What They Don’t Tell You About Acquisitions

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This week we’re having tea with Waseem Daher, CEO of Pilot, and Colin Kennedy, Chief Business Officer of Ramp.

Waseem’s first company, Ksplice, was acquired by Oracle in 2011, and his second company, Zulip, was acquired by Dropbox in 2014. Colin served as Chief Revenue Officer at Clarity Money, acquired by Goldman Sachs in 2018.

Highlights from Series Tea with Waseem Daher & Colin Kennedy

This interview has been lightly edited for length and clarity.

What are the biggest things you took away from your first company acquisition?

WASEEM (Pilot): Companies are bought, not sold. For example, Oracle acquired my first company, Ksplice. We had some technology that did software updates without rebooting or traditional pop-ups. Oracle wanted to bring that capability to their Linux offering. It was driven by a desire on the part of the acquirer.

Similarly, when Dropbox acquired our second company, a group chat tool for businesses, it's not that we had hit some particular usage milestone. It was driven by considerations at Dropbox.

Your company isn't bought because you'd like to sell it. Your company is bought because someone wants to buy it. That distinction says a lot about timing.

IMMAD (Mercury): We tried to sell Heyzap for multiple years. If you go to Google, Apple, or Facebook, they'll talk to you because they have full-time people that are paid to do it. You get excited about it as an entrepreneur. But until you do something that fits into that company's agenda, they're making a build versus buy decision: "I want to build x, or I can buy this for x million, and that saves me two years, and this company already has traction."

Apple had acquired a company called Burstly in our space. We had already built something successful in that space. That resonated with acquirers. I thought you could sell a company, but it wasn't about that. It was about fitting with what those companies wanted. In a small way, you can make a company get acquired. You just have to understand what that other company needs, and then build that.

What you think is going on from the acquiring company's perspective? What do they look for in an acquisition?

COLIN (Ramp): Companies are most likely to be acquired when the acquiring company identifies them and has an interest in making a purchase, not when the company is out there trying to sell itself. When Goldman acquired us at Clarity Money, it started as a partnership discussion. There was no way that we could understand everything they're solving for. It's hard to appreciate, from the outside, what a major decision acquisition is. It’s deliberate and driven by things you're not going to be able to identify until you talk to them deeply.

What factors do acquiring companies take into account?

COLIN (Ramp): So much of it is about the focus. It can be easy to assess if you get additional product capabilities, entry to new markets, revenue, future differentiation, a team. But integration can be hard: integration in culture and in terms of how does this throw us off our plan for the next 12 months? We're going to be spending at least 20-50% of our focus dealing with this acquisition as opposed to developing new stuff.

It's also true on the other side. When you're the company being acquired, it is going to impact your roadmap and operations. You're going to have key executive sponsors at the acquiring company. One important thing for the acquisition to go well with Goldman was a clear alignment. Unless you have an assessment of what the opportunity cost will be, there's probably going to be some disappointment as to how it's operationalized.

WASEEM (Pilot): Realize that the company has to be really invested to make this thing work. There is a distinction between the company wanting to do this, and someone from the corporate development team wanting to have coffee with you.

IMMAD (Mercury): A lot of these product teams, internally at Google and Apple, are looking at startups to just learn what's in the market, what are people building.

How do you position yourself as a company during an acquisition?

COLIN (Ramp): Why do you as a company want to be acquired by the particular acquirer you're talking to? Presumably, if you're running your business effectively, you know you have something valuable. You have strong principles for where you want the business to go, and what's going to motivate you and your team.

Ask the acquirer what's driving the interest, and pressure test that. If they're saying they're acquiring you for the talent, there should be questions around that. They should be assessing the talent more deeply. If there's that match between what they're saying they want and what they're actually exploring through diligence, it can lead to a good foundation.

How do you position yourselves? Talk about the fact that you've considered partnering with, or already have partnerships with, companies like them. Any quality acquirer is aware that, just as we don't understand their business extremely well, they may not understand aspects of our business as well as they would like to. They're looking for some proof points.

IMMAD (Mercury): Even if you have $10 to $20 million in revenue, that's nothing to a Google or Facebook. If you do go to a smaller company, that's when your revenue can matter a lot more.

Back when we got acquired, we were making something like $10 million a year. The company who acquired us was $200 to $300 million. You have to target the right size and motivation for an acquiring company.

COLIN (Ramp): When you're the company being acquired, it can be hard to know how your metrics fit with the acquiring company's metrics. I've seen so many startups spend time on metrics that don't actually move the needle for the acquiring company. They might care more about product synergy or team fit.

WASEEM (Pilot): The company thinks the product is just going to live on in the acquirer. But they're just buying good engineers and are going to sunset your thing. Better to find that out soon if that's going to affect your decision making, as opposed to when the deal is done and you don't have that leverage.

Do you think if you are selling your company, you should just always assume they'll shut down and sunset your product?

WASEEM (Pilot): One of our early advisors used to say, "Would you rather be rich or be king? You can optimize for control, or you can optimize for economic value delivered to you." In a situation like this, you generally don't get both.

What’s the process of being acquired?

IMMAD (Mercury): Basically, you start talking to an acquirer. It's similar to VC pitching. You're selling your company, literally. That tends to take a long time. You talk to corp dev, you talk to the product team, maybe they do deeper interviews.

