Merus Venture Summit-M&A: The Inside View, part 2

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Here’s part 2 of 3 from our recent M&A-focused event.  Just to recap: we recently hosted and moderated an M&A event at the Rosewood Hotel co-sponsored by SVB.  We had an audience of about 125 folks, almost all entrepreneurs.  We had one overriding goal: To provide an insider’s view of the acquisition process.  It was not to speculate about who is going to buy who, or how much Google paid for Android.  Rather, we wanted to answer specific questions that company founders have including what really happens during the acquisition process, what pitfalls to avoid, and how to ensure a great outcome for employees and investors.  Above all, we aimed to provide an unvarnished view of the sale process.  Thanks to everyone who attended and for all the great feedback and reactions. We were fortunate to have a tremendous set of panelists representing buyers (primarily Corp Dev folks) and sellers (entrepreneurs who have sold their companies).  The all-star lineup included:

The Buyers

  • Brian Schultz, Director, Corporate Development @ Microsoft
  • Dave Sobota, Director, Corporate Development @ Google
  • Ryan Aytay, Vice President, Corporate Development @ Salesforce
  • Ted Rado, Sr. Director, Corporate Development @ Cisco

The Sellers

  • Elad Gil, Director of Corporate Strategy @ Twitter. Formerly, Co-founder and CEO of Mixer Labs (acquired by Twitter)
  • Gokul Rajaram, Product Director of Ads @ Facebook. Formerly, Co-founder and CEO at Chai Labs (acquired by Facebook)
  • Jared Kopf, Vice President of Innovation @ Rearden Commerce. Formerly, Founder and CEO of HomeRun (acquired by Rearden Commerce)
  • Quincy Smith and Mike Marquez, Co-founders and Managing Partners @ CODE Advisors
  • Ramesh Rajagopal, Co-founder and President @ Authentic8. Formerly, VP of Corporate Development at Postini (acquired by Google)

And thanks to our friends Amin @ Facebook and Tom @ Groupon who reluctantly had to cancel their planned participation.

Below are some of the questions discussed and select quotes from our panelists.

Are Corp Dev teams evil? Will you steal my secrets and employees?
“Every company has a reputation and it’s important that a company is trustworthy. We all know each other and if companies act badly, word will spread. It’s still important to have good legal representation and to not divulge true secrets. You should also not withhold information that the other team needs to know for a deal.”

“Divulge what is necessary for the deal, but not more.”“It’s also important what stage of the deal you are at. Later on in the process, you can share more. The first meeting should be more general. Ask for context. Get them to divulge information. The revealing questions should come up down the road.”“Every secret will come out between [the time the] term sheet [is negotiated] and [the deal is] close[d]. You have to expect that and be prepared for that. If there is any information that you think could kill the deal, you have to be up front about that before the term sheet [is signed]. At the term sheet you are vulnerable because your whole team gets involved and you can lose credibility if things don’t work out. It is much better to have a deal not get to term sheet then to get to term sheet and then [have it] fall apart.”"There aren’t many secrets that would make me say, ‘Oh, no, we can’t tell you about that,’ but there is a certain amount of things that you want to be careful about. Don’t share who is your best engineer or best sales person. You have to be careful about protecting your talent.”

“The reality is that people think too much about the importance of the information and that secrets will be stolen. The larger companies have serious reputations to protect. It is just something that we never do. Once we get to a term sheet, everything will come out. If you want to get to term sheet quickly, you want to be more open. What you think is your IP is not something that the Corp Dev team will be able to copy just because of a conversation.”

“We actually follow through with over 90% of term sheets to [get to a] close in the last 5 years. If we don’t know about something great you have done, the price won’t go up after the term sheet. If there is something bad that comes out after the company has signed a term sheet, that is bad.”

“A company that I was on the board of was talking to a large company about being acquired. Sunday before the term sheet was going to be signed, we got a legal notice. We didn’t want to sign it because of this new detail and backed away. Six months later, the company is in a much better situation now that the legal matter is resolved and it won’t get in the way of a deal.”

