Validating the Acquisition Plan

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I'm doing well. Thanks for having me.

Thanks for taking the time to have a conversation. Can we kick things off a little bit about your background?

I've got a mixed background. It's fun. Everything from being called Gizmo in my fraternity at Berkeley, being a tinkerer of technology my entire life, to doing some Wall street stint and coaching soccer and then ultimately working in technology and building software for others. Until my good friend and I, Rich, decided why not start our own SaaS company. And here we are with Cloudbeds.

You're a two time founder because you did started a company prior to Cloudbeds that got Acquired.

I did, Yep.

And now cloudbeds. What got you involved in the hotel industry?

Glutton for punishment. I think I had a full head of hair when I started this thing. I'm quite envious of you. We realized a couple things. One is there's a trillion and a half dollars gets spent inside hospitality travel every year. And it's a ginormous industry. It's also one of the most complex. And at the time we had a hotel group approach us saying, hey, I've got this problem. And their problem was they had a bunch of different concepts in this big master development down in Latin America. What they were trying to accomplish was how do I centralize all the reservation experience for a consumer in one place. Now the issue was there was like nine different technologies that were doing one element of that flow. And we built from scratch this woven technology into one unified experience for a consumer. Rich and I looked at each other and we're like, it can't be this bad. Like it really can't be this bad. In an industry that will put a billion people into a bed for the first time by 2020 30, how on earth is the technology this horrible? Fast forward today, what we realized was travel as a whole has some of the least digitally adopting individuals. I love the term scientists. So the hotel scientists are not very tech forward in their thinking. They are very much old school. They like to keep things as normal. And I think our peer group for digital adoption in top 50 industries is forestry, prison, incarcerated services and construction. I'll take Procore all day long. Not too sure about forestry and prison services. I didn't know they had tech and to be honest with you, I'm sure they do. But if you think about that, here's an industry with a billion and a half people who are going to stay in a hotel this year. The consumer is incredibly savvy. The hotel operator is not. And so we saw this opportunity to take advantage of some tailwinds in the market and so we went vertical. We built a vertical SaaS company. It took a lot of years to prove that this thing was actually doable and possible. We strung a lot of technology together. We bought six along the way. We're actually in exclusivity on another one right now, which is really exciting for us. And part of that M and A practice was accelerating our capability from a product perspective is can we get to market quicker than a build for example scenario. And I'm happy to walk you guys through some of that thought process.

Would love to. What catches my Attention right away is the tech company. I run a tech company now and I'm curious too. We'll probably get in the conversation about managing their organic growth.

Yeah.

With these inorganic activities especially, you're still at the earlier stages and balancing that out where it doesn't become such a major distraction. And throughout all the organic efforts, we.

Tend to be a platform kill m and A approach, meaning when we buy platforms, we tend to roll off all of the customers into our ecosystem, even if that means deteriorating revenue. That's not in all cases, but in most cases we also like to find earlier stage mvp. That earlier stage MVP needs to be proven, needs to be completely reliable and scalable from an architecture perspective. But I don't need the big go to market engine. I have that. I have the logos of customers already in our ecosystem being one of the largest in the world. And we can also take advantage of the fact that our ecosystem is used by so many different types of properties. I don't need another interface. The interface basically becomes one inside our core user experience. And so really what we're looking for is technologists who have mastered the practice of whatever they solve for. So for example, our first M and A deal was my allocator. We had just raised our first $2 million. $2 million. Okay. And we stumbled upon this technology that allowed hotels to take inventory, so rooms and availability and then prices and send it out to the major OTAs, that's booking.com, expedia and others. They were doing maybe $400,000 in revenue recurring, something like that. We bought it for a million dollars. Now. Great multiple, if you wanted to accelerate to today in the way we think about things. But at the time it was half our cash. We basically just raised money and took half our cash on a bet. Now it was one of the best things we've ever done in this company history. It was one of the smartest things. And so that just became a service, that technology became a service to cloud beds, which meant there was no interface long term. It was just the connectivity that enabled the rest of the mothership, meaning cloudbeds core, to do everything else and connect to that ecosystem. And so Whistle, which is one of our latest acquisitions, which is a guest communication platform, that user experience has now been interfaced into cloud beds. And so that interface of old will slowly be sunsetted into the fields. But from the perspective of what we're looking for is we're looking for great practitioners of technology who understand the needs of the consumer but have built it in a way that we're able to flexibly take that and integrate that in many different ways. That's just been one of our approaches. Not every situation is the same. We've definitely bought tech that we've completely rewritten. For the most part, that's what we're looking for.

