Part #2 — $100M to $1B+: Non-obvious Lessons Learned Selling to Yahoo!
Note: I am no longer at Yahoo! and this is a follow up to my previous post:
(Part #1) 0 to $640M: Non-obvious Lessons Learned Building BrightRoll.
In 2014, Yahoo! acquired BrightRoll for $640M in cash plus a significant amount of employee retention. My agreement required me to be a Yahoo! employee for three years, so joined as VP, Ads Product.
While there is much written about growing a startup, there is far less written about being acquired, successfully integrating a startup or scaling within a large company. In retrospect, I wish I had been better prepared and more knowledgeable, and hope my lessons learned below can prove valuable to CEOs and founders everywhere.
As context is important, there are three important facts to understand about the BrightRoll acquisition before diving into lessons learned.
First, BrightRoll was a large, growing and profitable business when acquired. We had approximately 400 employees across multiple continents at the time of acquisition. As such, my experience may not apply to other situations such as acq-hires, small or very large deals.
Second, the acquisition of BrightRoll was viewed as a success inside Yahoo! as the business continued to grow and the acquired people and products had a meaningful impact on the company’s advertising business.
Third, Yahoo! was in a unique situation at the time of the acquisition. The company was worth over $50B, yet the vast majority of the company’s value was actually stock in another public company (Alibaba). While this reality perverted some parts of our experience, many companies experience similar challenges including activist investors, distracted management and press leaks.
So, while I can confidently say the acquisition and integration was a success, it is also fair that we made many mistakes and benefited from tremendous luck. Time always provides room for perspective and I hope these seven lessons prove valuable to others following a similar path.
Lesson #1: Lie
The conventional wisdom is that companies are bought not sold. This mantra hides the truth that most acquisitions are driven by fear and/or greed, both of which are accentuated by competition.
In fact, the perception of competitive interest in a company is the single most important factor in the speed, valuation, and likelihood of closing an acquisition process.
This fact is not that dissimilar from romantic courtship. I met an amazing woman in 2000 and spent six months doing everything I could to get her interested in dating me. After giving up, I answered her call while on a date with another woman and everything changed. While unintentional, the perception of alternatives changes behavior and thank heavens it does…we’ve been happily married for over 10 years!
In January 2014, I took the company on a non-deal roadshow (which is essentially an IPO roadshow without actually filing to go public or selling any shares) led by Morgan Stanley. While I would have loved to be the CEO of a great public company I knew it was unlikely we would be one. Our revenue growth was hard to forecast, we were experiencing a mix shift in revenue from media to technology and we had material looming threats in Facebook and Google. So, with little surprise, the feedback we received from prospective investors was mixed.
For every comment such as:
“I was intrigued in how Brightroll has gotten to a market leading position with great capital efficiency.”
We heard a lot more comments like:
“Ad tech has scared many investors, so the BrightRoll team should be prepared for more disciplined valuations.”
“Would like to know why the margins don’t seem to trend up as the company benefits from scale.”
By the end of the roadshow, I had confirmed going public was not our best option. However, we ended the roadshow by giving the presentation to multiple strategic partners including Google and Yahoo!. While not perfect, an IPO roadshow presentation with Morgan Stanley in tow is a decent example of creating the perception of competitive options.
Nearly six months later, Facebook acquired our smaller competitor LiveRail. While at the time I was devastated — Facebook was the most exciting company in the valley and they acquired a direct competitor at a huge premium — it turned out to be a key catalyst that changed the outcome of our company’s journey. Shortly thereafter, Yahoo! reached out to Morgan Stanley to express interest in acquiring BrightRoll.
Ironically, Morgan Stanley had essentially lost interest in representing our company as there was no IPO in the works or acquirers on the horizon. However, direct inbound interest from a strategic acquirer? Now they were engaged. While they were likely caught off guard, their response was immediate and steadfast:
“The company is focused on other options at this time.”
While under no circumstances I would advise making an intentionally false statement, I would highly recommend being thoughtful about the perceptions you create about your business. Employees, investors, bankers and all external corporate efforts contribute to a narrative that can create or destroy a potential deal. If you don’t like the term lying, call it positioning.
The lesson here is the most effective lie in business is when strategic acquirer tells itself it has no other choice then to do an acquisition…and fast! That’s when the magic happens.
Lesson #2: Be Selfish
While many of us understand the psychological stages of grief — denial, anger, bargaining, depression, and acceptance — few entrepreneurs understand the emotional stages of an acquisition.
Rather than thinking of acquisition as a situational change, the entrepreneur needs to approach this transition as a complete psychological transition. Change and transition are not synonymous.
