• 14 years ago

I don't disagree on that IP, but some of that intellectual stuff is still in people's brains. I do think 'talent acquisition' does play to the egos in some cases, but there's also the 'keep the talent' away from competition. Just because people know how it's done doesn't mean you should make it easy for them. Over time almost all this tech stuff gets commoditized (virtualization, search, big data, etc) but in the early stages, having some talent on staff that developed 'big search tech X', and keeping them away from competition, gives you a short term advantage.

ahoyhere4• 14 years ago

Yes. And on top of that, another dirty little secret -- when a startup is the fly buzzing around the ear of the big, established company, and it keeps buzzing and buzzing, the big, established company finds it easier to swat than compete with its own buzzing little irritants.

And it's a lot easier to swat a fly after you bought it and locked it down with a vesting agreement. A fly that's running around free might require a chase.

Lots of acquisitions are to destroy or at least undermine a competitor, potential competitor, or other disruption.

Which is why the chest-thumping "change the world!!" "disrupt!!" "free yourself, you caged lion you!!" rhetoric around startups is so sad. The "logical" result is usually the destruction of the startup itself, and the yoking of the founders to an agreement which forces them to stay at a big company -- the company that destroyed or undermined their baby -- in a JOB (cage) for years to get their payoff.

Miserable.

Having met quite a lot of startup founders post-sale (on the conf circuit, in speakers' dinners and green rooms), I can say… I have never met one who was thrilled about the money, and mostly they have struck me as tired, sad, and defeated.

SudarshanP• 14 years ago

Here is a suggestion for those who build a statup for getting acquired as a team. Build a start up centered around an opensource project that is awesome but not necessarily profitable. A Big$ company could acquire the group. They get a bunch of top quality programmers. Your creation wont be sunset. The opensource project may develop a life of its own at least through forking. At least it is better than creating a project that will be terminated on acquisition or lack of business model.

pron6• 14 years ago

I think the truth might actually be worse. I don't think that `the startup boom is really a disguised job fair for big corporations`. The dirty little secret is that startup scene is an arena and entrepreneurs are the gladiators. Big lumps of money, that seem imaginary to them are dangled in front of their eyes, and they're introduced to former gladiators that have attained fame and glory and were able to buy their freedom, all for the purpose of encouraging the gladiators to fight to the death. Some die and some succeed and are compensated nicely. Very few attain fame and glory, but enough to keep the ranks of new recruits full.

But of course, it's the owners of the arena, the big corporations who make the real money. Not necessarily from the gladiators themselves, but from the fight. The startup scene is a testing ground, a lab, for Big Corp. It tells them which way the market is going, it tests risky territory. And if something seems to work, Big Corp. snatches it right up. If in the past big research divisions had to test new ground, all on the company's dime, now startups are voluntary crash-test dummies, shooting for a big prize.

And the economics are simple: if the king wants to find a big treasure buried somewhere in the woods he could pay a thousand villagers $1000 each to look for it, or he could offer $0.5M to the one who finds it and let the villagers volunteer for the job. He gets the same work done at half the cost, one villager turns rich and inspires the poor masses, getting a lot of love and attention, while the king still gets to keep the treasure while giving the villagers a fake hope of changing their fate. Simple, really.

So the dirty big secret is this: the startup scene isn't a job recruiter for the big companies, but a way to get workers for free. It's a far worse form of exploitation.

Sorry for all the metaphors.

lallysingh3• 14 years ago

Don't be sorry, it's honestly spot on. It's a wonderful exploitation model of how young men (18-30s) think and feel natively. Big risks, big rewards. Legends, folklore, respect. The model was perfect 2000 years ago and finds new manifestations all over the place.

Of course, I'm not sure it's a terrible thing. Nobody actually dies, at worst a few years of hard fighting are expended before a "real job" is acquired. The hard, risky fighting, while exhausting, isn't a bad thing for the young.

aridiculous• 14 years ago

I do think the gladiator metaphor is helpful, but I have to add in that software developers/technical people tend to hold a lot of cards in the modern economy. For example, you can work on a startup, take 2 weeks off on a freelance project, and pay your bills for the next 3 months. Not to mention the startup itself will sharpen your skillset raising your value to future employers.

I think if anyone is getting screwed, it's the inexperienced "business co-founders," who don't have a high hourly rate to fall back on and fall hard for the emotional myth. They still have the resume item of "Founder" that appeals to future employers looking for initiative, but their unfocused skill-set might hurt them.

However, it's interesting that it's self-imposed harm for inexperienced business types, because I imagine that no one is actively exploiting them. Why would they?

mkramlich• 14 years ago

I like your take and think it has a ring of truth to it. However, don't confuse your model with reality. Reality is full of nitty gritty details and variations. And some folks start businesses to get rich, and do, and some start them to gain more control over their lives, or greater fulfillment. It's not all a bunch of duped drones working for The Man, for free. And just because there are some suckers, and some people are not good enough, doesn't mean all are.

pron6• 14 years ago

I'm not saying they're all duped drones, but most of them are working for The Man. And, of course, they can't unionize (not that that's been too helpful) because they're competing with each other for The Man's favors. They may take control of their lives, they may achieve fulfillment, but they don't hold real power. And like I wrote in another comment, any sustainable exploitation must be advantageous for the exploitee as well. I'm not saying the system's bad. Just have your eyes open.

ahoyhere4• 14 years ago

And funding and startups become about the glory, the dream, and not the actual results (e.g. breathing good, solid life into a dream… and making good money).