You have this vision as a vertical SaaS serving hospitality, but a real platform model. 100% that you're doing acquisitions and they're different expertise of capability that they've matured to. And when you acquire them, you're adding that capability to this core platform that is all driving your sort of core organic growth, your current go to market basically.

I think a really good analogy would be Salesforce. However, Salesforce keeps all those interfaces separate. So as you look at their laundry list of acquisitions they've done in the last decade, Slack is still sold as a third party. But Slack has now been deeply integrated into service cloud and sales cloud and stuff like that. So our approach would be slightly similar. We're looking for things that we can bolt on to the product ecosystem. I just want to get rid of the interfaces long term.

How do you approach M and A?

Oh man. So we are religious about our M and A practice. It's something that we've perfected over time and it's been fun. We were a little more cavalier early in the days and now I think we've done enough motion where we sort of have a system. There's six steps that we go to validate. And really along those entire six steps, what we're doing is trying to write a thesis. And we're also trying to write that thesis with the other party in mind. So we actually want them to participate in that process. We want them to give us insight to how they see the two businesses working together. What they see is the value add of 1 +1 equals hopefully 3 or 4 or 5. And so what we do is simple and probably makes sense. One, we always are surveying our customers. I don't think you can ever survey your customers as a tech company enough. Constantly be asking questions in different ways and different formats. Sometimes full surveys that are five minutes long, sometimes just one quick question in back and forth interaction. Sometimes we do polls inside webinars. We are literally trying to collect as much data on our customers as possible. We even bring tablets to big conferences and we have interns walk the hall asking hoteliers questions around buying trends and things like that. So we're very forward thinking around how do we understand what the need analysis is today. So we always started the need analysis. The second thing is we look at what trends are happening in this big industry. This big industry with a bunch of different influences. You've got outside party influence. You've got inside party influence, meaning macro things, micro events. And throughout that entire first two steps, we begin to start formulating ideas of, okay, who could the targets be? Or is this something we should build ourselves? You got to keep in mind, we've already originated themes throughout the M and A practice to this point. So even before we start serving the customer, people might be on this call being like, how do you know what to ask? We're asking such a wide array. We're looking for topics. Like if, for example, we were interested in car transfer software, someone in our ecosystem, meaning it could have been. Support teams are fielding a bunch of inquiries on why doesn't your booking engine enable car transfers? Meaning I can book a hotel, why can't I also prearrange a car transfer? Well, that keeps feeding up in some. It could be on the sales side. It could be on the support side. It could be in our marketing team. It could be partnerships bringing a lot of car transfer companies coming to us. I'm using such a poor example, but I couldn't think of anything else that wasn't revealing. All of a sudden, we then go and start serving our customers. All right, car transfers keeps coming up. Is this a theme? So then we survey, do you want this? Yes or no? And we're looking for buying trends. And then we go, industry trends. Is car trans plus hotel reservations a thing? I don't know. Let's go find out. So we then start serving industry people. We'd start looking at what other competitors are doing in this area. We'd even look at what the OTAs are doing. And so we start to formulate a little bit of step one and step two. To go. Yes.

To go back and forth.

