Eric Friedman

Buy a machine or buy the parts (creating vs. acquiring)

Last week I read a great post by Bryce Roberts of OATV called A Perfect Storm for Acqihires.

In it, he details the current state of the union for big companies and small ones looking to build out portions of their expertise through acquiring entire companies, and adding/folding them into the larger entity and  concludes:

It’s not necessarily a new frontier we’re entering. The current environment is simply turning up the volume on what has been happening for some time. And it’s only going to get louder. So BigCos and scaling startups, with increasingly valuable equity, are enjoying a perfect storm for acqhires.

I commented on the post, and as Bryce invited me to write up my thoughts, I figured I would do so here.  This is paraphrased from that comment and explored further below.

I can buy the parts to build a car, or I can pay more and buy one that I know will perform.  This is a no brainer decision because of time, quality, safety, and ongoing maintenance.

In the world of web startups,  you can hire individuals and try to make the team hum, or you can buy an agile group that you know can perform.  The issue is the premium you will pay for a fully functioning web startup team, but it may be worth acquiring a fully operational team that you know is going to produce what you want.

I am sure someone could do a better calculation but this is just back of the napkin stuff;

Acquhire option

what are 8 people worth all at once  who can produce? lets call it $10MM

2 engineers
2 mobile client developers
2 designers
2 front end developers
2 BD folks (hey im biased and can’t leave us out :))

Assuming $100K each thats $1MM in headcount instantly.

Cost? $10MM upfront to buy the startup and product.  Great small exit for the team.

Result:
Time ~ instant (or 90 days)
Hope they work at your co. for 5 years
You are paying $200K per person for an instahire situation.  (more if you count options, raises, more payments and “other” but trying to simplify)

Hiring Option

Hire 2 people per month ~ $100K/month/per person across 12 months is 24 people at a $2.4MM burn rate.  This obviously does not include ANYTHING else you need to be spending money on like office, computers, insurance, food, other so lets double it and call it $5MM

You get a stellar group that takes approx. 1 month per person to get up to speed (I think this is generous) so you are not running at full speed for 1.5-2 months per person.

Result:
Time ~ 10 months (but really longer in my opinion)
Have equal to or less than team in 5 months - hope they all can work well together - and get them up to speed on your product.

conclusion?:
Time is now an important ingredient to a startup trying to crank something and suddenly $200K per head for an “insta-team” situation makes a lot of sense.

I believe that you can buy a fully functioning machine, and pay a premium - or you can buy all the parts and assemble a machine yourself.  In the example of buying a car, buying the parts is most certainly not an option, and you are better off buying the finished product from a safe and stable Company.

A million things could go wrong with each scenario above - and I am sure I am leaving parts out, but I wanted to get my thoughts down after the request.

Original Article