“Being cagey with information does not drive a higher price for a company. Playing hard to get won’t necessarily drive a higher price. You can show more value by sharing information that is one way to get a higher price…so, be forthcoming with information.”

“Getting to LOI is 99% of the work. Don’t bring up important things after that point. The hard point is pushing towards that LOI. They want to honor their LOI, you have to make that bet to push that value up.”

Should we hire a banker or M&A lawyer:
“Don’t forget about the buyer side. We [the buyer] should be telling you some interesting stuff as well. It’s a way to gauge trust. Every time they ask a question, ask a question back. Sure, there is stuff they can’t talk about, but there is a lot of stuff that they are able to talk about.  Particularly if it’s a product question that is key. It shows them that you are interested in the company and you should have as much on them as they have on you.”

“Should you hire a banker? No, nine out of ten times you don’t need a banker. I think a good lawyer is far more important. A banker maybe sees 2 to 4% of a deal and a lawyer sees the other 95%+. The integration is something important afterwards that we haven’t even got into. The reason you want a banker is for process and for having a bad cop, [for] being the bouncer. You don’t want to tell people to wait outside, but someone has to do it. Also, bankers can be useful in handling the Board. It depends on the stage for how you will use them. And don’t forget to use your investors. Give them a general update and then give them tasks based on what they are good at. The bankers can be good as ringleaders as well.”

“Good point about the lawyer. Worked with a lawyer [on the other side] that was a solo practitioner in the Midwest. They missed some key deal points that hurt them a lot. A great lawyer is key.”

“The investors in DoubleClick did an awesome job being involved in that deal. With larger companies, the investors can be key in getting the right price and finding the right home for a company.”

“Investors can add enormous value as being the bad cop and coming in and saying the deal can’t go through unless X term is agreed on. They can add value doing that.”

“There are some bankers that have the right relationships that are really useful. Quincy [Smith] is a banker in the interactive space that has built the right relationships that makes him valuable. They can help companies find great homes.”

How long does it take? First call to close?
“It varies. Mentioned went from nothing to LOI to close in 2 days to close in 45 days. Usually takes a lot longer. It can take up to a year.”

“The longer a deal takes, the less likely it is to close. A company I was involved with said if the deal didn’t close by right before Christmas, they would go back to work and the deal was off. That was after we signed the term sheet. Regulatory processes can add to the amount of time that a deal could take. You want to make relationships with the executive leading the product team to see if the deal is real and build the trust level up with the entrepreneur. It is tougher to build trust with the Corp Dev guy who is doing the deal.”

“To keep things moving, make sure you are involved in the process. For the due diligence request process, be on top of that to prevent delays on your side.”

“Entrepreneurs have to be patient as well during the process. Larger companies have a lot to lose if there is something wrong with an IP issue, customer contract, or employee contract. All that diligence work has to be done. That work is going to be done. Only one deal didn’t close after the term sheet.”

“A lot of entrepreneurs will negotiate against themselves because the process is taking a long time and they are eager for the process to be over and the deal to close.”

How is pitching M&A different than raising capital?
“Try to get into the motivation of the buyer. It can really change how you present the company. Trying to know what they are trying to accomplish.”

“Some people think you sell the company and you are done. Some of these deals are all about the people. You should be doing deals that can fulfill your product vision and that you would really like to work at the company that acquires you for 2-3-4-5 years.”

“If they ask if you are out after the dotted line is signed, you are doing yourself a disservice. Those can be the deals that end up not getting done. Or terms that are not very advantageous for you. Sometimes, we’re acquiring technology, but the people are part of the DNA that we want to add to our company. It’s important that everything is done right and the check at the end of M&A is larger than your various rounds of financing, but it is still not the end, or it shouldn’t be.”

“Someone in the acquiring company has their career or a large portion of it depending on this deal. You are going to be working together and things have to feel right.”

“Raising money is like your first marriage, selling your company is like your last marriage.”

“In a sell situation there may be one or only two buyers. It’s different and, keeping that in mind, the emotions will be different.”

“Make sure when you are raising a round of funding, realize that it makes you stay with a company X years longer. It may give you the same financial upside to sell earlier and find the company the right home.”

