Setting Up M&A for Hyper-Growth Companies

We recently launched a new book titled how to Stand up an M and A Function. Even if you're an experienced M and A practitioner, standing up an M and A function is a challenge of its own. That's why my colleague John Moretta and I compiled a series of templates, perspectives and Excerpts from over 50 interviews to help you build your M and A team from scratch. Topics include the order of hiring, establishing your operating model, developing your organization's integration muscle, and more. Find it on Amazon under How to Stand up an M and A Function link is in the show Notes.

I'm Kisam 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. Hello M and A Scientists. Welcome to M and A Science. Our goal is to continuously expand our understanding of M and A and use that knowledge to create top notch training programs and resources. By visiting mascience.com, you'll find all the information you need to take your M and A skills to the next level. Get started by signing up to our free weekly newsletter to stay up to date on the latest courses, upcoming events and expert interviews. Again, that's mascience.com I'm your host, Kisam Patel, CEO and Founder of M and A Science. Joining me today is Michael Nav, Head of Corporate Development and Chief of Staff to the CTO at Own Backup. Own Backup is a leading SaaS data protection platform for some of the largest SaaS ecosystems in the world, including Salesforce, Microsoft Dynamics 365 and ServiceNow. Today we're going to talk about setting up M and A for hyper growth companies. Michael, how's it going?

Good man, thank you for having me. I'm excited. I've been following your show and your activities at M and A Science for probably, I don't know, three, four years now and I'm super excited to be on it.

Thanks for taking a break from doing deals to have this conversation with me.

Thank you. Yes, Deal world is always interesting, always happens and unpredictable.

Can we kick things off with a little bit about your background?

I'll say, like in many people, my background is very much not straightforward. I'm a very much operationally heavy background which is huge advantage in M and A. I started my career in the Israeli Army. I was there for six years as an officer focused on FP&A and leadership roles. Did a transition to the States through business school, went to Duke, had a blast. Go Blue Devils if we have alumni in the audience. And after that went to consulting and found myself very quickly in the world of M and A. My operational background actually was a huge advantage to me. I was able to think not how just to do a deal but how to operationalize a deal which was a lot of fun. I spent five years there for of Deloitte Consulting and last three were focused on supporting huge private equity firms in all their deals. So we ran something like a banking model where you have a team of deal execs working on a specific client across different deals. That place taught me all I know about M and A phenomenal experience. Cannot recommend it more to people that are considering that. After a quick stint of 18 months in a startup that I co founded, found my way in own backup. I joined Windows Series C company and it gave me really an opportunity to focus on early stage companies which I love and technology. As an Israelis and as an Israeli, we all love doing that. And bring to the table some M and A skills that I got from Deloitte. I found that on that with the perfect mix.

For me that's a quite a diverse background.

The only thing that's uniting it is doing a lot of operational work.

Well, you get the Israeli army part too. Does any of those skills apply to M and A today?

I didn't run with a gun in the Israeli army. I sat behind a desk and did budget management and fda. So yeah, honestly a lot of them apply. Operating a platoon is not that different than operating a company or a division or a department. At the end of the day it's an organization that you need to lead.

I'm sure this theme is going to come back about the operational experience and how it applies to M and A. Let's start with the beginning. How does a company evolve to start doing M and A?

I would first ask the question why does a company need to do M and A? Especially a company on the topic of hyper growth, the company that's growing really quickly. Why do you need to do M and A? That is the key question to answer before doing anything. You can always buy, but can you build? Can you partner with a company that provides you the same exact skills or product? M and A should be used as one of the tools it cannot fix all problems in the world and the why? I see two common things. One, fix something, it's not working. It could be a country that's not working, a department that's not working, a product that's not working, but fix something. And second is just go Faster. You can get a product to your salespeople much faster if you buy it than if you build it. Especially when you talk to me about enterprise scale and product ready to be deployed to large companies.

Those are the two main things. Pick something that doesn't work or go.

Faster if we bucket them at a super high level. Yeah, those are two main things.

We got examples that we can break down in these categories.

Let's talk about companies that we all know. Let's talk about Snowflake or DataDog darlings of B2B SaaS or B2B Enterprise SaaS. Both companies, if you look at their performance, they acquired between three and five startups before they went public, which is the hypergrowth stage, and after they went public, acquired close to 10 each. In both cases, most of the acquisitions are small tokens. They wanted to get a product to go faster. They can always develop it. They prove that they have the rigor, the people, the skills to build product. Doing M and A allowed them to go faster in fields that they didn't have the expertise in. So in some cases it might help them fix lack of knowledge in a specific domain and then go faster in that domain. Get a team and a product that can already sell and then start giving it to their salespeople, making money off it.

For example, maybe they want to get into the federal space and they could find a company to acquire to allow them to get in that space or build that distribution model faster.

