Over the past two decades, the number of start-up acquisitions has steadily climbed. These acquisitions have become the main channel for businesses to exit successfully. This is not surprising, as acquisitions provide acquiring companies with new technological innovations**, fresh talent, and enhanced market power. One of the most valuable assets of many startups is their human capital, which is often the driving force behind their innovation and success.
However, after the acquisition, a pressing question remained: what will happen to these acquired employees? They have no obligation to stay; They have the freedom to embark on new journeys, explore different career paths, and even start their own businesses. Ironically, what if these acquisitions become a catalyst for employees to leave and start their own businesses, perhaps even future competitors?
The birth of the San Diego Biotech Cluster, for example, can be traced back to the acquisition of leading biotech startups in the region. In 1986, pharmaceutical giant Eli Lilly acquired Hybritech, intending to enter the diagnostic testing market with this new technology and talent. However, most of hybritech's senior executives left due to a culture clash shortly after the acquisition, hampering Eli Lilly's ambitions. With an in-depth understanding of hybritech's diagnostic technology, many of these former employees not only left, but also left. They embarked on a new entrepreneurial journey and started their own startup in the region. Names like Amylin, IDEC, and Nanogen may sound familiar; Once part of Hybritech, they have grown into direct competitors to Eli Lilly and Company, contributing to the rise of the San Diego biotech cluster.
The hybritech saga underscores an important lesson: while startup acquisitions are designed to leverage innovation, talent, and market influence, they can inadvertently spur employee turnover and exacerbate the competitive landscape. Importantly, the hybritech story is just one example of a broader trend. Against this interesting backdrop, I set out to address a fundamental question: How do startup acquisitions impact employees' careers?
In my most recent study, I analyzed data from the U.S. Census Bureau from 1990 to 2011, which included 1.6 million regular employees, 230,000 acquired employees, and 3,700 startup acquisitions. I've found that the turnover rate is significantly higher for new hires compared to regular employees.
So, what is causing this difference? It depends on how the individual enters their role. Regular employees carefully evaluate job options before accepting them, while acquired employees experience abrupt shifts without having the opportunity to assess suitability beforehand. This lack of options has led to challenging post-acquisition adjustments. Usually, individuals are attracted to startups because of their autonomy, but when an acquisition happens, everything changes. People may feel like they no longer fit into the company culture and organizational structure. This abrupt change often leads to an unadaptable and higher turnover rate for the acquired workforce.
Dialpad, for example, was acquired by Yahoo in 2005 for its cutting-edge internet calling technology and excellent workforce. However, the post-acquisition disagreement led to a shocking finding – more than 70% of former Dialpad employees left within three years. The core reason for their departure is that they started out working for a start-up and not for an established company. After being acquired by Yahoo, employees quickly became frustrated with the bureaucratic environment of large companies. While the Dialpad team excels at quickly executing novel ideas, learning quickly, and adapting accordingly, it was difficult for them to drive new ideas through all the meetings and sign-offs before they were implemented at Yahoo. It is worth noting that several former employees not only left, but also started another company, Grandcentral, which later caught the attention of Google, leading to another acquisition.
Now that we understand the conditions under which employees leave, I want to delve into who leaves, what they do afterward, and why acquirers should care about these departures. Using the same U.S. Census Bureau data, I found another important trend in my follow-up research: a large number of employees of acquired startups leaving and venturing into their own businesses, some of which became direct competitors, as was the case with GrandCentral. Several Grandcentral employees left after the acquisition to form Switch Communications (which later became DialPad again after repurchasing the rights to use the name), now a direct competitor to Google Voice.
This employee exodus is often triggered by the departure of a startup founder or someone at the top, setting off a ripple effect. In addition, allowing acquired startups to retain their original positions after the acquisition seems to mitigate this trend of departure.
The root cause of these deviations reflects differences in post-acquisition objectives and resource allocation. Acquiring companies may underestimate the contributions and innovative ideas of acquired employees, treating startups as a small piece of the puzzle of their broad business portfolio.
For example, when Google acquired Waze, the latter's former CEO, Noam Bardin, highlighted the difference in employee alignment. In a startup, consistency includes the product, company, and brand, while in an enterprise, it is centered around the company brand rather than a specific product (e.g., Google instead of Gmail). Zoom's story further illustrates this point: Eric Yuan, who was involved in WebEx, continues to serve as VP of Engineering after being acquired by Cisco. However, his vision for Webex was at odds with Cisco's direction, prompting him and 40 other Cisco engineers to leave and form Zoom, with Yuan Zheng as CEO. This move quickly transformed Zoom into a formidable competitor to Cisco WebEx.
Now that we've investigated the post-acquisition workforce, what should the acquiring company do to prevent turnover and inadvertently creating competitors? First of all, it's best to go with the flow. Don't ask them to change locations, and don't integrate them – let them remain independent. Second, it's crucial to try to persuade and motivate top management, such as founders or senior executives, to stay with the company. Their choices have a huge impact on former employees as well as on the company's culture and mission. If founders stay, their former employees are likely to follow suit, creating a domino effect of retention rather than departure.
Perhaps the most important conclusion is that acquiring startups and their employees is a fundamentally challenging strategy for companies. While many believe that post-acquisition talent retention can be easily managed with retention incentives (e.g., ** options that vest over time), the reality is that many employees who acquire from startups choose to leave early, despite knowing that doing so will leave money. Table. Unlike other company resources, such as patents and equipment, talent cannot be fully owned. To be successful, acquiring companies need to be prepared to tackle a new and complex set of management challenges.
Workplace