Eventually you end up getting an LOI (letter of intent) that lays out the terms. It's not legally binding apart from an exclusivity clause, which says you can't talk to other acquirers or VCs for a certain time period. Once you sign that, that's when they look through your financials, patents, and legal things. At that point, they can renegotiate the deal. That's a painful process because you can't shop the deal and you're already mentally committed. Then you sign and become an employee. Sometimes there's a step between signing and closing as well.

COLIN (Ramp): There's often variation in what the acquirer wants, what the motivation is, the size of the companies, the groups involved, the level of diligence that's needed. It's okay for the company being acquired to ask basic questions. This is a serious transaction and you better find out to what extent there is alignment.

How do you validate the interest as real?

COLIN (Ramp): There's no way to guarantee it. You are fundamentally taking a risk, presumably with commensurate upside. Most folks in this space are good actors. You can look at the history of acquirers and see how they've treated other companies. They're aware that they're establishing a track record.

It's easy to spend a lot of time and have it go nowhere. To what extent do you mitigate the distraction? How do you work through that, and do so in a productive way? Whom do you share the information with at the company? It's a tough secret to keep at any startup. Erring on the side of transparency will create more comfort and efficiency across the board.

What do you think about using investment bankers or some third party to help with negotiation and closing?

COLIN (Ramp): It's helpful to use some intermediary or third party. The term intermediary can be a bit misleading; you're not looking to be disintermediated from the process. You're looking to have somebody help you facilitate the deal and be an advocate for you.

Whether it's a lawyer, a firm that you've worked with before, an investment banker, or one of your board members: there is one that’s primarily in the driver's seat. It’s less about skill sets and more about whom do you trust and has an aligned incentive?

IMMAD (Mercury): Have someone that is not emotionally invested in getting this deal through. When you're not a rich entrepreneur, and you're thinking your net worth went down by a million dollars, it becomes emotional. If there's some third party, they can say, "We agreed to $40 million. You're trying to reduce it to $35 million. That's not happening.”

How can you get more optionality in the process?

IMMAD (Mercury): Whether its VC or acquisition negotiations, the best leverage is if you can walk away. The second one is having alternative offers. If you don't have true leverage, it's hard to pretend that you don’t need it. You can also have a VC term sheet at the same time as having an acquirer. The leverage doesn't have to be two acquisition offers.

COLIN (Ramp): Don't play hard to get. Don't play anything. The best way to negotiate is from a place of integrity and grounding. They also have options, just like you have options.

Are there any tricks to help make sure deals get through?

IMMAD (Mercury): Get the number of the CEO. The CEO normally just wants it done from the acquirer. They don't necessarily care about small negotiation deals. If you're getting hung up with corp dev, the CEO doesn't care. It's a way of short circuiting the process and making progress.

COLIN (Ramp): If you say what you care about, and they start to pull away from the must haves for you, then you have some authority to start a more open discussion. Unless you have that foundation of trust from the beginning, you're not going to be able to navigate that. Both sides are going to pull away because each side is worried about being exposed in some form.

Once you've signed the LOI, how long does it take to close?

IMMAD (Mercury): We signed an LOI with 45 days exclusivity. But it overran and took 70 days to close. One of the worst things we did was agree to a 45 day LOI. If we made it shorter, that would've given us more leverage in that exclusivity period.

WASEEM (Pilot): The LOI had a 30 day exclusivity period with the Oracle deal, but it took 60 days. Dropbox was 30 day and it did in fact take 30 days.

Do you know any good resources people should use when going through the acquisition process?

COLIN (Ramp): This is where your investors and advisors can be extremely valuable. If you don't have any, you may want to consider adjusting your network of support, because there's a reasonable likelihood that you're going to encounter a scenario like this. Have somebody who is disinterested, objective, has the ability to talk with you about blind spots, and can push you in different directions. This is not a process to go through alone.

Who decides to spend money on cultural integration? What’s the best way to integrate cultures when you join companies?

COLIN (Ramp): The spend will come from the acquiring company. How is the hard part. This is when you see the benefits of spending time, upfront, aligning on why the acquisition is happening, what both companies are looking to get, and what customers and employees care about.

The culture integration will come down to conflicts in ownership and trying to address those. Find projects the teams can work on to get early successes. Success does often breed success. Get people to work together, sooner rather than later, and get past formalities.

WASEEM (Pilot): People think about acquisition as the end point, but it's actually the beginning of a many year relationship. Your team needs to work with the other people at this company. How do we make sure that happens smoothly? How do we make sure we're not a part of a larger company that doesn't play nice with other people? You want to avoid that perception. You want to get the team integrated, because that's what is going to set them up for success.

One thing we haven't touched on is whether you should sell your company.

WASEEM (Pilot): What is the risk/reward calculus? What feels like the right home for the team? What feels like the right home for the mission you’re trying to achieve?

For example, Pilot wants to be a giant, iconic, and public company. I don't see the world in which it ever makes sense to sell Pilot. But there's always a calculus about, “how much appetite do I have for risk now versus something that is not what I was aiming for, but is more secure?"

IMMAD (Mercury): The value of money is not linear. Your first million is worth way more than your second million. You've gone from zero to one. Sometimes early entrepreneurs raise too much and reduce their optionality. Whereas, when you're 100% set that you want to make this as big as possible, that doesn't matter as much. One thing that has changed recently is VCs are more open to entrepreneurs taking secondary. You don't need to build a $100 billion company to have any liquidity. That's a good thing for the whole ecosystem.

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Thanks,

The Mercury Team