Google, Twitter and Yahoo are three of the most acquisitive tech companies. Corporate development representatives from these companies talked about how they seek to create successful deals at an event yesterday at Orrick.
The process of meeting and understanding how a selling company fits with an acquirer can be broken down to three steps, as they talked about in this earlier post. But besides those meetings, there are a number of issues that need to be resolved for deals to move forward.
Many startups are concerned with sharing trade secrets or other confidential information with potential acquirers. (We hear that question at Exitround often.) But Dave Sobota, director of corporate development at Google, says he encourages startups not to share secrets that would be confidential particularly at the beginning. “I always tell startups I don’t want an NDA. Don’t share confidential info with me. Just talk to me like I’m a reporter,” he says.
Then the two sides can get more serious step-by-step as they build trust on both sides. Later on, it’s possible to get an NDA in place, he says.
Google (and other large tech acquirers) will sometimes bring in a “clean team” to help evaluate a company. No, this is not a radioactive clean up team. It’s a team at Google–separate from the deal team or product team involved–that evaluates the selling company just on their technical skills. It’s designed to shield a buyer from potential law suits that could result from employees learning secrets about a potential acquisition target.
“If necessary, we’ll bring in a clean team,” Sobota says. “We don’t want to be exposed to trade secrets of target companies. It hurts us to be exposed to litigation. We’ll bring in a clean team who doesn’t work on the (same) product at Google to evaluate the technical chops of the acquisition but don’t share anything they learned–just the results of the evaluation to decide whether to move forward.”
The clean team also prevents top teams at an acquirer being legally “tainted” on a project they are working on. For example, Google may have a top team working on a top priority project. But if that team meets a seller in the same space and talks but then Google doesn’t buy it, Google could theoretically be sued by the seller if that Google team goes on to build something similar or related–even if Google was already working on it separately from the company they met. The clean team usually is kept completely separate, keeping separate notes, and so on, from the main deal team and product or engineering teams involved.
Valuation of the selling company is obviously the issue that many wonder about. Buyers typically have comparables from other deals they have done. Yahoo evaluates factors like the value to Yahoo for engagement, time on site and other metrics, says Aaron Crum, co-head of corporate development. But admittedly, for companies with little or no revenue, pricing models can all go out the window, he says.
Two major points for valuation are price, and then team compensation and retention, says Jessica Verrilli, principal, corporate development, at Twitter. The acquirer typically looks at a specific roadmap and how long it will take to launch something. Then if the new company will push up its schedule by say one to three quarters because of the acquisition, the acquirer figures out how much that speed is worth to it.
The value of the deal also is based on the idea that if the team leaves on the first day at the new company, the acquirer gets nothing, particularly if it’s a talent deal. That’s why incentives and retention are part of many of these deals.
At the same time, while there are comparables, the range for prices paid per person in acquihires is huge, says Google’s Sobota. A Ph.D. in machine learning can receive something quite different from someone just out of college.
There are typically three components, particularly for talent deals, to the valuation of an acquired company, Sobota says.
1. Payment to cap table: This pays back the shareholders of a company, particularly venture investors, if there are any. Depending on the particulars, Google may ask the founders to “unvest” part of their shares and re-earn them at Google. This is a way to incentivize founders to stay at the company.
2. Stay bonus to founders/employees: This is designed to keep founders staying at the acquiring company and at Google and Yahoo is typically paid in cash. In many cases the majority of the considerations are paid near the back end of the retention time period, Sobota says.
3. Standard offer letter: This includes traditional employee salary, restricted stock units and health benefits. This tends to be the smaller of the three pieces.
Yahoo’s Crum typically doesn’t like to do milestone earnouts, preferring to use payouts tied to how long the founders stay at the acquiring company. That’s because at some time period after an acquisition, perhaps two or three years later, there are always disputes about these milestone earnouts. That could be an argument about not getting enough server time or not getting enough sales support, he says.