Federal space is a little tricky. There's a bunch of approvals. But let's. Snowflake just acquired nist. It's an AI startup that's specifically doing time series analytics. Can they build those capabilities knowing that they have a team that's focused on data and they have phenomenal data engineers? Absolutely. But they probably saw in this company something that did not. They cannot build very quickly or some people that have such subject matter expertise that if they have those people they just, just go faster.

All right, so how do you build out an M and A function or specifically a hypergrowth company?

My biggest piece of advice is start early. It's very difficult to buy companies while growing over 60% a year or over 100% a year. The main challenge is all the people in the company are already been working 150% capacity. You're already so busy that you, if you now start hearing about M and A, you want to give up. So you're trying to give me the third job to do. My advice is get somebody in the door to help you think through this, to have understand the organization, build a relationship with all the executives, understand how it functions. Only then start doing M and A. If you have a target in mind, it is feasible, but it's going to be very difficult to execute because the functional leads are so busy that they would not have enough time to devote to M and A. You need somebody that truly understands the organization and then can execute M and A. When you're growing super quickly. Why is it unique for hyperscalers versus the steady state large public companies? It's mainly in hyperscalers. There is a lack of middle management. Everybody's extremely busy. Even middle management is trying to now hire more people to become more senior management because the company's growing so quickly. Nobody really is working at a 70% capacity.

You got this constraint of resources because you're growing, people are already under the water. That's probably one of the biggest headwinds that you have.

Absolutely.

If you think about the traditional approach of standing up an M and A function, you typically go hire somebody from banking environment just to bring them in and get things started with the deal capabilities. Same thinking there.

It depends and it's very tricky when you're so early. You want to understand that your core product works very well before you start anything. And the person that you want to bring to start helping you acquire companies is somebody that will understand the domain. Now everybody can understand read a deck and understand how market works. But if you want to be really good earlier on in buying companies, you really need to understand how the product works. You need to understand the nuances in the product, why you truly win deals against competitors, and if you have an additional product to sell that it is good for the buyer. The technology works together. Now usually in large deals, what would you do? You would start assembling a diligence scheme and bring in your head of product, bringing your head of engineering, bringing your head of sales. Those people are building the company at the same time. They don't have time to babysit ahead of M and A and tell them like oh you know what, this architecture will not work or this, there's a channel conflict on the sales side. You need to understand those things by yourself and your team needs to understand those things. Now one, it takes time to understand them, but two, you need to bring somebody in that has skillset to understand those things. If you're bringing somebody in that is ex banker, ex consultant and did not work in early stage and did not experience experience technology and you expect them to understand kubernetes and Kubernetes architecture versus monolith architecture. That's going to be difficult. You need to invest a lot of time teaching them. So my recommendation was always going to be bring someone in that has product shop that has some technical understanding but also can build models, think about the business and do the same things that you would expect it of a corp def function to do at super scale.

That's a rare set of skills there, my friend.

It is a rare set of skills but remember that the financial models you can always hire somebody from the finance team to do. You can ask your VC to give you an analyst to do. It's going to be much harder for them to help you understand if there's a good fit across the board. So I will default to a 80%, 70% understanding across multiple functions than an expert in financial modeling that does not understand the product.

I want to break this down into some steps because I want to make sure I'm not missing anything here. I want to talk about the people to hire, but it sounds like there's some things you need to prepare ahead of time in terms of thinking through what the strategy is going to be. Can you maybe walk me through that? Like who's involved and how do you shape that thinking?

Let's talk about today's market. If you're thinking about M and A and the product is not on your three year roadmap, you're doing it wrong. It's very easy to get distracted by a new shiny toy or new shiny opportunity. You need to first build your product roadmap, especially as an early stage startup. And that's not news to anyone. The product is what drives a business. But M and A should fit into this picture. It should help you bring forward revenue streams and products that are already on your roadmap. Now obviously opportunities can come out of nowhere. You can not think about something and then it happens. But those should be an absolute exception if it's not already on your roadmap. You should not even consider that. Now that you have your roadmap you can bring in ahead of M and A ahead of Corp Dev to start thinking what pieces of those roadmap you can bring forward. How can you get to this roadmap faster? What will it mean for the company and the company digested? Do you have enough Runway to support another unprofitable product for a while? Keep in mind that we're talking about hyper growth environment. When many of the startups are not profitable, they're burning cash. Now you bring in more people to Build more product, they're going to burn more cash. Okay, so those are the base things that I will start thinking about before even bringing anybody in and starting massively exploring M and A opportunities. Don't even source a deal and identify the target. Just talk about the strategy and where you want to be as a company.

Really clarify the strategy, look at the roadmap and stay grounded on it and not really deviate from it.

