Rowland Savage, author of How to Stick the Landing: The M&A Handbook for Startups, discusses mergers and acquisitions (M&A) and why it’s so important for software engineering startups to know the details. Host Gavin Henry spoke with Savage about why a startup should always be thinking about being acquired, the ways to ensure that it happens, the steps to take for a smooth process, the amount of effort it takes, the risks, the types of acquisitions, the reasons for selling, the reasons for buying, and what to expect along the path to a successful exit of your company.
Show Notes
Related Links
- Episode 449: Dan Moore on Build vs Buy
- Episode 448: Matt Arbesfeld on Starting Your Own Software Company
- Episode 373: Joel Spolsky on Startups: Growth, and Valuation
- @corpdev.io on Twitter
- CorpDev.io website
- Roland Savage on Medium
- How to Stick the Landing: The M&A Handbook for Startups
Transcript
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SE Radio 00:00:00 This is software engineering radio, the podcast for professional developers on the [email protected] se radio is brought to you by the IEEE Computer Society. I is your belief software magazine online at computer.org/software.
Gavin Henry 00:00:17 Welcome to software engineering radio. I’m your host, Gavin Henry. And today my guest is Rowlandland Savage. Salvage is an entrepreneur and corporate development professional who has spent most of his career working with startups in one way or another. He has taken two startups from concept through to commercial deployment. As a leader in the Corp dev team at LaSeon Roland successfully executed a number of deals. I was notably part of the team that acquired Trello Roland. Welcome to software engineering radio. Good, thanks. Is there anything I missed in your bio that you’d like to add?
Rowland Savage 00:00:49 That’s pretty much the highlights.
Gavin Henry 00:00:51 Excellent. I’d like to start with an overview of what a business is, why someone creates a business and why another person or company acquires a business who has a business and the types of business in relation to software engineering that you’ve come across.
Rowland Savage 00:01:06 Ultimately a business is an individual or a team who have gotten together to solve a particular problem. Well, I’ve done that with some varying degree of success from the astronomy successful to the much less so as I’m going to task with some of my own startup experiences and whenever another business, a larger business, a more established business seeks to acquire a startup. It’s typically for one of three reasons they’re interested in the team as in the experience and the knowledge that the group has, has accumulated more interesting than the product, what it is that built and what it does, its capabilities, or they’re interested in our customers. They want to get access to those customers either to make them their customers, or to maybe sell their products to those customers. And then an ideal situation for the M and a professionals, the corporate professionals, it would be all three.
Gavin Henry 00:02:00 And these businesses, are they different throughout the world? Or is it more or less the same in relation to software engineering?
Rowland Savage 00:02:07 When it comes to software, it seems same but different. So a lot of similarities, but in the U S every state has its own nuances. And across Europe, some countries just have a lot more regulations and red tape to deal with than
Gavin Henry 00:02:20 Others. So it depends on the country,
Rowland Savage 00:02:24 But in general, the standard structure has evolved from all the way back. I think the origins are throughout Martin street in London, um, and that is become a standard limited liability corporation type structure.
Gavin Henry 00:02:38 And you touched upon the person starts a business to meet a particular need. Yeah,
Rowland Savage 00:02:45 If they don’t, it tends to be short lifts, you know, people that are exploring or trying to figure out what they do after they start the business. Normally find that’s a challenge. The world we live in today, the most effective way to start a business, it started with a problem. And once you’ve come up with a solution to that problem, more importantly, you find customers that are happy to pay you for that solution. Then, you know, you’re on to something, something that can be its own its own Anthony.
Gavin Henry 00:03:11 So that’s a very similar problem space based on some of our other shows we’ve done just in software engineering in general, where you don’t just create a product to find customers and you don’t just create a business to find customers, you should start with the problem space.
Rowland Savage 00:03:29 Yeah. I mean, the thing is you can create a product to find customers, but the chances are you won’t be successful. And I know that sounds harsh. But as you mentioned in my bio, I’ve had some experience in the venture capital world. And the success rate for startups, I think is one in 20. That’s what the, the statistics were the last times I checked them. So the whole, in the last five to 10 years, we’ve just become a lot more efficient at starting companies and having them become successful. And that’s part of the lean startup methodology. And some of the other aspects we go about actually building these products. But the key thing is, entrepreneurs will tell you this because we’ve all experienced it. You’ve got to find a real pinpoint, not just something that would be a nice to have.
Gavin Henry 00:04:19 Yeah, we’ve done two fantastic shows, episode 4, 4 8 with my own starting your own software company that goes into all those things. You’ve just touched upon on episode seven, three with Juul on startups, growth and valuation, which is highly recommended. Now we’ve covered the reasons to start a business and the reasons not start a business. Why does a person or another business buy another business? If that makes sense?
Rowland Savage 00:04:46 The quick answer is for acceleration. So it’s a funny thing on the, in the corporate side, when you’re in the corporate development team, anytime you look at a startup, so a team of people that have developed some product or capability, and you go talk to your engineering folks, they will always have the same reaction. And that is that we could build this ourselves. So every company typically thinks that engineers are the best when some of them are, but the issue at hand is both the time it would take to do that. So now occasion of resources prioritization, and then having the time to actually build the thing and also an appreciation for the effort that’s involved to make a product successful. So whenever slack build a messy system, it’s not just a case of figuring out the technical challenge of being able to send the short form text message from one user to another. It was all the customer interviews. They did all the effort they put in the design and all the problems they accomplish getting that product to market and solved and those small things. And I think all of the software engineers would appreciate. They just take.
Gavin Henry 00:05:53 Yeah. And it’s also what to say no to as well. Isn’t it?
Rowland Savage 00:05:57 And there’s a lot of the way I think of corporate development from the corporate side is it’s externalized, R and D. So if you want to do to kick off all these programs internally, you would have to kick off 10 for every one successful program. So as a result,
Gavin Henry 00:06:14 Whenever you look at, if you want to acquire a particular startup, you’re typically looking at the ones that have been successful. So you’re kind of happy to pay a premium because they have already circumnavigated the risk associated with whatever that particular problem and coming up with that solution. Yeah, I think in one of our other shows, I’ll put it in the show notes. When we chat to one of the top guys at base camp, they have the idea where they do internal pitches. So I guess that’s similar to the Corp dev situation where they might have to pitch 10 projects, but they could just go out and buy a company that’s successful already.