The successful retention of acquired teams often has less to do with the deal structure and getting the perfect purchase or retention price than with other things on the job that make a team happy, Verrilli says.
“It’s more: does the team have ownership on initiatives that are high impact for the company and are they empowered to do what they talked about,” she says. “Corp dev is a lot about emotional intelligence to really get to know people and set them up for success. If they’re not happy and engaged, even a strong retention package probably will not get them to stay. They have other options. That’s why it’s so important (for startups) to get to know who you’ll work for and what they’re building.”
One example of a success in that vein was Cabana, which Twitter acquired in October, 2012, Verrilli says. Cabana was acquired specifically to work on the Twitter Cards product. The seven-person team hit the ground running at Twitter and four months after the acquisition launched Cards.
The Cabana cofounder was successful, so he was pulled in to help with diligence on another acquisition, Crashlytics. As a result, he was promoted twice. That provides real long-term value to everyone involved–if the company empowers leaders and gives them opportunity, she says.
Another key to successful acquisitions is checking in regularly with teams that have been acquired after the deal. Yahoo, Google and Twitter all have teams that do this at regular intervals to make sure that the integration is going well. The goal is figure out if anything is not working as planned and fix it to keep everyone on the same page.
See Part One Of This Post: The 3 Major Steps To A Term Sheet
For startups, the acquisition process and all that is entailed to get acquired by a large company can seem shrouded in mystery.
But particularly at companies that make frequent acquisitions, there is usually a well-trod routine and process in place. Corporate development executives from Google, Twitter and Yahoo (as well as our own Exitround) detailed some of their thinking and how they work at a panel yesterday at Orrick.
Jessica Verrilli, corporate development principal at Twitter, says the first and most important thing with a startup, before getting into price, terms or anything else, is talking to get an understanding of the real interests, passions and vision of founders.
“For us we always start out the conversation trying to understand what the (startup) team set out to build and what they are passionate about,” Verrilli says. “What are you so excited about that you quit your job, recruited your friends to tackle that vision? We try to figure out: are we also interested in tackling that vision? In many cases that’s where things diverge.”
For many acquirers, finding out what really makes an entrepreneur tick is the first check box in their minds, says Aaron Crum, vice president and co-head of corporate development at Yahoo. “What are you really proud of? Tell us when your team threw an impromptu party after you solved a problem. Where have you failed? Don’t be afraid to tell us.”
Finding entrepreneurs who really want to work at Google is also an important point, says Dave Sobota, director of corporate development at Google. ”We want to make sure they’re passionate about what they’re doing at Google. If they want to be a stand-alone company that probably won’t work for us because they may be asked to work on similar but not the same things. We try to sell you on the scale and audience at Google you’ll not have at your current standalone company.”
3 MAIN MEETINGS
While the actual acquisition process can be confusing, there are essentially three big milestones to get to a term sheet, says Twitter’s Verrilli. (Caveat: there are many permutations of this, but these are the essentials.) The first meeting, as noted above, for a startup with a potential buyer’s corporate development representative is to find a fit with the team’s general interest, passion and what they want to build.
If that goes well, the corporate development executive needs to find a “sponsor” at the acquiring company, if there isn’t one already. That person is usually the engineering or product head of the unit that will be owning the new team, business or technology. That is the person who champions the deal. It’s rare to do a deal where there is no sponsor pushing for the acquisition, she says. The second meeting with the startup should include the sponsor to build that relationship and case for the acquisition. “That person needs to make the case (to the buying company) alongside corp dev,” she says.
The third meeting should be some way to vet the technical startup team. That could be through interviewing the team, or it could be through doing a “tech talk.” These are usually where the team or individual will come to the acquirer and give a talk about some area of expertise. “It’s a friendlier and easier way to get to know the technical depth of the team before putting them in front of a white board for a coding interview,” she says. “It sets a better working dynamic and exchange of important information about the quality of talent.”
Once these three steps are passed successfully, the corp dev team usually has enough information to make a case for an acquisition to the buying company, Verrilli says.