That is step one. Now after that I would do a high level build by a partner analysis. Figure out what areas are you good at building are synergetic, you know how to do. If you're a data company and now you need to build DevOps tooling because for some reason they're for the same buyer, you probably don't have the people internally to build those tools. It's just a different domain, different experience. That's something you might consider buying. But if it's a data company and you want to build another data product, building it might be a better idea. So try to break it down to what skills you have as a company internally, from selling to building. And then where do you need help? Where do you need domain expertise? Those are areas that are probably very well fitted for either partnership or acquisitions. Okay, so we got a roadmap, we got a roadmap. We got the areas we want to focus on. After that, I'll start sourcing. I would start understanding the market. Who are the players, what do they do, how do they work, who are the big ones, who are the small ones. Just understand how the products there work, what can you buy, how it will help. In parallel, there's some level of preparation that you need to do for internal teams.

Tell me more about that.

Yeah, people need to understand that at least your executive team needs to understand that you're going towards an acquisition, you're considering it, it's going to be disruptive for their work. Now, you don't need to bring everybody in the know, but there's some executives that you probably can buy a company without a general counsel or head of HR or even ahead of it event at some point, and I'm disregarding sales, product engineering, that's an obvious need to talk to them as corp dev, we need to remember that after everything's said and done, we're not the one operating the assets. The asset is going to get dispersed into your organization. Somebody there will be operating that. They need to be on board. If they're not on board, the acquisition will not be successful. Now again, this is not that different from larger scale companies. But in smaller scale companies, those executives are already overworked, overstretched and don't sleep. You're asking them to sleep even less, to work even more. Because now they need to integrate in transaction.

How do you walk through that communication? Is that something you're that clear and transparent about? And you say it like that. You're not getting much sleep now, but you're going to get even less sleep if we end up doing a deal.

You don't obviously that's something you as a core dev executive need to keep in mind. You don't obviously communicate in that way to those executives. It's more so you need to understand that a lot is riding on you you as a corporate development team to help execute. You can't always get a point of contact or a subject matter expert will dedicate time from every function, especially earlier on when the transactions are smaller. So it's going to be on you to do a lot of the heavy lifting and then eventually bring in the head of HR when there's a payroll specific question in country XYZ that you can't really answer. But everything beyond that you need to do, you need to prep. So if in a traditional M and A environment where they're a large scale company is you probably get an M and a person dedicated from every function, this will do the majority of the work and the corporate development function will pmo. In this case, the ownership of the corporate development function is much larger of the actual work that needs to be done. For every function there's legal documents that corporate development will not draft. But within the operating function that are not very particular, such as legal, corporate development will act as working hands within the function. From thinking about sales and sales synergies and actually how sales are going to be delivered to which people will be on which teams. That's not hr, that's corporate development early on and eventually getting there and validating that with the functional leads. So you need to do much more of the work as corporate development than relying on the teams.

Okay, fair points. So we got three key steps. Reviewing the roadmap, doing our build by partner analysis and then we go source deals and then I guess we can get into some differences from there. I'm curious on this front end of the process, reviewing the roadmap, how do you not deviate from that? Because I'm even looking at this current environment, so much buzz and hype around AI. How do you not just start trying to influence the roadmap to start building a case to go in that direction.

Good leadership and focus, same as every company. Think about the companies that we stayed true to their mission and vision and built over the years the same thing and did not catch up in the trends here and there. I'm not saying AI is not viable and it should not be integrated in your roadmap. Every company should consider how AI is going to impact their product roadmap, how it's going to impact their business. However, going, running and buying an AI company tomorrow, I don't know if it's going to be a wise decision, but that is something that not corp dev is going to set. That is a vision that should be set by the broader leadership of the company, by the CEO, by the executive team. Being corp dev being part of it or not part of it. It cannot be driven by core dev. Core dev cannot go and suggest immediately, oh, let's buy an AI company. That's cool. There's a product vision, there's a product roadmap. That is a truth. That's what we should be operating now is there's a huge opportunity and something that is really worthwhile considering. Maybe, but it should be earth shattering.

I got it. So you got to be all ears, listening and understanding. This is what the company looks like as they're trying to naturally best serve the customer and then build off of that. And that's when you start doing your analysis. I guess the other challenge I would foresee is the culture of the engineering team that tends to want to build everything in house.

How do you manage it?

Yeah, do you encounter it and how do you manage it?

Of course. Engineers also always want to build everything because they think they either know how to or can or have the immediate skills and tools. It's not always the case. And it's not always the case. Not because they're not good enough. There are good enough, but sometimes it's capacity, it's a capacity constraint. You, you need people and good people to build good products. Sometimes you just don't have the time or you don't know a specific piece of it. If I tell you now that's the data and DevOps environment. If your data product is focused on AI and you need to build a product that is focused on Kubernetes architecture for DevOps you have great AI engineers. It doesn't mean they're going to be phenomenal engineers. For Kubernetes even. Let's talk about sales. Sales people think they can sell everything to everybody all the time. If you sold your entire career to the Head of engineering and sold them product. If I give you a head of a chart to sell to, can you do it? Of course you can. Can you do it effectively from day one? Probably not. You're probably going to have significant rent, period. It's explaining that we're buying time. We're not saying that you can do it. We just want to do it faster.

Okay. Sounds like some work there though, to still convince them to get on board with that.

