The Talent Acquisition “Put” Will Create More Startups and Better Startups

From the outside, a talent acquisition looks a little bit like a failure: a founding team got together, launched a product—and couldn’t get traction. The company was liquidated, and its most valuable asset turned out to be the founders’ resumes.

The Bubble and the Blowout Preventer

But an increase in talent acquisitions will directly lead to an increase in the amount of money angel investors can afford to invest. And by offering a more efficient market for top startup talent, this increase in available capital will be absorbed by qualified new founders. There may be a risk of a bubble, but untapped talent is a blowout preventer.

Talent acquisitions lead angels to invest more because illiquidity is one of the big reasons not to invest more. If the average startup takes ten years to show any return, then a prudent angel investor should, on average, invest 10% of his or her Angel Bankroll in any given year. There’s no sense in being fully invested by year five, for example, and passing on investments (or allocating more money to an illiquid asset class) for half a decade.

But that ten-year average can’t last long in the face of a few year-one and year-two acquisitions. The dollar amounts are low, of course, but that’s compared to low valuations. Talent acquisitions almost always happen before the bigger VC rounds, when the founders own lots of stock and the number of potentially disgruntled investors is minimal.

And if the turnaround time drops from 10 years to 8 years, the optimal amount to invest each year rises from 10% of bankroll to 12.5%—raising the total amount of money available for angel investments by 25%!

Are Talent Acquisitions Getting More Popular?

It’s hard to say. They’re less likely to be reported than big acquisitions. And it’s easier to say “It was a talent acquisition,” than “We got basically nothing, for a business worth less than zero.” But there are signs:

Facebook’s CTO got there through Friendfeed

Today, LinkedIn bought a company for their “Recommendation Technology, Team,” which is at least halfway there.

• There are even questions about whether Google paid $182 million for Slide in order to get Max Levchin and his team.

Facebook’s Hot Potato acquisition has also been branded a talent acquisition.

That’s enough for a trend story, but not enough to declare a trend. But there are good reasons for talent acquisitions to pick up. With more API- and platform-based companies, it’s easier to see another firm’s work up close. And the startup scene is simply better-networked than it was in the past. Meetups, retweets, LinkedIn recommendations—it’s hard not to hear about interesting new companies when their biggest asset is still their teams.

The Result?

Here’s the most optimistic scenario: more angel investing could lead directly and proportionately to more wealth creation. According to Paul Graham:

Good investors are rare, even in Silicon Valley. There probably aren’t more than a couple hundred serious angels in the whole Valley, and yet they’re probably the single most important ingredient in making the Valley what it is. Angels are the limiting reagent in startup formation.

If those good investors can do a little more investing, that’s positive.

Even better, this trend will push talented people to start more companies. Joshua Schachter doesn’t have to stick around at Google when he can do his own thing. Worst-case scenario, he’ll be back at Google (or Yahoo!, or Facebook, or Twitter) in a couple years, with a couple million dollars for his (and his investors’) trouble.

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| August 5th, 2010 | Posted in economics |