How to Buy Companies That Aren't Profitable Yet

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Again, that's dealroom.net/MCP.

Now back to the episode.

I'm Kison Patel and you're listening to M&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&A deals. Hello, M&A scientists. Welcome to the M&A Science Podcast. This show is part of our mission to rethink how M&A is done and build the operating standard for buy-side M&A. That old school, Seller-led approach is dead. Buyer-led M&A is about strategy, alignment, and execution, putting value creation at the center of every deal. Let's be real, it's not just about closing the deal, it's about making it successful, and that comes from learning from operators who've done it. You want to go deeper?

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We got tons of free resources on our website, frameworks, guides, tools, all built from operator experience. We also have this M&A Science membership, which gives you a full system access to exclusive frameworks, templates, expert Q&A sessions, direct access to me, and our AI-powered Deal Pilot platform. If you just want to stay sharp, we also got a free newsletter that gives you all the news that we keep up with and events we're doing. Anyways, let's jump into it. I'm your host, Kison Patel, CEO and founder of M&A Science. Today, I'm joined by Matt Arsenault, VP of Corporate Development and Strategic Alliances at Jamf. Traded on NASDAQ under JMF. Just kidding. They're now private. They were taken private this past January by Francisco Partners. And those of you who don't know Jamf, they're the gold standard in Apple device management and security, working with over 70,000 organizations worldwide, managing more than 30 million Apple devices. Matt heads up corporate development for a company that's not just buying technology, but they're also navigating one of the trickiest dynamics in M&A, which is acquiring venture-backed companies. That are basically valued at their future state, not their current reality. So if you ever wondered, how do you actually acquire those kinds of venture-backed deals and get them through? That's what we're going to talk about. Matt, how you doing?

I'm doing great. How are you, Kison Patel?

Doing good. Thanks for joining me. You're in Boston. I'm in Chicago, but can we kick things off with a little bit about your background?

Yeah. So I've been in and around M&A since about 2006, first as a consultant at EY and then through various different operating roles at companies coming through the finance side of the business. Working a little bit more on the integration or post-deal. And then in my last two companies, have really been part of developing the strategy of how to enter adjacencies, how to identify assets early, and really building out platforms that are available for the customers to extend their usability. Our product strategy and kind of buyer persona are central to the strategy that we've built here at Jamf and were very central to the strategy we built at Everbridge previously. Background-wise, audit, finance, transactions advisory, then FP&A, and then corp dev integration.

Well, what point did you figure out that M&A was like your calling?

I've always been very interested in deal dynamics. One of the things that was super interesting when I was at EY is you would go from having, even if you did small audits, maybe 12 or 15 companies you got to look at in any given year. Versus M&A where you were looking at one every two weeks. So you got to see 20+ businesses, their operating, their value propositions, the way that they were positioning their products. For me, it's really been about the acceleration of learning and understanding, and I've probably looked at over 200 companies now in my time, just trying to understand how they're differentiating, what are they doing to add value, And how are they building their technologies? It's been a really interesting career so far.

Hard to get bored. Every deal's different.

Exactly.

In terms of a VC-backed company, I mean, fundamentally they're just valued different. A VC will value a company at like $100 million, even these days higher, that's doing $4 million revenue. What are they actually valuing?

They're really valuing the companies on two major pieces with a couple of secondary pieces, but the two major pieces are the reputation and/or scalability of the management team. So being a previous founder or a large company executive really helps with your fundraising and valuation. The other that they are really trying to fit is what is the opportunity for market disruption? And that's where you're going into that seed round or Series A or Series B rounds is trying to prove out that there's a large market and that you have a product that you've developed or are building that fits that large market. What a VC is looking at is the potential for a company to capture revenue over its kind of funding cycle, which is usually 18 to 24 months. So in a lot of ways, a VC is valuing a company today at what they believe the company will be in a year and a half or 2 years from now, but they de-risk that by understanding how big of a market and the problem that company is solving.

So they're really betting on future. There's a market opportunity. Obviously the team comes in play. When we look at typical deals, it's like very much of a disconnect. And I guess I, I want to get a sense when you look at more of the broader investment capital life cycle as an earlier stage company goes from VC, then private equity, then strategic buyer, like where do you see the disconnect happening in terms of how these businesses are valued?

