For a high-growth company, acquisitions fundamentally boil down to one of three types: (1) team buy, (2) product buy, or (3) strategic buy. There is actually a fourth type of acquisition companies can make, often called a “synergistic” acquisition. Most high-growth technology companies do not do “synergistic” buys—that is, those made for market share and cost-cutting reasons—like more mature companies do, so I will not discuss that type of acquisition here.
Type of acquisition: Team buy, aka “acqui-hire”
Valuation range: Anything from small signing bonus for the founders to $1M to $3M per engineering/product/design employee acquired.
Reason for purchase: Increase pace of hiring. Hire key talent the company would not be able to otherwise acquire. In most cases, the product the purchased company was working on is discarded and the acquired team reassigned to a new area.
Examples: Drop.io acquisition by Facebook was largely to acquire Sam Lessin.
Type of acquisition: Product buy
Valuation range: $5M to $500M. Most are in the range of several million to $100M in size.
Reason for purchase: Fill a product hole or reposition an entire team to work on an area that is already in a company’s road map. Sometimes the original product survives as a stand-alone product, sometimes it is integrated with other products, and sometimes it is discarded in favor of a new, similar product to be launched by the acquiring company.
Examples: ZipDash, acquired by Google and repositioned to form seed of Google Mobile Maps. Android purchase by Google. Acquisition of Summize by Twitter to create Twitter search.
Type of acquisition: Strategic buy
Valuation range: Up to $20B
Reason for purchase: Purchase of a non-reproducible asset that has strategic value. For example, while Facebook could have launched a photo app, it could not reproduce the active and dynamic community using the Instagram social network.
Examples: Instagram and WhatsApp purchases by Facebook. DoubleClick, Motorola, and YouTube acquisitions by Google.
How you approach the negotiation and execution of each of these three types of purchases will differ wildly. The large, strategic buys tend to be heavily negotiated and often involve the CEO of the acquirer. They may be more about connecting with the founder of the target company and painting a big picture of why they would want to join forces with one another. These can be very emotion-driven sales. On the other end of the spectrum, small team buys may be desperation moves by founders shopping for a “soft landing” for their startups as they run out of money or realize they lack product/ market fit.