Acqui-Hires and the Decline of Venture Capital
Not Your Father’s Acquihire
Traditional “acquihires” were modest affairs: A struggling startup at the end of its runway would sell itself to a Big Tech company for pocket change, primarily to give its founders a face-saving narrative as they slunk back to working as W2 employees. Today's “non-acquisition acquihires” (which I’ll refer to simply as “acquihires”) operate at an entirely different scale, targeting promising early-stage unicorns in what is largely a transparent attempt to avoid antitrust scrutiny.
Notwithstanding the differences in scale, the current crop of transactions do share one key feature with OG acquihires: The lion’s share of the value accrues to the employees of the target, not its shareholders. But whereas the earlier generation of acquihires almost exclusively involved startups which had already been marked to zero by their investors, the new crop of deals have involved some of the most potentially valuable companies in any VC’s portfolio.
This new trend in acquihires is relatively recent, but has been accelerating:
In March 2024, Microsoft announced an acquihire of Inflection AI, in a deal valued at $650M. Mustafa Suleyman, Inflection’s founder, is now head of AI at Microsoft.
In June 2024, Amazon announced its acquihire of Adept (approximate value = $450M).
August 2024: Google/Character.ai, $2.7B.
June 2025: Meta/Scale AI, $14B.
July 2025: Google/Windsurf, $2.4B.
Although the detailed terms of each transaction are not always publicly disclosed, it appears that every one of these deals involved payments to investors that made them whole, but represent only a 1X-4X return on their stake in the targets.
Truncating the Right Tail
This new style of transaction represents an existential threat to the VC model, as it essentially transforms every venture investment into callable equity, thereby destroying the skewness that makes VC profitable in the first place.
A basic tenet of VC is that portfolio companies follow a power-law distribution: In a portfolio of ten investments, nine of the holdings will probably go to zero, but if one of them is a 100-bagger, it pays for the rest. This extreme skewness means that the optimal strategy for a VC is to maximize shots on goal, without wasting too much time assessing the quality of each shot, and VCs have generated excellent returns for a long time by following this basic strategy. However, if a VC gives a third party a call on his most successful investments, the entire model breaks down. The new breed of acquihires potentially represents just such a call, turning potential 100-baggers into 2-baggers.
Countermeasures
Given this existential threat, one would expect VCs to aggressively oppose these new acquihires. And they certainly possess ample tools to do so.
Almost all acquihires feature one or more of the founders targeted for employment by the acquiror acting in the role of either an officer or a director of the company. In this role, the founder has a clear fiduciary duty to the shareholders, a duty that is almost certainly violated by the inherent structure of an acquihire. A VC that sued a founder in this context would find themselves in a target-rich environment, whether they argued duty of loyalty, corporate opportunity, or even a Revlon theory of liability.
Turning to prophylactic measures, VCs could demand protective covenants at the time they invest. Probably the most radical remedy would be a requirement that all consideration for an acquihire (including the signing bonuses paid to the founders) be pooled, and distributed the same way that M&A proceeds would be. But even vanilla governance provisions (e.g., that interested officers and directors must recuse themselves from the negotiation of a transaction) might be enough to ensure that founders can’t misappropriate most of the enterprise value to themselves.
I can vouch from first-hand experience that the typical VC is not shy about pushing for aggressive, one-sided terms, when they feel that it is in their interests to do so. And yet VCs seem to be meekly acquiescing in these transactions. Why might that be?
Changing Leverage
Over the past decade, VC has become a rather over-crowded trade. A slew of new entrants such as SoftBank, Tiger and a16z have displayed a willingness to write big checks, often with little due diligence. This has fostered a bit of an arms-race dynamic in the industry, where VCs can feel like “If I don’t do this deal, with no questions asked, one of my competitors will.” And as discussed above, the power-law distribution favors taking multiple shots on goal, so firms have tended to privilege deal flow over deal quality.
These supply-side pressures have been met with demand-side challenges, as well. While the total number of startups seeking funding has remained steady or perhaps increased, each of those startups is, on average, dramatically less capital-intensive now than it would have been twenty years ago:
IaaS players such as AWS have substantially reduced the CapEx budgets of most startups
SaaS vendors such as Stripe, Vanta, Zendesk and the like offer startups an attractive build/buy tradeoff for much of the generic “plumbing” that must be assembled for any new business
AI tools such as Claude Code or Codex allow startups to leverage a small team of developers to quickly roll out prototypes and MVPs
So essentially, the supply curve has shifted rightward at the same time that the demand curve is steadily shifting leftward. Ultimately, one would expect this dynamic to lead to a reduced cost of capital (that is, higher valuations), but valuations can be quite noisy and epoch-dependent: Entirely independent of the overall supply of capital, it is reasonable to expect qualitatively different valuation metrics for an innovative AI play than would be used for yet another tired SaaS company. In the long run, historical fund returns will provide the most robust confirmation of changes in the cost of capital – and preliminary results seem to be hinting at this – but this is obviously a lagging indicator.
For now, the most noticeable impact of this shifting power dynamic is that VCs are competing, not so much on price, but on being as founder-friendly as possible:
SAFEs and other lightweight financing vehicles kick the can down the road on a lot of tough negotiating points
Founders are “taking chips off the table” earlier in the lifecycle of a startup than was once the norm
VCs are committing to transactions faster, and with less diligence, than they used to
In this environment, it can be hard for a VC to push back against a potential acquihire: They’ve worked so hard to build a brand as “founder-friendly”, and suing one of their founders would undo all of that work in an instant. And besides, it’s only one transaction – better to take your 1X return, generate some goodwill, and live to fight another day. But if acquihires become more ubiquitous, these isolated gestures of goodwill could become a systematic threat to the VC franchise.
Implications for the Future
If the acquihire trend is, indeed, a harbinger of a broader decline in the leverage of VCs, the implications are beyond the scope of this article. If liquidity events continue to be structured to cap investors’ upside, perhaps the industry will evolve toward something more closely resembling debt financing. Or perhaps talent agents will become the new kingpins, as they are in other arenas (sports, entertainment) where labor is the key input, and capital is just a commodity. Or maybe the whole acquihire phenomenon is just a passing fad, fueled by the AI bubble.
It’s too early to tell which of these timelines we’re in. But the acquihire phenomenon is interesting precisely because, even if it is transient, it reveals some deeper cracks in the foundation of VC: As a general rule, when you see the Visigoths repeatedly eating the Romans’ lunch — without the Romans fighting back — it doesn't bode well for the Romans.
Jonathan Bain, Partner