Those things change, and I do think they change based on the market. The disruption of the VC lifecycle for companies like Anthropic or OpenAI haven't happened yet. And if you look in the previous kind of cycles, companies that had those large consumer never really got onto the profitability. We hung on to grow at all costs in our last cycle a lot longer than the metrics would tell you that the disruption happens as growth in a market starts to decline or stall. Depending on the market that you're in or the type of asset that you're building, you can feel that disruption as early as a Series B round where you have to go to growth capital and you start to look at profitable growth versus market capture share and growth based on fundraising. But where I'm typically seeing this in today's environment is that disruption is truly happening even before the Series B round in enterprise software and even cybersecurity. And the reason for that is the AI trends have really disrupted how quickly a company can scale to its value proposition. The old adage of triple, triple, triple, for anyone who doesn't know what that is, for you to get your Series A round kind of through a venture capital fundraise in the previous years, you had to be able to convince VC that you and the management team could triple your revenue every year for 3 years. So if you started with a million, you would get to 3 million, then you'd get to 9 million, then you'd get to 27 million. And that curve was an acceptable curve to get to pretty standardized valuation. With AI, that curve is really even steepening. In certain markets, folks are expecting you to 10x in a year. And that's why you are seeing valuations in certain markets that are way ahead of where the revenue is, because VC is betting on the disruption of a major incumbent and believing that a company at a million can get to 10 million in the first year, and then from 10 million to 100 million in year 2. Now, we aren't seeing that pace, but that is the belief of a lot of the venture capital firms. But the number of assets that they believe will do that are much smaller. So you're really seeing a kind of two-way market for VC right now. One where those who are appointed at large markets with AI-native technologies and a solid management team are getting multiples that don't make sense to a lot of people in the market, and everybody else who is struggling for fundraising. What we are seeing is a higher concentration in fewer assets with higher valuations.

I want to make sure I got you here. Early-stage VC, your model is focused on growth at all costs, but hypergrowth that you're really trying to grow that triple model you explained, 3x. Now there's even pressure to go to 10x, but there is very big expectations that you're shooting for the moon and trying to get some high-scale growth. And then if the growth stalls, now you're essentially in a different category.

And that's where you need to start thinking about EBITDA and earning—

Profitable growth.

Profitable growth.

Exactly.

Profitable growth. Then it's, whoa, your whole dynamics change because you're not growing triple, maybe you're getting 30% growth, which essentially is still different. That puts you in a growth slowing down. Now you're thinking about how do you turn this growth into profitable growth and maybe like bigger emphasis on a rule of 40, essentially at that point.

That's where even rule of 40 is starting to change. Rule of 40, for everybody who doesn't know, you take your growth rate from the last year and your EBITDA percentage, you add them together, If it equals 40, then you've optimized your business at scalable growth. With some of the things that we're seeing in the AI market, there's a lot of literature coming out that tells you that 40 should be 50 or 55% to be a well-run software SaaS company. But that is ignoring the investments that are needed in AI or the true token cost of usage for Claude or ChatGPT or the other AI bases. We are still in this period where people are still pointing towards the old standard of 40%. The theory says that it should be higher because of AI, but no one really knows what good looks like right now.

You made this point to me before that a dollar growth is worth 2 to 5 times more than a dollar of earning.

That is still persisting. It is collapsing a little bit in the current market where growth is 2 to 3, 3.5 times more valuable than a percentage point of earnings. So again, how you get to that 40 of adding the two together does matter. If you're growing at 30% and you have a 10% EBITDA margin, that company is generally worth more than if you have 20% growth and 20% EBITDA margin. The empirical evidence shows that has persisted for a very long time because growth allows more optionality for the company to invest in areas that it deems fit, and it makes the company more flexible in its areas of expansion.

Dealroom is an example, but you know, we're operating at breakeven and then we push for a rule of 40 all on growth. So would you think that's like an ideal thing to do to optimize for?

0% earnings is always really hard. What I do think is happening is even though it is valued higher, there is more risk in that operating model because you don't have the ability to absorb a shock. That is where it depends on the strength of the balance sheet. It depends on the investor base that you have behind you. Cash reserves. Yep. Going that far used to be the standard. 40/0 was better than even 30/10. As current environment, folks in my seat in Corp Dev, are looking for companies because we are being pressured more for EBITDA. We are looking for companies that we can get profitability into over time. So that 40/0 mix is becoming less valuable now than it was even 3 or 4 years ago.

Can you teach me how to do a deal in this market? Like in this example, venture-backed company, they've maybe raised some rounds of funding and their growth has stalled.

I don't know.

Is that the situation? Are you still looking at these companies where They're like, ah, we're going to raise our Series B at X valuation. What does a typical scenario look like that you encounter on these kinds of deals?