The final part of this series coming soon…

Merus Venture Summit–M&A: The Inside View, part 1

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We recently hosted and moderated an M&A event at the Rosewood Hotel co-sponsored by SVB.  We had an audience of about 125 folks, almost all entrepreneurs.  We had one overriding goal: To provide an insider’s view of the acquisition process.  It was not to speculate about who is going to buy who, or how much Google paid for Android.  Rather, we wanted to answer specific questions that company founders have including what really happens during the acquisition process, what pitfalls to avoid, and how to ensure a great outcome for employees and investors.  Above all, we aimed to provide an unvarnished view of the sale process.  Thanks to everyone who attended and for all the great feedback and reactions. We were fortunate to have a tremendous set of panelists representing buyers (primarily Corp Dev folks) and sellers (entrepreneurs who have sold their companies).  The all-star lineup included:


The Buyers

  • Brian Schultz, Director, Corporate Development @ Microsoft
  • Dave Sobota, Director, Corporate Development @ Google
  • Ryan Aytay, Vice President, Corporate Development @ Salesforce
  • Ted Rado, Sr. Director, Corporate Development @ Cisco

The Sellers

  • Elad Gil, Director of Corporate Strategy @ Twitter. Formerly, Co-founder and CEO of Mixer Labs (acquired by Twitter)
  • Gokul Rajaram, Product Director of Ads @ Facebook. Formerly, Co-founder and CEO at Chai Labs (acquired by Facebook)
  • Jared Kopf, Vice President of Innovation @ Rearden Commerce. Formerly, Founder and CEO of HomeRun (acquired by Rearden Commerce)
  • Quincy Smith and Mike Marquez, Co-founders and Managing Partners @ CODE Advisors
  • Ramesh Rajagopal, Co-founder and President @ Authentic8. Formerly, VP of Corporate Development at Postini (acquired by Google)

And thanks to our friends Amin @ Facebook and Tom @ Groupon who reluctantly had to cancel their planned participation.

Below are some of the questions discussed and select quotes from our panelists.  This is part 1 of 3.

For the entrepreneurs, Why sell?

“Excitement of joining a large platform that affects hundreds of millions of people and being able to lead a small part of large part of the business. Facebook has a very good record of doing acquisitions and taking awesome talent and giving them a lot of responsibility.”

“Had plans to go public. The valuation was the key component. It had to be translated into a price that made sense for all of the years that we put in. We were also focused on making sure that the customers and employees would be taken care of well in the new environment. ‘What does the new buyer mean for the business?’ There has to be an emotional buy-in for the sale.”

“We were 9 people and were going to make up 10% of Twitter. Sometimes, a company is just running out of energy or is potentially going to get crushed (for real or it is just a threat). Sometimes, they will actually build the product (25% of the time) and may actually crush you, but, more often than not, it is just a threat during the negotiation process. Sometimes, the company is willing to pay up based on a year or two of expected growth, so it can be worth it from the financial perspective. Sometimes, you sell simply because the company is running out of money.”

“Thousands of seed funded companies out there and a lot of them may end up being talent acquisitions.”

“There are so many large companies where you can have a real impact by reaching all of their users.”

“Sometimes you are forced to sell by market conditions. Multiple bidders cause the price to go up. [The acquirer can help you] fulfill your a vision or help you better achieve your vision. They provide additional resources. Android was a great example of that. They needed Google’s resources in order to create such a valuable platform. Youtube as well.”

On the buyer side, Who is the decision maker?
“What the CEO wants, the CEO gets [laughter in the crowd]. Product teams decide the majority of what we see. The Corp Dev/Strat team may bring opportunities to the product teams to see if they are interested, but that’s just on occasion. Usually, it’s product-led.”

“It’s usually a collaboration between the GM of a business unit and the Corp Dev team. It’s less top down, where the CEO says who we are acquiring next, especially when the GMs have a better understanding of their particular business and are managing multibillion-dollar businesses. It’s important [for entrepreneurs] to be proactive instead of reactive. There’s a lot of inbound activity, but if the Corp Dev team is doing their job, usually they’re in front of the opportunities.”