Rowland Savage 00:06:49 And having it available today are more or less today. You know, obviously there’s a period of time associated with doing the deal and integrating the company, but that’s a huge deal, especially as the company you’re acquiring get larger. So if you want to build that thing, it might take you 24 months or you could do a deal. And six months from now, I, that capability is functional within your product.
Gavin Henry 00:07:12 And, um, why would a person want to sell a business if there, you know, if we’d keep the terms, acquisition and selling to separate for this question, does a startup always want to be bought or do they want to carry on? Or when you experienced, what have you seen for the reasons to sell a business?
Rowland Savage 00:07:28 Yeah, not always. So there are some people that want to do their own thing, be the captain of their own ship. And they may have designs to become the next unicorn or kick something all the way through, from inception to IPO
Gavin Henry 00:07:41 Kind of unicorn.
Rowland Savage 00:07:44 Yeah. And that’s great. And then there’s other companies that are successful enough to have free access to venture capital or other financing. In which case they don’t need to be inquired, but need in inverted commas there. So they are able to continue executing on their plan without any external interference. And again, that’s grit. Now, there are a couple of other categories of people who there’s people that might want to be acquired. So the most obvious answer might be because of liquidity. So if you start a business, you tend to, entrepreneurs tend to invest an awful lot of time and money in doing that. And it might be a long time before you’re able to see any kind of return on that. So if someone’s able to come around and tell you, Hey, you can keep doing the job you’re doing, but we will give you a pretty decent sum of cash.
Rowland Savage 00:08:31 There’s a lot of people will find that attractive. There are people that need to sell their business. So they have raised a certain amount of money. That money is it will give them a certain timeline to execute on. And if they don’t have additional financing lined up, they know if we don’t find an exit point before that money runs out, then we’re in a lot of trouble. And the final reason people might want to do it is because as you are growing accompany, your as a fonder, your role will change. So if you really enjoy building products, for example, and you are the CTO or the lead product officer of a company as that company goes, you must spend a lot less time building product and a lot more time hiring people and managing people and allocating work. So there is an opportunity for some teams as they grow, if they’re required, they can affect to be focused on the things that they love doing.
Rowland Savage 00:09:26 And the building, the product may be talking to customers, maybe selling the product and figuring out ways to market it and let the larger company deal with the more boring aspects of running the company. And that’s the legal, financial, the chasing up customers and dealing with all those things that founders inevitably have to deal with after they get to a certain size. So an acquisition is a way sometimes to sort of lock in what you’ve done and then sort of let the larger company help you scale it. And the scaling part can be quite difficult as well.
Gavin Henry 00:10:00 Yeah. I understand a lot of those points cause they bring home some of the business people I know, but it sounds quite a personal decision of why you’re selling that business.
Rowland Savage 00:10:09 Yeah, it always is. And I should actually add one more. A lot of people start a business with a goal in mind and the best way to get to that goal might be through acquisition. So if you have a product that typical situation, startups can find themselves in where they have a good product, but they don’t have the customers, people aren’t seeing it using it. Then if you join forces with a larger company that has users, then that might be the easiest way to get your product into the hands of as many people as possible. And for a lot of people that that kind of is their objective, that they can make the world a better place by having as many folks as possible, use their particular tool to help make things more efficient.
Gavin Henry 00:10:49 So it’s not just about making money, it’s whatever their wishes are.
Rowland Savage 00:10:55 No. And as you said, it’s a very personal matter for all funders. And quite frankly, after a certain point, the money matters a lot less to people satisfying their initial objectives.
Gavin Henry 00:11:06 And how long does this process normally take? If you, if we focus it down to a big company, buying a startup,
Rowland Savage 00:11:13 Do you mean the acquisition process itself? Yeah.
Gavin Henry 00:11:16 Let’s go from, you’ve approached someone or you’ve been approached and you’ve got some money, whether that’s all of your money or some of your money, how long does that normally take?
Rowland Savage 00:11:27 So there’s normally some, some form of bidding period where the companies get to know each other through some mechanism, and that can be a variable amount of time. It can be very, it could be a long slow process or it could be something that happens quite quickly, but the deal normally officially starts whenever a term sheet or an LOI is issued. And that is where the headline terms are agreed between both the company. And the, that
Gavin Henry 00:11:54 Was the letter of intent is that basically says, this is what we want to do, how much
Rowland Savage 00:12:01 It’s basically saying, Hey, I really do want to buy you, which is it’s good to hear that in explicit terms, we would like to pay this amount of money. We would like to pay that amount of money over these certain terms. Most commonly know, we’ll do it over a period of time. And we have these expectations. You might come and work at our headquarters, or you might continue to run the business for 12 months, or you might start working for someone within our organization. And that kicks off the mini sort of round of negotiations where both sides have to agree that this deals what they want and the general shape and form is something that’s acceptable to both parties in my book, I’ve likened that to an engagement proposal to get married. So it’s non-binding, but it’s not something that should be taken lightly, but both parties should be committed to making it work.
Gavin Henry 00:12:53 And it’s a bit more than a prenup
Rowland Savage 00:12:57 And more than that. Yeah. So from that point to actually receiving funds at the end of the deal can be done in 45 days. I’d say 90 days is probably a more realistic timeframe to wrap your head around. It depends a lot on the size of the company. It depends a lot on the complexity of the company. It depends a lot on how familiar both sides are with each other. So for example, if you have integrated with the company, if you’re on regular speaking terms with engineers or product managers at the acquiring company, if this is a conversation that’s been had before and floated, that might be a very quick process. If you’re a simple company with offices, one area everyone’s signed all their agreements, your customer agreements are quite straightforward. Then the process can go very quickly, but especially in today’s world, even small companies can get very complex. So you can have employees in multiple countries. You can have customers in multiple countries under different agreements. And all of these are things that the acquiring company needs to understand and needs to figure out a plan of how to integrate that into their overall offering and how things will look wants to deal is complete.