This is where this has changed even in the last 3 to 6 weeks with some of the stuff that Claude or Anthropic put out with Mythos and some of the other advancements that we're seeing in AI, the defensible mode of a lot of companies, even startups, has shrunk. What we are seeing is that there are a bunch of assets who have had stalled growth but are remaining subscale. So they don't have a customer list that you would need or a technology that is in an area safe from AI intrusion in the short term. Those assets are stalling in their sale processes because nobody wants to catch a falling knife. You never want to get to the point where you got a good deal, but you could get a great deal. There is a portion of the market that is totally locked up where the threat of Mythos or the next generation of ChatGPT is making the value proposition of the company less value. The other side of that, which is where the VCs are playing and are really dug into, are the opportunities where it is an AI-native development team. They have historical data that is of value. They have a loyal customer base or the starts of a loyal customer base. They have a unique value proposition. Those are the ones where you're competing against the promise of VC right now, but those are the assets that have the greater potential for growth. I do think that the strategy that the company has is pointing it towards one way or the other of, am I trying to find a company that has been disrupted by AI and I want to transform that within my ownership? Or am I looking for areas of growth? At Jamf, we have a bit of a unique situation being focused on the Apple ecosystem where we're actually trying to balance both of those aspects at the same time. So we are looking for the assets that have real growth potential while we're also looking at kind of areas of competition, areas of availability where finding a competitor that has been disruptive, that has earnings, that is still growing, is of interest. So in our approach, we're balancing between those two, but a lot of corp dev teams are pointed at one or the other.

So some of these pure IP plays are totally different lens. Now, if you look at those as one, nobody's safe from AI, and if you're betting on that, you don't want to be in that spot where you're catching the falling knife. This company's vulnerable to getting completely disrupted by Frontier, Lambda, somebody can just—

And that's where having a view of the level of disruption is really important. In, in a weird way, a lot of the startups that happened in the last year that were AI native have already been disrupted by Claude Cowork and the LLMs themselves.

Like the wrapper products.

The wrapper products. They were all great. They had good knowledge of a specific domain, but Claude Cowork has become so capable that the expert themselves has no technical background, can get to those workflows those tools and skills within Cog Cowork the same way a development team did 6 to 12 months ago. There's a real disruption of those wrapper products. And again, that is just then a hiring exercise. So they know how to use AI natively. They were wrapping a product, so they've shown an understanding of how the LLM works. And there's always been in, in the software industry, a view of acquihires, typically an engineer, a team would go for about $500,000 per engineer. In this environment, AI-enabled or AI-enlightened engineer is going for anywhere from $750,000 to $1.2 million per head because companies are looking for that expertise. But at that point, the technology they built or the early customer traction is almost entirely discounted versus companies that are in more protected use cases where the actual IP matters or the IP is protected from the LLM. Think about things like defense contractors, somebody who has developed a— or designed a system to deal with medical records within the Department of Defense or the VA. The LLMs aren't going to understand the complexities of those systems or the rules on protecting the data or otherwise. The IP there still has more value. I know that's an extreme use case, but I'm trying to show the distinction of where AI may eventually be able to disrupt, but there are use cases where the IP itself and the know-how of those systems or those customers means that you have a bit more of a protected moat, and therefore the IP in those areas is more significant.

It's interesting because the threat isn't the competitors. Threat is the customers themselves using AI to just pipe code out another solution. You reference that when you look at this company, now you're looking at ones that have this existing customer base, what their growth is, and then here's this factor of the threat against AI.

Yeah, because even my corp dev team, they make fun of me because I don't have enough tokens used. That is not something that I would put on a resume. That's not something that you would have out there is how many Claude tokens did you use in the last 6 months? But it does matter. Your understanding and adoption of that capability is really important for where things will go in the future. And if you can build that skill of understanding the tools and skills in Cloud Co-Work versus being able to vibe code something in Cloud Code, now you are becoming a more effective employee, even in a role like Corp Dev, where we're distilling information faster, we're reporting out to our executives faster, we're making more sound decisions on a potential target because we are using our tools and skills that have been developed in Cloud Co-Work. To evaluate the information that we're getting. This transformation of how we work is happening real time, and it is all built on how adaptable are you to the tools of the LLMs.

How do we leverage all this when it comes to negotiating these deals and trying to get a founder to realize what's more realistic value? It's like the crux of especially software. I don't know other industries, But software especially, there's always this bid-ass spread and everybody's very optimistic on their valuation. I probably am too.

There's two elements to this. The first is very human in nature. You have to develop a relationship with the founder, the founding team, the operating team, so that they actually will listen to your advice. So yes, you'd have to know their investors. You have to be talking to their investors. Yes, you have to know the bankers that might be bringing them to market. But if you do not have a relationship with the founding team, you are just competing against a process. Building that relationship with that founder, with that team is really important. And doing that when they are not just starting their funding cycle is another really important approach because nobody listens to what is viewed as an adversarial stranger when you're out there fundraising. Kison Patel, not to pick on you, but we've known each other 4 or 5 years now. When you ask me my opinion on your valuation, you would listen to me much more than if you turned around and met someone who was looking to acquire Dealroom for the first time and they tell you, "You're not worth what you think you're worth." So that build of the relationship and knowing the companies that it could be disrupting you is really essential to even starting the conversation.

