May 17, 2011
By MIGUEL HELFT
SAN FRANCISCO — Sam Lessin sold his Web start-up to Facebook for millions last year, and Facebook promptly shut it down. All Facebook wanted was Mr. Lessin.
That is what it has come to in bubbly Silicon Valley. Companies like Facebook, Google and Zynga are so hungry for the best talent that they are buying start-ups to get their founders and engineers — and then jettisoning their products.
Some technology blogs call it being “acqhired.” The companies doing the buying say it is a talent acquisition, and it typically comes with a price per head.
“Engineers are worth half a million to one million,” said Vaughan Smith, Facebook’s director of corporate development, who has helped negotiate many of the 20 or so talent acquisitions made by Facebook in the last four years. The money — in the form of stock — is often distributed among the start-up’s founders, employees and investors. The acquired employees also get a rich salary and often more stock options, which makes this a good time for entrepreneurial engineers.
Mr. Lessin, who is 27, happily traded his dream of becoming the next Internet superstar for a prominent job with Facebook. “The impact here is astronomical,” said Mr. Lessin, whose start-up was called Drop.io. “It’s awesome.”
But the deals may not be so good for everyone. Some Silicon Valley veterans fear that companies are overpaying for talent and that some of the acquired employees will defect as soon as they can, perhaps because they will get restless in a corporate environment. And venture capitalists, who hope for windfalls in the tens or hundreds of millions if not more, will only grudgingly settle for less.
“It is not what we are aiming for as investors,” said Dave McClure, founder of 500 Startups, a venture fund. “We are trying to build large, lasting businesses.”
Still, Mr. McClure and other investors said a talent acquisition that offers a modest payoff is better than no deal at all if a start-up sputters. And while a sale for a few million will not make or break their funds, it could amount to a tidy sum for an engineer just out of college, they said.
“Who are we to tell a young entrepreneur that they can’t have their first million?” said Paul Graham, a partner at Y Combinator, a well-known incubator that has invested in hundreds of start-ups.
The talent acquisitions are a reflection of the most competitive market for computer whiz kids in more than a decade. Big companies like Google and tiny start-ups complain that they cannot find enough good people. They are dangling new perks and incentives, from free iPads to lessons in entrepreneurship, to lure them.
“The war for talent has gotten even hotter,” said Scott Dettmer, a lawyer who has advised technology companies for decades. “And this is another vehicle to satisfy the insatiable quest for talent.”
Perhaps no one has jumped on the trend more enthusiastically than Facebook, which has bought a string of small start-ups with names like Parakey, Hot Potato, and Octazen. Almost all their products have been killed.
In 2009, Facebook bought FriendFeed, a service to help people track the online activities of their friends. Tech insiders thought it was trying to compete more effectively with Twitter. But Facebook was really after FriendFeed’s dozen well-regarded product managers and engineers, including two of its founders, Bret Taylor and Paul Buchheit, who had also worked at Google.
“We really wanted to get Bret,” Mark Zuckerberg, Facebook’s chief executive, said in an interview last year.
While the FriendFeed service remains available, it has received no upgrades or new features. Of the 12 employees who joined Facebook, eight remain, and Mr. Taylor is its chief technology officer. Mr. Buchheit, best known for creating Gmail, has left.
Neither the acquired nor the acquirers like to talk numbers. But the acquisitions are generally in stock, and employees typically must wait a year or more before they can sell their shares. Facebook says the deals are worth it because the company needs creative entrepreneurs who can also help keep Facebook’s start-up culture alive.
“The measure of how well these work for us is that the C.E.O. of every acquisition we’ve ever done is still employed at the company,” Mr. Smith said.
But the size of some deals is raising eyebrows.
It was widely reported that FriendFeed was bought for about $47 million, or about $4 million for each employee, though some money went to its outside investors. When Facebook bought Drop.io for an undisclosed sum, only Mr. Lessin, a friend of Mr. Zuckerberg’s since college, joined Facebook. He is now in charge of the user profile pages.
Facebook paid a few million dollars for Drop.io, according to people briefed on the deal who would speak only on the condition of anonymity because the terms of the deal were confidential. Facebook declined to comment on the prices it paid.
“Some per capita values seem hard to justify,” said Randy Komisar, a longtime venture investor. “But there is not a lot of proven talent in areas like social networking that are battlefields for today’s companies. People will look back and realize that they overpaid in some cases. But in the heat of the moment, they may not feel they have a lot of options.”
In the interview last year, Mr. Zuckerberg suggested that paying top dollar for people like Mr. Taylor and his colleagues at FriendFeed was justified: “Someone who is exceptional in their role is not just a little better than someone who is pretty good,” he said. “They are 100 times better.”
Other companies are more circumspect about their strategies.
Google declined to be interviewed on the topic. In a statement, it played down its involvement, saying that even if a service from an acquired company was shut down, its ideas often surfaced later in Google products.
Zynga said it bought 12 companies in the last year, and an unspecified number of those were for talent. One was Area/Code, a gaming studio in New York with 20 employees. While it kept one of Area/Code’s mobile games, Drop7, Zynga said it bought the company largely for the design expertise of its employees.
At a recent networking event for start-ups in Silicon Valley, many entrepreneurs talked about possible deals. Alexander Moore, who is 27, said he had never heard about talent acquisitions when he started Baydin, which helps people organize their e-mail inboxes, in Boston in 2009.
He has since relocated his three-person start-up to Silicon Valley. “Here it’s happening all the time,” he said, “and it’s something we’d definitely consider.”
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