Yeah. This is triangulating into something real. So then we go, cool, this is a build or a buy in this scenario, how long would it take us to become experts, like actual experts at building out car transfers? Or is there some startup or some company that has become the expert at car transfers and is already partnering with companies like ours? And can we just go partner with them? And so we then just go build and partner. So we haven't even explored, do we try to buy? We just go, hey, how do we get an mvp? How do we test it in real life? So we know that the industry is saying something. We know our customers are saying something too. Those are triangulating correctly. Let's go put it into action. Let's go find a hundred proof of concept customers, let's pilot it out and we'll set some totally subjective number as a target. It could be we need a hundred properties and we need 5% of our reservations book a car transfer or 10% or whatever it is, it doesn't matter. And that probably would be fed by our research. And if it hits it, we're like, okay, that's interesting. This is interesting. Now we can go down into, is there even a target? This whole process is us building up to beginning to understand some kind of sort of strategic rationale. There's a target out there, there's a partner out there that's proving that it works. There's capability for us to build it. And we begin to sort of really formulate down into, maybe there's an M and a thesis here, maybe it's something that we could bite off. Maybe the revenue accretion is doable, maybe there's something that's profitable that we could actually extract EBITDA from it. And all of a sudden we start bringing together targets. Not just one. All we try to go from big, small to medium. We want to look at everything. And ultimately what that leads to is a lot of opportunities for two groups to begin to fall in love and, or fall out of love with this thesis. And it's a product team and then it's our corp dev team. So both teams are partnering on this. We always find some type of internal stakeholder. It typically comes on the product or engineering side. It could also be myself or my co founder or even a sales leader, a partnership leader. It's never corp dev. Corp dev can never be the sponsor of these deals. It has to bring some team into the fold. So they have worked to even convince any of us up front. They're trying to remain unbiased. And we do product demos. And these are my favorite thing. I love seeing product demos. I could do product demos all day long. What we learn is we start to learn about the talent. So we've already done a complete analysis of all their talent, who they are, where they came from. Is there overlap? Is there not overlap? Is there redundancies and synergy of GNA and finance and HR and people? We have a good idea of who these people are. But until they start opening their mouth and until we see how they treat their staff in those conversations, who they bring to the fold for the product demo, because look, they know that we're looking at this strategically. The Founders are aware that this might lead to somewhere and so it's very interesting to see who's in the trust tree when you bring a strategic product demo the light. And so there's a lot to tell from founders and CEOs and C level staff. And we really are looking for culture fits along the way. We're also looking for salesmanship. Are they passionate about that product? All the things you would expect. It's like an interview except they don't realize they're being interviewed because we're just asking questions about the product. After five, six, really coordinated, incredibly thorough steps, we then write a memo and the hope is we found a target. They're excited about what we're doing, we're excited about what they are and their culture and their people and all that stuff. We believe that there's opportunity to bring both of them together. We start writing the memo and we have them contribute. We have them contribute. It could be a deck, it could be a written memo, it doesn't matter. But we want to see where their vision is and how it brings together. We then share our fears, we share our risks, we share as much as we can transparently so that they understand what we're doing is really bringing a document to the table. Doctrine, some kind of doctrine, PowerPoint or written so that they have to show that with the rest of their team or their board or whoever their decision makers are. And it shows that they helped participate in that. We wrote a lot of it and we're sharing why we came to the equation, what the risks are. And the founders on the other side are pretty revealing. They're like, I'm really scared to go to market or we're really struggling in our win loss ratio right now because of this competitor. And it's just all revealing. That document is meant to be all revealing. It leads to really quick due diligence. Nothing comes up in due diligence because we would know about it. I'll give you a perfect example. Last year we looked at a deal where we were told that revenue was in the millions. Right? This is a founder led organization, big company, 25 plus people doing millions of dollars, profitable. And we started doing our dance, we started doing our process, we started going down when corp dev started to get into the financial, the quality of earnings analysis. We're like this thing doesn't even cross a million dollars in revenue. How do they have millions of dollars in revenue? But we're here and they're over here. Something is not adding up. What they were equating to was trials. So if all of those trials worked out, they would have millions and millions of dollars in revenue, not millions and dollars of captured revenue. They had millions of dollars worth of opportunities that may or may not ever translate into business. That was a weird one for us because of course that would come out in our review. Of course, like people would get fired if they missed that in our analysis. And. But why wouldn't that have been brought earlier to the table? It was weird. That's the thing where we try to avoid. So ever since that happened and we've never had something that blatantly obvious where it was just like, no, that's not how you run accounting. But okay, we try to bring things clear. So we try to get them to commit as much as possible. And that way we really have a good sort of framework to build off. That's oftentimes us spending two days in person with the teams. Whether we go visit them or they visit us in our office. We just want to spend as much time so that that would have come up over a beer, I'm sure. And we had just skipped one of our steps because we were so excited about the tech. Now granted we ended up buying that asset, but we bought it as an asset and there was no team came along.

I want to make sure I got the six steps. So I have one of the customers. 2. Industry trends. 3. Build versus partner analysis.

Proof of concept. Yeah.

4. Strategic rationale. Define it. This is where you start looking for targets. Number five, product demo which has some initial culture diligence and things related. We'll talk more about. And then six, the investment memo and creating that transparency which lends into more formal diligence.

Sounds about right.

Can we break them apart and talk through some of these in more detail?