You'd probably hurt my feelings more.

Then we'd go get a drink and I'd explain to you that I still like you, but it's the wrong expectation. You have to have that relationship to have the bad news or the hard conversation. Then when you are in that position, there is a really important piece to the counseling that you give a startup, and that is, what is your risk tolerance? Because remember how I said that these folks will grow at all costs? So let's say you raise $10 million on a $100 million valuation as a company that has a million dollars. You better get to $10 million of revenue by the time you are at about 18 months, or your cash burn is going to put you out of business. The way the VC is setting this up is to say, "Hey, Kison Patel, you're worth $100 million. Here's $10 million. Give me 10% of your cap table, or 15, and I'll take 15%." And the entrepreneur is negotiating that percentage of the valuation most of the time. You then have complete power over the company because you then say to the founder, go spend it. And you take your cash burn from your position to break even to, I'm spending $10 million over 18 months. I'm going to have to burn about $500,000 every month. So I'm going to spend $500,000 to $600,000 more every month than I make. And if I'm not growing to that $10 million by the end of the 18 months, then I am in a really bad position as a founder where that behavior that the VC was looking at for an all-in growth bet basically means that the asset I brought in that I thought was worth $100 million is worth zero. The first part that I really talk to the entrepreneurs and I start to coach them through is what is your risk tolerance? Because I am using an extreme example. Every VC out there has a different view of that million-dollar company, and every VC out there has a different weighting of all in. I only want 5 of my 100 investments in my fund to actually be successful, but those 5 all have to be worth a billion dollars. That is a thesis that a VC will put out there. They will go after that. Are very heavy in the way that they drive to growth versus others are just looking to get to more PE multiples of 3 times value in 3 years. That difference in the approach of the VC is really important. I'm not actually coaching an entrepreneur through their valuation at that point. I am coaching them through their own risk tolerance, their own view of their market, And I'm trying to shape their view of, when do you think you'll be worth $100 million? Because as soon as I can start to get them to think about that horizon, and I can say, look, as a scaled business, you're only going to trade at 5 to 8 times or 8 to 10 times revenue, which means to get to that $100 million, you got to be $12, $14, $15 million. Do you think you can get there in 18 months? "Ah, that's a lot. I don't know where we're going to—" And that's when I can start to have the conversations of, "Okay, so under the scenario where you spend $10 million in 2 years, you're worth $100 million. In that situation, you're only going to take 90% of the cap table and actually you're going to take less. Let's say you execute that plan." And now I start to talk to them about the dynamics of the deal that they're actually agreeing to, which usually has liquidation preference, It has voting rights preferences. It has different tools where even if they hit that plan, the entrepreneur, their share is lower than they would get in a direct deal. Said another way, a $25 million M&A deal today can be just as valuable to a founding team as a $125 million deal 3 years from now that a VC has funded. Because of the mechanisms of that liquidation preference, the mechanisms of the overall venture exit plans, what I try to explain to them is that difference of, of VC valuation, again, tells you what you need to sell for in 2 years to be equal to what you would take today. And then you start talking about the view of Well, is $25 million now equal to the $100 million 2 years from now? Or can I make that $100 million $400 million? And you really do come back to that risk tolerance of the entrepreneur, and you start to whittle away at the belief in the certainty of the VC promise, which is, I'll give you $10 million today and you'll be worth $100 million 2 years from now.

Again, a little bit of this math. So if we had, let's use that first example, we had like $4 million revenue, you get valued at $100 million, and then the push is, oh, I can do another round. I guess in that case, like how much would you raise? You'd raise what, $20, $30 million?

So usually Series A is about a 20% hit.

So depending on the company, this would be more of a Series B then. Exactly. So what would be our Series A raise? It was like a million. And then they probably raised—

they probably raised anywhere from 7 to 25, and it would take 20% of your cap table. Yep. So call it 7 on 35 all the way to 25 on 100.

Then we're looking at the next round where it's okay, 20, 25 million. That's kind of where that point you're looking at right now in the example of, hey, you've got 7. If you did a deal now, even if it was only at 25, realize something versus if you raise a 20 and you don't move that needle, again, that risk is factored in and you end up going 1, maybe you get up to the 4, then you're still at that same spot where you've got a lot more raised out. But you know, if you look at the correlation—

That's the risk. So let's say the company doesn't go from the 1 to 10 to get to the valuation. The liquidation preference of the VC means they take their 10 plus their return.

First. Yep, exactly.

So if you only go 1 to 4 and I'm multiplying that by even 8 times, now you're $32 million of value and the VC takes their liquidation preference of 1 times or 1.1 times. So their 10 comes right off. So now you thought you were worth $100 million, you sell for $32, the VC takes their 11. Now you are only getting $21 million as the founding team, not the $25 I would have offered you 2 years ago.