Of course there's work. Everything will require work. Convincing engineers is one of the hardest thing and getting their buy in is a hard thing. But in many cases they also know that they won't get there without help. So then the question is, do you hire 50 more people or do you buy a company that can get you those skill sets from the from day one? And then in some cases it's not an engineering decision, that's a business decision. How quickly do you want to go.

The sourcing component, does that tend to come natural where you can identify things through conversations with your product engineering folk that surface or are you doing a lot of research and looking around through databases and things of that sort?

Earlier on in the hypergrowth stages, it should come from three areas. It should come from your product. Teams can tell you, hey, we already partnered and we already love this product we work with. It might make sense from your customers. You'll be surprised, but in some cases your customers will tell you, hey, we use this product and this product together. You just need to keep your ears open from your VCs, they know your business, they're your investors, your interests are aligned with them. They can actually think together about what they're seeing in the market. And then from research, a lot of theory research that you need to do to understand the markets, understand what products are the best in those markets and at the corner. In some rare cases, bankers can be pretty good. It's rare because the deals are not large enough for bankers to care. The fees are just not there. So it's much harder for them to pay attention to these type of companies at scale. That's why I find bankers not really effective in the hyper growth stage. Because unless you're doing over half a billion dollar deal, the amount of bankers and the help they can provide you is going to be limited.

Right? I mean that'd be a good banker that's doing it to foster a relationship.

I know a few that are great, but you're asking the person to spend significant time understanding a market that is relatively small and they really need to invest A lot because instead of investing you they can invest in a publicly traded company that they know that can get the fees from there. It's tough.

These are great examples. I like the VC ones. That's a good one too. Is the investors that should be looking at the marketplace as a whole as well.

And when I say VCs it's not just your investors would build a relationship with the broader VC community as they see many of the companies. There are VCs that are very focused on specific themes. If you're interested in CyberSecurity talking to VCs at Greylock or Bolt Start or if you focused on Israel Wild Ventures Cyber starts. There are VCs that just focus on cyber talking to them, building relationship with them. If you're a potential buyer in this space is critical. They see all the company they can help you benchmark one against the other.

Right. I like that. So being proactive to build those relationships and network with not only your own investors but other investors.

I won't give specific but one of the deals we did was sourced by a VC that was not ours that made the introduction because they had us in mind as a buyer and and knew a company that wanted to sell.

Fair point.

And it was not rovc. It was a just a friend.

It works. I want to go back to the hiring part because now I get this understanding. We're thinking about formalizing and actually standing up a function for this hypergrowth company you mentioned earlier. There's a skillset where you really want somebody that is operationally oriented that's going to understand these nuances of how the company works through engineering and product and so forth. How do you find find that person?

A lot of interviews and understanding of is a person interested in understanding product. Do they have the skills to truly understand how the product works, how tech markets work? There's a big difference in analyzing public traded companies and digging through 200 early stage companies that were just founded and have a landing page and you need to understand what the hell are they doing and does that make sense. So I would optimize for passion for production and knowledge of it. I would have to check the box of yeah, they can model. Yes, they understand how M and A process worked that is needed. But are they the best in class in that even if they don't and they have the passion understanding of a product I would take that over somebody that knows M and A in the best way possible but just doesn't understand product well enough because the ability to contribute to the product roadmap because that is the goal is to contribute to the product. Roadmap is critical. The candidates that I found the most appealing here are the ones that did traditional banking, flash consulting and then either went to VC because they see a lot of deals and they see it early stage or went to a startup, already spent time in a startup, know how it feels to be down the trenches in early stage startup that you don't have structure, nobody's really telling you what to do. You need to always continuously build your own book, create your own opportunities.

So going beyond just doing the deal, there's some click down interest in the actual business and how things come together.

Yes, it's way beyond doing the deal itself.

Can you help me contrast the difference between when the deal actually plays out, we identify an opportunity and we go through to get a LOI sign to close. If you'd contrast the difference between a traditional company versus one that's in that.

Hyperscale phase, what happens after that OI signed.

You mentioned that you have some pretty clear constraints if you're dealing with the team where it's even harder to get those shared resources. Like how does that pan out or make a difference in the deal process itself or does it not?

It's not at a high level. So you still need a pmi, need functional leads and people that can help you and you still hold those people accountable to executing. Because we all signed up to do the deal, all the executive around the table, around the leadership, they've all signed up that this is the right decision. That's where the company is going and we should do this now. In larger companies, in many cases the sourcing and deal team will be separate from the pmi. That's not the case. It's going to be soup to nuts. It's from the thinking of the strategy to finishing the last item on the PMI list, it's all still owned by and operated by corporate development. That's one large difference. I saw large companies structure this way, so it might be a difference, might not be. But hand holding and helping execute some of the items is still the case. In the early stage you still help and support a lot of the doing and not just point it to the functions they pay. Functional lead, you own it, you do it. The support is needed. And again it's not because they're not capable of doing, is because you need to remember they're so stretched in terms of the work capacity, sometimes it will just fall through the cracks.

