Growing Beyond M&A

If you're paying per page for a virtual Data room in 2022, you should be fired because that's just wasting money. And that's why there's firmroom.com a virtual data room that meets public company security standards for a fair price for only $500 a month with 10 gigs of data included, somebody had to build the best VDR out there. It if you're getting duped into paying more than $10,000 for a virtual data room, save your money. Visit firmroom.com it's an M and A Science company. We don't build crappy products. I'm Kisan Patel and you're listening to M and A Science where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals. Welcome to M and A Science where leading M and A practitioners share lessons learned from their experience. If you're interested in keeping up the latest from M and a science, visit mascience.com and subscribe to our free newsletter where we share highlights from our interviews and invitations to events as we build the greatest community of forward thinking M and A practitioners. Again, that's mascience.com I'm your host Kisam Patel, CEO and founder of M&A Science. Joining me today is Christina Ungaro. Christina Ungaro is the VP Head of Corporate Development at Windriver. Windriver is an enterprise software company focused on mission critical edge computing applications. Today we're going to talk about how to achieve your strategic goals outside of M and A. Christina, how are you doing today?

I'm great. Thanks Kisan for having me back.

Hey, my pleasure. Thanks for taking the time to come back. Can we start off with a little bit about your background?

I've been engaged in corporate development and M and a for about 18 years now. I had previous roles at IBM and Jones Languise, so and for a little over a year now have been at Windriver, which is an enterprise software company focused on edge solutions where I oversee corporate development which inclusive of M and A and corporate strategic alliances as well. So I'm excited to be here and talk to you about all things not M and A for the first time.

Let's get right into it. When do you start thinking about your approach in general?

For us, it all starts with business strategy, developing a strategic roadmap that outlines where we want to go as an organization. And it really comes down to finding that intersection point between what customers are asking for, where the market opportunity is, and what we can reasonably and feasibly deliver. So finding the intersection of those kind of three criteria, once we have the business strategy laid out from there we look to determine where do we have gaps and how are we going to solution those gaps and accelerate the strategy through a combination of build by and partner. So very classic build by partner framework and determining what the right path is. There are a number of, I would say, common reasons why partnership might ultimately be the path to solution a lot of our gaps. And some of those reasons might be maybe we've determined that the there's a capability we want to provide that we don't want to own or don't need to own. Maybe it's not our core competency. Maybe the market is extremely competitive and dominated by incumbents. Maybe the market is commoditizing. Maybe the market's actually really early and emerging and it's too early to pick winners and it's a better strategy to partner with rather than picking a lead horse. Those are some good, valid reasons why it might make sense to partner rather than M and A. And then of course you want to pursue an M and A, but there just aren't good actionable candidates out there who, maybe due to incumbency, maybe due to valuation concerns, size concerns, maybe the ownership structure is complicated. So sometimes you have made the decision you do want to own, you do want to acquire, but the opportunity just isn't there right now. So that might be another reason why we decide to partner. Overall, I would say we have chosen to pursue partnership probably more than M and A in the near term to quickly gain access to a lot more capabilities and deliver value to our customers.

Start with the strategy, have that defined. I like the part where you reference what's the customer asking for? What do you see as market opportunities? What can you actually deliver on? And then the buy versus build, when you look at that, we're looking at the space in general and starting to come to that conclusion of buy versus build, or are we starting to identify specific companies and then get a sense of buy versus build.

We have to define what product or capability we're trying to deliver on. And then really the question is, do we want to own it? So buy and build are kind of two sides of the same coin of I need to own it. And if we decide we're going to try to build it, we've got to look at the cost to build it, the time to build it. Do we even know what we're trying to build? Because if we don't have customers yet, and we don't know much about that market yet. Maybe we don't understand the requirements very well. Do we have the skills in house to build it? So there's a lot that goes into that build decision. And I think companies routinely underestimate the effort that's required to build a new solution. It's not unusual to quickly pivot to should we partner or choir from there. If the build option looks expensive, time intensive or insurmountable.

Okay. And then that's when you get to that point. Let's take an example. I don't currently offer M and A data. And if I wanted to create a capability to offer all these corporate development practitioners M and A data, I'm still at the point where we don't want to build it. It's gonna take years to accumulate that kind of database. Do we then look at acquiring companies and start building out a list of potential targets? At what point do we really start thinking that maybe we should partner and know that most of these companies are going to be pretty pricey? The ones that have the better data set.