Before we keep going, that math Matt just walked through is the conversation most corp dev people are not prepared to have. You're in a deal with a venture-backed founder whose growth has slowed, but their valuation expectations are still anchored to the last round or the version of the company they believe they can still build. You have to figure out how to close that gap without blowing the relationship or the deal. And it's not just the math. You have to understand the founder's risk tolerance, the investor preferences, the cap table, the retention packages, and what deal structure actually gets everyone to yes all at the same time. That's what DealPilot powered by M&A Science was built for. Hundreds of practitioner conversations organized into practical deal guidance you can use when you're in the middle of a situation like this. Valuation frameworks, stakeholder mapping, negotiation patterns, and deal structures that help you think through the trade-offs before you have to make the call. If you're staring at a bid-ask spread right now or no one is coming, check it out at mascience.com. All right, back to it.

So there's painting that picture out. So starting with the relationship, you got to at least have that relationship that they're actually going to listen to you and have some trust. That part's key. Then you're having a conversation about, here's your scenario, let's explore what the risk appetite is. Because yes, you can keep doing another round, but then there's some factor of risk to it. And I've seen this before. I actually was surprised in the past year, founders I've known, a surprising amount that actually took the exit instead of doing the Series B. I can think of two companies actually that opted to go ahead and do a flight and they got, you know, it was a great market. So they end up getting a good valuation, exited out. 3 companies I know now where it worked out well for them. Even one actually was, I was really surprised because they raised in '21. I guess that's another scenario. That's the model right there. Is there anything else I'm missing in terms of get the relationship, trust, kind of think through risk, then you get the financial picture, then you sort of really look at the more of a viability of exiting now versus continuing the VC track and raising more.

The old adage, a bird in hand is worth 2 in the bush. Some people believe it and will go with it and others go, "Yeah, you're telling me there's 2 in the bush, I see 4. I'm going to go get the 4." And I go, "Look, come back to me 2 years from now." My duty as the corp dev leader is to then find more assets. If the preferred asset is looking for those 4 birds in the bush, you let them go chase the 4 birds in the bush, but we have to look for the second competitor in the space or a new approach in the space or different alternative that is willing to take that one bird in hand. There's a lot of sifting that is happening right now because you have to find that right entrepreneur that still wants to grow the company and the product and still wants to provide that value to the customers, but doesn't want to take the risk of having an investor.

How does that play out? I feel like most companies have multiple co-founders. And then you have a board and that represents the investors. How does that play out? Is it like get one co-founder that's, yeah, this makes sense, I'm ready to do something and this would give me more stability, and the other one doesn't want to do it? Then you have the board that's, we believe in you, want to keep investing in. Like how do those dynamics actually play out?

It really depends on voting power.

How do you get to that? Do you just say, hey, can I see your cap table? Can I— like, how do you understand that for a company? Because sometimes they're shy about talking to through that?

Well, anytime I'm engaged in either a fundraising effort or an acquisition effort, part of that is understanding the cap table. Who is going to get paid what and what does that mean? You don't get that upfront by any means, but you have an ability to understand, are there 5 co-founders and they each own 10% of the company, or are there 5 co-founders and one owns 40 and the others own 2.5%? You have to start to build that relationship and trust to understand who the key influencers and decision makers are, And then you have to involve the other parties. That's why I said earlier, you have to understand the different investors, the different profiles of those investors. You have to have relationships where you can with them in order to unlock the ability to influence and say, look, I know you think that there's a lot of upside here. Here's what I'm seeing in the market. This is why we want to act on this now. What's your You have to stakeholder manage the best you can. And that's where the buyer-led M&A approach, Kison Patel, that you've been talking about really does kick in. If this is a pure auction that I never get to talk to the investors, I never get to talk to the management team, you can't take these approaches. You're just paying what is perceived as fair market value. By doing it this way, building those relationships, you actually have to help the CEO or founder manage their stakeholders. So one of the first conversations I have when we are starting this conversation around risk profile, your goals, is I very clearly point out to the founder, there's kind of 7 or 8 different key stakeholders you need to think about. And they started— a lot of them sit back and go, "How many?" And I go, "Well, you got to think about your investors." You got to think about you, but not just you, you as an employee or you as a, as someone who has created this, you as a supervisor, your family. What is this going to mean for your family as a founder? The team. A lot of folks have built this with very loyal people that they want to take care of. They want to make sure they're going to have a job. How do you value the team and their future work or their future safety in a job? You got to think about the customers, the customers that you've made the traction. You've got to think about, in some cases, the vendors or the key contributors that were in the process of building. And you got to put that picture together as an entrepreneur. And you, for the first time, realize it's not win-win-win. There's always a sacrifice. If you do better by your investors, you do worse by your employees. Yes.

