Startup acquisitions: Acquihires and talent hoarding

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.