This is a line my friend Jerry Colonna uses when something like the AT&T – Time Warner deal occurs. As time passes, the line has shifted to “We were right – just fifteen years early.”
Jerry was Fred Wilson‘s partner at Flatiron Partners. We were all investing in Internet-related stuff at the end of the 1990s. Jerry and Fred had one of the most successful VC funds during this time period until the Internet bubble burst and blew us all up for a while. We made plenty of investments together and I sat on a number of boards with Jerry – we had some big winners and a handful of craters in the ground.
At the peak, AOL bought Time Warner for $162 billion. We only know that was the peak in hindsight – at the time it looked like it validated a lot of what we were doing by investing in the Internet.
“This merger will launch the next Internet revolution,” said Steve Case, America Online’s chairman and chief executive, told a news conference Monday. “We’re still just scratching the surface.”
The market responded according to plan.
“Analysts expect competing Internet and entertainment companies to seek similar deals in hopes of keeping pace with AOL and Time Warner, and some of those stocks also got a lift Monday. Disney jumped $4.81 1/4 to $35.93 3/4 and News Corp. rose $7.31 1/4 to 45.06 1/4 on the NYSE. Lycos leaped $9 to $79.75 and Yahoo! climbed $28.81 1/4 to $436.06 1/4 on the Nasdaq Stock Market.”
Yup – you saw that correctly, Yahoo was at $436 / share. I think it split 2:1 twice, which would have made it priced at $109 / share. It’s currently at $42 / share so if I got the splits right, after its collapse in 2001 to a low of around $5 / share it took it 15 years to claw its way back to $42 / share (a 10x from the low, 40% of its high at the peak.)
Ponder Gartner’s Hype Cycle for a moment. You can apply this to pretty much anything in tech.
2000 was the Peak of Inflated Expectations. 2002 was the Trough of Disillusionment.
Now, choose any new and exciting technology now. Apply Gartner’s Hype Cycle to it. Ponder where you end up.
Steve Case wrote a book earlier this year called The Third Wave: An Entrepreneur’s Vision of the Future. In addition to looking forward to the future, Steve uses his lessons from the past to explore how things play out. It spans the time frame from 1985 – 2015 which you can just lay down on the Gartner Hype Cycle.
In the context of this, the AT&T – Time Warner deal seems extremely well timed and relevant. Now it’s all about execution.
Consider any of Apple / Google / GM / Ford buying Tesla. Where does that fall on Gartner’s Curve? How about the auto industry. Or drones. Or what people are currently calling AI. Or – well – keep going.
One of the biggest challenges in tech is not being right. It’s being ten or fifteen years too early.
Recently I wrote about how I think about private company acquisition strategies using FullContact as the example of one where it is working well.
Last week I was at a board meeting for a different company which did an acquisition a month ago. I heard a fantastic line from the founder of the company that had been acquired.
It’s business as usual except better.
Now, it’s only a month in. But this is what an investor loves to hear after a month.
Usually, the first three months post acquisition are up and down. The acquirer and the acquiree are trying to figure out how to interact. The founders of the acquiree are usually tired from the deal process and adjusting to their new reality. The acquirer is trying to be helpful, which is often precisely not helpful, especially as the acquirer integrates the acquiree’s people into its structure and processes.
I know a lot of companies that have a very well defined post-acquisition process. However, many of them don’t take into consideration the dynamics and personalities of the acquiree. Instead, they assume that everyone will happily be assimilated.
Other companies have a very hands off approach for a period of time, sometimes up to a year. But, after that period of time, the mechanical integration often begins. In situations where there has been little to no interaction, followed by too much interaction, pain often follows.
There’s something in between. This is especially important when younger private companies (50 to 500 employees) acquire another smaller (1 – 25 employees) private company. There is no one way. But your goal should be simple: “It’s business as usual except better.”
When we invested in FullContact in 2012, they were a small team with a big vision to create One Address Book To Rule Them All. Over the past four years, they’ve systematically executed on their vision, building a contact management platform that touches all aspects of the problem. Along the way they built a sizable business.
Two weeks ago FullContact raised a $25 million round. They followed this up with two acquisitions – first Conspire and then Profoundis.
