Editor’s note: On September 30th, 2013, the Glazed Conference brought the best and the brightest in wearable tech / wearable computing to San Francisco to discuss the state of the industry and what the future holds.
Exitround founder and CEO Jacob Mullins led a panel on M&A / BD opportunities for early-stage startups in the wearable space. The panelists were: David Blumenfeld of Westfield Labs; Jeff Eddings of Turner Broadcasting; David Liu of Jefferies; and Stephanie Palmieri of SoftTech VC. The following are highlights from the discussion.
Jacob Mullins: So, what’s it going to take for wearable computing to become ubiquitous?
Jeff Eddings: There’s a cost/benefit analysis. If the device provides enough value to you as a consumer then you can be hooked by anything–you can overcome looking dorky outside. A lot of people are saying “Hey, I don’t know about Google Glass.” But what I really think they’re saying is I don’t think there’s enough value for me. What can I do with this that I can’t with the smartphone in my pocket? That’s a great fact for a wearable startup to consider, and something that, if done right, will easily get the attention of bigger companies.
Jacob: How do you view the startup ecosystem in relationship to what you’re trying to do? If you see an enterprise use for an application, do you build yourselves or do you look outside?
David Blumenfeld – Westfield is a digital lab, but we can’t develop all of our own technology. Even if we could we’d miss an opportunity to work with companies who are specializing. We very much look at partnerships in the ecosystem of app developers to enable the kinds of services we want to make available, whether that be wearable tech or other.
Jacob: Glass and Pebble are hardware that shifted us toward a software conversation. Now startups don’t have to build hardware–many can focus on just the software. From an investment or advisory point of view, is there a strategic advantage or disadvantage to focusing on software when you’re playing in the hardware ecosystem?
Stephanie Palmieri: When Fitbit launched it did one thing really well: track steps. It didn’t sync wirelessly, it didn’t do much with the software, but it worked. It makes sense for others to follow this model. Focus on hardware at the beginning; just get something out that works. Then, as you hit scale, begin to develop more functionality, to do successive releases on the software that enhance interaction with that device. Or you have partners who do it, your own mini ecosystem. But it’s hard to do all of that well as an early-stage company.
Jacob: Let’s cover some transactional thoughts, and how startups might work with folks like you. What do you think about when you consider buying or building, partnering or investing? What do you actually want from a startup in those cases?
David Liu – We’re seeing an intersection of lots of dynamics, and any startup I look at would have to be taking advantage. First is the ability to be a software company in disguise, to have a hardware product but think like software guys. Second is crowdfunding platforms, which give the opportunity to pre-market a product, and to determine market. They also offer working capital, which is a natural for investors/financiers. Lastly is the ability to forecast whether a product might appeal to a specialized power set of users or else go mass-market. If you’re in the middle it’s a challenge to see it as a successful M&A or IPO candidate.
David B.: Westfield Malls reaches 1.1 billion shoppers annually, so it’s a natural test bed. Our model is to do pilots and, if they work, expand and extend, at which point we could capitalize on the distribution we have to offer. So startups should definitely search for pilot opportunities rather than straight retail.
Jacob: There are some huge players in the market with wearable hardware: Google, Apple, and potentially Microsoft. Jawbone has raised $310 million, Fitbit has raised $43 million. To an early-stage startup those numbers can be daunting. When you advise them, when you find things that are really interesting, how do you rationalize that?
Stephanie: I was thinking about this when you brought up Kickstarter. Investment via Kickstarter means there’s an early community that wants to adopt your product. But there’s a big gap between that early backing and mainstream, widespread distribution. A few years ago it was easier to make this jump; today there are just so many more companies. So I think a lot about what it’s going to take for that core team to make it from a distribution standpoint. Can your team make that leap to mass marketing and sales? Can you survive until you hit that big retail channel? I’m looking at that core team to see if they have the talent to take a product from early indicators of market to the next level: building a brand following without the support of the Apple store or Best Buy.
Jacob: How do you see the wearable market evolving? How long before the large players start to get acquisitive and we really start to see big acquisitions?
David L.: There are always tech companies willing to buy other tech companies, and we’re going to see more of that in the wearable category, from a wide swath of companies. This could be a startup with a great product, or whose team provides expertise.
The last bucket is the mega-acquisition, the hundred-million dollar market, and here I think the wearable category is in that last mile. The last-mile strategy is to be able to know exactly who you are and what your preferences are. If wearable gets us to a truly quantified self then that’s the holy grail, because this is the essence of the big Internet company’s business: selling their data to advertisers and merchants.