Okay, so just being prepared to actually support more of These functional leads through the activity. But otherwise fundamentally the structure is very similar.

Yes, otherwise the structure is relatively similar. But being much more hands on is a critical part.

What's the overall team structure look like? When we think about building the seminary function and trying to get a sense of who where does it sit? Who does it report up to in.

Terms of the size of the team? It depends. It depends how acquisitive you want to be. It could be from one person to five. I saw them play out in different way shapes and forms. The corporate development team ends up being not just pure play M and A because it can be go through different cycles in your business and you want to still be effective and productive and contribute value to it. Now where it sits in my humble opinion early on it should sit under the CEO or within the product organization, not under the standard cfo. Mainly because the knowledge of the product is much more important than the ability to financially engineer. If you have to pick one of them that I would always optimize for the knowledge of the product.

Have you ever seen a similar product.

Technical organization, product or CEO? Okay, I'm thinking about incentives. The CFO's job is to control the money. Especially think about earlier on it might be an experienced cfo, might be a new cfo. But their goal is to control this dependency, not think about how to deliver the best product to your customer. Your goal as a corporate development function is to improve or enhance the product that you deliver to the customers. Deliver more, faster. Where can you execute this the best? Which executive on the executive leadership team, if not the CEO you align the most with?

That's a good case why you shouldn't put in a cfo.

And it's not because they're bad people. Because love the cfo. My existing CFO is one of my good friends. We work great together and he's a partner of mine executing transactions. But what he cares about and what I care about is not necessarily the same things which we not that caring is not the right way to phrase it is what we optimize for every single day. Got it.

For this overall product roadmap that we're trying to hit our goals and targets, what other constraints would you come across? You mentioned the functional leads and their bandwidth. Are there any other constraints when managing M and A while scaling burn?

You're going to eventually buy companies. If it's smaller, it's got to be smaller than you. If it's smaller than you, it's probably something that's also a startup. You're Adding burn rate. It was easy in 2020 and 2021. Much more difficult in today's environment. Adding additional burn. It's going to impact your Runway. Understand how it's impacting your Runway. When can the product turn profits? Is it synergetic? That's one. The second one is does it really fit and how quickly can it generate revenue? Is a buyer the thing if you're as an early stage company, you're probably used to selling to a single buyer. You optimize that very well. You have a product work that makes revenue, that has true product market fit. You're growing very quickly, but you're still selling to a single person. You're selling to the chief revenue officer of your organization and now you have a great opportunity to start selling to the chief data officer of the organization. There's going to be a conflict there. You need to understand that your team will need to be retrained. You have to remember that that has to be a consideration because the cost of making that mistake and that not working is going to be much greater the earlier you are in the life of the company.

That's a big go to market consideration there.

Yep.

I feel like that's every deal though.

It is every deal. But the earlier you go, the cost of the mistake is higher.

That's true. That is very true. That would be much, much higher.

And the cost of wasting time on a transaction you will not do is higher.

Can we say overall then it's riskier? I guess it all depends on the size of the acquisition and how much change you're making in your organization.

I wouldn't say it's always riskier. It needs to be very thoughtful when you do it. But that's why you might understand why I always say that earlier the corporate development function needs to understand much more of the business than later on because the cost of mistake is so high. So you need to have a developer good sense. How the sales function is working, how the engineering function is working, how the product function is working, what do they really care about? What they can digest, what they cannot digest before you do a transaction takes you time to generate those relationships to truly get the understanding of the business. So if you want to hire corporate development function earlier and immediately give them a deal to do, the risk you're adding to the deal is pretty high because they just don't know your business well enough yet.

What's more important to get right, the actual go to market part or the product coming together is one I would.

Say go to market My engineering team, if they'll listen to it, will not like me tomorrow. But I'll say go to market mainly because the product, the back end of it, you can keep separate.

You can get away with it for a while.

Yeah, nobody knows what's going on behind the scene. If you put in nice enough abstraction, the go to market is a go to market. Either you sell it or you don't sell. Either you make money of it or you don't make money out of it. So the gross margin might be lower. If the back end is wonky, you can fix it over time. Nobody would judge you. Everybody would judge you. Can you sell this? And that's step number one.

What's the best approach with that then? Because I feel like at this earlier growth stage, you're still figuring a lot of that go to market out. You're scaling it and, and there's a lot of moving pieces there. And then you're looking at bringing this other capability into the organization and shifting things around. And like you gave the example, you could be selling to a whole different profile.

If you're still figuring out your go to market, you should not do M and A. If you don't know who your buyer is and you don't have a repeatable motion that you need to put a dollar in and more dollars come out, don't do M and A. Go figure that out.

Fair enough.