The stages of an acquisition are the same as with all major life transitions:
(1) an end — the finality of no longer being an independent company
(2) a neutral zone — you drop old practices and develop new ones
(3) a new beginning — you have fully accepted the new ways of operating
Of course, the greatest challenge facing the entrepreneur in an acquisition process is that you have to try to execute a major life transition by yourself, in a short period of time and while under enormous stress in a confidential process.
Due to the speed and complexity of the acquisition process, I recommend a simple heuristic — be selfish. Surprisingly, in most cases being selfish will lead you to the right outcome for all involved. Let me explain.
The first part of any deal negotiation is to determine all the key terms in the term sheet. On one side, the acquirer wants to pay as little as possible. They want all the money to be paid slowly to employees to retain them over time and increase the likelihood of the acquisition being successful. On the other side, investors and employees want to be paid the most possible and all upfront so they can choose to stay or pursue other opportunities.
In our deal, it was clear that if I didn’t agree to stay for multiple years there was no deal and we would not be able to operate independently. So, immediately I needed to make the psychological transition from being the Founder / CEO of an independent company to being a VP of Product at a large public company. Once I began that transition, other key terms came into focus:
- I’m only going to survive my required tenure if my key team members stay.
- I’m only going to be successful if my team maintains product and go-to-market ownership.
- There are employees who were essential getting to this point but whom won’t be key to our future success.
In many cases, I was optimizing in my own self-interest but those selfish motivations aligned with the goals of the acquirer and the best outcomes for my employees. While this is not always the case, it was true more often than not.
In retrospect, I should have actually been much more selfish. Many employees were kept on far longer than they were adding value and many walked away from large compensation packages that could have been allocated to other employees who stayed on.
Also, reporting structure negotiations can be a grueling part of the process with varying incentives across the players on the acquiring side of the table. I should have been much more aggressive in the clarity of titles, role and reporting structure, and unfortunately spent multiple years undoing mistakes in this area.
The lesson here is you need to mentally make the transition to be an acquired company in order to know what to optimize for in a deal. Often what’s good for you personally and/or good for your ongoing team actually increases the likelihood the deal being successful.
Note: A caveat to this lesson is don’t be selfish beyond the point of putting the deal at risk. Once you have committed to a deal, the key metric quickly becomes the likelihood to close because of the risks of a failed transaction.
Lesson #3: Mistrust
Acquiring companies can’t lie because it’s illegal. Right?
The corollary to Lesson #1 — Lie — is to assume that at all points in a deal process you are being lied to by the acquirer.
• “We are experts at integrating acquired companies.” Yup.
• “Titles don’t matter here. We are a flat organization.” Sure.
• “It’s like a reverse merger. Our guys work for you.” Have that in writing?
This need for mistrust is driven by the fact that in nearly 20 years in business, I have never met a member of a management team that believes they are ineffective at their job. Not once.
However, the facts tell an entirely different story — most acquisitions fail — and those failures are usually the fault of the acquiring management team. Most acquirers have poor discipline in deal evaluation, execution, and integration, and getting any of those wrong can result in a failed acquisition.
In retrospect, I should have been more aggressive about the following questions and had a “trust but verify” philosophy in response:
- Who developed our integration plan and was it developed for companies with our size of revenue and employees?
- How will we handle having duplicative products in market and who controls that decision making process?
- What’s the plan to combine sales efforts given our team is dedicated to selling a single product with a nuanced value proposition?
Furthermore, even simple HR decisions such as an individual’s title or who they report to can be made incorrectly and are hard to correct later. In one case, I recall being baffled that a company could pay $640M and jointly run a confidential deal process for months, yet I wasn’t in the loop on a simple HR decision. It’s easy to say “titles don’t matter here” but if it turns out titles do matter, you will have to deal with the consequences.
Any one of these items seems trivial but the confluence of them was nearly fatal. It took us over a year undo some of the damage done by following existing playbooks and best practices, all delivered to us with the best of intentions. The truth is, we never fully regained our full cadence and momentum, and as a result delivered far less value than we could have.
The lesson here is to assume that large public companies are really a disorganized group of individuals with conflicting incentives. While you may be proven wrong, this bias will increase the likelihood that both sides bring the necessary discipline to make the deal execution and integration a success.
Lesson #4: Fire People
While many startups aspire to “fire fast and hire slow,” few do it in practice. As for large companies? Even fewer.
Conventional wisdom suggests that large companies have established performance measurement processes and prune leadership through annual reviews, layoffs or other means. However, the reality is that most large organizations are bloated, inefficient and full of weak employees. Don’t forget — they are buying your company because they failed to innovate and lost against you in the market.
So, the question becomes what do you do with your existing team and the new talent you are given as a newly acquired leader in a large organization?