You might enjoy my essay since we're obviously in agreement: http://unicornfree.com/2011/fuck-glory-startups-are-one-long...

fan• 14 years ago

I believe that your metaphor above is correct in getting at some features of the startup world, namely:

1) Many founders are attracted by glory rather than logic.

2) Large companies receive research information from startup successes and failures.

But I don't agree with the gladiator metaphor at all because it implies a degree of deviousness and collusion that isn't present in the startup sphere, and is disingenuous to imply.

Take your example of the king offering $0.5M for the finder of a treasure. Here you imply that his goal of offering the prize is to "give villagers a fake hope" and "inspire the poor".

What if the treasure in reality was just worth $0.6M to him? Then the king might conclude a) if someone had the treasure, he'd be happy to pay $0.5, but b) suppose the cost of finding the treasure via hire at $1M, then it is not worth hiring people to dig it up.

Thus, the king may not decide to hire people to dig this, while happily posting a prize. He doesn't need to have ulterior motives to do this.

Now let's take the economics further. Suppose some people are efficient and other people are not efficient diggers (they're good bakers), and there is no way to observe this beforehand. Then if he hires people to dig, the king will lose money because he's at half efficiency with half bakers and half diggers. If he posts a prize, the efficient diggers will self sort into digging, and the bakers will produce real good.

Our data points are few, and really just 1) and 2), so we can't know for sure companies are being evil (and I don't believe they are). It's a classic case of an underdetermined system.

neworbit• 14 years ago

To take a slightly more balanced view on it, acquiring the team and the early fruits of their research but not a market-dominating position was Cisco's growth strategy for a long long time - cherry-picking startups that had built an amazing new next-gen router or other critical appliance, or even just built the core of what would one day be one, and acquiring the team and what they'd built. Cisco then excelled at taking that from "great prototype" to "market ubiquity". You could do a lot worse.

And talent acquisitions alone aren't terrible either, at least for the founding team. They're never the home run investors hope for but they have been known to return a profit on "sunk costs" cash.

pg5• 14 years ago

This guy has not done the math. An investor makes so much more from big successes like Dropbox and Airbnb than from HR acquisitions that they'd be acting counter to their own interest to focus their attention on the latter. Far from making out in HR acquisitions, early stage investors generally get screwed in them. We often make zero from an HR acquisition, between the liquidation preferences of later stage investors and the fact that much of the supposed acquisition price is set aside as incentives for the founders to stay with the acquirer.

lallysingh3• 14 years ago

I have to ask, what are the "takes" on different exits? When do founders get the best return on their energy, vs the best return on the potential of their company? When do investors?

Edit: basic 3rd grade grammar.

pg5• 14 years ago

The expected value of turning down the current offer is almost always positive. It's very rare for founders to reject an acquisition offer and then later wish they'd taken it.

The difference between founders and investors is that founders care about more than just expected value. A founder with no assets other than his stock in the company will often prefer to sell now and lock in the current price rather than keep rolling the dice. So to the extent there is a difference between the motivations of founders and investors, it's exactly the opposite of the situation this writer describes.

chaostheory• 14 years ago

secret? http://paulgraham.com/hiring.html

I don't think it's dirty either, since it helps big companies innovate.

outside1234• 14 years ago

i think there is some truth to this but only to the extent that the talent acquisition is a way of blunting losses, not the goal.

sbronstein• 14 years ago

Another problem with this article is that only one of the three acquisitions he cites was actually your standard 'acqui-hire'.

Teachstreet was doing great until Google changed their algorithm last year. That apparently killed their traffic and so they started looking for a buyer since their main business was no longer viable. So yes, a talent acq, but not in the way that he suggests.

Lala's technology supposedly formed the basis for iTunes Match and iCloud. I personally think that there may have been a bidding war between Apple and Google (because IMO $85M was ridiculously high for LaLa) but that's just my own hypothesis. Regardless, not a talent acquisition.

Summify was a 'traditional' talent acq. of the type Twitter, FB, and Google have been doing of late. So he is one for three of the examples he chose to cite in his article.

jessicarichman• 14 years ago

Perhaps this should be viewed as a good development rather than as a problem. Talent acquisitions may be a much easier way of rewarding entrepreneurial spirit and innovation than traditional recruiting mechanisms. There is a continuum between recruiting and acquisition that has previously been seen as a binary. Why not fill in this continuum with new ways of hiring that reward creating new ventures instead of filling out job applications and sending resumes?

This is not a bug. It's a feature.

The 'Startup Boom' is a disguised jobs fair for big corporations

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