Gavin Henry 00:14:10 Excellent. I’m going to move us on to the next section, just to summarize your last answer. It just depends on what that product is for how they do, how long they’ve been in business, what countries
Rowland Savage 00:14:23 It does, but I would put that 90 day figure. So even very large deals can be completed. Maybe it’s longer than that. Maybe it’s four months rather than three months, but they don’t go on for years. Once the LOI has been a great it’s uncommon than everyone to move quickly at that point. And ironically doing a small deal can sometimes be more time consuming than doing
Gavin Henry 00:14:43 Thank you. So you touched upon this in the first section types of acquisitions, and now that we’ve covered the basics, I’d like to explore the main types of acquisition. When your book, you list three types. Can you tell me what these three types are?
Rowland Savage 00:14:59 Yeah. So the three main reasons a company might want to buy a startup is to acquire either the team, the technology or the customers, or ideally all three. So if a company is acquiring the team, that’s in the valley here is known as an Aqua hire. If they’re only acquiring the team. And the reason why a company might want to do that is because the team has some set of specialist skills. So you’ll see that happen. For example, if you have a team of Stanford PhDs that are working on an AI algorithm and the larger company wants to create for want of a better term, an AI department with easy thing they could do is acquire that team and then put them to work, to solve the problem they have in mind.
Gavin Henry 00:15:40 And how would they get to know each other artificial intelligence team has it, they just in the same circle,
Rowland Savage 00:15:46 That’s the role of corporate development. So corporate developments will be scanning the ecosystems that the company is active in and reaching out to companies and developing relationships.
Gavin Henry 00:15:56 So just like business development and sales. Yeah.
Rowland Savage 00:15:59 It’s like that. The other way it happens is involved. So for example, that small company might have an integration, might have a marketplace app, or might otherwise be engaged with the developers and perhaps from meetups or through some common program in which gets they get on the company’s radar internally, it’s recognized and that to be valuable to spend time getting.
Gavin Henry 00:16:20 So there are an acqui-hire in the, the valley California
Rowland Savage 00:16:26 At varying degrees of attractiveness, depending on how available developers are at that point in time
Gavin Henry 00:16:33 On the second type would be
Rowland Savage 00:16:35 For the product. So the team has built some capability and solve some problem that is interesting to the company. So an example of that, while I was at Atlassian, we bought, uh, a video conferencing technology to integrate with HipChat, which was a competitor to slack. So that’s a very clear cut case of, we need to find someone that has built a video conferencing platform that is reliable, that has a, an architecture that would fit with our architecture and is amenable to the idea of joining a larger company and integrating that platform with a messaging system. So in that case, you’re looking for, for someone that has a very clear set of technical
Gavin Henry 00:17:15 Requirements,
Rowland Savage 00:17:18 Acquiring the acquiring competence, specifically the technical or product team within that company. So they will have a mind and that is something perhaps we could build ourselves or we could buy if something’s already out there. And in this case, I mean, I think of the amount of effort involved with building a good and stable platform like that, you know, it’s probably tens of years worth of effort. So it’s a nice pack to be able to plug that in
Gavin Henry 00:17:44 It’s some in-depth knowledge needed for video codecs and all that stuff. And the third type account
Rowland Savage 00:17:51 Then for customers, the companies interested in the customers. So in each of the two previous times, so, I mean, they’re obviously all related. So if you’re interested in the product, then the team that’s built that product is all obviously of interest to know when acquiring for the product, the company may or may not be interested in the customers that the team has captured through that product. So the company might see the acquisition as a new line of business. They might see the acquisition of a way to get into an adjacent line of business, or they might see that the acquisition as a way to cross sell their products to the startups customers. So when all instances acquiring for access to the customers is going to be more valuable probably than just, just acquiring the product itself or just acquiring the team.
Gavin Henry 00:18:40 But they might not care about customers, the
Rowland Savage 00:18:43 Product they might not care. The larger company might have so many customers that are whatever number that the startup has. It might be interesting from the startup perspective, but much less. So from a large company
Gavin Henry 00:18:56 That leads us nicely onto my next question is do some companies do acquisitions to kill technology or to learn about gain expertise and that technology, how do you not caring so much about the revenue?
Rowland Savage 00:19:08 Almost all competence will care more about the technology probably than the customers involved. They say almost all. And again, it depends again, if someone was to buy slack, they have whatever many tens of millions of users. That’s interesting, you know, that’s
Gavin Henry 00:19:21 Valuable Salesforce,
Rowland Savage 00:19:25 Right? Exactly. But a lot of the times the company is buying the technical capability companies don’t buy other companies just to shut them down. That’s an expensive way to throw the competitor out of business might think is illegal under certain circumstances, but it’s also just, if you want to compete with why not just compete with them, why not just beat them by building a better product or offering a lower price. We’re doing something along those lines. Now that doesn’t mean the companies aren’t acquired and the product line sunsetted, but eventually we see that happen. I think Microsoft acquired Wunderlist. I think they’ve sunset that that’s a good example, but it tends to be more of a change of priorities or changing direction, or perhaps the intention was me and Dubai technology with the goal to scaling it on. It just turns out after deep investigation, that just doesn’t work. That was a premise that ultimately,
Gavin Henry 00:20:21 So again, it comes down to what is of interest to the acquiring company really.
Rowland Savage 00:20:26 And one of the points I tried to get to in my book is it’s really important for the people in the startup side to really understand what the, um, the acquiring company has in mind. So all of these approaches are valid, providing people know what they’re getting into. So if there’s a risk associated with shutting programmed on, for example, if startups see that as their baby, I’m under no circumstances, do they want that product to be end of life? They need to know that going in and that sort of holds everyone involved to have that conversation.
Gavin Henry 00:20:57 I’ve got a link to your book in the show notes, but just to let the listeners know it’s called how to stick landing, or you can tell me what it’s called,
Rowland Savage 00:21:04 Stick the landing, the MNA handbook for startups.