If those three major milestones or meetings take more than a month, that’s typically too long, she says. Being put in limbo can be a “nightmare for founders,” she adds. “You can add urgency and ask specifically what it will take to resolve (the delay).”
Once the deal reaches the term sheet phase, both parties should have reached a high-level agreement on the major deal points. This includes signing a letter of exclusivity for negotiations. By this time, “both teams have an incentive to actually get a purchase agreement closed,” she says. There should be mostly smaller clarifying points left to negotiate by this point.
What corp dev professionals at acquiring companies need to sell a deal to their own company is a “deal thesis”–essentially, why this deal makes sense and is worth spending resources on. That thesis could be purely acquiring top talent, buying a business, or buying prized technology assets. The corp dev professional crafts this thesis together with the deal’s sponsor. The thesis has to match the specific initiatives, needs or goals of the company at that specific moment in time.
“Our job as corp dev is to say, this team is exceptionally talented, in design, leadership, or engineering, and in front end or backend or mobile,” Verrilli says. “We’ll have them come here and tackle this specific initiative and these specific goals. Our job is to work with internal teams to craft this central thesis to justify paying for talent beyond (what it would cost) to just hire someone.”
For corporate development executives, deals that come in through executives at their own companies are naturally good leads. “When stuff comes in internally it tends to be a really strong signal,” Verrilli says. “My engineering or product colleagues send me deals I’m really interested. It’s great. You’ve got this high level alignment. You’ve already got that box checked.”
So if you’re an entrepreneur, it’s not a bad idea to connect with the engineering or product heads at the relevant companies, whether that’s at a conference or any other way, to develop that relationship.
Exitround is very happy to help publicly announce that Live Nation Labs, a subsidiary of the entertainment giant Live Nation Entertainment (NYSE: LYV), is acquiring Meexo, a San Francisco-based company which builds mobile, social applications. As part of the transaction, the founders of Meexo, Romain David and Dav Yaginuma, will become product and engineering leads on mobile for Live Nation Labs. Moving forward, Live Nation Labs, a subsidiary of the Fortune 500 company, sees Meexo as key to its strategy in digital and mobile. More from Live Nation, and Meexo.
The companies were first connected on Exitround’s private, closed marketplace for companies. For Exitround, this transaction demonstrates our increasing growth in helping companies outside of Silicon Valley find innovative technology companies to buy. While we still work with many of the top Silicon Valley names, more and more large companies that are not traditional technology companies are looking to make technology a core part of their business. And the way they are doing that is often through acquiring top companies and talent. These are often companies that earlier stage companies would never have thought of as potential business partners or acquirers. Through the marketplace dynamic and proprietary algorithmic matching engine, we’re able to make many more connections–and specific personalized connections–than these companies would have made otherwise.
Congratulations to Romain, Dav and the team at Live Nation!
The big day came in 2005, in a nondescript IHOP in San Antonio over egg whites and coffee. Webmail.us CEO Pat Matthews was meeting with Pat Condon, the co-founder of Rackspace, near the company’s headquarters.
Matthews was telling Condon about Webmail’s new round of funding and how well the business was doing. “He said to me, ‘I think you should talk to Rackspace before you raise money.’ That confirmed an ongoing feeling I had for some time—they might be interested in acquiring us.”
The conversation resulted months later in Rackspace’s first major acquisition–Webmail.us. The 60-person company from Blacksburg, Virginia became a key part of Rackspace’s growth and later its corporate development strategy. Matthews’ story is a one of startup pivots, near shut-downs, a dramatic acquisition, and an emotional IPO as part of Rackspace, but ultimately a positive ending.
Matthews, a native of Springfield, Virginia, attended Virginia Tech during the exciting boom dot-com years. He and his cofounders, Bill Boebel and Kevin Minnick, got close to graduating. But like others at the time, they were swept up in the Internet boom and dropped out in 1999 to pursue a startup idea that Boebel had thought up while still in school and interviewing for corporate jobs.