On using a banker:
“Oftentimes, a banker isn’t necessary, but the bankers can help people not get too emotional. Try to separate the tactics and the reason why you want to sell. Usually, the Corp Dev team is the bad cop trying to get you to take the lowest possible price, while the product team is the good cop and the team that you will be working with after an acquisition. So, separating that out is important. Best advice: assume that at no matter which stage, the deal will fall apart.”

“After signing a term sheet, 1/3 of the deals didn’t go through at Google. [Even if] you have a signed term sheet, you have to keep working.”

“It has improved a lot since then.” (laughter in the crowd)

What should the seller do if a buyer is calling?
“First, think it is bs. It’s highly likely that they are full of crap. M&A is part of the strategy that a product group comes up with. You want to be optimistic and engage, but you want to limit the distraction and the number of people on your side that get involved. You want to quickly qualify how serious the opportunity is. Find out where this interest is coming from and how real the inquiry is.”

“Use the opportunity to build a relationship. Don’t involve anyone else. But, show them what you have built. We knew the Corp Dev folks for a year before the acquisition and building that relationship was helpful. Realize that the deal may not go through, but still build that relationship.”

“The only thing that I would add is: deals don’t just happen overnight. You foster the relationship over time. A number of deals that I have been a part of have taken a year. You have to be careful not to appear arrogant. Don’t want to seem ‘too busy’ to even talk to a Corp Dev person.”

“A year for a big company is a footnote. For a startup, it’s like a lifetime. Be aware that the timelines are very different.”

Should companies market to Corporate Development?
“No, and if you do, it should be a soft sell. Don’t say ‘we want to sell.’ Build a relationship with Corp Dev and the product teams, but I maintain ‘the best companies are bought, not sold.’ Just be on the ball and execute, and good things will happen. If you are too aggressive, the Corp Dev team may get tired of it.”

“Over 70% of the deals that start with one suitor, end with that suitor, assuming the company is sold. So, building that relationship and seeing where there is a cultural fit is important. You want to be careful with dangling one offer in front of a different company. Of course, a banker will want to make sure the best possible price is reached.”

“We see deals all the time where we have a term sheet from x company. Do you want to get involved? 99% of the time, nothing will happen if there is no relationship with anybody else in the company. Also, if we get the feeling that we are just being used to play off the other side, we aren’t going to play. It’s a hard game to play because relationships do have to happen over time. So, if you have deep relationships with multiple companies, than you can get involved in the process with multiple companies. It is harder to just play one company off the other, especially if you don’t have that relationship. It’s risky.”

“It’s tough to do anything in a compressed timeline. If your idea is you’ll just call up Corp Dev and see if something happens, it won’t. The key is working with the product team. Maybe partnering. Maybe just building a relationship. The product team will know if you are doing well in a market. Like with Postini and Google.”

“A company we knew very well had a term sheet from another company. We got involved and went from 0 to 60 and got to an LOI in 2 days and closed the deal in 45. Those things can happen on rare occasions when the relationship is strong.”

“On this panel, we have successful large tech companies. These are Corp Dev teams that represent tech giants. Depending on the company, Corp Dev can mean something completely different. If a company is not in a growth stage, they can be looking to acquire a team and product to renew growth and innovation. It’s different.”

Is it a distraction?
All the entrepreneurs agreed it was an enormous distraction.

“It’s a big distraction. You need to first figure out if you want to sell. Have the conversation with your Co-Founders and CEO. Don’t involve the team early on. Be careful with involving the team because they can find out that the company isn’t that valuable. In one case, an early employee left because they found out their equity wasn’t really worth much. Don’t call your investors. You can be in situations where the investors and you spend a ton of time going back and forth when the deal is still very early on. When the process starts to get serious, involve the lead investor but don’t involve them too early because they will drive you crazy.”

Stay tuned for part 2 in this series..