If a company can crack that code and harness the network effect–you’re wearing it and I’m wearing it and we’re both engaged, so we pass the tipping point for mass market–then you’re going to see big companies step up and pay a big number.
Editor’s note: James Kean is the founder and former CEO of WellnessFX. Prior to that he helped start the company behind WebMD. In 2013, Health Elements acquired WellnessFX; Jim spearheaded the deal. The following is an edited transcript of an interview with him, conducted 01/28/14.
What is WellnessFX, and what does it do?
WellnessFX is the first consumer-driven health services market, a digital storefront for health services. Consumers can use it to purchase blood panels, and then choose a physician or nutritionist to interpret the results—to diagnose and consult—by phone. Recommendations could include supplementation, dietary change, exercise, or further consultation with a doctor about genetic risks or early signs of disease.
WellnessFX democratizes the consumer health model, part-and-parcel with the ethos of the Affordable Care Act.
Your product offering changed over time. Can you talk about those changes, and what prompted them?
These kinds of panels and consultations are not nationally regulated, so we had to deal with fifty-one different countries [states], as it were. We started with high-end panels, a kind of Cadillac model, only in California. This allowed us to make some profit and learn. But we were under market cost, purposely setting the price low and operating with low margins to gain new customers.
For one founder who recently sold his startup, it was the culmination of a long journey. At the same time, the founder, who spoke to me on the condition of anonymity, had problems during the acquisition process, feeling bullied by a venture investor.
The investor argued against a sale of the startup, and then after agreeing to the sale, proceeded to call the buyer and yell about terms of the deal. The investor also pushed for certain terms that the founder felt were unfair and benefited the investor.
The founder was pleased with the outcome but felt powerless to stop this investor from essentially steamrolling the process.
“They didn’t want to sell because, for them, the deal was too small,” the founder says. “Eventually our investors inserted themselves into the negotiations. They actually screwed things up for us because they demanded more and actually offended the buyers.”
This type of story rarely gets publicly told in Silicon Valley, since founders and investors don’t want to reveal how the sausage is made in negotiations — and more importantly don’t want to criticize each other in public and break Silicon Valley’s unspoken rule of positivity. But because of how venture capital is structured (more on this below), and because of the many startups that will need to sell without being able to raise more funding in the current environment, these types of situations are bound to come up.
Negotiating with a buyer is a challenge for founders in an acquisition. But negotiating with one’s own side — the investors — can be just as difficult, if not more so. These disagreements typically arise when startups get an offer to sell and the founders and venture investors disagree about what to do. These offers, even if relatively small in Silicon Valley terms — say $10 million or $20 million — can be “life-changing” for founders. But for venture investors, particularly with big funds ($300 million, $400 million or even $1 billion), smaller exits are not appealing. To explain why, we need to look at how traditional venture funds are structured.
As a founder, Kristian Segerstrale has had two successful outcomes. An expert in gaming, he cofounded Macrospace, which merged with Sorrent then was renamed Glu Mobile. He also was cofounder and CEO of Playfish, which was acquired in 2009 by EA for $400 million. He is now a co-founder at Initial Capital, which led the seed round in Supercell among others.
I caught up with Segerstrale to get his thoughts on how to manage acquisitions and make them successful. There are many facets of an acquisition, but Segerstrale focuses on the individual people involved and the often-overlooked things that can keep a team from leaving after an acquisition.
First, when you combine your company with someone else’s, you are getting married in a very real sense. It pays to spend a lot of time courting first. “Spend as much time with the acquirer as possible, specifically the CEO,” Segerstrale says. “You should talk about the business, but more importantly about values and culture to understand whether the companies are likely to be successful working together.”
It’s worth it to invest this time before an acquisition. If you don’t, you could end up being acquired and spending a couple “miserable” years with a company watching your baby gradually wither to nothing as a result of a poor fit, he says. “I’ve seen it happen, and I know that’s a horrible place to be.”
Here’s this week’s round-up of the technology M&A market.
Some of the big names in tech made acquisitions this week. Here are some of the notable transactions:
LinkedIn acquired data-focused job search company Bright.com for $120 million, its largest acquisition ever. The deal, which falls into LinkedIn’s core job search focus, was 75% in stock, the rest in cash. LinkedIn’s other past larger acquisitions include Slideshare ($119 million) and Pulse ($90 million). LinkedIn has previously been active buying startups related to CRM, such as CardMunch and Rapportive.