The trio built fieldParty.com, a portal for local events with user-generated content, where people could find information on what’s happening in their cities, or list information they wanted others to find out about. (The idea was wildly different than what the company would later become.) They launched it on March 10, 2000.
Founder Question: ”How can you as a founder talk to a buyer and what are common errors disclosing too much information too soon, especially when the buyer is a competitor or in the same space? I’d would love to see a follow-up post on protecting yourself or business in case the deal falls through and they steal your roadmap?”
Answer: Serial entrepreneur Jason Lemkin, a venture capitalist at Storm Ventures, in July 2011 sold his company EchoSign to Adobe. Prior to that he was part of two previous companies that were acquired. Here is Lemkin’s personal opinion on this*:
At EchoSign, I made plenty of mistakes in our acquisition. In an earnest attempt to be 100% transparent, I shared everything except our detailed customer list with Adobe. I thought the easiest thing was to share everything. We’d been around for five years, had tens of thousands of customers and millions of users, and anyone could use our app. And a Google search would turn up the rest, so what was there really to hide?
Adobe was quite clear that if we didn’t sell, they’d buy a competitor (which is pretty standard pre-term sheet). But they did say it repeatedly. So, I decided I would not share any actual customer names and contact info, so I wouldn’t be handing them a list to steal our customers. Which they were fine with.
But this 100% transparent disclosure created too many sub-issues. It created 60 people in the meetings asking me things that didn’t matter. Buying a company at the end of the day is a binary decision. You decide to buy it or not. In truth almost nothing else matters except your team and traction.
The buzz has not yet died down on the much-hyped Twitter IPO, and two more consumer Internet IPOs this week jumped into the public markets hoping to follow in its wake. Startups, investors and the tech world will be watching these two offerings to see if enthusiasm from Twitter rubs off on other initial public offerings and the exit market in general.
When Facebook’s much-anticipated IPO cratered last year, the IPO window temporarily clamped shut, particularly for consumer Internet companies. So many are watching to see if the relatively successful Twitter IPO will open up a window for more companies to enter the public markets. So far, interest in new growth companies (e.g. Zulily) looks to be high. But Chegg struggled in its initial trading.
Zulily, an ecommerce site for babies and moms, raised $263 million in its IPO, pricing 11.5 million shares at $22 per share. Seattle-based Zulily raised $140 million in venture capital from Maveron, August Capital, Andreessen Horowitz, Trinity Ventures, Meritech Capital partners and others. Shares (NASDAQ: ZU) opened at $39 this morning and were trading up 69% to $37.19 in late trading Friday.
Meanwhile, Chegg, an online textbook rental company, priced its IPO at $12.50 per share, then opened at $11 per share. But shares fell 22.6% in its fist day of trading on the NYSE . Santa Clara, Calif.-based Chegg had raised close to $200 million from Foundation Capital, Gabriel Ventures, Insight Venture Partners and Kleiner Perkins Caufield & Byers. Shares were up 4.28% to $9.26 in late Friday trading.
The acquisition process can unearth dozens of issues that a startup may not have previously thought about. As a result there are many ways mergers and acquisitions can fall apart, says Ron Fleming, partner in Pillsbury Winthrop Shaw Pittman’s corporate & securities practice based in New York.
Fleming says his work on mergers and acquisitions for startups focuses on two main things: helping you get your financial considerations and helping you keep it. Right now, deal flow is high. “We’re seeing a lot of activity. M&A is as hot as it’s been in the past 5 to 6 years,” he says.
These days, companies are moving faster than ever to make acquisitions. Transactions that used to take months often now happen in a couple weeks, partly as a result of new technology. And the acquisition process is typically not a full-blown investment banking process, Fleming notes.
In general, both buyers and sellers want to get a deal done before some larger macro issues cause problems. “There’s a lot of pressure to make it happen. Just in general, there’s a sense that the world feels like it’s about to fall off a cliff. You want a liquidity event to get done before something changes–a government shut-down, a fiscal cliff, a stock market crash. Nothing good happens by waiting.”