Sure.

Survey customers. You mentioned a lot of different formats. It could be a one question thing. You could have folks the tablet asking questionnaires. Walk me through that. This ties in the second one you have investment trends might develop a hypothesis and you're validating it. Can you give me some examples or even like what type of questions you'd ask these customers?

I'll give you a perfect example. We just did a survey middle of last year around AI. We were asking our hoteliers our real live questions to a real live hotel audience in one of our product release webinars. What does AI mean to you? And there was a series of questions related to AI. What practices of AI do you think it would be useful for? And we gave them a box full of operations or data or revenue pricing. We know where AI is practical in a hotel for technologists like this, that's pretty straightforward. We just wanted to see their lens and so we started asking them questions around that. We did that in a live webinar, in a poll. We did that as a follow up survey. We've done that at trade shows all around the same theme. And really what we're trying to understand is how in vogue AI data, generative AI and OpenAI and all this sort of talk about it was translating into an industry that doesn't have a high digital adoption curve. Was it getting through just because the massive amounts of media talk or was it something that was very early into our correct assumption? It was really early. Now we've done that same survey again. We've done it each quarter since then and in different ways. Again, trying to pull up now. Every industry trade show I've been to has talked about AI. Every single one of them. I just went to another one last week. They had a whole panel on AI. It's like you can't escape it. As we've watched our customers go through the same surveying behavior, whether it's a Pendo notice inside our application where a pop up shows, hey, take a quick survey and they go through five questions. We are trying to just triangulate on a trend line to see whether or not this is becoming more and more interesting. And we're also looking at that from a perspective of what is our future product lines look like in 2024. So we were really trying to understand what are some of the things we're doing. Do we touch AI, do we not? Can we wait? Is it a little bit too much snake oil? What is the real value here and how much money we have to invest in it, blah, blah, blah. This is a recent theme that's just a recent survey. We think it's interesting because AI is interesting, but like we've been using machine learning for seven years. Like we have machine learning built into our application. We will always have machine learning. AI has just been glamorized because of media attention and all the talk about it. But I wanted to hear real time feedback. And so when you have a thousand hotels on a webinar, you ask them questions. If you don't, you're just losing this amazing opportunity to get some real time information. So we always do two polls. We typically do one or two small questions in there. And then we also have a team in the live chat asking questions, following up to questions that are being answered, triangulating around those Things. This is us just having conversations. That's the best way of describing it. Have conversations until you go blue in the face. Because if it's the same thing over and over, you got something. If you're getting a scattered answer list, oh, keep going, go deeper, you're not there yet, you don't have the right answer.

Awesome. This is really relevant by the way, because I'm working on AI for our product and having a lot of one on one conversations with customers. I haven't really applied surveys because I'm always like to just get in there first and have those conversations, see, get some insights. I think you're right because I can see where we can create like a quadrant of use cases and say all right, let's get some feedback like where would you fit on in this sort of quadrant here?

Keep in mind when you do one on ones, you can lead the witness. So if you're very good at asking one on one questions, you can create unnecessary bias just by a one on one conversation. We always do one on ones too. And then we do group think and then we just try to get obfuscated. They're just answering questions on the whim, depending on the time of day, things like that. It's that whole collection. But I'm listening you to interview me and I'm changing my answers on the fly just based on how you're approaching it. I could tell you have a influence over this conversation alone.

So now, now taking that back of like you got to have a multi prong approach, like let's took the data from different areas, even different formats of surveys and then start putting it together and see if we can get some visibility into patterns or insights out of it. And then the industry trend at this point. Are you creating a market map? That's the most common thing I see, right? You sort of map out the space and you say okay, here's the different tech companies specializing in these areas of capabilities. Is that kind of what you're doing in the industry trends? There's other elements. Are you looking at some industry publications? See what the talk of the town is?