OpenTable acquired restaurant recommendation app Ness for $17.3 million (net of Ness’ cash the price is $11.3 million). The startup had raised upwards of $20 million. OpenTable has been focusing on its mobile experience, having acquired the food photo sharing app Foodspotting for $10 million in January 2013 and recently announced a test of mobile payments in restaurants through the OpenTable app.
Amazon bought gaming studio Double Helix Games for an undisclosed price. Irvine, Calif.-based Double Helix, which created “Killer Instinct” for the Xbox One, has 75 employees. The acquisition, adds to recent speculation that Amazon may release a gaming console. Amazon already has Amazon Game Studios in Irvine.
McGraw Hill Education acquired Engrade, which provides online curriculum tools for students and teachers, the latest deal involving a non-tech company buying a smaller technology company.
Originally a dating service, Anyperk pivoted six times before it found its niche.
Pandora’s product-building process helped the company build only the most important things.
U.S. venture capital funds increased their performance in the third quarter, according to Cambridge Associates and NVCA. But VC funds were still beat by the DJIA, Nasdaq and S&P 500 over 1, 3 and 5-year horizons. But over 10 years, VC funds beat all those indexes.
Meanwhile, the most active venture investors on 2013 were 500 Startups, Andreessen Horowitz and Google Ventures, according to DJX VentureSource.
Photo credit: sovietuk on flickr.
Optimism is running high in the tech startup world, as exits for VC-backed startups jumped in Q4, while VC investing and pre-money valuations also increased, according to DJX VentureSource.
Both mergers & acquisitions and IPO exits increased in Q4, providing liquidity for startup founders, employees and investors. M&A valuations of VC-backed startups jumped 17% in Q4 2013 from the prior quarter to 115 deals worth $12 billion. The total value of deals jumped 37% from the year-ago period. The largest deals of the quarter were Climate Corp., which was acquired by Monsanto; Passport Health, which was bought by Experian; and Braintree, which was bought by eBay.
Overall 2013 M&A volume, however, by price paid dropped 14% from 2012 from $43.0 billion to $36.9 billion. Number of deals dropped from 456 to 413.
Value from public offerings, meanwhile shot up 60% to $3.6 billion in Q4 from the prior quarter, fueled particularly by Twitter’s $1.8 billion offering. The number of actual deals dropped 20% to 20 deals, but still was up from 8 deals in the year-ago quarter.
Overall trends show deal sizes (for large exits) increasing, while IPOs are also increasing, according to a post by Tomasz Tunguz. (Whether IPOs are just increasing during the past year or two in a cyclical trend remains to be seen during the next downturn. Also, focusing on the number of exits that are “material” could miss a fairly large number of exits in the market.) The overall growth of “large” exits shows an overall value that startups are building and the value they provide to larger companies.
VC investment in U.S. companies increased, as did pre-money valuations. Private companies raised $8.9 billion from 901 deals in Q4. That was up 2% in capital and 5% in number of deals from the prior quarter. The Q4 investment was also up year-over-year 7% in dollars and 3% in deals. The most active investors were Andreessen Horowitz, First Round Capital, Battery Ventures, Google Ventures and Accel Partners.
Editor’s note: This is adapted from a talk given by Geoff Lewis, a venture capitalist at Founders Fund, about how to plan ahead to sell a company. He previously cofounded startup TopGuest. This is the third of three posts.
In Part 1, Geoff discussed folding M&A into the fabric of a startup’s roadmap–the terminal plan–and mapped out how to begin creating this plan; in Part 2 he covered strategy for appearing more attractive to acquirers by controlling the narrative. Here, in Part 3, he concludes his own narrative, discussing valuation, motivation, and the human element at the heart of any deal.
To most, price is the most interesting thing about M&A; as an entrepreneur and founding team, it’s of course the most important aspect of selling your company. You want to get the best price possible. At the same time it’s the most detached from reality. There’s really no way to objectively value a startup. There are comps, revenue multiples, and the prices the companies you’re talking to have paid in previous acquisitions. But fundamentally every startup is unique, and there’s no truly objective price. This means that price is a figment of your imagination, and a function of your sales skills. If you can dream up a great price and do an amazing job of selling, you just may get it.
There’s another way M&A is detached from reality: the higher the price, the more potential appeal it has to the acquirer. On a psychological level, a high-priced company can seem more important. A hundred million dollars? A billion? It must really be worth that much.
Manu Kumar, founder of seed stage venture firm K9 Ventures, focuses on investments that have a hard science or new technology focus. He knows about acquisitions, having invested in BackType, which was acquired by Twitter; card.io, which was bought by PayPal; Torbit, which was acquired by WalMartLabs; and IndexTank and CardMunch, which were both bought by LinkedIn. Previously, he founded SneakerLabs, which was acquired in 2000 for more than $100 million, then he founded iMeet, which was merged then acquired in 2002.