I think you have to look at those two in parallel. Are there companies out there that you could acquire to quickly gain entry into that market? And replicating data MNA data is a very hard task. That would require a fairly large investment whether you buy or build. But I would look at acquisitions and then there are partner opportunities where you could potentially white label somebody else's data set. And is there a value added component that you can bring on top of that makes it a unique offering to your customers. So I would look at those two types of pads in parallel from a white label versus an acquire.

And this is when you got into the other scenarios where hey, M and A is expensive. Right. If I look at it and we look at the top three companies in that space, they're a lot bigger than we are.

Very expensive. Yeah. And it's gonna be hard to compete with them too. If you decide to build.

Exactly. You had if it was a market that's new. It's just generally risky. Cause you don't know what who's going to be the dominant players. Take the opportunity to have multiple partnerships. Was there anything around the nature of just how competitive it is? Is that part of it or looking at that way?

Sure. Yeah. Incumbent incumbency. Yeah. Is the market already dominated by some large incumbents? So if you're trying to gain entry into that market, maybe better to partner with one of those incumbents rather than try to beat them at their own game.

And then the nothing's for sale.

Yeah, that could be.

Is that a real reason? Or if you really want to get in and buy something and twist an arm and make it happen, not so.

Much that nothing's for sale, but you might be. It might get back to the incumbency problem. The best options in the market are just too big to digest.

Okay, so we're in that situation. What's next? What do we start thinking about in your situation?

Take an inventory of what you have to bring to the table that somebody else maybe doesn't have or could use more of. So a dedicated, a captive M and A audience, that's a pretty powerful asset that you can bring to bear. And then if there are other things that you can bring on top of that, combined with a data set to create something that's a little bit unique and compelling, you've got the beginnings of a win win for a partnership.

We got complimentary technology, data room, workflow management. Yep, this is good. I'm getting the most time for value from this conversation. Now. Usually we make up an example, but this is better. We'll use M and A science. When we started looking at that, we defined that we have some of these capabilities. We've gotten this unique audience of corporate practitioners and some of the tech tools. What's next? We start approaching companies?

Yeah, start approaching companies, get to know each other. It's very much a two way co selling type of discussion. Early on, introduce your platform and your strategy and get insight into their platform and their strategy and then try to get a feel for the seeds of a, what we call a vision match. Can you start to develop a vision for success and envision a scenario down the road where both of you are really getting a lot out of this partnership? What does that look like exactly? Try to put some concrete parameters around that and then create a path to, to get there. It could be joint solution development or product development, training, enablement incentives, sales incentives potentially. So identify what you need to put in place to make that vision a reality and make sure both parties are willing to make the investments needed to get there. Accountability and ownership from both sides is very key. What you don't want to do is create a partnership that's dependent just on two people in each respective organization. You want something that will survive, people changing roles and reorganizations and that sort of thing. And developing metrics and performance indicators and a regular cadence to review the health of the partnership. I think that's all important to keep things going. The biggest risk with partnerships is that People change roles, people lose focus, things start to wither on the vine. I think that happens a lot sometimes. Things never really get off the ground. We do some PR together initially and there's a nice press release and a lot of good intentions, but the focus is never really there. The commitment is never really there. So that's really important from the outset is to create that accountability and that focus and long term commitment.

How does this happen? Is this on the 1st? Because a lot of what you talked about is structuring this partnership. How quickly does this unfold? Let's play out the first meeting and we are starting to introduce the idea that I'm reaching out. Just here's this idea. How does it come out after the.

First get to know you meeting? Chances are if they're a much larger company, they probably have done this before and they probably have some models already that you could even leverage because data companies love to monetize their data. So. So they've got a lot of structures in place to monetize that data and they may have some playbooks that they can leverage to get things off the ground quickly. After the introductory phase, start to sketch out what this partnership could look like and leverage pre existing constructs as much as you can because that'll help accelerate things.

That makes sense and that could come from either organization. Well, let's play. In our case, we don't really have.

Any of that, but I bet the companies you're talking to do okay.

And now let's just say for the fundamental sake, if we didn't have that, there may be a little bit more work and clarity around the overall picture of how the firms would work together. But tell me more about the vision part. How do you relay that?