I love using a targeted acquisition approach in conjunction with a business that has a clear strategy and strong organic growth. My first company (Feld Technologies) was acquired by a company doing a rollup (AmeriData – acquired 40 companies between 1992 and 1996 when it was then acquired by GE Capital.) I learned a lot from that experience and then proceeded to try to use the rollup strategy with several other companies, including Interliant, my biggest failure of all time.
By 2002 I realized that what was classically called a rollup strategy was not generally effective, at least not for me. But by reflecting on which particular acquisitions worked, why they worked, and when they worked, along with understanding the opposite (what failed, why, and when they failed) I started to develop a clear view around a targeted acquisition strategy.
Today, I’ve got a clear view of how this can work. I’ve learned a lot from my partner Seth and his own experiences around M&A. While a few acquisitions don’t work out, with the right strategy, approach, and clarity on what success is, it can be a very powerful approach.
At the essence of the approach is a focus on two things – acquiring people and product. The classically rollup strategy was much more focused on acquiring revenue. In my world, historical revenue is the least interesting thing to consider in an acquisition strategy. The goal is to acquire technology that is on your product roadmap or people that fit culturally within your organization and help you execute on your roadmap faster. The phrase acquihire emerged from this, but many acquihire’s, especially by large companies, are not particularly well thought out or integrated into an existing roadmap.
Ultimately, the goal is to use acquisitions to compress time on product development and get people on the team, especially in senior roles, who can help build out areas of the company they have experience in. Interestingly, many technology assets don’t need a lot of people. At the same time, many people are interested in working on things other than the technology they’ve been focused on.
In FullContact’s case, the team, led by Bart Lorang, has figured out their own strategy around this and is executing well on it. In the absence of any of the acquisitions they’ve done, FullContact has a strong business. But our acquisitions of Cobook, nGame, Brewster, and now Conspire and Profoundis has accelerated our business in powerful ways.
We’ve seen several M&A deals collapse unexpectedly in the past two months. Each was at the signed LOI stage. There was no warning or evidence of an issue until the moment the CEO got the phone call from the acquirer saying the deal was off. In both cases, the explanation was vague.
I’ve also seen several financings fail to close recently. Two of them were late stage financings that were pulled by the investor at the last second. One of these investors is highly visible for doing late stage deals. The other was an investor I didn’t know much about. The explanation I heard from the founder in each case was again vague.
In contrast, we closed a deal in two weeks last month. The person on the other side was willing to give us a lower price in exchange for “deal certainty”, explicit words that she used. We are very pleased with the deal and the price and appreciated that our reputation for just getting it done resulting in a significantly lower price. Deal certainty has always been important to me and I expect it’ll become even more important in the next year.
You will be seeing a lot more deals that don’t get closed after the handshake, verbal agreement, or even a signed non-binding LOI. This is natural in this part of the cycle, when prices feel high to investors, there is a lot of competition for deals, and a goal of some investors and acquirers is to get an LOI or term sheet signed with an exclusivity period in order to give them time to make a decision.
There are also a lot of unsophisticated buyers and investors out there. They generally don’t value deal certainty, especially if they come from other industries where lots of deals fall apart.
At this stage, it’s very important that the founders, whether they are selling their company or raising money, know the experience of the buyer or investor. You need to know their process. You need to know their investors, especially if it’s a private company buying another private company. Understand the history of their deal execution. Ask about, and understand the process from LOI / term sheet to close.
Basically, don’t be naive. There are lots of investors and acquirers out there who have low to medium deal certainty. There are others how have high deal certainty. Do your work and know who you are dealing with before you engage in the process for real.
I hope you had a nice 4th of July yesterday. Amy and I hid out all day in Longmont, playing with the dogs, napping, and reading. As a result yesterday was a three book day.
One of them was Semi-Organic Growth: Tactics and Strategies Behind Google’s Success by George T. Geis. If you are a Google watcher, aspire to have you company acquired by Google some day, or just want to understand Google’s approach to acquisitions (which Geis calls “semi-organic growth”) this is a must read book that is well worth the money.