I would consider doing M and A. When I have this motion. I have the product is flying off the shelf. I know the buyer, I know what they want. I have their ear. I have all of that. Then you can. If I give you another product to the same buyer, how would you feel about this will work this way. What would you think? Would you be open to buying it from me? Then that introduction becomes much more natural, much easier to digest than, oh, I don't know if the buyer or I don't have repeatable motion.

Yeah, I guess that sounds like getting into an approach. How do you validate if you're ready or not? Just to make sure that you're doing the right thing here.

You, you feel that you found product market fit, your growth will be astronomic. You feel that the product is selling itself. You just know how it works. Give me 10 more salespeople, I will make more money in an efficient way.

But plug in the new product knowing that it's going to fit in well into the this overall go to market.

There's no magic trick there. It's same as any company. Do customer interviews, go ask your Customers what to think about this opportunity. Go validate the market. It's not as easy as, oh, we can just do it. It always comes down to talking to the customer.

Yeah, I feel like this is the element that gets screwed up the most. And that's where I'm trying to get a sense is how do you keep that from screwing up? And I agree. I think there's this qualitative component that gets skipped because you're lingering on the assumptions that you had to begin with and you keep writing off of that versus really rolling up your sleeves to have those conversations. Do you think that's it? You do that?

That's a piece of it. That is really even more important earlier stage because the deal is eventually for the product roadmap. You want to bring more products to your customers, go figure out the customers want those products and want them from you. It's not and I'll give an example that's top of mind Salesforce buying slack to tell you that's a product roadmap. Yeah, they're probably product elements, but there's also expanding the tam. There's the elements of increasing dominance with an enterprise. There's a lot of other interests coming into play. Then will our customers want to buy black from us? Potentially. But it's just one component earlier on. That's the component. Will the customer want to buy this product? No matter how good is the technical architecture, will the customer want to buy it from me?

When you do that, there's this time of when you're doing an active search to look for opportunities. Do you lock in on opportunity then start doing that stuff? Because I feel like depending on the situation you might have a really short timeline or are you doing this stuff ahead of time before you do the search?

I like doing a hypothesis driven approach to it. I will have a hypothesis exactly what I think is true. What I think is true with a customer. I'll do some validation first to understand if I even should go and search for a company that I can buy and do a X validation after I have a target might continue doing that validation. Because targets can look so different. Even if the problem you're trying to solve is the same problem. The approach different startups take to the same problem, which is different. So what you thought was truly like, oh, that's my perfect approach. Might not be the case, not be the target that's available, but not be what the team you want to buy. You might have the best product operated by a team of 10 people that you just don't get along with great people, just don't get along with them. They'll never do the deal because those 10 people can ruin your culture. And when I say ruin it, it's just be the wrong fit for your culture.

You catch that pretty early. Does your team speak up and say no, we're not going to work well with that team and they're pretty vocal.

About it or I tried to catch up very early just from the founder because when the teams are small, the culture is driven by the founders. You get to meet the founders in very early on. In the process you get. I try to meet all the founders immediately to just understand the nature of them, how they got started. Tell me the story of the company because there's always a story behind every company. Now if the culture is not a good fit for us, I'll pass. Mainly because the product might be great, but I'm losing all the people, the great people that built it. They might be a great fit for a different company, but not for our culture. We'll have tissue rejection early on.

Good point. So you'll pick it up between the founders pretty early. We talked about before doing private to private deals versus buying from an institution. Can we talk about that?

The private to private market is struggling now. I don't know if you saw the numbers Q4 was a 94% decrease in private to private deals.

How much?

Yeah, I don't know if you follow and if you're listening follow Thomas Tongus. He was a partner at Redpoint and he writes a wonderful blog about everything tech. But the recently top of mind for him was M and A and he gave some data and private to private is struggle and in many cases they're struggling because what do you pay with cash is expensive. You pay with cash you don't really want you now stock. How do you price a stock? All that are the last valuation of the larger company valid. Is the last valuation of small company valid. It gets very complicated and very difficult because everybody thinks that the other side needs to adjust their expectations. And if you're the larger company at a smaller company is running out of funding, you're the smaller company. You're saying of a larger company valuation decrease. You get into the dynamic that you're playing chicken and we're not in the end of the rope yet. There's still private funding in the markets. So everybody is in a holding pattern.

That's true.

Yeah. It's a very interesting dynamic. I believe the dynamic will break end of Q2 and we'll start Seeing much more companies just going out of business or getting sold in a 5 sale have to sell. Running out of money at the end of the day when you don't have Runway, you don't have Runway. You got to close or sell you.

This time where the pendulum shifts back in favor of the strategics.

I think it's already shifted. We're already there. We just don't see it enough.

Yep, we're seeing it on our end. Seeing companies that are preparing to do more acquisitions. If they have cash.

If they have cash. Cash is king. We forgot that. But cash is king.

What about the strategics in terms of portfolio rebalancing and maybe looking at companies that should know.