Gavin Henry 00:21:09 So in your experience and what you’ve been through yourself and what you see, which type of those three types of acquisition
Rowland Savage 00:21:18 And almost all circumstances is the combination. I would say the customers matter lasts for a lot of the deals that are done. People are interested in the combination of the team and technology. However, customers validate the technology. So if you’ve built something and nobody wants to use it, it has to be a pretty well understood niche for someone to want to buy
Gavin Henry 00:21:43 That. It is,
Rowland Savage 00:21:46 But you don’t necessarily, if you’ve got a hundred customers, for example, that might be enough to revalidate the product.
Gavin Henry 00:21:53 Yeah. You’ve got a varied enough input for customers to have the right feature set and give you some guidance. Yeah.
Rowland Savage 00:21:59 So it’s always nice when there’s customers, but you know, a lot of the time, for example, these larger companies, like a Salesforce might simply be looking at your company as an additional feature they would add in perhaps not even charged for just to improve the customer experience and the retention associated with it.
Gavin Henry 00:22:18 And are you allowed to talk about the reasons Trello, just in broad terms, where would they fit in the type?
Rowland Savage 00:22:26 Well, they were definitely, there was definitely a highly talented team there and they had a fantastic product. So child, I don’t think it was a secret. They were monetizing their customer set and they did have an awful lot of customers, but I think what was exciting for it last season was this lightweight, visual, very easy to use intuitive tool that Trello had created and what that would bring to the Atlassian offering, which at the time was JIRA tends to be a very, quite a heavy whip tool. Come on, line driven more than,
Gavin Henry 00:22:57 Oh, the Gyra. I don’t know how you say it. Ticketing system source control.
Rowland Savage 00:23:03 It’s probably very successful, but it’s, it’s kind of a, it’s a product built by engineers for engineers. So you can see that there’s having the travel definitely represents the whole new way of sort of building products. That will seem very valuable to it last, and then in terms, I think for Trello, having access to the, you know, the enormous ecosystem of blasting customers and their products, which, you know, an awful lot of people use was one of those sort of win-win scenarios.
Gavin Henry 00:23:31 And it was a success.
Rowland Savage 00:23:32 Yeah, I think so.
Gavin Henry 00:23:33 Excellent. We actually use Trello to do all the different stages of the shows at software engineering, radio,
Rowland Savage 00:23:40 Just a tremendous team, their
Gavin Henry 00:23:43 Product. I like excellent. I’m going to take us on to the next section. I’d like to discuss getting a line for an offer, you going out and trying to find someone to acquire you or what happens if you are approached out of the blue. So if you are approached, so you haven’t had any intention pine, or maybe you have to be acquired, is there a particular way to value your startup? Or how do you do that?
Rowland Savage 00:24:07 Yeah, I think you’re asking two different questions there. So first and foremost, it’s how these offers manifest. My key piece of advice here is not to be surprised. And by that, I mean, if you are a startup, you should, as you’re developing along your journey, have a good idea for the type of folks that might be interested in acquiring your business because they’re your closest neighbors. So our biggest competitors, they also, as you’re developing, we’ll probably have a number of programs that you might want to build yourself up. And those are the partner partnership programs, the hackathons, the even engaging with them. A lot of large companies have programs that have outreached towards startups. It’s a good way to get access to knowledge and expertise. And even
Gavin Henry 00:24:54 So it was less likely that you would be approached. It’s something that you should be thinking about.
Rowland Savage 00:24:58 Yeah, yeah. You don’t have to do a deal, but you should know who might be interested in buying you and whenever you’re talking to a startup and they just think it would be Google, it’s like, well, think through that and who might be blogging right now, given that example of the video technology you should, it’s incumbent on the leader of a company like that, to know who’s interested in video technology right now, who’s writing blogs about, wouldn’t it be great to have a great video technology? Because if not a, if not an acquisition opportunity, that might be a business development opportunity. That might be a customer prospect.
Gavin Henry 00:25:32 Yeah. It could be a partnership acquisition.
Rowland Savage 00:25:35 Yeah. So it’s never clear at the start of the, of the conversation where, where it might lead. And that’s true in the company side too. So the roots of having becoming a customer, becoming a partner or becoming an acquirer, they all start the same way. And that starts with hearing about the startup, getting to know the startup and getting to understand the startups capabilities.
Gavin Henry 00:25:55 We’ll stick with a startup that has intention of being acquired. And they’re putting themselves in the different circles is the star of evaluation different from a valuation of a business that is fully sufficient or has been going awhile?
Rowland Savage 00:26:07 The principles are the same. I mean, there’s a risk associated if the company requires financing in order to remain solvent. And then the next question would be, I likely are they to get that there’s no financing, but just to be specific, the, whether the offer is solicited or has been worked towards valuation as much an art as it is a science. So things that startup founders want to keep in mind is look for comparable transactions. So look for companies that are in some shape or form like yours that have been acquired and how much I’m the amounts have been disclosed, which does not always happen, probably only happens less than half of the time I suspect. And the reason that’s important is it is very hard to value a business that doesn’t have a stable, recurring growing revenue sprint. It gets very subjective at that point of view.
Rowland Savage 00:27:01 And it’s also worth pointing out that accompany, the same company might be worth different amounts to different acquirers. The reason being that whenever I acquire a startup, I am going to want to, let’s say either sell their product to my customers or sell my product to their customers or some combination of the two. And depending on what my product is, the number of customers, I have my price point. I might arrive at a very different valuation as a different company that has more or less customers or charges a greater or lower Amman for their product. And that’s something to keep in mind. Both valuations will be correct from the perspective of the acquirer.
Gavin Henry 00:27:43 Yeah. I suppose it depends say a company’s running stuff in private hybrid clouds and the other one’s purely in the cloud. It depends how the acquire does things. Some of that might be useful. Some of it might not be so that can change.
Rowland Savage 00:27:56 Yeah. It’s the maximum is that all deals are different, but the question is Hamas does the acquire value, what you have done. If they value all the aspects about what you built, how you’ve built it, how you deploy it, et cetera, you should feel that their offering, you’re going to get an offer, reflecting the full value at that point in time. If they only want part of it, you know, let’s say you’re an on-prem solution and the cloud solution. And they’re only interested in the cloud solution then that on-prem side of your business is effectively worthless to the acquiring company. Not again, there’s some sense of negotiation when it comes to determining value where there’s got to be an acknowledgement that got to meet somewhere, somewhere in the middle, but it’s always worthwhile keeping that in mind.