Geis covers a detailed history of Google’s acquisitions along with a framework for how to think about them. It’s comprehensive and well done. We were investors in several of the companies mentioned and Geis gets the details, and the general context, correct. While I knew most of the history from just paying attention over the years, I learned a few things.
There was one construct that bothered me – Geis’ use of the phrase “acqui-hire” and his effort to categorize acquisitions as acquihires, ACQUI-hires, acqui-HIRES, and ACQUI-HIRES. His goal was to use “acquihire” as a substitute for acquisition, while emphasizing the relative importance of the product/technology or people in decision to make an acquisition.
I don’t like the use of the dash in the phrase, so I stubbornly don’t use it, just like I don’t like the dash in the word startup. I also don’t really like the word, as it has morphed to mean too many different things. I regularly hear people talk about any type of acquisition as an acquihire, rendering the nuance of the word meaningless.
While I appreciate Geis trying to use it as a framework for categorizing each acquisition, I wish he’d just come up with something simpler, like a set of things Google was searching for when they made an acquisition. The four that are most relevant in my mind are product, technology, customers, and people.
Acquihire only really refers to one of these things, which is people. The earliest use of the phrase I could find was in 2005 in Rex Hammock’s post Google acquires(?) Dodgeball.com.
Google acquires(?) Dodgeball.com: But really…When a public company with a market cap of $64.1 billion “acquires” a two-person company, isn’t that more like a “hire” with a signing bonus?
Hammock called it an “Acq-hire” and defined it as:
Acqhire – When a large company “purchases” a small company with no employees other than its founders, typically to obtain some special talent or a cool concept. (See, also: NFL first round draft signing bonus; book publishing “advance” after publisher bidding-war.)
Acquihires quickly expanded to cover deals that were more than just the founders, but clearly only talent acquisitions. In acquihires, the products were quickly abandoned as the team that was acquired went to work on the acquirers products. Often this was built on top of the concept that the acquiree brought to the table, but the core product was rarely used.
We went through a phase where acquihires were positive ways for large companies to pick up talented teams to work on a specific thing that was important to the acquirer. Then we went through a phase where acquihire often referred to the acquisition of a failing startup, just as a way to give the team a soft landing. Then acquires started using the concept of acquihire to try to shift consideration away from the cap table and instead increase the amount of “retention consideration” going to the remaining employees, independent of the capitalization of the company. If you take it to its logical conclusion, acquihire starts to be a substitute for acquisition.
I’m not a fan of this as I think it’s confusing. I like Hammond’s definition with the extension that it can include more than just the founders. But it’s clearly an acquisition of the people, not of the product, technology, and customers of the company being acquired.
I pains me as an investor when entrepreneurs talk about their goal of being acquihired by a large company. I think your goal should be to build something a lot more important and valuable than simply the team being acquired.
Part of the fun of having a blog for a long time is that it captures some of the history – in the moment – of what’s going on. For example, from a post in 2008 about Rally’s $16.85m financing, I riffed on the origins of the company.
Rally started out life as F4 Technologies. I remember my friend Ryan Martens sitting down with me and Chris Wand around 2001 and walking us through his idea for changing the how he approached managing the software development process. I can’t remember if Ryan used the word Agile at that time, but I remember scribbles on a white board that listed out all the different software that Ryan had used at BEA to manage his dev team and how maddening it was to try to integrate information in Word, Excel, Project, a dev workbench, a set of testing tools, and the support / QA system. Ryan had a vision for an integration web-based system to layer on top of all of this to help support and manage the software development process.
We weren’t the first investor in Rally. Ryan quickly raised about $400k of friends and family money. We offered Ryan space to work out of our office which he did for a year or so as he got things up and running. About a year after he got started, he was ready to raise a venture financing. At the same time, his partner at his previous company – Tim Miller – was doing an entrepreneur-in-residence at a local Boulder VC firm (Boulder Ventures). Ryan was encouraged to team up with Tim and shortly after that happened we co-led the first round VC financing with Boulder Ventures.