Our investment in ModeWalk

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It’s 2011 and virtually anything can be purchased online. There have been many innovations in e-commerce in the last 10 years—group buying, flash sales, retargeting, dynamic merchandising, penny auctions (evil!), monthly subscriptions for almost anything, daily deals, just to name a few. But we still have a ways to go to capture in a browser the charm and rich experience of physical retail. Perhaps charm isn’t the right word to describe a trip to Costco, but when it comes to categories like luxury goods and haute couture fashion, the buying experience is part of the product.

While I certainly wouldn’t call my partners and I at Merus experts in the world of high fashion, we have been discussing this year the fact that we haven’t yet seen a great deal of truly engaging or immersive online shopping experiences. Particularly as tablet adoption increases, which are inherently more personal devices than your desktop or laptop, it seems the time is right to improve the typical flow of browsing and buying. Enter ModeWalk. When we first met with the founders of ModeWalk, we were immediately drawn to their vision of providing an emotionally engaging e-commerce experience while affording luxury fashion brands the opportunity to share their unique perspectives directly with consumers. Add to this vision the team’s unique blend of skills, experiences and connections, and we were sold. We recently led the company’s Series A round, which also includes an accomplished group of angel investors and fashion industry executives.

ModeWalk has just launched in private beta. Here is what Vogue had to say. We are proud to partner with the ModeWalk team as they redefine luxury e-commerce.

On y va!

Posted by Sean

Our investment in Authentic8

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We’re excited to announce that Merus has invested in the online security company, Authentic8.

It’s a Big Idea
The web has become the primary vector for criminals to deliver malware to scam users. Since it’s the browser on your machine that downloads and runs code from the web, it’s impossible for you to know if the code that’s downloaded is secure and trustworthy each time you go online. What’s more, the criminals’ attack “surface area” is even broader than the browser–there’s URL redirection and other potential weak points all the way across the chain from the user’s machine to the web destination.

At the same time, tracking one’s passwords has grown increasingly unmanageable. It seems like each site has different password strength requirements, minimum (or maximum) password lengths, set of characters you’re allowed to use, etc. To deal with this complexity, people end up setting weak passwords, re-using them across sites, or storing them in unsafe places. As a result, online accounts are more easily compromised by criminals.

Dealing with online security is a major pain point for consumers and businesses of all sizes. Authentic8 turns the problem on its head: What if you could simply outsource the headache of keeping your browser secure and managing all of your passwords to a trusted and reliable party? Authentic8 delivers the Simply Safe browsing experience.

Real Software Solving Real Problems
How they solve this problem is quite novel. Each time you access the web, Authentic8 launches a Disposable Browser in the cloud. In essence, you’re surfing the web in real-time from Authentic8’s servers where they manage all security aspects on your behalf. It’s called a disposable browser because they’re “single-use”–Authentic8 gives you a fresh browser instance each time you access the web and discards it when you’re done, a bit like dental floss or latex gloves. The implication is quite powerful: Malware never touches your machine.

What’s more, once you’re using Authentic8’s service, they do all the hard work of validating the destination site you’re trying to reach, as well as securely and automatically submitting your login credentials. So there’s no need to remember any passwords or manually generate new ones, as some sites periodically require. The company precisely fits our goal of investing in entrepreneurs building real software solving real problems.

Exceptional Team
Perhaps what we like most about our investment in Authentic8 is that we get to work with the two exceptional founders again–Scott Petry and Ramesh Rajagopal. Scott and Ramesh worked together for several years at Postini, the company Scott founded in 1999, which was a pioneer in security-related SaaS, where Ramesh was VP of Corporate Development (Google acquired Postini for $625M in 2007–an acquisition sponsored by my two partners, Salman Ullah, who led Corporate Development at Google, and Sean Dempsey, who led the overall acquisition).

The three of us at Merus also had the privilege of working with Ramesh for several years when we were all part of Microsoft’s Corporate Development & Strategy team. We’re also excited to be partnering with Foundry Group, which recently announced their investment in Authentic8.

To be considered for Authentic8’s beta program or for more information on the company:
Click here to be put on the list of future beta invitees. For some great insights and discussion on Internet security (like this one: “Macs & Volvos: Where perception transcends reality“), check out Authentic8’s blog, OSMoSis.

Posted by Peter Hsing