I'll go for the strategic. I'll go back to the product rule now. Is that something you want to do? Is it's. Have you already thought about somewhere then yeah, it's going to make sense. I believe there's going to be a decent amount of consolidation. The consolidation is going to be driven around specific buyers. Let me own the chief revenue officer of the organization selling everything soup to nuts. And in that case there's going to be a lot of different smaller companies that you can buy. Just figure out small holes in your portfolio. But Strategic will be active. We see them active. I know the security space. Look at Palo Alto. They shouldn't stop. Look at Snowflake not stopping too. But those are companies that are wolf capitalized that have a very good product portfolio that sell very well with a repeatable motion that now plugging figure out what are the next markets or what holes do we have in our portfolio.

So large still scaling. You'd consider them still in this hyperscale phase. But they're larger and more mature and that's easier for them to act on. Those deals they don't have. They have a burn rate but definitely balanced. Better being public and whatnot.

Being public, having the resources to put behind it. Not just capital but the human resources to put behind it and for it not to be extremely disruptive to the business.

Okay, so private. Private deals are harder to do right now.

I believe they're definitely harder to do right now. At least at this point.

Yeah, I think you're right. Time goes by, people start accepting what they can get and maybe we see some correction on valuations.

We'll definitely see the correction of the valuation. The question is who's going to blink first, the smaller companies or larger companies. And I believe it's going to be the smaller companies because they're going to run out of financing. Larger companies still produce money. They can get credit lines, they can get structures and whatnot. When you're series B or a series A company, it's going to be much harder for you.

It doesn't make sense to be opportunistic on some of these things. I even think of running our own business that hey, should I be actively networking with adjacent corp dev folks to look at some of these companies that maybe are in the single digit growth or declining and think of their similar products that you can buy for the revenue and kill the product and acquire the customers. Those things tend to be a little bit more opportunistic. Is that the wrong thing to do? When we talked about staying true to.

The roadmap, if it's part of the roadmap, doing it's not part of the roadmap. Think how distracting it's going to be to your business and are you willing to live with that distraction in many cases that your answer truly is going to be no because it's going to be too distracting. If you're gaining market share and it's exactly the same product and we just want to kill the product, get the customers. That's all that's fair square, that's on your roadmap. That's your existing product that's getting more customer.

You're just going faster.

Yeah, you're just going faster in a different way. Ask yourself how much is it going to cost you to acquire those customers? You have customer acquisition costs, sales, marketing, whatnot. You're getting 300 customers, it's going to cost you $5 million to acquire in different way and you need to scale the team and so on and so forth over time. If you can get them for $2 million, that sounds like a good deal. But the $2 million are much riskier because the $5 million, you know how they behave all day long. You should know the two. Okay. Comes with a lot of asterisks and little notes and say like oh, that person is actually not going to get along with that person. That might be a problem. And you don't really know that customer because they're good friends with the CEO and that's how they got signed.

Are there deals that you come across that change your strategy where it's this is such a unique opportunity, we should rethink our things. Maybe it's a new potential business line or something like that.

Absolutely. I always keep an open mind and I every deal that come across that somebody might propose and I never thought about, I'll Go back and look at our products roadmap and say does it fit? And did we not completely not think about it possible or did we think about it say it does not fit? Now if we thought about it, it doesn't fit. Does this change anything? Does this change the fact that we get such a great asset? But it's extremely rare because our goal and our job is to know our business in and out, to know our products. It's no, they're adjacent products and they're adjacent to the adjacent products. So we probably have thought about it in some way, shape or form. If you truly understand the product roadmap.

Like your market map, it shouldn't be completely way off.

Now to tell you that do I have assets that are currently not on the product roadmap, but if I have a chance to look at them, I would 100%. I have three names that I know that if I have a chance, I would love to look at them. And they're completely not the product roadmap. Because that could be a strategic shift to the business.

Bring in someone like a project manager to focus on the M and A. That person still needs cooperation from the workers to do the work. Correct. Everyone is busy. How do you balance that? Which I guess goes back to that point which you mentioned. You got to get your hands in there and actually help them. Anything else? The other thing I was just thinking of is external resources. Do you start saying, hey, knowing that you're, you're this hyper growth company doing M and A, you start leveraging more external resources or is that backfired at times cause they don't know the business.

They don't know the business. And by the time that it will take them to get to know the business, the business is going to be in a different place. You started process with a consultant and by the time they're hired and you sign the docs, they're at four months in. The business grew by 80% in those four months and hired 80 more people. So the person that we're supposed to work with changed three times over. Now my suggestion is get creative. There's somebody in the business that knows the business. Try to bring them to be a project manager. See if you can figure out your internal resources. Not necessarily from corporate development, it could be somebody from sales that actually has been here enough, knows the executive, knows how the business works. Try to bring that person to help you.

That makes sense. If a company does not have M and A resources in house, at what point in the process do you suggest the company acquiring or being acquired. Bring in a specialist and how long after the deal with the specialists typically.