It has been a rocket ship from there. Tim, Ryan, and team have created a phenomenal company that is built on two trends that have picked up massive speed in the past few years: (1) Agile and (2) SaaS. In 2003 – while Agile was known – it was largely limited to ISVs and a few leading IT organizations. SaaS was beginning to be talked about as Salesforce.com’s success (and leverage from the SaaS model) became apparent.
Or if you want to go back to 2004 and 2005 when I was really learning about Agile, well before it had become a household name, you could read my posts Agile Software Development with SCRUM or Do You Develop Software For A Living? – Get Agile with Rally Release 5.
Or maybe dip into the 2006 and 2007 time frame when Rally was in an award cycle with my posts Rally’s New Financing and the E&Y Entrepreneur of the Year Award and Boulder 2007 Esprit Entrepreneur Awards.
Over the fast dozen years, Rally has gone from a raw startup to a 500 person public company. Tim Miller (CEO) and Ryan Martens (CTO, founder) have been working together from the start of the journey. Jim Lejeal, the CFO, was an original angel investor, then board member, and then CFO joining full time when the company was around 200 people.
It makes me so happy to reflect on my relationship with each of Tim, Ryan, and Jim. I first met Tim when he had just started Avitek (his previous company) working in the same office space as Andrew Currie, who had just started Email Publishing (my first angel investment in Boulder.) I met Ryan via Young Entrepreneurs Organization – we were both in the same YEO forum. And I was the seed investor, via Mobius, in Jim’s second company (Raindance, which he co-founded with Paul Berberian – CEO of Orbotix and Todd Vernon – CEO of VictorOps.) But more importantly, I’m close friends with each of them, even though my direct involvement in Rally ended about two years ago when the company went public.
There are hundreds of paragraphs I could write about all of the amazing things Rally Software has done for the Boulder Startup Community and for the extended city of Boulder. But I’ll end with one of them – the creation of the Entrepreneurs Foundation of Colorado (now Pledge 1%). The story starts in 2007 with the founding of EFCO, which Ryan and I spearheaded and had a huge punch line in 2013 when Rally Made a Gift of $1.3 Million To The Boulder Community after their IPO. Ryan continues to head up EFCO and is co-founder of Pledge 1%, which is the effort to take EFCO international.
To the extended Rally Software family past and present – congratulations. You’ve built something very special that is part of the long arc story of Boulder. And – to Tim and Ryan – thank you for letting me participate in your journey.
There’s an amazing amount of bad activity going on in the world of tech right now. It’s predictable – when things start going well the switch flips from fear back to greed and all sorts of craziness ensues. One of the things I see appear is a steady stream of crap aimed at innovators. Patent trolls are an easy one, but heavy handed regulatory activity by incumbents and random lawsuits around acquisitions are also part for the course.
I was going to write about how the FCC’s potential action on net neutrality could seriously jeopardize Internet innovation, but Fred Wilson beat me to it (he’s got an east coast time advantage over me) with a phenomenal post titled The Fast Lane, The Slow Lane, and The No Lane. I love the phrase “permissionless innovation” as well as the way Fred describes the issue:
“But that period of “permissionless innovation” is likely to come to an end soon if we all let it. The FCC has responded to a court ruling by proposing a convoluted set of rules that will allow fast lanes, slow lanes, and what’s even worse, no lanes. The FCC’s proposal will allow the telcos and cable companies that provide the last mile connection to your home or office to prioritize some bits over others. That’s how they create the fast lane and the slow lane. It also allows discrimination in which they can decide not to allow your bits through at all, creating a “no lane”.”
Go read Fred’s post The Fast Lane, The Slow Lane, and The No Lane and then hit the back button to continue here. I’ll wait.
If you wonder who is driving this, it’s the telcos and cable companies who control the last mile. Please don’t pretend that you are surprised.
But that’s just one category of bad activity that falls in the “incumbents trying to use government regulation to control their industry and suppress innovation.” Nothing new here – it’s been going on since the beginning of time.
A different version of this popped up last week. If you recall, a month or so ago Facebook announced that it was buying Oculus Rift for an eye popping $2 billion. Amazing and congrats to everyone involved in Oculus Rift. I’ve long been a John Carmack fanboy since I first played Doom and realized id Software was based in Mesquite, TX, near where I grew up. I’ve always loved his hacker spirit, amazing ability to do things no one else could envision, and willingness to open source a lot of his work to lead the way for others. So I thought it was pretty awesome when he went to be CTO of Oculus Rift to pursue the next generation of virtual reality software.