Here are some basic (by no means comprehensive) tips from Fleming to prepare for an M&A process:
Optimism for global tech mergers and acquisitions is on the rise and acquihires remain an area of major interest for large corporate acquirers, according to a new report by Morrison and Foerster and 451 Research.
About 50% of corporate executives surveyed are predicting M&A activity to increase in the next six months. Only 7% expect a decrease in activity. That 7% is down from 20% who expected a decrease in deals six months ago. As a measure of heat in the market, executives also are expecting an uptick in bidders and a spike in private company valuations.
In a review of recent past activity, 40% of corporate development executives said deal flow in the past six months was higher than it has been in the past two years, while 36% said deals were down over the past six months.
The report is based on a survey of about 200 C-level executives, corporate development executives, in-house counsel, bankers, venture capitalists and financial advisors. Despite this overall optimism, overall global tech M&A volume is down 15% from a year ago period, 451 reports.
Congrats, someone is interested in talking about potentially buying your company! For many entrepreneurs that’s an exciting feeling. But the acquisition process can also be intimidating and even confusing. You may not know why a potential buyer is calling, what exactly they want, or what to expect throughout the process. Part of the reason for that is there are no set rules for how an acquisition occurs. The specifics of the process can vary depending on the types and size of companies and buyers involved. Still, based on our experience with hundreds of corporate development members actively engaging with Exitround companies, we wanted to give a general sense of what to expect when a potential buyer comes calling. As you’ll see, there are many different boxes that need to be checked for a potential buyer to pull the trigger and buy a company, but with a well-prepared, transparent approach you can make the process as smooth as possible. And keep in mind that you’ll have to tailor this to your specific situation.
1) Getting To Know You
After initially connecting, a buyer will ask to set up a first phone call (typically within a week’s time) in order to quickly gauge your general interest and fit for his company. Consider this like the initial phone screen during a normal hiring process, to determine the highest level feel of a conversation to see if it’s worth spending more time on this potential match. This is also the time where you should get a sense for if the buyer is actually not interested in acquiring you, but just wants to learn more about you for the future. Or if the buyer may just want to explore business development deals. In other words, how serious are they and how serious are you. (This is the subject of a more in depth future blog post.)
2) First Information + Face-to-Face
If the initial phone call goes well, they will now (within a week of the initial first call) ask for LinkedIn profiles, GitHub profiles, and any other team and/or high level product information (if they haven’t already).
Typically, they will also want to set up an in-person meeting with the founder/CEO or cofounders. The goal of this meeting is to get a sense of your expectations, as well as a closer look at the fit of your company with theirs. If you’re not geographically located near each other, they’ll look to set up a web video conference or longer phone conversation.
Exitround is growing quickly! After launching in March 2013 as a way for early stage startups to more efficiently and discreetly discover acquisition opportunities, the marketplace continues to flourish and multiple transactions have been consummated. (We’d love to say more about these transactions, however the option of secrecy belongs to our buyers, and in these cases they are holding onto it).
Today, there are over 500 unique corporate buyers that have registered for the marketplace, including 30+ public companies, 20+ Fortune 500 companies, and 20% of the buyer set are based internationally or looking for international acquisition opportunities.
In addition to talent acquisitions, we’re pleasantly surprised to see profitable and large revenue early stage businesses also joining the marketplace to explore their options as sellers. In acquisitions, under $100M transaction size, typically, it’s difficult to get the interest of a traditional investment banker or M&A advisor and oftentimes the economics of this relationship aren’t favorable to the company. Exitround’s proprietary software based matching algorithmic marketplace surfaces the best opportunities to buyers, based upon their specific target preferences. Today, 6% of the seller companies on Exitround are doing over $1M in annual revenue, with a handful reaching $10M in annual revenue.
To augment our growth we’re thrilled to announce two new executive hires: Tomio Geron as Director of Content Strategy & Marketplace Analyst, and Kedric Van de Carr as Head of Business Development.