It's not so much that like our corp Dev team is responsible for mapping the industry. Okay, we're already doing that biannual. That is unrelated to a specific deal. We are trying to create the largest database of all of the competitors, all of the peer group point solutions, things like that. We just want to know where everyone stands. And so twice a year we'll go back and pull how many employees they have and try to triangulate around revenue scale. And we put that into our CRM. When we go into industry survey, there are maybe a handful of places our customers go for information. Only a handful. Those are going to be conferences, those are going to be some media specific niche media outlets. There are some reputation or review sites. We have partners that we can go to as well, that we're already working in relationship to. And then lastly, there is just our own reach. I'm part of a collection of CEOs in our industry that get together, we all chat, we all share information, we try to be transparent. Some of us are competitors, some of us are not. I find it incredibly helpful to share. I don't have anything to hide. I really don't think that's a competitive weakness of knowing what my revenue scale is or how many employees I have or things like that. From an industry perspective. Look, at the end of the day, the surveying from an industry perspective is we're trying to get third parties to revalidate what we already know from our customer perspective. We want to make sure that what our customers saying are not biased by our customer, meaning they're just not a sample of our customers. Now I have N plus 300, which is what I need for statistical relevance. So if I survey my base and I get over three to 400 customers, I've got relevance. It doesn't matter. I don't need this survey anymore because I have so many customers. I want to do the same thing outside of our customer base and try to get that with a wider audience. And there's some groups that we will go to do surveys for us. We'll pay for them, get a third.

Party and have them run a broad survey that's outside your customer base.

Yep.

And then that's more of your industry research.

That's more of the industry research. And it's actually more industry surveying. That's the surveying part. The industry research part is there's consulting practices that do work in this area. We might talk to them, we might hire them for some initiative. We really haven't spent too much time with third party consultancies like Bain or McKinsey or Deloitte. We know them all and we spend time when they're on initiatives and whatnot. We haven't engaged any of them. I think that would be overkill for the type of research that we're looking for. Nevertheless, there's plenty of sort of niche consultant practices that are publishing information. Frequently we subscribe, we purchase all that data, bring that down, and then that just Goes and reconfirm some of the surveying that we're doing.

So we got a good mix between the research you do, working with some of these consultants to help out with some of the. I say what, what exactly would you hire them to do?

Like a consultant practice or like the survey group?

The survey group I get. I think that's pretty straightforward that hey, this is for a hypothesis and you want this broader view. But when you mentioned of doing more industry research and bringing consultants in, I'll.

Give you an example. We occasionally will do mock RFPs through third party consultants. So we'll actually have them take us through like a mock sale to make sure that we're triangulating message around certain products that we're exploring or we're looking at just to understand the value proposition, the selling cycle, things like that. We've hired them to do outside in work so that we are not revealing. So sometimes there's only one or two providers in the space, but versus 18 providers. So if we just start knocking on the door, there's enough closeness between those that it begins to signal and we try to be mindful of our approach. So I would say two things. One is we'll use them for outside in work on a very small niche work where we'll have them do some of the customer surveying, the research and whatnot so that we don't identify a target that we're looking at. We've only had to do that twice. For the most part they're doing things that is busy work that our team doesn't want to do.

Fair enough. The build versus a partner analysis. This gets interesting because maybe at this point I assume you found something. Let's be really hypothetically here. Let's say we just talked to a bunch of property owners and found out that AI to help housekeepers determine which room to clean first is something that could really optimize and make it much more efficient so guests aren't waiting 3pm to check in. You're getting that figured out. How do you start thinking through the partner versus builder?

So that would be a really interesting one because I think we would be torn on do we build that or do we partner with that? And here's why. In our partnership ecosystem, we have housekeeping apps that specialize in housekeeping and maintenance practice. We have our own too. So we have our own that competes with those, we give ours away for free and those are paid services that we make revenue from as well. It's an interesting dilemma in that what we would really be realizing is this AI application, is it better suited for tacking onto our app, which is a very light, basic housekeeping module, or is it better to buy one of these guys who's our partners, who's already doing it, and then tacking the AI on that? And so what we would be doing is both. We'd be looking at where are these guys headed in terms of their product cycle, the depth of their capability, Are they embedding AI into that use case that you revealed? And then we'd be looking at our product team to say, okay, guys and gals, we are nowhere near this over here. We know that we're not trying to be these sophisticated housekeeping apps. Is this useful and how long would it take? And so we'd be running a dual track analysis, knowing what I know about our own ecosystem. So it was just, it was really fascinating. I can't believe you picked that one because it's kind of funny. But it's a great dilemma that we would have internally, because I love AI, I think it's fascinating. But then I also realize how mission critical housekeeping is to some businesses, and some it's not. So some it's about speed of turn and others are just like, I just need to make sure I check a box. That's why we have the two different sides. What I would say is we would first go back to all of our users, all of our users using our partners, all of our users using our app, and we'd survey them separately and we would probably start asking these customers, why don't you use these products over here? Have you looked at these products over, seeing whether or not we could push all of our customers off our homegrown system into a paid service in the future. In the meantime, we'd be looking at these customers, seeing if we could push them off the paid service into the free. So we'd be trying to get different patterns to see whether or not we were right in our hypothesis. Is it just the AI that's interested or is it AI plus all of the ecosystem around the AI in the.