Gavin Henry 00:28:40 I could just see one part of that as something as a pain, and they’re going to have to sunset at some point and do migrations. So that leads me nicely onto my next question. Where do we see the crazy numbers come from in the press, the unicorns, and there might be a team of 20 or 30, but they’re just volume to where you were wearing more than make sense. Do you have any insight as to how that works?
Rowland Savage 00:29:02 Well, I would question the, are they valued more than mixed sense? Are those numbers crazy? So I buy that. I’m not being cute, but it’s a small numbers of people. Small groups of people have created products that have been enormously successful and have attracted huge numbers of customers and potentially generated huge amounts of revenue. So whenever you see those silly numbers, someone has sat down and think this company will generate revenues that would justify that valuation on either they are doing it, or there is a path they will do it at some point in the future. People doing these deals generally, aren’t stupid. They’re not throwing money away. They see some super valuable pathway. I’ve actually got an analogy there to think about. And it’s whenever Google bought YouTube at the time, I believe that was pillared as I think they paid a billion dollars at the time. I think that that deal was pillared as being a, you’re crazy for paying so much money for YouTube. And that, that was just the height of extravagance. Whereas what would you to be worth now, if it was independently valued, it’s something billions of people use every day. The question is how much is that company worth to that particular acquire on Y
Gavin Henry 00:30:21 Um, that cleverness and insight comes from the team, getting bored to say, hold on a minute, we’re potentially worth this much to you.
Rowland Savage 00:30:30 Again, I would think very much. My goal in life is to try to break down the barrier between the acquire and the acquired. I mean, ultimately whenever you’re deciding to join forces again, go back to that marriage analogy. It’s a marriage. You have a shared goal you’re working towards. So by themselves, there is a value to be created through an acquisition in that by themselves, the smaller company may not be able to achieve the greatness that could be achieved through the acquisition. Whenever we build a business case for acquisition, one of the questions we answer is how does one plus one equal three Holly, by putting our two pieces of the puzzle together? Do we get something that’s greater than the sum of the parts?
Gavin Henry 00:31:13 Yeah. So yeah, it’s really, again comes down to the desires of the people selling.
Rowland Savage 00:31:21 Yeah. And ultimately that combined offering might be closer to realizing the vision that both companies, then they do it by themselves.
Gavin Henry 00:31:30 Going back to the offer stage. Now that we’ve covered off crazy numbers are in fights, lack of insight from the reading of the article. Maybe we’ve touched on the timeline and the stages after an offer letter. Could you just give us a recap on that?
Rowland Savage 00:31:44 Yeah. So after the LOI has been agreed, typically the stage is after that will be due diligence, which is for the acquiring company to understand everything about what it is they’re buying will be the agreement of the legal documentation, which is largely at the stage of lawyers, arguing with each other and working out the fine detail from a legal perspective of the deal. There’ll be a free as of integration, which should begin before the deal closes, but will be an effect. The sequence of steps that happen immediately after the deal closes. And then closing itself closing is when people put their signatures on paper, she accounts from a legal perspective than to become one.
Gavin Henry 00:32:28 And at the closing stage, yes, if you’re already having chats about integration and obviously NDA and all that type of stuff, so you’re sharing things or what point up until completion, can you both just go, nah, I’m not interested.
Rowland Savage 00:32:46 The common or friend is a, deal’s not done until it’s done. So right up until both signatures are exchanged and the legal documents have been executed. One party can walk away from the
Gavin Henry 00:32:56 Transaction. Yeah.
Rowland Savage 00:32:59 So the process is set up to build confidence as you go through. So for example, if there’s some problem with the term sheet, with the LOI, then you need to have that conversation before you go and spend six figures on lawyers in the cottons and anyone else you might need, and you don’t want to disrupt your business for three months just to ultimately walk away. So it’s important to have those hard conversations earlier. And I mentioned integration because that’s a huge deal, understand post-deal who are you going to be reporting to is defined, are going to be reporting directly to the CEO, or is it going to be reporting to someone four or five levels down? Does the team have to relocate or not? Does everyone in the team get a job or not will the condition?
Gavin Henry 00:33:42 Yeah. I’ve seen your, um, your helpful guide to the pocket book, sort of help you go through that. And I’ve seen some deals in the press and things where some chats I’ve had with some other guests where integrations just either stagnate or just don’t happen. Acquired company may have been barrel being just a partner if they haven’t gotten up at nailed.
Rowland Savage 00:34:03 Yeah. Well, again, this is something that’s important for both sides to agree on. So the most important determinant for the success of the deal is the integration and that needs to be thought through. And it’s important because there are different people involved in the doing of the deal. So the folks involved in actually doing the deal are not the same folks that are going to be involved with running the combined.
Gavin Henry 00:34:26 We’re going to touch upon integration in the next section. So you’re moving along nicely. You’ve done completion. Do you then get a big fat check and one girl or not check, but you know what I mean? How does that work?
Rowland Savage 00:34:38 Yeah. So typically wants the deal closes. There will be some transfer of funds. So the way deals normally work, I’ll speak just to my experience here in Silicon valley is typically you will, you will be given some portion of the funds at closing and then have a retention piece. I’ll probably fast over the two to four years. So imagine you get a fifth of the funds upon closing then another fifth after year one, and then another fifth after year two, another fifth after year three and another fifth year four. So upon closing, yes, wires will be initiated, but not for the full amount. So it would be a very foolish thing for an acquiring company to suddenly have a different group of people, a large check, and then just hope everything works out after that. And that’s really not.
Gavin Henry 00:35:25 And that’s also called an earn-out
Rowland Savage 00:35:28 And then on the structure, yes, it can be in or not or a whole back.
Gavin Henry 00:35:34 And does it cost money to be acquired? I think we touched on that a little.
Rowland Savage 00:35:37 Yes. Most importantly, it costs a lot of time and effort from the founders. It will be disruptive for a period of months while you go through the process
Gavin Henry 00:35:46 And that holds everything else. Yeah.
