Startup Acquisitions: Acquihires and Talent Hoarding

TL;DR

This paper models how firms may engage in inefficient acquihires of startup talent driven by competitive pressures, leading to suboptimal talent allocation and negative effects on consumers and employees.

Contribution

It introduces a game-theoretic model showing that firms pursue acquihires as preemptive strategies, even when unprofitable, highlighting inefficiencies and negative externalities.

Findings

Acquihires can be driven by preemptive competition rather than profitability.

Such practices can lead to inefficient talent allocation.

Talent hoarding reduces consumer surplus and increases job volatility.

Abstract

We study how competitive forces may drive firms to inefficiently acquire startup talent. In our model, two rival firms have the capacity to acquire and integrate a startup operating in an orthogonal market. We show that firms may pursue such acquihires primarily as a preemptive strategy, even when they appear unprofitable in isolation. Thus, acquihires, even absent traditional competition-reducing effects, need not be benign, as they can lead to inefficient talent allocation. Additionally, our analysis underscores that such talent hoarding can diminish consumer surplus and exacerbate job volatility for acquihired employees.