Housekeeping app, Are you running surveys against it?

You're running surveys, you're doing one on ones, you're doing Figma mockups to show you're trying anything. This is such a unique case that I'm playing with it a little bit to show how we would have to start getting. Yeah, this, to be honest with you, I almost would say you put the thumb in the wind and yeah, I think that's directionally accurate because I don't Think you ever get the answers that we would be looking for? This is one of the ones where we'd start spinning our wheels. We would have so much analysis, we'd get paralysis and we'd have deal fatigue and not do it. We just, we'd say, no, we're not going to do it. Yeah, because it would be too much change for what our discipline is. Meaning we already have something and we already have partners. We can validate both. This is a layer that sits on top. I'd rather both of them just develop it on their own and not worry about a target at the end of the day. Let's say we found the strategic rationale was not to partner, not to build, it was to buy. We would have already done the analysis on what it would cost, how many engineers, how many PMs would be working on it, what the UI time commitment, how long that would look at. And we basically work that into the deal price. And so we'd say, okay, a million dollars to go build this application. Million dollars from start to finish is going to be nine months. We can or cannot monetize it. We think the number of customers that would attach it based on this user install base is 50% and therefore we could quickly create a model. Wow, okay, we spend a million, we make a million. I don't know if that's something we, we want to do. And so then we might look at the buy. Wow. We get a full fledged app that's way better than our basic one. It also has a light version of it. It's doing $3 million in revenue and it's got half a million in EBITDA. We would say, wow, building makes sense, it's cheap, but we don't get any acceleration revenue or creative value and product. We might start moving away from build over into the camp of buy purely based on the economics of what we accretively add to the mix. Now we would then start eroding what our price would be based on the fact that we know it would cost a million dollars. We know that we're going to have to lay people off if there was overlap. So you start to un the purchase price, decision making and then sometimes it brings you right back in where you have a really tiny gap between the two and that again leads to analysis paralysis. And we're just like, we're done, we're out. We can't do this. This doesn't work for us. It has to be a clear cut winner. We all have to be unanimously aligned.

So there should be like A pretty clear gap either the capability that you have. I was actually curious about that. When you're talking through, if you get that bias from the developers, they want to build everything in house 100%.

They always believe that their stomachs can have more food in it than they can actually handle. And at the end of the day, I love that about them. I want them to be fearless in our ability to build up. Sometimes it's good to just bring in some institutional knowledge and groups that have only been thinking about that for a period of time. And I think you accelerate what we can do. And we have a saying internally, if you're going to reinvent a spark plug, don't just throw 10 Sparkplug engineers into a room and say, hey, create something new. Put one so form and function is there. And then do nine other engineers from other walks of life. You're going to get something innovated. And so sometimes we need to bring the outside in. And that's helpful and healthy.

On the strategic rationale, you got this viewer. The hypothesis of, hey, we validated that there's a opportunity to add this capability. Is there any more details that you put in there before you start looking out for, for targets?

At some point in time, the internal sponsor is coming into the play and so they might have some added bias in that strategic rationale. They might say, hey, there's a use case here. I really have convicted.

Just like a product manager, product owner person.