And so— Doesn't get talked about, let's say.

Yeah. You start to think about those different stakeholders. And to be clear, for some of these entrepreneurs, even second-time entrepreneurs, managing all those stakeholders through a deal process, it puts a magnifying glass and a bright light on it. When you're doing it on a day-to-day operating perspective, you're making those choices. You're not really thinking of those trade-offs. When there's real money on the table, you have to. Or you're not actually preparing yourself for the exit.

Have the conversation, help them think through. So I think the big part of the story, making sure you're aligned, you have an interested principal that wants to do a deal, you have the story, then helping him manage that story so it can be carried through these other stakeholders and helping him, coaching him, know like what's that reception going to be. Then some of these other dynamics that do get more tricky that people don't immediately think about. There is no clear making everybody— when you're unhappy, there's going to be trade-offs and you got to figure out where that right balance is.

And then there's other ways that the bigger companies do corp dev, which is just put an obscene amount of money in front of everybody and you just hope that people stick around.

What about the situation when they're underwater? They've already raised a bunch of money and now their growth has stalled. Now they can't get another round of funding, but you value this business less than what they've raised, which makes it awkward.

Those are really hard conversations. I know.

How do you do those deals? Because you still want to do the deal. There's a point they come to realization because maybe they hired a banker. The banker runs a process, and even after running a process, they still haven't concluded to a buyer. It's just that situation. And I guess there's like a curve of, hey, I'm still optimistic that we can get value or at least get our money back. And then over time, I feel like time kills deals, but time sets expectation reality over time. How does that play out for you? How do you accelerate that area of diminishing expectations to get the deal done?

I don't think you accelerate. You let time—

Just let them suffer a little bit.

It's not just let them suffer. Those are hard conversations because then deal structuring is the only way to do it. Meaning, again, come back to your stakeholders. How much do I have to get to the preferreds for them to vote yes? How much do I have to make sure flows through to the common shareholders for them to put some money in their pocket? What are the retentive packages that I have to offer those founders or those employees? How much severance is in the deal of people who just simply are not going to make it through? That becomes a very complicated calculus, and that's where you have to be intentional. You have to be thoughtful. Those processes, I know you say accelerate, you actually have to be very calculated and patient in that process, or you will leave a key stakeholder group behind. And as a corp dev team that has to operate that asset post-closing, there's more risk of damaging the asset in decisions. You haven't run it, you don't know it, than there is in the turnaround. So those are the situations that generally will take longer and you have to spend a lot more time with the bankers, with the founders, with the investors to truly understand the willingness of each stakeholder and how can you put a deal together that actually allocates value across the different stakeholders in a way that you still get a team that's operating at a high level and is excited to come work for the company that is acquired.

Would you be excited to work for a company when your stock options go to zero? Unless you got something new, you have to create something new. You have to refresh.

You have to think about it. Communication is really hard, let's be clear, but there's assets out there where the team who operated it, the team hanging around knows that something is wrong.

Is there a kind way to kill hopes and dreams?

Yes. It's never fun, but there are kind ways to do it and there are brutal ways to do it. One of the most formative experiences of my career was coming out of EY, I went to an automotive parts manufacturer. This was my first job where I was in the company. I was so excited to get there. And the first deal I was working on, the day it closed, our executives walked into the factory and fired all 512 people and said, "Your jobs are going to be eliminated." In that communication, they then said, "But we need you for up to 2 years. We will provide you quality and production level." bonuses that will double your salary over those 2 years if you hit targets. We will offer resume help and job search coaching. We will give you up to 4 hours a week paid after the period of notice where your line is exiting the factory for you to conduct interviews at other companies and to think through your next steps in your career. And we will be part of your journey to your next spot in your career. At the time, I was like 28 years old, and that hits you as, that is just brutal. You just walked in and you laid off 500 people. And then I got to spend a lot of time in that factory with those people as we were resetting costing and we were trying to make sure production was hitting targets and whatnot. And that element of understanding the difficulty that you are putting someone in and being a part of the solution is really important.— when there is severance activities throughout my career, I have thought back to that. Like, how do you make it as palatable as possible? And again, this is a stakeholder trade-off. There are conversations that I've had where I say to the sellers, I am carving out under our severance policy, I don't care what your severance policy says. So I'm going to subtract severance from my enterprise value, keep it as a pool, and that will be paid directly to the employees based on 'Our policy, which is more generous than yours.' Those are not easy conversations. They can kill deals for sure, but you have to think about that balance of taking care of the employees with the voting power of the shareholders and founders' interests. And so by understanding that stakeholder, you then are able to do it in a way that is compassionate and supportive versus the PE walks away with all their money and the employees head to the unemployment lines without any cushion.