Yeah, I think it's understanding first what you're looking to get out of the relationship. What capability are you looking to bring to your customers? What kind of unique positioning in the market do you have? What kind of unique audience do you have? So you have to understand your assets first and then can this partner potentially layer into that and create something new and valuable to your customers? Yeah, that's where it starts. It's understanding your market, your customers, and solution that you're trying to build and where this potential partner could fit into that. It is a bit of an iterative process, really, restructuring that, that win win scenario, because you're going to go into it initially focused on your side of it, but you really have to continually put yourself on both sides of the table to try to get to that mutual outcome.

So you're building the vision around. Here's what you're trying to achieve for your customers and how the capabilities would be able to accomplish that, what that would look like. And then you get the agreement on the other side. They see the same thing. This makes sense. How's this compared to doing M and A?

It's very gray. So M and A is a lot more black and white. You already know the outcome is going to be go, no go. Going through diligence and assessing technical and product fit and culture fit becomes fairly programmatic after a while. But with a partnership, it's. It's a completely different can of worms. There's no predetermined outcome. The outcome might change continuously over time. And so it takes a much deeper understanding of your business and their business and understanding how to get synergies out of the relationship without having control over each other's assets. It can be pretty tricky and it can be pretty gray. And you have to work a little harder to create that vision, match and create those metrics and those outputs that you're looking to achieve. It's not predefined. So when you go into it from the outset, it's very open ended and it's trying to translate a lot of ambiguous conversations into a very specific outcome. Ultimately, that's yours for the shaping.

You're making it sound harder than acquisitions.

It can be. When you do them over and over again though, like M and A becomes a little more programmatic and you develop some playbooks and companies that have data or software, they get pretty good at entering into reseller agreements and OEM agreements and things like that over and over again. So it can become more programmatic over time. But if you're doing it for the first time, it can be a little bit daunting.

Other components on structure, we got a vision alignment. What does it entail, like the goals or the deliverables?

Deliverables, yep. In your case, you're trying to, I assume, bring a data M and a data offering to your user base. I assume you want to try to monetize that in some fashion. We're not all working for free. What does that offering look like? How do you plan to monetize that and how does it create real revenue growth for both you and the partner? Ultimately, it has to come down to value. We have to define how value is going to get created and how you're going to measure that value.

So there's the business model that gets clarity that here's what we're going to do offer this to customers and upsell and a subscription. We're selling at 30,000, let's make it a $12,000 add on or something like that. And then so I'm clarifying, here's the business model. What about the go to market? That there is a lot of moving parts to get this out there. Is that stuff that comes later or.

Yeah, I think it could come at any point in the process. But it's important to define how you're going to sell the solution. So are you simply selling a partner solution to your customer base or are you actually creating a new offering and who's going to sell that? I think defining where the M and A science or deal room sellers come in and what are they taking to market. Is the partner involved in the go to market as well? Putting the right sales incentives and training in place to make that happen. All of that needs to be thought through. The solution itself will help guide that which party is best positioned to lead. But yeah, go to market is an important element for sure. And there's no right or wrong point in the process when that should be addressed. I think it naturally starts to flow once the partnership starts to take shape.

Okay. Because there might be some opportunities where here combined this becomes a unique offering that may warrant more of a cross sell type of opportunity for both organizations.

Yeah. The important thing is it has to be worthwhile for the sales organization. So as a salesperson, if you can sell your own subscriptions for a hundred thousand dollars a pop or you can get a slice of this other thing at $10,000 a pop, there's not great alignment there. You always have to put yourself in the shoes of sellers. What's going to get them motivated.

Have you seen something there where it typically should be similar size solutions for it to work out well or even bigger what's ideal?

Similar size helps, but if it's not a similar size, is it an easy add on or an easy sale? It's okay if it's small as long as it doesn't take up an undue amount of the salesperson's time relative to other opportunities. If it's a simple add on then that's a little bit easier.

Okay. What kind of metrics do you build around this to know and I guess when does that come in flight too?

The metrics aren't going to yield anything until things are really up and running. Partnerships take a little longer sometimes to yield results in an M and A which is more overnight. So it might be 6:12, 18 months out. But it really depends on what the outcome and goals of the partnership are. But you can track things like partner related revenue and profit or joint customer wins. It really depends on how you've structured your success factors from the beginning.