Yeah, it could be myself, it could be my co founder, it could be our head of strategy, it could be our sales leader or product leader and saying, guys, there's something here, we need to do this. Think about it. Production managers who are doing their jobs are going out in the field as well. They're going out in the field, they're doing surveying, they're talking to other competitors, they're talking to product partnerships. They should fully understand what they're solving for just as much as what corp dev would do, which is to reconfirm the exact data that they're looking at. But just from a deal side. It's funny, sometimes our PMs are just as knowledgeable about a space as our corp Dev people, because they're looking at it from just two different lenses. But I love the arguments, the push pull like, well, no, we could build this. It's like, well, can we? You just told me two days ago it's going to take two years to get to that point. I did, but I think the iterative approach and so it's like when an Architect comes and designs you a beautiful home and shows you these 3D renderings. You're like, oh, I can see myself living there. And they're like, okay, cool. Yeah. The contractor says it's going to take two years to build it. You're like, oh, that deflates it a little bit. And so, like, I can show beautiful renderings of things, but actually getting to use it is two years away. Sometimes it means that we need to bring them closer to reality and say, can we grab this now? Can we start to integrate now? The funny thing in all of this is when you start integrating products together in your tech company, it never goes as planned. It always takes longer, and sometimes it even takes two years fully integrate. The build scenario is like, yeah, it would take two years. The integrated scenario is like, oh, we're going to do in six months. And then two years later, I'm laughing like, hey, we finished the integration. I'm like, oh, okay. So we spent more and we're at the same place minus whatever revenue. So I've given up on grading strategic rationale from how quick we can get something to market because it never works out that way. It is always two times longer in every scenario that we've ever done.

More like construction projects.

Yep.

We get this strategic rationale put together, we identify targets, and we start doing diligence on them. Our product demo seems like early diligence. You had some interesting points that you wanted to see. Who are they bringing under the tent? The sense of the culture. Can you tell me a little bit more about that? I'm curious too, if there's like, specific key questions that you ask that give you some insights about what that culture is like, or is it just pure feel from how they do the simple task of demoing the product?

I am a big people person. Our company culture is all around people and how we treat each other and with respect. The interaction of leaders and who they bring around the table, who is trusted, is really fascinating. Sometimes it's more, sometimes it's less. We ran a deal that was a failed process. At the beginning of last year, it was just the two founders. They never brought any other team members into the equation. It was weird. Something was off. We realized early that we were just a stalking horse for another deal that was being delayed. But then there was behavior where then the stalking horse theory went away, where they're like, no, we're all in. And they started revealing more. But it kind of had this flip flop and either they both had the world's best poker faces or they were the world's worst user experience. They just didn't know what they were doing. They were deer in headlights. Every time they got in calls with us, they couldn't sell their product. They couldn't convince us the product was real. They couldn't articulate why they weren't selling more things that didn't make any sense. In hindsight, I'm so thankful that deal didn't go through. I'm so thankful. There was deal fatigue, there was back and forth between. They had bankers, we didn't. And then we almost brought bankers in because we're sick of their bankers. It was a little bit of everywhere. There was a perfect storm of things going wrong. And for us, one thing goes wrong. We're like, eh, could be just the deal. Two things get wrong. I don't have any hair on my head, but every hair was sticking up on my head. Three, I was like, we're done, we're done. We started actually pushing them away, saying we traded the deal. And they just kept coming back. And so then we're like, maybe we are just not understanding anything that's going on. And the same thing happened again. Fail process. Six months later, pop back up, same initiative, same behavior, kick them to the curb again. And no, no, no, really. And we're like, we're done. TV timeout, indefinitely. Wow. And so culture was the driver there. We never thought we could work with these people. And you see that coming over many conversations like, I'll never forget this. And this is. I'll try to obfuscate this somehow. I won't say the year, but we were in love with a piece of technology. Every person in my team unanimously was like, we need that piece of asset. We need it now. We are going to revolutionize what we're going to do. Let's go fly to this part of the world. We're going to go meet with the team, we're going to spend a week there, we're going to write our thesis together, we're going to do our process. So we get maybe day three, we passed the oh, let's get to know each other, drinking beer, having some good meals and doing the vision board and the strategic rationale and all the fun stuff. Then we were getting into the deal points and the negotiating and the actual due diligence. And I shit you not, one founder took me aside and look, if it's a problem, I think we can do this deal without my co founder and that person. We don't need that. What? Infighting was revealed and the same thing happened on the other side. Those two guys were like, look, he doesn't do anything. He's a waste of space. He owns a lot. We don't want him going forward. Wait, wait, hold the phone. It's almost the beer test. It's almost like that. You sit next to the person at an airport and can you stay in them for six hours? That's who you want to hire? Yeah. If you had a great conversation for six hours, you could do anything with that person. It was weird, bizarre. I can't explain it. And so then what? We like, literally like, all right guys, we're going to take a break. We're going to go back and we're going to collect all this information. We basically told them, we're like, we're done, we're not going to go forward. And they freaked out. What do we say? And they're like, no, no, no. Like there's a lot of fighting. We're worried about who does what going forward. And we're committed. And you know what? That team is still together today. So we didn't do the deal. They're still together today. They're doing fantastic. Maybe we just got them on a bad day, but lessons in M and A, you never reveal that. Don't reveal the ghosts in the first date. That was weird. And we've had plenty of conversations with them. Pr the first in person, like the, the honeymoon stage. Woo. That was a doozy for sure.