Rowland Savage 00:35:48 So you’ve got to be careful. One of the scariest things for me being on the corporate side when acquiring a startup was making sure that we didn’t topple them like a small boat then top of by, you know, the wake of a big bolt while we went through that process. Because remember there is a potential that you would walk away after occupying their, their mind and their Headspace for a couple of months. You always have to be as cautious about that. And as efficient as possible. In addition, commonly you would spend six figures on a lawyer and to work through this process as well, or something close to that,
Gavin Henry 00:36:19 Talking about lawyers and accountants, how much does the inquiry and company need to know about your company,
Rowland Savage 00:36:27 The acquiring company can’t acquire you, and then suddenly find out that you’ve been sued, but that’s just kind of happened. They can acquire you and find there’s employee issues. They can acquire you and find out actually you had a fonder who kind of owns the IP or could make a claim on owning the IP after the deal closes and Sue them for more than the deal is worth.
Gavin Henry 00:36:49 So that could be something like they create the software themselves before they started their legal entity.
Rowland Savage 00:36:55 Not just that. And again, I’m not up to data on UK law, but if everyone who’s ever worked for the company, hasn’t signed an IP assignment to the company. Then the company itself doesn’t have full chain of custody on the IP, which means someone could buy the company and someone else comes out of the woodwork and say, Hey, I worked in that. I worked in the real important piece and it’s really hard to prove that they didn’t and they potentially could have a legal cam. And that’s just a huge headache nobody wants to deal with.
Gavin Henry 00:37:25 And that’s covered under the term due diligence. Isn’t it, all of that. And what, so our team is typical to have on the side of the company getting acquired. So not the big company, the small company
Rowland Savage 00:37:36 Typically you’ll have the Fonders involved with probably someone to provide definitely someone to provide legal advice. So a good M and a lawyer, and then probably someone help on the finance side
Gavin Henry 00:37:49 And acquisitions
Rowland Savage 00:37:50 And mergers and acquisition. Yes. And then someone on the finance side. So part of the process will be to review all of the financials and make sure everything’s understood. I’m unclear. Now that might be the CFO of the companies had it. It might be one of the board members if they’re experienced or it could be an independent financial advisor.
Gavin Henry 00:38:09 Okay. Just to round off the section or bang on time. So that’s good. So yeah, due diligence, telling them everything you need to know, you need a good team to support you, to make sure you’re not getting to something on both sides that you’re not privy to. And if you’re allowed to say, I don’t think I’ve asked this already, how did the last one happened again? They approached cello. Is that correct?
Rowland Savage 00:38:33 It’s funny. I was just writing those large deals and the Trello deal was a $425 million
Gavin Henry 00:38:39 Deal.
Rowland Savage 00:38:41 Yeah. Those are in process for like Trello was on our radar for years. Scott would make a point of trying to meet with Juul and Michael, whenever he was in New York. So we, we tried to build a relationship over, over a period of time and understand where they, where they were and where they were going. So it’s hard to come up with just one inception point. That’s why, when I say it shouldn’t be these acquisition offers shouldn’t come out of the blue. You should know if someone’s interested in you and be helpful in facilitating those relationships.
Gavin Henry 00:39:11 Excellent. So let’s say we’re now we’ve been bought the process out and we’re all extremely happy. We’ve got to do the integration. I mean, may potentially head off into the sunset once that, or now, or, you know, Honda have appeared has done. So how do we start merging things at all? Is that decided that fund before completion or
Rowland Savage 00:39:32 Ideally at least at a high level, it is. There’s actually a lot of things that needs to happen in reasonably short order. So for example, the, if you have customers or generating revenue, you’ve got to join, you’ve got to combine that with the acquiring company. So how you go about buying our acquiring customers has got to be aligned with their way of going to buy the combined customers. And then where are the cash flows? The systems they run through and high they’re ultimately reconciled. There needs to be a plan for combining notes. Ultimately moving to one standard. The various groups have to get to know each other. So the way you build product has to align with HOD. The big company builds the product and there needs to be a plan of how they’re going to be integrated. The specifics of that depends on sometimes you’ll find companies run more or less independently for six to 12 months or right away, it might be, how do we plumb our system into your system so we can offer that joint offering to this.
Gavin Henry 00:40:29 So you’ve called them the financial part, the sales part, the operational part, autumn to margin aligned.
Rowland Savage 00:40:36 Yeah. The hitch, our part probably happens before deal closing in that all the employees are given you contracts, whatever share says, or whatever Sheriff’s scene they were on with the old company. They’re not on a new one with the new company. So that has to happen as well.
Gavin Henry 00:40:52 You say Sheriff’s scheme. Yeah. Yeah. Yeah. And have you ever seen instances where a company buys a product to get product market fit on the customers, but scraps a product and rewrites it all from scratch? That’d be pretty crazy.
Rowland Savage 00:41:07 I haven’t personally seen that. It’s actually, it’s not that crazy. So think it’s common as products grow and expand that they’re all rewritten or certainly redeveloped as they go. So it is possible that you might acquire the effectively turn of a version, two.zero of the product that may be perhaps written on a different platform. That’s more scalable or utilize a new languages or capabilities that the startup team wasn’t as familiar with. So in general, I would think of it more of a, of an iteration or an evolution rather than a scrapping.
Gavin Henry 00:41:42 And in general to things always run smoothly with integration,
Rowland Savage 00:41:46 General things tend to not run smoothly, but that’s, that’s the challenge. So there’s a transition period. Well, actually it started off with a nice bit. It started off with a honeymoon period. So whenever a deal happens, normally everyone’s very excited about that. So there’s a new shiny thing been brought into the company and everyone’s quite damn excited to have that.
Gavin Henry 00:42:03 I think in your book, you’ve discussed being loved to death.
Rowland Savage 00:42:07 Yes. Well, if you think about it and a company that has a hundred people in it, and there’ve been bought by a company that has 5,000 people in it, you suddenly find every engineer wants to talk to the very small number of engineers on the other side. And suddenly they’re spending the whole first month fielding coffee requests. And because they don’t know who’s who in the new organization, people are tend to be very polite. So they effectively can be brought to stand still just through people being curious and interested and wanting to wish them well, which is all good, but like all things there needs to be balanced there.