Do you have separate metrics between. Here's our internal measurement to measure if this partnership's successful versus here's some joint metrics.

Yeah, I think you have to figure out what you can measure without putting undue burden on the business. So that's important to figure out up front and taking into account what systems that you have in place and that sort of thing. So just like an M and A as well. We love to measure synergies, but you have to be able to measure them. If everybody's doing a lot of financial gymnastics to get to certain numbers every quarter, that's not going to be a good use of people's time. So you want to make sure you have the systems and infrastructure in place to get those metrics and outputs fairly easily.

Is it usually just revenues or are there other metrics?

There could be other metrics like joint customer wins or pipeline activity or pipeline or backlog. So there could be other things at play if you're doing. I've worked on some partnerships that are more focused around joint solution development and potentially even patents can be a measurement, a point of measurement if you're creating new IP together through a joint venture or partnership. Depends on what the outputs of the partnership are.

The people part. You mentioned that the biggest risk is the people when it comes to partnerships. Why is that?

It's natural for in a lot of organizations for business leaders to lead partnership activities as a way to accelerate their own business lines and their P&Ls. Partnerships are very relationship driven sometimes. And when people move around or move on, that's when things are at risk. The more you can put good processes in place, good documentation, and enable a lot of your sales organization, a lot of your internal organization around the partnership, the better the chances of that partnership will actually thrive and survive beyond a single individual who might be championing it. At the same time though, you do want specific individuals to have accountability over the partnership and you do want people to be on point to manage that relationship, because that's important as well. So it's about finding that right balance between driving that systemic governance around the partnership, but also making sure you have a personal kind of high touch around it as well. So it's a bit of a balancing act.

I think the reverse, unpacking the enablement of this maybe could help get a Sense of how do you actually make that happen, Set up that governance and keep those people aligned.

Yeah, we have alliance managers dedicated to all of our important strategic partnerships. And if somebody moves on, someone else has to take on that account, so to speak, Just like a sales model. So it's very similar to an account rep model in a sales organization. And so there's always coverage, so that never drops. And we do, we might do quarterly or annual reviews with the partners to review a little bit of a state of the union to review the health of the partnership activities that we've been engaged in together over the last quarter or the last year. Having a cadence like that in place also helps keep people focused and on track and make sure things don't just go wither.

So there's a team to keep the relationships with those partnerships as they evolve between getting the initial idea, starting to shape it. What are the steps to get us to a formal partnership agreement? And then I take it, that gets handed off to the team that takes on the relationship from there.

Similar to an M and A, it's agreeing conceptually to the right high level terms and parameters that you want the partnership to reflect and then translating that into a legal document. We do have partnership agreements and partnership agreements can come in a lot of different flavors. They could be a teaming agreement, it could be a reseller agreement. There's a lot of different forms that that can take that most contract attorneys are very familiar with. And these are the agreements you probably see in an M and A. When you're going through the diligence process, you review lots of these agreements as well. But you do have to translate into paper at some point and start to get it documented. And that starts to look very similar to an M and A process in terms of a little bit of redlining back and forth and getting things documented to reflect the way you want the partnership to work. Then from there, similar to an M and A integration, there's a partnership sort of integration phase, so to speak, which is really enablement. It's if there's joint solution development, it's getting your respective development teams connected and developing the roadmap as they would for any new product, developing a joint solution roadmap and executing against. And if there's a go to market component, making sure that you're doing the right training and enablement with your salesforce and putting the right incentives in place to make things happen. So there's definitely a structuring phase, negotiation phase, and then an execution and operationalizing phase that's Very similar to what you might see with an acquisition. With an acquisition, you close on the acquisition, you integrate it, you have full control. With a partnership you don't have full control. That's the kind of the key. And there is no sort of endpoint. You've got to continue to make it work every quarter, every year. And at some point it might not work. But those are the key differences, I would say process wise and timeline wise, between an acquisition and a partnership.

What's the timeframe you typically see compared to M and A doing a partnership?

It's all over the map. I've worked on some partnerships that are based on a repeatable model, maybe that we've already done before. So this can happen very quickly in a matter of weeks. And in other cases you're working on that vision match for a long time. There's a lot of churn and there's a lot of, hey, I think there's something here. But you can't quite put your finger on it yet. And so sometimes it does take a long time to structure those outcomes that you're looking for. So it can be weeks to months or years. But I suppose M and A can be the same. I've worked on deals as well that can be months or years in some cases. So there are some similarities in that regard.