Stick around big it depends if you're planning to be acquired. You can hire a corp dev function to manage the process for you, but to be fair at certain scale they're just banks do that. If you're planning to be acquired and you're a series a company with 30 employees, I would probably tell you not to bring a core dev function. The CEO should run the process and the CEO should potentially hire an advisor maybe to get that. And that will come from the VCs. VCs know those advisors and can help if you're planning to buy. Get the person in at least six months before you want to do a deal. Let them get to know the business, get to know how it works, understand the product itself, understand the market around the business and only then try to start doing a transaction.

Any other advice or tips on managing acquisitions in a hyperscale environment?

Know the product. Know how the technology around it works. Know who the buyer is. Truly understand it. If you want to be successful in it, knowing just how to model it doesn't count.

It's absolutely true. Know the product and then I guess you have to also know the go to market.

Absolutely. And that's part of knowing a product is knowing who to sell it to. It's not just knowing what the architecture and what it's written in.

They kind of know it. Soups notes Any tips within that? What's the best approach to really understand it? As somebody coming in new to the.

Organization, it's very hard to teach somebody to be curious. They just need to be curious. It's not something that you can test for during the interview process and I would and I have with my team but it's very hard to teach somebody to. You don't want to be the person telling go learn that field or go learn this. Go understand this. You want the person to do it themselves. Only that way they will truly understand the company and the product. Telling them every step of the way how to work and what to do. They're an early stage company. You don't want to do it with any of your employees. You don't have time for this.

Is there a way to test that out? Do you do like a business case exercise or something to see how they approach it?

100% I'll do a business case that is sound weird and completely unrelated. I'm testing in many cases curiosity. I don't care about which answer you give me. I care about how you got to this answer. What work did you do? And my entire interview would be around not the answer itself. I'll test it. It's logical and has some common sense in it. But I'll care more about the process you took together.

Yeah, that's where you're looking into is how they approach it and come to that conclusion.

Made a great hire recently in my one of my questions was give me your top two performance stock in the next stocks in the next five years and tell me why in one paragraph in a specific domain. But it's a question that a will test. How coherently can you write and articulate your thought in one paragraph? You can't just wing it because you know that I'll ask you questions about this and what did you look at? What indicators did you look? So you need to understand a whole market. Do this and then I want to see how deep you go.

I like it.

I'm going to use that one one of them but that's a fun one.

What else you got? You got any other good ones? They're going to listen to this and they're going to know how to ace interview with you.

Michael no, trust me, that was the one that I already used so I'm happy to share that one.

I got one other question here.

Go for it.

What types of technology can help accelerate time? Time to value or emanate post deal close.

If the question goes to the technology of how the product is architected and built, I'll say probably kubernetes and cloud technology. Obviously you want the product to be as flexible as possible and as easy to integrate as possible. If you're running a microservices product that is going to be easier to integrate than in a monolith code just because you can integrate bits and pieces of it and not the entire thing. And yes, you should run in the cloud, ideally be written in a language that is well accepted. Don't write it in, I don't know, something old or something esoteric.

I think somebody's looking for a magic bullet answer on this one on something that'll just get your deals done faster.

But there's no magic bullet. It's a lot of hard work.

That AI doesn't exist yet.

No, they should actually ask ChatGPT for the chat things and maybe they have the better answer than me.

I've been playing around asking a lot of M and A questions. It's been pretty interesting.

I actually have not tried asking M and A questions, but I will after.

This podcast yeah, just keep digging into it. Just keep digging into the little detail and you'll be surprised the level of detail it gets into. It's tough. Definitely things you poke around and find on the web. But it's pretty good. Synthesized nicely.

Yeah.

I don't know. Let me ask it. To build a business case on a deal, see if it works there.

They definitely can write a proofread and rewrite a deal memo very well.

Yeah. What's the craziest thing you've seen in M and A?

People getting married to deals. It's like being pot committed in poker, but that's across any given stage or shape and you just get married to a deal and people want to do it no matter freaking what. For every deal I do or don't do, I try to now have something called the Red Team or Pre Morton. I don't know if you're familiar with those concepts, but I did run it every time to just see what I'm missing because I'm so cognizant of that I might be the one married to the deal.

How do you do that? I know larger corp dev teams will do this in terms of they institutionalize it, but if you're smaller, it's actually cool to even hear you think about it. How do you even do that?

You need to have people you trust that will tell you the truth and systematically do that. Meaning you actually dedicate time doing that in the pointer. Right team and somebody that knows about the deal is under 10. Yes. We are doing it because it's a priority. If we want to execute this transaction, make sure it goes well and it makes sense. Somebody needs to check my math and my logic.

That's like shaping your own culture internally to make sure you don't have these biases that are pulling you to do something that you shouldn't be doing.

Yep, Very cool.

Michael, thank you for taking the time with me. I enjoyed the conversation. I appreciate you helping me become a better M and A scientist here.

Hey, thank you for taking the time and always follow your work and enjoy pleasure with all mine.

Hey, those of you with us, thank you for staying through this whole thing. Until next time, here's to the deal.

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