Now, I don’t know John, I’m not an investor in Oculus Rift, or Facebook, or Zenimax, but I wasn’t particularly surprised when Zenimax decided to assert that it owned part of Carmack’s brain. You can read an enormous amount of chatter about the situation, and form your own conclusion, but mine is that Zenimax is a bad actor here. Given that Zenimax wouldn’t let Carmack pursue any virtual reality work while at Zenimax resulted in the logical conclusion that he’d leave and do something else. Asserting that whatever was in his brain while employed at Zenimax belongs to Zenimax is nonsense. There’s a phrase for that: “intellectual slavery” and it’s not one I support.
If you are interested in this situation, here are some good links to understand what is going on and being asserted.
Now that I’ve been clear about what I think, I’m curious what you think.
I love playing offense.
FullContact is officially in this mode and today announced that they have acquired Cobook with Pot, Ski Passes and Dogecoin. Kaspars Dancis – the awesome CEO of Cobook – has a more seriously titled (and equally serious post) up at COBOOK + FULLCONTACT.
One of my basic strategies as an investor is to use targeted small acquisitions throughout the life of a company. In 2005 Fred Wilson called this approach the “venture rollup” and said nice words about me and it in his post when he said “My good friend Brad Feld is up to his old tricks. Brad is the master of the venture rollup.”
We’ve been investors in FullContact for about 18 months. They’ve got a real business at this point, are growing very fast, and working hard on their mission of creating One Address Book To Rule Them All. If you haven’t tried FullContact’s Address Book, you are missing out. The magic feature of “unified contacts” that they’ve been working on for over a year is up, running, and amazing.
Cobook is a perfect acquisition for us. The Cobook team has developed beautiful Mac and iOS address books. We’ve admired them for a while and decided a few months ago to join forces to have them accelerate our development on other platforms. The full team is moving from Latvia to Denver and is already hard at work integrating FullContact and Cobook.
If you’ve been watching what the companies I’m involved are up to, you saw this move in November when Yesware bought Attachments.me. And you’ll see it from companies I’m involved in again, and again, and again.
When I saw this graph I was hooked. If you are a Twitter user and you don’t use Followerwonk, go try it now – I’ll be here when you return.
Yesterday, SEOmoz announced that it had acquired Followerwonk. The acquisition closed about six weeks ago and the Followerwonk product has been fully integrated into SEOmoz. And the Followerwonk team is now fully part of the SEOmoz team. And it’s awesome.
Rand Fishkin (SEOmoz’s CEO) blogs openly about how the deal happened. It’s instructive for anyone in a startup – either one that is acquiring someone else or being acquired.
If you know me, or have worked with me, you’ll recognize this as a common part of my startup playbook. I think it’s incredibly powerful to accelerate the growth of a company via targeted acquisitions. Fred Wilson once referred to this as a “venture rollup” which, while many are allergic to the word “rollup”, is probably as good a label as any for this. Another recent example from my world just to see what I mean is Rally Software’s acquisition of Agile Advantage.
Doing this well is hard. I’ve been fortunate to work with several amazing CEOs who I’ve learned a lot about how to do this with, including Matt Blumberg (Return Path), Tim Miller (Rally), Mark Pincus (Zynga), and JB Holston (NewsGator). And I learned the basis of everything I know about acquisitions from Len Fassler and Jerry Poch, who acquired my first company. Each has used the strategy skillfully and effectively.
I think Rand, who is using this strategy as part of continuing to build out SEOmoz, is going to be a master at it. If you read his post carefully, you’ll see that he has immense respect for the people behind Followerwork. His behavior pre-deal is consistent with his values and signals his behavior post deal. The entire company embraced Followerwonk and made them part of the SEOmoz gang immediately. He, and the entire team extended trust up front, unambiguously, and without hesitation or reservation.
Peter, Marc, and Galen – welcome to the team!