Big companies keep buying startups, then smothering them

The retention letters go out the week the deal closes. The options vest over three or four years. The people who made the startup worth buying start leaving anyway.

Twice as likely to leave

Daniel Kim, a management professor at the Wharton School, has been studying corporate startup acquisitions as a hiring strategy. Firms buy a young company to bring in talent, a product and a way of working, then treat the stock plan as the reason those people will stay. In a conversation with Knowledge at Wharton about his paper "Predictable Exodus: Startup Acquisitions and Employee Departures", he reports what US Census Bureau data showed.

Acquired workers are twice as likely to leave as regular hires with nearly identical profiles who join the same acquiring firm. The departure effect is stronger for the very best employees. Those are the people the buyer most wanted to keep. The vesting schedule, usually three to four years, was built to stop exactly this. People leave despite it.

They did not choose the buyer

A regular hire picks the employer. An acquired employee does not pick the buyer, and does not pick the life that comes with the sale. Kim's example is a person at an online fashion startup who is told the company is being bought by Walmart, and that they need to move to Arkansas to join the e-commerce team. Amazon had been in the discussion as another possible buyer. Staying would have been a different decision under that buyer.

Non-founding employees can guess that a startup doing well might be sold. They cannot guess to whom. Kim's account is that the missing choice lowers the average match between those workers and the firm that now employs them. Turnover follows. The parent then folds the team into its city, its process and its idea of a career. That is how a corporate startup acquisition smothers the thing it just paid for. The team that justified the price starts to thin out.

The mismatch you can measure

In Kim's conversations with corporate development executives, one belief keeps coming up untested. Once you buy the company, generous options will hold the people. His results argue against that belief. The diligence he wants comes earlier, and it is about the match. He builds a measure of how entrepreneurial each company is from the career patterns of the people who have worked there. The greater the distance between the target and the acquirer on that measure, the greater the departures. He calls the gap organisational mismatch.

A seat to refill is the small cost. Kim's next question is where those people go, because the strategic cost depends on the destination. Some may move to an unrelated industry. Others may join a competitor or start a rival. A vesting clause does not answer that.

What belongs in the diligence

If you sponsor acquisitions, or you inherit the team after the press release, put three questions next to the price.

1. Name the people this deal is for. Separate the ones a three-year vest is likely to hold from the ones the research says leave first, the strongest.
2. Score the organisational distance before you sign. If the two companies have been built from very different careers, price the exits into the model.
3. List what you will ask people to change in the first months. City, manager, process, product. Each item is a reason to leave that the option pool does not cancel.

The integration plan is where this damage gets written down, usually by people who will still have a job if the founders walk. Someone who wants the capability you paid for has to be able to stop a move, a reorganisation or a process rewrite that the match cannot survive. Do that before the all-hands, while the people are still in the building.