In this piece Kumar, who is often actively involved in M&A negotiations for his startups, talks about how to build a startup for the long-term while also preparing for an exit; what information is important for startups to keep private from acquirers; and why he often meets with and negotiates with buyers on behalf of his startups.
What are your rules for startups when it comes to mergers and acquisitions?
1. Build A Real Company
When I was doing my first startup, my rule number one for M&A: Companies do not get sold, they get bought. It’s probably the single most important thing. It’s very difficult to take a company, dress it up and go sell it. Any good acquisition happens because buyers come looking to find the company being acquired.
2. Prepare For An Exit–Just In Case
The second thing is: it’s important to make sure the M&A process is not a one-time thing or an isolated incident. It’s something you have to be thinking about and working towards for the life of the company. For example, with CardMunch (which I invested in and which was acquired by LinkedIn). They pitched an idea (to me as an investor) that they wanted to work on. But I didn’t like the idea but I said, “Let me pitch you on another idea.” (It became an app to digitally capture business cards and integrate with your address book). I said to them, these are companies that could be interested to buy you: LinkedIn or Salesforce. So at the point of inception we’d already identified who could be potential M&A targets.
Editor’s note: This is adapted from a talk given by Geoff Lewis, a venture capitalist at Founders Fund, about how to plan ahead to sell a company. He previously cofounded startup TopGuest. This is the second of three posts.
In Part 1 of Geoff’s talk he discussed folding M&A into the fabric of a startup’s roadmap–the terminal plan–and mapped out how to begin creating this plan. Here, in Part 2, he gives further strategies for appearing more attractive to acquirers.
ADJUST THE ROADMAP
Once you’ve identified prospective acquirers, you’ll want to adjust your internal roadmap in order to set yourself up for success with them. The key here is to not change what you’re actually doing. If you’re in advertising analytics and you want to get acquired by an eCommerce company, you shouldn’t suddenly open an eCommerce store. But what you should do is make the small tweaks needed to set up your chances for success.
The first thing to do is remove blockages. If you have an odd biz dev deal where the company that you have the deal with owns your IP, you would want to try and get out of that. If your engineering team is on a skunk-works project that’s going to take 4 years to finish but you only have 6 months of runway, you’ll want to stop that. If you’re being sued, try to settle that pending legal action before beginning the acquisition process.
There are always things you can do to increase your company’s strategic value, and these low-hanging fruit pieces should be done before you start talking with acquirers. How do we define “low-hanging fruit?” Generally as anything that has little or no dev complexity but high strategic upside.
David Liu, managing director and co-head of digital media and Internet investment banking at Jefferies, a division of Leucadia National Corp., has worked on more than 100 transactions. In his first piece he talked about how companies should think about pricing themselves during an acquisition and how to approach potential buyers. In this second piece, we get his opinion as a banker on how companies should think about negotiations with potential buyers and how they can optimize their outcomes.
Besides the core value of a company, how is a company valued in an acquisition?
I believe that the value of any company has two core elements: The first is what I call the “intrinsic” value of company. This is the aggregation of the company’s assets (i.e., financials, market position, brand, team, etc.). In other words, what is the company objectively worth? The answer can be found by answering questions such as, “What are the comparables with public companies or other recent acquisitions?”; “Who are the companies that see strategic value in the product, tech, or new market?” (We covered this in my last post.) That’s what I refer to as the company’s intrinsic value.
The second element is one that many overlook and, in my experience, can be a much larger driver of value if optimized correctly. The second part of the company’s value comes from the actual deal process. A lot of entrepreneurs put more emphasis on the first half but not the second and as a result they are under-optimizing. I don’t think they realize that things like competitive heat around a process can substantially appreciate the value of a company – particularly when animal spirits take over and buyers start to bid with what appears to be reckless abandon. We commonly refer to this as “deal heat”. In other words, the value of the company changes based on the dynamics of the negotiation, what the buyer believes the company is worth and other externalities that may be driving a buyer to increase their offer.
What are the kinds of things that create deal heat?
Unfortunately, there is no one-size-fits-all nor is there a “Deal Heat for Dummies” manual. As I said in the last post, every process involves both different quantity and varied quality of buyers so you need to think about each situation uniquely. For example, a buyer who really wants to or needs to compete fiercely with another company and knows the competitor is also bidding on the same seller can drive the price way beyond whatever the intrinsic value of the company is. That’s how you get these sale prices at levels that appear crazy.