What's the difference between strategic and organic partnerships?

I would say organic partnerships in my definition are very foundational to doing business and don't have the strategic elements that a strategic partnership would have. And what I mean by that specifically is let's take the software industry as an example. It's important that your product, if you're going to market with software, is interoperable with other products. So your application has to work with different operating systems. If you're developing an app, you want to make sure it works with Android and Apple and you're going to have to sign a base agreement with Android or Apple. You need to make sure it works with other middleware. And so that's all really just foundational kind of partner level work to make sure that you can get your product out to market. That kind of partnership activity should be as automated and programmatic as possible. It's just table stakes. That kind of activity will be high volume but low impact. Whereas strategic partnerships are really about selecting targeted partner that you believe together you can create value and synergies that you could not otherwise get on your own, similar to an M and A. And they can be very multidimensional. There might be joint product or solution Development, joint sales, go to market, could be national, could be global. You need to scope that up front. And those strategic partners will be low in terms of numbers but very high impact. That's how I distinguish the two. We have at Wind river over 250 partners, but many of those are foundational organic partners we need to work with on an ongoing basis just to make sure our software works with theirs and vice versa. But we're not engaged in any joint solution development or go to market activities with those partners. On the other hand, we have a handful of strategic partners where we are. So that's how we distinguish them.

Does it distinguish between the activity where you'd have an internal partnership sort of function versus corporate development?

In my experience, corporate development teams that are engaged in partnerships are typically focused on those high value strategic partnerships. And the organic partnerships might be managed through a different team or through a different program. Really depends on the organization. But typically corporate development really only gets involved in those more kind of complex strategic alliances that require creative deal structuring.

You mentioned a few different types of partnerships. You mentioned teaming up, reselling, what else is there?

There's a whole world out there of different ways to partner. On a most extreme example, there's joint venture, which I'm not a huge fan of joint ventures because they come with a lot of complexity, governance and reporting requirements. And oftentimes you can maybe achieve the same outcome with a more virtual construct. But that's one model. There are partnerships that may come with a strategic investment along with them. Where you're now you're a shareholder, maybe you have a board seat or a board observer seat, maybe you've got some outsized influence on the roadmap or the business strategy. And that might be necessary if it's a partner that you have a very high dependency on. And then just getting back to just other structures, we've worked on IP licensing agreements, there's all kinds of partnerships that just require licensing each other's technology or brand name or whatever the case may be. So lots of different types of licensing agreements, royalty agreements, sell through, sell with the teaming reseller, white label. There's a whole host of different models out there that it will depend on what industry you're in and what kind of products you're selling.

When you said joint ventures, your favorite, you have minority investment. Well, I looked at partnerships with investment as essentially a minority investment. Well, you'd separate them. You'd say, hey, here's a company, maybe we did like a corporate venturing. You make a minority investment, but in this case, there's those parameters of doing a partnership, but you're also making an investment and taking a similar small bite to the company.

Yeah, it just depends on what your strategy is. If you've got a corporate venture capital arm, you obviously are going to have capital deployed broadly and you might not be partnered at all with many of those companies. You might just be looking to support that ecosystem for whatever reason. But most strategic corporate strategics, I would say do true minority investing with specific intent and very specific reasons. And there's usually partnership tied to it. Shareholders generally don't like to see corporate corporates deploying money into just investments just for economic reasons. There should be some strategic element to it that furthers the business.

The different models. When you say sell through sell with, so there's. It seems like distribution could be on either side or both sides of the organization could be.

Yeah. In your case, if you partnered with a data provider, you could potentially just make that data offering available to your customers as its own product. Essentially they are selling through you as a channel. If it's a sell with, it's more of a joint go to market motion. That's typically what you see in like larger enterprise focused businesses where you're going to large Fortune 100 companies with complex solutions. You might have a few different people at the table selling together. So that's more of a sell with motion. So yeah, it depends on the situation.

Okay. But it's all open. It can sell on either side. I can, they said do joint selling. Let's talk about joint ventures more. Why would you opt for a joint venture over a partnership?