The memo you mentioned, you do this jointly. Can you tell me a little bit about how that approach works? Cause I never heard of that. Where you actually create this memo and you share it with the target company.

So the goal there is to be all revealing for them to be all revealing and for us to be all revealing. I learned this practice from someone who's way smarter than me at M and A. Their argument was if there's a board or this venture backer or private equity backer and you have a founding team that is revealing their fears, the risks, the things that keep them up at night and that is getting articulated into why the synergy between the two companies makes sense and we are from our opposing side showing our fears of the deal. I think the threats of the deal and why we're very nervous about things like this that have now been revealed to us. It allows us to re architect the value and what we're going to pay for the deal. If they're bored, if they are venture backed or have a board, they have to reveal that document. It's a Formal offer. It's like our NBAO. You then have a boardroom on the other side saying oh, didn't know you're so afraid of these things. That's revealing to me. So it's our way of like bringing to the table an honest conversation. It's not about trapping anyone, it's about an honest conversation. Because VCs or private equity firms always tell their founders, I want a 5x MOIC. Okay guys, you'll take a 2x MOEX every single day of the week. We all know that. Stop telling people you want a five when I know you'll take a two. And at the end of the day, a cap table is not what you necessarily have to write a deal around. That is just a legal document among parties, but what I am buying and how I'm convincing the seller of what value is from my lens. I can write whatever deal parameters I want. If I want to shift all the value to the team going forward and pay less for the asset or whatever the deal conference, I can do that. They don't have to accept it, but I can do that in my legal right. And so all we're trying to do with the memo is bring two aligned parties together and that's the go forward teams. Those are the people I care about. Now if I'm letting shareholders roll, I want them to feel comfortable about what we're doing too. I want them to feel like they have an upward path to success. I want them to see the strategic rationale that one plus one equals more for them, that their share value is going to go up. So I'm very revealing. I will do management presentations, board presentations where I show our thesis from our lens of why we're doing this. And then I'll even go backwards to show our performance. Here's how we create moex for our shareholders. Here's how we've done it historically in the past. This is what our milestones is. Why? What stock price you're getting from me? It's a stock deal is fair and here's how I'm going to give you your return and all that stuff. So this is a two way street. This is never a one way street. It needs to be very collaborative and we think it works great.

Do you have everything? Price terms? It's all outlined in this memo. How long is it? Five, six pages or longer?

We restricted 10 pages and that's going to include some financial analysis on there. But we try to do it in two pages. It never can be done in two pages. We try to do it in two pages, it always becomes like six to 10.

You got any tips for pitching this to the board? To get it. Get them to say us.

Oh, man, those memos that we write, if you don't believe the deal at the end of that memo, you don't know how to read, to be honest with you. I mean, it is full conviction. There is everything from our return on invested capital, what are the attachment rates of why we're doing it, how we're cutting the stock. We have such a thorough analysis on our end, it's pretty straightforward. Like, we've never had a memo get rejected in our company history.

From our board, I've written down so many different topics that we can cover from breaking down the memo and then also some of the negotiations that happen with these transactions. Hopefully I can catch you later this year, Adam, so we can continue this conversation. But before I wrap things up, I gotta ask you, what's the craziest thing you've seen in M and A?

We're probably out of it, but when I was a young associate at a bank, we pitched Facebook to get acquired by eharmony. And at the time, this was early 2000, so think about what Facebook was like. You were single or you were married. You had that little indicator. But we had seen that there were so many patterns of bringing people together, and eharmony had so many identifiers of what were matches. We thought the two companies were a match made in heaven. And at the time, Facebook was only worth a couple hundred million bucks and eharmony was worth a billion. Obviously, Zuck said no, which makes perfect sense considering what he created. But it was the craziest pitch deck that I've ever been part of. That's.

Oh, yeah, I never heard of that one.

Yeah, totally outside of the box. Dead on arrival, very quickly.

Awesome. I love it. Adam, thanks so much for taking the time. You've helped me become a better M and a scientist.

A lot of fun.

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