Predictable Exodus: Startup Acquisitions and Employee Departures
45 Pages Posted: 12 Oct 2018 Last revised: 4 Sep 2019
Date Written: September 1, 2019
This paper investigates the effectiveness of startup acquisitions as a hiring strategy. Unlike conventional hires who choose to join a new firm on their own volition, most acquired employees do not have a voice in the decision to be acquired, much less by whom to be acquired. Startup acquisitions therefore provide an empirical setting in which non-founding employees are quasi-randomly assigned to a new employer. I argue that the lack of worker choice lowers the average match quality between the acquired employees and the acquiring firm, leading to elevated rates of turnover. Using comprehensive employee-employer matched data from the US Census, I document that acquired workers are significantly more likely to leave compared to regular hires. This effect is more pronounced among high-earning individuals. Moreover, I demonstrate that these departures can be largely predicted ex-ante. Leveraging population data on career histories, I construct a measure of “startup affinity” for each target and acquiring firm based on pre-acquisition employment patterns, and show that this strongly predicts post-acquisition worker retention. Lastly, an analysis of serial acquirers suggests that firms learn over time how to effectively retain employees from startup acquisitions.
Keywords: Entrepreneurship, Mergers and Acquisitions, Human Capital, Startups
JEL Classification: L26, G34, J63, M50
Suggested Citation: Suggested Citation