So I think there are select situations where a joint venture can make sense. In my opinion. If you're creating something new and both parties have something very distinct and unique to bring to the venture, and there's limited friction with your existing business and you want to create a new brand and all that sort of thing, it can make sense in those situations. But then when you have other situations where two parties are contributing, maybe existing assets, existing people, existing contracts, it gets a little bit messy. Disentangling that from your existing business and then layering all the governance and reporting on top of that, those can get a little bit hairy. So it really just depends on what the nature of the joint venture is. And. But if you're going to go down that path, it can be an expensive and cumbersome path. So there has to be really good reasons for why you're going down that path. The other thing to think about is I've always likened to join joint ventures to entering into a marriage that you know is going to end in a divorce at some point. Very rarely do joint ventures just exist into perpetuity. So you end up spending a lot of your time negotiating exit terms upfront and down the road. It's going to be a situation where either you're fighting over the asset or it's a hot potato and neither of you wants it at all. That can be a lot of taxing on resources and time working through those exit terms. And so I think you just have to really take some people jump to joint venture immediately as a construct. But I think it's important to just take a step back and try to figure out what are we trying to accomplish and are there other ways we can accomplish this without going down the path of actually creating an illegal entity which comes with a whole other set of obligations around it that shouldn't be taken lightly.

It seems like joint ventures are common in some industries over others. Do you see it in software as much?

We don't see it as much in software. And I think maybe some of that has to do with the fact that there's so much intellectual property at stake in the software industry and it's hard to divide that in half when you're talking about a joint venture and who has rights to what and that sort of thing. But then of course you go to certain markets like China, where China has been a huge proponent of the joint venture model for various reasons and many companies had good and bad experiences with that. Yeah, it depends on the industry and it depends on the market too. There are certainly some geographic markets that will lend themselves more to a joint venture structure. I've seen it over the course of my career in the government and defense sector as well, where the government actually has a program called its Mentor Protege program, where they actually encourage companies to team up, big and small companies to team up together in a joint venture to deliver solutions. And they do that as a very deliberate way to have access to innovative, cutting edge technology from the small company with a larger company on top of it to de risk it. That's a model the government really likes. So there's all sorts of unique situations where a joint venture might be the right path or simply necessary to actually winning the contract. My preference is to only go down that path as a last resort.

Yeah, don't jump right to it and get joint venture happy. What about minority investments? When do you start thinking about minority investments?

I think as a corporate strategic and putting aside for the moment Corporate venture capital arms, because we're not talking about that. But a true minority investment, I've only used them sparingly and it can be a good solution. When you're in a strategic partnership and you've got a lot of dependency on that partner and you're worried about certain things like are they going to get acquired or what if they change business direction or whatnot. So situations where you're creating healthy dependency on a partner, a minority investment might make sense as a way to demonstrate your long term commitment to the partner that might be important to them as a way to get access to certain rights that you otherwise wouldn't have such as information rights, a board observer seat M and a notification rights. It's rare to get a right of first refusal, but you can always ask for that. Sometimes you do get that and just generally have more of a seat at the table and more influence over their product roadmap or their business strategy. So all of those things might be important if you're very dependent on that partner.

So those little incentives are what drive you to start thinking about that. Who usually brings it up? Is that something you would bring up?

If you can achieve a lot of those things without the investment, that's always preferable. But typically the company, if it's a startup or company mid stage startup, they might be going through a funding round and they might bring it up. They like having corporate strategics as a startup, having VCs on your cap table and corporate strategics, each of those brings their unique pros and cons. So I've talked to some startups that actually would prefer to have more corporate strategics on their cap table because they bring synergies and they bring market access and they bring a level of partnership sometimes that they can't maybe can't get from the VCs that they've been working with. And so it just depends on what the company is looking for. But oftentimes they bring it up.

Okay, I've had it on the other side where we've had some key accounts and they brought that up. If there's warrants and so forth. I don't like that.

Yeah, sometimes I've done warrants where that are performance based so it can drive a certain level of commitment and focus.

Maybe that would be interesting if it was based on.

Yeah, especially when you're talking about a large company partnering with a small company and the small company is worried about being one of a hundred partners in the large companies programs. How do we get elevated as a partner and get more airtime. And warrants could potentially be a way to do that.

What would they look like? Give me an example of a structure for warrants.

I've done warrants that convert based on mutual revenue achievement. So they're usually tied to revenue or some other concrete performance indicator. And at that point the warrants best but they're not as with any warrants, they're not liquid until there's a liquidity event.