Gavin Henry 00:42:41 And how do they protect themselves in those situations?
Rowland Savage 00:42:44 Ideally, there should be an integration manager on the company side who can effectively be the bad cop to say, Hey, these people already have jobs which occupied a hundred percent of their time before been acquired. They know I have to do all the acquisition activities, which is probably another good hundred percent of their time. And they are going to want to meet them, integrate and connect and understand everything about the new company. So we just can’t do everything all at once. So maybe let’s, let’s fix things in let’s take things gradually.
Gavin Henry 00:43:14 And those, all the knowledge get transferred.
Rowland Savage 00:43:17 I don’t know if the knowledge, if it needs to get transferred thought there are definitely interfaces need to happen. So there there’s gonna be some, some connection points. So at a, at a product level or an engineering level, you definitely want a mind meld to happen between certainly between key resources on both sides. But overall, ideally that the startup that’s been acquired should be able to bring some new energy, maybe some new processes, maybe some new practices about how they do things because startups can normally move quickly really quickly. And the larger company in turn can help with, okay, here’s the more standardized processes we use because for a large company with many customers, stability is key and providing customer support, et cetera is key. So if you can combine those things, that should be quite powerful, but it takes time. And it takes time for both sides to kind of get comfortable with each other
Gavin Henry 00:44:12 Before
Rowland Savage 00:44:13 It should be mapped out, like all things. I mean, you should, you should have a plan and then you should have the ability to stray off plan where necessary.
Gavin Henry 00:44:19 And is that usually part of the payouts over the next few years,
Rowland Savage 00:44:23 In an ideal world, the payout should be time-based. Everyone should be understood to be doing their best in the situation. Sometimes payouts will be milestone based. And the reason why I caution and I’m accepting that is because the person who accepts the milestone payment may not be in full control of all the effort that’s required to satisfy the milestone. And I’ll give you a very simple example. Let’s say you agree that you have 500,000 customers and you agree that you would get a big payment and you get to 1 million customers. But in order to do that, you need to add an extra a hundred engineers. And then when recruiting comes around, you’re only able to add 50 engineers. So if everyone’s making best efforts, you’re in a sticky situation there, you know, so people are working hard to meet their goals, but for reasons, sort of not their fault, they’re unable to complete that goal.
Gavin Henry 00:45:17 It’s not really done until those two to four years are complete.
Rowland Savage 00:45:22 Yeah, that, that would be the best situation is that you’re working to that two to four year plan, where after that time, both, all the knowledge has been integrated to the combined company. The two products are effectively one product. And at that point it becomes much less important to know, you know, who came from company a or company B, they’re just kind of the one team at that.
Gavin Henry 00:45:46 And did they ever do milestones payments based on your turnover of that company
Rowland Savage 00:45:53 That can happen? It depends on the specific
Gavin Henry 00:45:55 Of the deal. So it just depends on what’s going on. And what happens if the thing you love the most in your stock isn’t used? So you’ve got a couple of products that they’re not interested in your baby. It’s not just someone you have to suck up.
Rowland Savage 00:46:07 Well, that should be something that could have been perceived before the deal’s done. And if it’s really important to you, you should be aware of that. The thing to remember when you sold your company, you have sold your company. So you are seeding control to someone else. And what can happen sometime is that priorities simply change and you know, the world. So for example, COVID just happened last year. I can guarantee roadmaps were rewritten, Regardless of the intent, the real world comes into play and suddenly something might be dropped. Something might be reprioritized. That’s just part of the process. And ideally the thing you love most is probably the thing that makes you most interesting to the acquirer. Um, it’s usually hot works. Um, you would be working on some plan to get that thing into as many people’s hands as possible. Again, there is a reality there that’s just gotta be acknowledged
Gavin Henry 00:47:01 And that’s potentially something you can build into the terms of the two to four years
Rowland Savage 00:47:06 Potentially.
Gavin Henry 00:47:08 So how do we confirm or validate a successful or failure of an acquisition? I did the acquisition succeed.
Rowland Savage 00:47:17 It’s actually harder to do than you might think. So the only way you could reasonably do that is if you have a stated, shared goal at the time of the acquisition. So if you, that we’re going to buy product day combined with product B. And at the end of four years, we expect to have a million users using it, or we expect to be generating $10 million for the revenue through that. Then it’s very clear to say whether it’s successful or not successful in the reality four years after an acquisition, the companies have been reorganized several times, especially if it’s high growth. The teams have been combined, the products have been combined and it’s very hard to pick apart what part was product day and what part was product B. Also the benefits might be hard to quantify. So take the example where you are buying a small company that turns into a feature and a much larger project product that customers are using on it. It creates more delight with those customers. Well, how do you attribute increased customer happiness or higher customer attention to that one feature because there’s a lot, a lot more going along.
Gavin Henry 00:48:24 So it was quite hard to define the success criteria for an actual,
Rowland Savage 00:48:28 It is an over what time period. Again, going back to the Google deal with YouTube that did turn out to be hugely successful, but not right away. It was probably years later. Sometimes it’s obvious. Sometimes it’ll be a combined go to market effort. It just doesn’t work. Sometimes you acquire customers and customers leave because they, they like working with a small company and they don’t want to be with the large company, or they don’t want to be with that particular large company. Sometimes there’s a breakdown among the defining team and they’ll, they’ll leave sometimes that happens.
Gavin Henry 00:49:02 Yeah. You mentioned that in your book to always think about the fact that you’re going to I’m paraphrasing, but basically always think you’re going to come across with people again, you know, as you should treat other people in life is not slay everyone.
Rowland Savage 00:49:15 Yeah. And it’s just, it is a hard process, you know, and that’s, that’s the other thing to acknowledge. I mean, combining two, these can be difficult. And also the role of a startup, the startup CEO within a larger organization can be very powerful if they know how to leverage you or can just not be either Dan, the someone that is just making waves within a much more structured environment. And that might be difficult. There has to be some evolution of roles.
Gavin Henry 00:49:41 Can you anticipate these types of failures? You’d probably get a few signs upfront.
