The Nuts and Bolts of Facebook’s Acquisition Strategy

Mark Zuckerberg has famously said that Facebook acquires people, not products.

Since making its first acquisition in 2007 with Parakey, the company has picked up small teams that may not have seen broad traction but clearly have gifted technical talent. Some of these entrepreneurs have gone on to serve as the new chief technology officer, launch the original iPhone app, Questions and Groups, run Photos and Places and lead platform.

The acquisitions replenish the entrepreneurial lifeblood of the company, which is becoming larger by the month and risks losing its young-and-hungry startup feel.

“The CEOs of companies we’ve acquired have had a significant impact on Facebook,” said Vaughan Smith, who is director of corporate development and leads partnerships and acquisitions. “They take ownership of engineering priorities and bring drive and organizational abilities.”

Facebook has acquired 10 startups this year, including a deal that hasn’t closed. That means that beyond Octazen, Divvyshot, Sharegrove, NextStop, Hot Potato,, Walletin, and a partial acquisition of Zenbe, there are at least two more acquisitions Facebook hasn’t announced. Chai Labs was reported, but not confirmed.

Smith says he expects Facebook to do “double-ish” the volume of transactions it did this year in 2011. He added that the company is open to acquiring larger teams now, perhaps as big as 20 to 30 people, now that Facebook has grown to more than 1,700 employees. Although the company is focused on talent, it has an interest in mobile, location and payment services as targets.

Scoping out targets is a collaborative effort. Most of the time, product managers or top engineers will recommend people. Sometimes Smith and Mike Brown, who also works on corporate development at Facebook, will make suggestions after talking to the venture capital community. Having the internal support of Mark Zuckerberg, vice president of product Chris Cox, chief technology officer Bret Taylor or vice president of engineering Mike Schroepfer is key.

“The way I think about corporate development is that you’re using your balance sheet to achieve your strategic objectives,” he said. “The most important bottleneck in growing the company is finding enough of the right people.”

If Facebook is interested, there will be an initial interview assessment, talks with senior product or engineering leaders and a discussions of terms. Founders of startups Facebook has already acquired may also reach out to them. These entrepreneurs are “our best source of leads. They help us with identifying other fabulous entrepreneurs,” he said. “The best people know who the other best people are.”

Usually, Facebook is successful on the first go, but there are a few companies that have required several attempts. Deals usually take from a few days to a month to close. “If there are entrepreneurs out there that are considering a sale or their strategic options, they should be talking to us,” he said. “They can have more impact here and we’ll give them a short, straightforward answer.”

Smith said when pricing the deals, Facebook doesn’t really factor in how much the company has raised from investors. The essential criteria in pricing a deal is how much Facebook thinks a team can impact the company.

“If a company has raised a lot of capital and they’re looking for return, then that’s not a company we’re going to buy,” he said. “If we find that their price expectations are higher than we can justify, that’s where the conversation ends.” However, Smith couldn’t think of a time when investors have had to take a loss on a sale to Facebook.

“We want everyone to be happy. We primarily pay with stock and we think that’s the best way,” he said. “We’re very bullish about the prospects for Facebook and we expect that will be true for many years.”

Smith said Facebook rarely loses out to competitors. “We’re in the fortunate position of being the acquirer of choice,” he said. Sometimes Facebook will take intellectual property with a deal, but not always.

“The good are driven to make money. The great are driven to change the world,” he said. “The best platform to change the world is Facebook. We’re right at the heart of the biggest trends in social and mobile.”

He also disagreed that Facebook was helping fuel a bubble for talent and in the valuations of early-stage startups, despite warnings from venture capitalists like Union Square Ventures managing partner and Twitter investor Fred Wilson (who derided and Hot Potato as failures in a New York Observer story earlier this week).

“There will always be a premium for great companies and great talent,” he said. “People that are exceptional are disproportionately successful and impactful. It’s unlike most other sectors in the economy. Even though on the surface, it appears to be a bubble, it isn’t really.”

He also said that that the success of past acquisitions had brushed away concerns that bringing in talent this way would create internal politics.

“We want a fair outcome for everyone. The experience to date has been that the people we’ve acquired have been such a positive for the company that everyone has embraced them,” he said.