Okay, that could be a good option. I like that.

Yeah. It's a fairly benign way for the company giving the warrants. Warrants don't really mess with your cap table too much until the liquidity event happens. So if they're tied to performance, that can be a win win. They can be a fairly effective and benign way to achieve the outcomes that you're looking for if you're a startup.

So the small company here's an incentive with one of the larger companies to do a partnership. I would offer warrants saying hey, here's an incentive that we could provide and the revenue achievement. I guess it all goes back to the earlier point of it depends how we're distributing and what expectations are built in the partnership going back to the minority investments. Can you teach me how to negotiate those first right of refusals?

I haven't been very successful at it myself and I wouldn't recommend that anybody agree to it. Unfortunately, I don't have any tips there other than it doesn't hurt to ask.

That would be a court dev's job. A little too easy. Just put the door in a bunch of different deals.

Obviously the more money you have at stake, the more sway you might have in getting that type of a term.

But that's true. They take a bigger bite. Just something I'm curious about that may not be is going to give me. I know what kind of response in terms of it. It depends when I think about these margins around these partnerships. Is there like ranges, even software side particularly. Obviously every industry changes. Is there something around that to wrap your head around between we're taking your solution and selling it to our client base or vice versa. That's sort of a range or any.

Guidance on that in terms of the pricing model around that?

Yeah. On the business model side to get a sense of hey, how do you at least come in the gate with some consideration of this would be enticing for both sides.

Yeah, it does depend of course software licensing in general has a high range of variability around it because every company has a list price and then engages in a healthy amount of discounting on a routine basis. So it's hard to say where the starting point is. But I think as a software reseller, the resale partner might be able to earn anywhere from 10, 20, 30% kind of margin on reselling software. So you're not going to get the 80, 90% margins that the partner is able to get through a firsthand sale. But as a reseller, you can sometimes make pretty decent margins reselling those. And for the partner, they're still getting a healthy cut and instead of paying a commission, they're paying to a reseller partner instead. So. So most software companies have pretty well defined multidimensional channel strategy that will have a direct sales component, a reseller channel, and then maybe some other partner channels.

And then I gotta figure out our go to market and incentivizing our sales reps within that margin range, which doesn't leave much left after that.

If the software costs $100 and you guys are buying it from the partner at 70 and selling it for 100 and you're making 30 off of it, then you need to figure out how much of that 30 are you going to share with your software sellers.

Yeah, because that keeps like that whole thing of how do you keep them from the other objects that there is.

A business case around it. How do you get your sellers excited about selling this versus everything else they have on the truck?

Yeah, because they're big items that they're getting 10 to 20% on. Then when that's said and done, I'm like, rather they focus on our own products.

Like any good salesperson, they're going to focus on selling the big ticket items first and then the next thing is they're going to sell whatever sells quickest. And that might not be the biggest.

Ticket item, but it still might be additive. If it's that friction to sale isn't so strong that they can do a quick little checkbox and add it in there, the stuff that doesn't work. I feel like there's a lot of times you do these partnerships, you have a lot of conversations. You get to the point where even with a good vision, you get an agreement finally signed. Crickets. Nothing happens. Even if you get the introduction, the different marketing folks are talking, the sales teams are talking, Nothing happens. Have you been in that situation? What do you do to make sure that doesn't happen?

It happens all the time. It could be that the joint solution is not well defined or there isn't enough value out there. It could be that customers, you misjudged the customer demand or the way customers want to consume. Or it could just be a function of lack of internal focus and just that incentive misalignment. So there's a lot of resources, reasons why it happens. It does happen all the time. But yeah, it's just gotta dissect why that is and try to execute the next one better. Sometimes also the one partner starts to maybe change directions or the partners end up eventually competing with each other based on trajectories they're each going in and that can bring friction down the road as well. Or maybe one partner makes an acquisition that suddenly puts them into misalignment or competition with the partner. Sorts of things can happen to derail that. But in my experience, the two biggest issues have been either the joint value proposition, which is never well defined in the beginning, or it's a sales issue, a sales enablement issue, and the salesforce just isn't focused on it because it's just. It's too small or too hard to sell relative to everything else that they've already got.

That's what I ran into is more of the enablement component. Are there any things that you could do to help get off from the right start?