Definitely a conversation and mapping out the stakeholders and then being more sensitive with the case. Have you done it before? You got examples? You're going to do a venture. Let's do the positive. All right, let's do the positive. I'll see you next week so you can tell me the other one.

The bad deals, Kison Patel, it's important to know how to do them, but they don't come by that often. It is contingent on business cycle. It is contingent on growth cycle of targets. Those are hard.

Really, those are the deals I seek out are the ones that— those are the ones I can afford.

Exactly. Those are hard. There are deals we have lost as Corp Dev in a given round where we have gained a good partner, we've gained a good advocate, we've gained a good knowledge of a space. Part of the view of measuring the deal is having that ability to communicate with your executive team, your board, your stakeholders on your side, you're not going to win every deal. Sometimes losing gracefully is an important piece to the puzzle. Some of this is— there are places where we have lost the M&A, but we've gained a great partner that we've built through an OEM agreement, or we've done joint marketing with, or we found ways to grow together. There are others where we've been able to convince the team that their growth prospects are not what they had hoped, and they have become part of the organization, whether that be, again, Everbridge, Jamf, or before that, even GV Digital, where we were able to convince the founders that their next round of fundraising was not worth the risk of that, trade off that risk to trade off that risk for certainty in the cash.

You got any, an example you can talk through?

One of them, and it is pretty funny, people have seen in the news a couple of key acquisitions that have been made in cybersecurity space. Some of them are companies that we've talked to through their Series A fundraise, through different partnerships. They've been on our marketplace and they end up going to another cybersecurity company, and those are a little less interesting. But again, it is absolutely part of the journey is to be potentially in their Series A, but not win. That framework is definitely something that I learned at EMC with EMC Ventures and reinforced while I was at GE with GE Ventures. There are deals that you lose from a corp dev perspective. You put the time in, and you build the relationships. I'm thinking Foghorn Systems way back in the GE days, Cenex, which was a very interesting hardware components company where the venture fund took a stake, but I helped coordinate business relationship with the company. The corporation realized the value through the partnership. The VC firm within the corporation realized the value through exit. And I do think that there are some that we have at Jamf now, that are there where we've had good partnership, we've tried it out, we're going to make more of a financial return than a market-based return, and others where we are making a better market return than a financial return. It's hard to talk through some of the examples in specifics only because a lot of them still stay on the table for me right now. Okay.

One thing I want to ask is valuation gaps, you know, beyond using earnouts, equity rollovers, like what structural terms are you using to bridge valuation gaps or the bid-ask spread?

It depends on which stakeholder, and that's where each deal is different in how you're doing it. If the founder is more worried about their go-forward compensation or their founding team's go-forward compensation, the employee base, more valuation in retention bonuses or RSUs or equity in parent company, our parent company, that goes a lot longer than an earnout or a deferred payment. When you are You're truly trying to close a valuation gap with the equity holders. That is the hardest one to close because the expectations of the sellers are set by what they believe is market. You really have to start to understand your bid power in the process. Sometimes you're closing the valuation gap on your own side saying, "Hey, if we really want this asset, I know this is a robust process." because there's things showing up in the data room I'm not asking for. So I know that they are adding it because someone else is asking for it. So you can start to gauge that process. You can start to gauge where you are in the process. You have the conversations with the people you have the relationship with on the management team. Talk to the bankers. Closing the gap with the financial sponsors is the hardest one to do. And it is usually done through the mechanisms you talked about, deferred payments, earnouts, carveouts or other ways to share the risk of the upside.

Big thing is figuring out who the stakeholders are.

Which valuation gap are you trying to close?

One of the— Yeah, you might have an internal versus with the target. I like the internal dynamics. That could be a whole content just about that. And then with this target company, because I feel like there's always high expectations on it, and that's the way— I don't know if that's like the default lever. Do you just start saying, okay, we'll structure this deal somehow, we'll put it in earnout, we'll roll over equity. That's what I tend to go to, or is there other ways around it? Do you convince them to go down in their value?

The beauty and curse of finance is it truly is all math and it's really risk-based return. You're either trading value or you're trading risk. It truly is the negotiation around those segments of the contract. And in any negotiation, you have to figure out where someone is more dug in. What's most important to them? Is it top line number or is it certainty of payment? Is it timing of payment? Is it shared liabilities? Is it escrow? There's so many different mechanisms within the contract you can actually negotiate on that you have to find out what they are most seeking so you can understand where you can make those trade-offs. And that's the beauty of the Corp Dev job is you're solving that problem across two organizations at the same time.