Rowland Savage 00:49:46 I mean, it’s the good fences make for good neighbors. I mean, as much as possible, you want to have discussions on alignment and, and especially roles before the deal closes. So transparency is key here. It was a gift that Atlassian, one of their values is open company and not a lot has to be clear. Here’s how things are going to be. And those conversations aren’t always easy and on both sides, but it’s best that they’re had. And they’re not sort of eventually evolved into when it’s not clear, who’s going to report to who or when it’s not clear what, what that combined is going to be, or who’s going to drive. That’s where the friction spin tend to tend to bump up the surface.
Gavin Henry 00:50:27 And have you seen situations where it didn’t fail, but there might’ve been some overpayment in terms of the actual value of the car.
Rowland Savage 00:50:36 Again, it’s hard to quantify that what I will say is I’ve seen a situation where the full value hadn’t been realized in the time along the original timeline. And it was just that additional, additional priorities got in the way, but then eventually that move was taken and then seemed to be quite successful,
Gavin Henry 00:50:57 I guess, potentially law companies or acquires and completion just hop in before March last year, couldn’t protect it 12 months COVID so
Rowland Savage 00:51:06 These things have, and it was for you and I 2008. It wasn’t that long ago, there, there are corrections in the market and not just that there’s new competitors, you know, there’s new people, there’s new approaches. And so it’s, you’re kind of hitting a moving object with a moving object and to get to a new destination. But that’s part of it. If someone has acquired your business for a reason, especially if it’s significant, the chances are that that is something that’s important to them. They want to follow through.
Gavin Henry 00:51:31 So measuring business value and getting the most out of the acquisition should be a given of the stock, but things change over the two to four years.
Rowland Savage 00:51:39 Things change over time. Yeah. And
Gavin Henry 00:51:42 Are there companies out there that look at acquisitions and treat them like a portfolio where the care about the overall return, but expect some to fail kind of like private equity and investors and things.
Rowland Savage 00:51:53 Yeah. That’s particularly the model of private equity investors. And what they’re typically trying to do is find an asset company and then apply whatever their system is to enable that asset more. So part of that system might be for example, that they have and just reconnections where they have back-office support, or they have scaling through the next stage of the company. And typically they will invest in a lot or buy a lot of companies and kind of run them pretty hard to see the return there after
Gavin Henry 00:52:22 And would be your, so a classic around a, B C type funding where they’re getting money, but not actually relinquish and all of the ownership of the company.
Rowland Savage 00:52:31 No, no. So I would treat venture capital investment. Our intent is very much to invest in the team, that’s operating the company and help them get to the next stage. Whereas a private equity investment tends to be more, tends to be larger typically, and also tends to be more to alter course somehow or adjust course or accelerate the course through some
Gavin Henry 00:52:55 Mechanism. That’s your PE and your VC. Isn’t read about that.
Rowland Savage 00:53:00 The line blurs between some of them these days, but you’ll kind of know what, when you see it.
Gavin Henry 00:53:05 Excellent. I think that’s been a great summary of the timelines. I’d like to start wrapping up the show now that’s okay. Around knowing what is involved in being acquired extremely important for software engineers and companies. But if there’s one thing of budding entrepreneurs should remember from our show, what would you like that to be,
Rowland Savage 00:53:21 Just to be mindful about the process? It’s good to understand the process and knowledge is par. So if you know, what’s going to happen, you’re better prepared to deal with it and have the conversations you really need to have
Gavin Henry 00:53:36 Be the best starting place.
Rowland Savage 00:53:37 Yeah. That’s, that’s probably a good starting point. Yeah.
Gavin Henry 00:53:40 And is there anything key or anything at all that I missed that you’d like to mention?
Rowland Savage 00:53:44 Not really. The one thing I would talk about is this, this need for transparency in the process, that’s a two way street. So I think it, the hose that the acquiring companies to be transparent about their intentions, because you can, short-circuit some conversations very quickly, but also for the startups being acquired to be as open as you possibly can, it’s very hard to have conversations and I’ve had it where someone said, you should buy us and then say, well, how many customers have you gotten to, I’m not telling you, how does your product work? I’m not telling you that either. And it’s like, how do you expect by you? You know, we just hope that what you’re saying is true and it’s like, that’s really doesn’t make any sense.
Gavin Henry 00:54:24 Yeah. I suppose not kind of like the car analogy, I went to buy that car, but you’re not allowed to see it, or you’re not allowed to task. How can I really understand?
Rowland Savage 00:54:33 And as I said, the processes about how we develop software are changing. So it’s got like, most people are blogging, their customer numbers, you know, have been very open about their monster, raising their head, constant things like that. So a lot of the times this isn’t sensitive information. That’s stuff that can be readily shared and might help the company get through.
Gavin Henry 00:54:52 But some of it is pressed police though. So you have to dig, it got a minute or so left. I’ve got a question about lighting and cello. What was the most difficult part, if you’re allowed to say, or what could have been prepared for better during the whole process?
Rowland Savage 00:55:10 If I was outside are probably the most difficult part was convincing them to, to sell the business because they were kind of doing so well by themselves. So there’s a truism and acquisitions that the company you want to acquire the want to sell themselves because they’re doing
Gavin Henry 00:55:25 So well.
Rowland Savage 00:55:28 And the companies that want you to buy them, you probably don’t want to buy them because they want to sell because they’re not seeing that, you know, the
Gavin Henry 00:55:35 Grill.
Rowland Savage 00:55:38 So the key is really, is trying to identify a shared goal. And Holly, both sides can kind of contribute towards that goal.
Gavin Henry 00:55:46 And it goes back to the point of finding the pain point to solve in your business or your product
Rowland Savage 00:55:51 Ultimately. Yes.
Gavin Henry 00:55:52 Perfect. So where can people find out more if they want to reach out and you’ve got your Twitter account? How else can people get in touch
Rowland Savage 00:56:00 And look for Roland Savage or visit my [email protected].
Gavin Henry 00:56:05 And you’ve got a medium.com.
Rowland Savage 00:56:07 I do have a medium website. Then I have a series now on adding transparency to the M and a process. And that is just rolling Savage on meeting
Gavin Henry 00:56:18 Roland. Thank you for coming on the show. It’s been a real pleasure. This is Gavin Henry for software engineering. Thank you for listening.
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