If what you're creating is a very unique joint solution and it has to be meaningful enough, you could put dedicated sellers around that potentially and that would help alleviate some of that friction within the salesforce. But obviously it needs to be a meaningful enough on its own to justify that. Or it might be a solution that doesn't require any direct sales. Maybe it's something you're selling through a marketplace or more of a passive sales channel or an E commerce channel. And in those cases you wouldn't have those issues, then it becomes a function of effective marketing.

Would you recommend evaluating partnerships before doing an acquisition?

I would recommend looking at it as do we need to own this capability and are we well positioned to own this capability? And that's where kind of the market dynamics come into play to help guide that decision.

Let me rephrase that. What if there's a company you want to buy because you know it's worth it, they don't want to sell. Would you use this partnership to get a little dating relationship going?

Sure. Sort of a try before you buy strategy? Absolutely. If you talk to any strategic acquirer, I can guarantee you some percentage of their historical M and A has come through. They were partners first. So I think it's a very common pathway to partner first with a company before you acquire them and you'll Learn a lot about that, about them, about their product, their culture, fit, synergy, potential. You'll learn a lot about all of that before going down the acquisition path. And if they're reluctant to sell, there obviously must be good reasons for that. But forging a successful partnership could bring them around eventually and things change down the road. I think that's a good strategy overall. We call it try before you buy. It has definitely been effective in the past. I've been in many situations where the company I was acquiring was a partner. In some cases a company that we were invested in.

I like that the timing could fit better down the road as well for their considerations.

Sometimes the timing is just not right now, but things may change in the future. And some of that might have to do with where you each are in your maturity cycle. Might have to do just with people who are at the helm. That can heavily impact things as well sometimes.

Any other advice that we didn't touch on that you'd have for me on structuring partnerships?

I think we covered a lot of ground here.

We did.

So yeah, it's my job. The only other advice I would say is that there are some very distinct differences between partnerships and M and A. And one thing that I have found personally is that M and A can be be very procedural in some ways and partnerships, they are a lot grayer as we discussed. And you do need to have a much deeper understanding of the underlying business and getting people on your team to work partnerships, it's great to bring those people in from other parts of the organization. Corp dev people typically draw from finance or strategy. From partnerships though you want to draw from sales or support or some other areas of the organization. People who really. Who've been deeper in the trenches and really know the business because they might have a very fresh perspective to bring and structure in the partnership. So it does require there's some commonality in the skill set between partnerships. Native. There's also some unique differences. You're putting together a partnerships team. It does require a little bit more of that sales and business development experience and background compared to your classic kind of finance banker backgrounds that you get in Corp dev.

That's a really great tip and perspective on putting that consideration in so I don't screw up the next partnership.

Yeah.

Christina, what's the craziest thing you've seen in M and A?

The craziest thing I've seen in M and A. He said. I'd have to say just I'm watching it right now. This Twitter Elon Musk saga is probably one of the crazier things I've seen in recent memory. We could talk about that all day long.

I think it's the media is bored and needs something. If it wasn't Elon, it wouldn't be covered.

No, it wouldn't. But I think there's a lot of good lessons learned coming out of that situation in real time. For me, it's do your diligence, don't rush into things hastily. Certainly don't buy things for political reasons. And I think when you acquire businesses based on and value businesses based on the underlying fundamentals, irrespective of what's going on in the market, then you'll never have buyer's remorse. The market can move around. Market's going to move around every day, every month. But if your valuation's really tied to underlying fundamentals and sound principle, that doesn't move around as much. I think we've seen a lot of buyers remorse in this tech market over the last six months and people who are valuing things based on market multiples are the ones who are having the biggest regrets right now.

Yeah, sounds like there's a lot of opportunity ahead for you if the market keeps holding up this way.

I hope so. All strategic acquirers are hoping this will be a good buying opportunity.

But Christina, thanks for hanging out with me today. I enjoyed this conversation. Thank you for helping me be a better M and A scientist.

Thank you, K. It's my pleasure.

Cheers. Here's to the deal. Thank you for taking the time to explore the world of M and A with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple Podcasts. We'd love to hear from you. If you need help standing up an M and A function or optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email Kisan K I S o n a science.com or you can text me directly at 312 857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter. Again, that's mascience.com here's to the deal.

Foreign.

Views and opinions expressed on M and A Science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.