What if you got the CEO, is it an operator you're talking to, but then there's a key investor, are you getting that conversation? How do you approach that? Trying to. Trying to? How do you do? Do you go through the CEO or do you just go around and—

Go around them. Go around them. Now that's the preferred is to go around in that I will say there are processes where the CEO very early will introduce us to their investors, their key board members. But that's where, as you build your reputation over time, you build your connectivity over time, it's just natural for you to talk to some of the investors anyway. So that's really been a concentration for me and my team is finding ways to seek out the investors in the spaces we're interested in and have a quarterly check-in or a semiannual check-in anyway scheduled so that it's not awkward when I reach out to say, hey, I'm really interested in this asset and I want your perspective. On how this process is going. Again, it comes back to those relationships and those pieces of that relationship and making sure that you preserve that right to have a direct or hard conversation at that level to say, "Look, I am on this one. I'm going to allocate more value to the employees. That base is more important." It does come back to that long-term relationship with the venture capital or the investors as well. A lot of them do understand in this community of M&A, of deals, of financing, especially in software cybersecurity, the community is so small that the chances of you doing one deal with a firm are very low over a whole career. So a lot of those firms have a longer-term view. And if you're a known entity to them, if you're taking the time to build that relationship, you can have a hard conversation that says, look, this deal, I have to take care of the employees more, or I need you to give on your preference because the founder is getting squeezed too much. We can do another one later where we'll have different circumstances, different terms, but I do need this now. If you don't have that relationship, if you don't have that long-term view with the VCs, you're never going to be able to ask for a concession. And that's another important thing that I learned along the way from my big company days. They always had the relationships with the NEAs, the batteries, the Bessemer Ventures. Because we were a natural acquirer for half of their portfolio. Anyway, if you're not that big, you don't have that, but it doesn't mean you can't take the time and effort to build those relationships.

Yeah, one more question to wrap up. What should entrepreneurs raising venture capital today be thinking about if they want to actually close a strategic deal later?

It comes down to a real hard view in the mirror of how steep and how fast do you want the treadmill to be. And the biggest logos in VCs may not be the best fit for you as an entrepreneur. So knowing what type of journey you want to take as an entrepreneur, as a leader, founder of the company, that's an important step to take first. And then it is really hard for me to say this as somebody who is full-time employed. The first check might not be the right one. Think about as you're shopping that the interviews that they're doing with you and the investment committees that are interviewing you to give you an answer, you are just as much interviewing them for them to be your board member or your advisor or your partner in growing the business. Don't get blinded by the first yes and do your homework on the firms before you start to get to the investment committee meetings.

Yeah, that's a good point. References, because you're going to have to live with them on your board. That's the tricky part with the VC, capital. It's like you have a short period to learn these investors, and then all of a sudden they're on your board for this long-term period versus later on, get to know folks over a longer period of time and know how they're going to be on your board. Last thing I got to ask you is what's the craziest thing you've seen in M&A? We've done this a couple of times. I know. Yeah.

If I get any more stories— I got to come up with a new one.

Good thing you've worked on more than a few deals.

One of the craziest things that I've seen It usually happens around tax or IP. A deal we looked at had a couple of individuals that had built software and we did a code scan and the code scan had copied and pasted notes in it that didn't make any sense to us. We started to ask, and it did lead to conversations around IP, like who else contributed, why would they have pasted in some of these things? Usually the oddities in any deal come from like detail of the diligence, and that's where going slow is important. Make sure you're finding these types of things where you wouldn't expect the developer notes section of a code base to have things that you have to ask questions on. But even there you can find things. Not to throw out a full promotion at the end of our conversation, but we've been working very closely with Sema Software and they've got some really interesting tools and some really cool things that I find fascinating when we go through their reports. And that's one of those weird things that you do get in getting a full code scan is developer notes. Why would developer notes matter? But they do in establishing IP ownership for small companies. Yeah.

I've heard good things about them. You could, if you reach out to them, tell them M&A Science sent you, they're a great team. I enjoy working with them. So that's cool. That's great to know. You actually, that's how you actually found it was You doing the scan with SEMA? Yeah, SEMA software. That's a good one. Check out if you got to do your deep dive into the code. Those of you listening to this podcast, I just want to thank you so much for taking the time. My fellow M&A scientists, I appreciate any feedback. We got topics I haven't covered yet, some criticism, I'll take it. Connect with me on LinkedIn.

Till next time, here's to the deal. What Matt walked through today, the VC valuation mechanics, the liquidation preference math, how to coach a founder through their own risk tolerance. That's not stuff you pick up in a single deal. That's someone who's paid close attention across a lot of deals and kept building on what they learned. That's what an M&A scientist is to me. Someone who treats every deal as something to learn from, not just close. And that's the practitioner DealPilot was built for. 400 conversations with people who work exactly that way. The patterns and the judgment calls they refined over a career, organized so you can learn from their experience, not just your own. If that's how you think about this work, check it out at mascience.com.

Thank you for taking the time to explore the world of M&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&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, Kison, K-I-S-O-N, @mascience.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. Views and opinions expressed on M&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.