Exit strategy for sputtering startups: Get acqui-hired

Prahar Shah, the founder of Mobee, bought another startup because he wanted its talent.Suzanne Kreiter/Globe Staff/Globe Staff

In most industries, if you start a company that doesn’t fly, you lay people off, file for bankruptcy, auction the desks and equipment, and look for another job.

But in the tech sector, you get acqui-hired. People who understand how to build mobile apps, online services, and Web-based software are in such short supply that even if a startup fizzles, it still has a chance of getting scooped up for its talent. West Coast companies like Twitter, Zynga, and Dropbox have done acqui-hire deals locally. HubSpot, a Cambridge-based digital marketing firm, has made at least five acqui-hires. And few people think the phenomenon will die out in 2014.

“I expect a surge, frankly,” says Waltham venture capitalist Jo Tango. Lots of companies, he says, have raised small amounts of seed funding — $500,000 or $1 million — but won’t be able to raise additional capital.

Getting a startup of any kind off the ground is hard. “It was just exhausting,” says Pat Kinsel, founder of a mobile startup called Spindle. Spindle’s app helped highlight nearby sales, concerts, and event. Kinsel says, “When people ask me what it’s like having a six-week-old baby at home, I tell them, ‘It’s 10 times easier than having a startup.’ ”

Dan Wolchonok started a company while earning an MBA at Yale. PrepWork provided a background briefing on the people with whom you were going to meet over the course of the day. “It’s just kind of soul-crushing when you’re doing everything yourself — software development, marketing, design,” he says. “I was just really burnt out.”

Prahar Shah said he acquired Kickscout because its founder, Michael Sheeley, “has the brightest product mind of anyone I’ve ever met.”Suzanne Kreiter/Globe Staff

Wolchonok’s company — which consisted only of him — was picked up by HubSpot last March. Twitter bought Kinsel’s company last June, without divulging the price. Seven of Spindle’s software developers moved to San Francisco to work at Twitter headquarters, and two employees, including Kinsel, opted not to take jobs at Twitter.

What’s the difference between an acqui-hire and an acquisition? With a traditional acquisition, the purchaser is getting some combination of a product, revenues, and a customer base. With most acqui-hires, the employees are the main focus.

The price tag can range anywhere from a nominal amount to $50 million or more, says Jeff Fagnan of Atlas Venture, a Cambridge investment firm. Typically, though, entrepreneurs get a bit of money and a contract that requires them to stay for a year or two at the acquiring company.

The investors get at least a portion of their money back, Fagnan says, and sometimes a small return. On their LinkedIn profiles, the founders can boast that they’ve had a startup acquired, even if no one was high-fiving after the documents were signed.

“It allows people to declare victory,” Fagnan says.

Just last month, a Boston mobile startup called Kickscout was acquired by another local startup, Mobee. Kickscout created an app to assist shoppers in finding items they loved, online and at retail stores. But founder Michael Sheeley says it proved hard to attract enough users to make the app a viable business.

Mobee’s founder, Prahar Shah, wanted to bring Sheeley on board because Sheeley had helped attract millions of users to an earlier company, RunKeeper. “He has the brightest product mind of anyone I’ve ever met,” Shah says. “When the opportunity came to join forces and acquire the technology he had built, we had to make it happen.” Sheeley joined Mobee as its chief product officer, and the Kickscout app vanished from the virtual shelves of the App Store.

HubSpot chief executive Brian Halligan says he doesn’t see the acqui-hire trend slowing down. Young entrepreneurs and engineers are launching startups, and growing tech companies like HubSpot would like to hire them, but can’t. “It’s a massive supply and demand imbalance,” Halligan says.

But when those small startups can’t raise more money — or get tired of struggling to hit it big with limited resources — they’re open to considering an acqui-hire. “There’s usually a little stock involved, and sometimes a signing bonus or a payout at the end of 12 months,” Halligan says.

The glass-half-full view of acqui-hires is that they can provide good experience for entrepreneurs and engineers. The infusion of talent can help the acquiring company enter new markets or develop new kinds of products. And sometimes, a local acqui-hire results in the acquiring company setting up an outpost in Boston.

But in other circumstances — and this is the glass-half-empty take — an acqui-hire equals a loss of local talent. West Coast companies are often willing to pay a higher price in these kinds of deals, says Antonio Rodriguez of Matrix Partners. That’s “great for the entrepreneurs, but a challenge for our ecosystem locally,” as teams get shipped to California, he says.

Matrix was an investor in a Boston startup called Sold, which made a mobile app to simplify the process of selling old electronics and high-end goods. It was acqui-hired by Dropbox last November, and most of the team relocated to San Francisco.

Acqui-hires can feel like one more dynamic that tilts the table in favor of California. But Fagnan predicts the trend won’t last forever. “Acqui-hires probably aren’t a very cost-effective way for the acquirer to recruit people, if you actually ran the math,” he says.

But for now, Fagnan says, he’s still encountering a fair number of entrepreneurs who have an offer of an acqui-hire in their pocket — and not many other options.