For your existing team, the decisions are quite easy. If you have people you should have fired a long time ago, address them immediately and use the acquisition re-organization as the necessary catalyst. If you have duplicative functions — HR, finance, etc — avoid the long goodbye and get them on transitions plans or out of the company as quickly as possible.
For talent that you are taking over as part of the acquisition, the decisions are more nuanced. On one hand you want to be ruthless about talent management and keep a high-performance bar, but on the other hand, you don’t want to create an us vs. them culture and alienate new members coming to your team.
Imagine if the situation were reversed and you were buying a smaller competitor. What would you do with their team? The answer is you would quickly empower the strong performers and fire the weak performers as quickly as possible. So, do that.
Furthermore, it is highly likely that your team will be quickly integrated into a performance management system that assumes that the majority of your employees are average. Strong startups usually have small teams with better than average performers so any performance methodology that requires the team to be average in aggregate can be a demotivating cultural disaster that results in significant attrition.
The lesson here is that talent is often the primary driver of a startup’s success. While there are obviously some companies — Facebook, Google, etc — that have deep benches of talent, few large organizations have comparable talent to leading startups. If you don’t get in front of these talent management issues and take control of hiring, firing and performance management, you can find yourself in a tough position to deliver the growth you signed up for.
Lesson #5 — Be Unmanageable
I was at the office late one night during the deal process talking to Bruce Falck our COO. He had worked at Google for 8 years and was giving me advice on what it would be like working at a large company.
He said, “the exact same skills that helped you build a company will make you successful in a large company. My advice is to be innovative, take risks and don’t take no for an answer.” In short, be an entrepreneur.
However, there is one key difference between an acquired entrepreneur and entrepreneurial executive in a large company. The difference is that the acquired entrepreneur most likely can’t be fired for any reason other than Cause (a legal term you should understand) which essentially means they are un-fireable. Since no company wants to pay an acquired CEO a huge sum of money to leave, you can and should be truly unmanageable.
At an offsite, I was on a panel with David Filo (founder of Yahoo!), David Karp (founder of Tumblr) and Simon Khalaf (former CEO of Flurry) discussing how to instill startup culture inside Yahoo!. The moderator asked each of us what we believe our ‘superpower’ was and I replied without hesitation “truth-telling.” I should have known the first question from the audience would be directed at me.
Truth-telling is one of the most powerful ways to be effective in a large organization. Many employees are concerned about contradicting the CEO, their boss, their boss’ boss, their boss’ peer, their counterpart or anyone that may provide feedback on their performance at the end of the quarter. There are real and powerful structural impediments to truth-telling at large organizations.
However, when you are un-fireable, those impediments do not apply to you.
For example, product managers in online advertising companies often invoke efforts by Facebook or Google in internal debates or prioritization discussions. A common argument would be to say, “between us and Facebook we have X% market share.” I often like to make the counter point, “Yes, and between Barry Bonds and I we have 762 homers.”
The quicker an organization can talk and hear the truth, the quicker you can get a team aligned around the right strategy. And don’t forget, truth-telling is equally important as it relates to culture because large companies are often tone-deaf on cultural issues.
The lesson here is simple — don’t change. Be an entrepreneur and be unmanageable. The worst case scenario is they pay you to leave.
Lesson #6: Steal
While it is true that large companies are generally too internally focused, it is not true that internal resources are appropriately allocated, leveraged and/or optimized. In fact, I often said (even before being acquired) that Yahoo! had billion dollar businesses hidden under tables that someone simply needs to go find and pick up.
After being acquired by a large company, a powerful growth driver is to find and take control of forgotten, under-leveraged or poorly managed assets. By “stealing” these untapped growth engines it becomes much easier to deliver value quickly because these assets are already fully integrated into the company systems and simply need to be activated.
At Yahoo!, the legacy display advertising businesses was still large, with high quality and high performing inventory, and had the potential to be much larger if it was effectively managed. We knew that by simply applying our product knowledge, operational leadership and relationships, we could drive tremendous value.
This internal theft required three important steps:
(1) gain internal control for revenue / strategy for the display ad businesses
(2) combine the teams within sales and product
(3) empower our existing leaders to expand their scope and execute
While it was not easy, taking ownership of another internal business was the most important decision we made as an acquired team. We demonstrated we were able to add value to other parts of the organization and increase our overall impact as an acquired company.
Unfortunately, savvy executives in large companies are also cunning thieves themselves and acquired companies are easy targets. While you are out plundering the bloated organization for new areas for growth, your flanks are being attacked by internal managers touting “synergies” or “cost savings.” Large company accounting can often lead to unnatural and sub-optimal outcomes, and internal executives know the fuzzy math better than you.
The lesson here is simple — large companies have lots of assets, many of which are forgotten or poorly managed, that can be major growth drivers for your acquired business. Beg, borrow or steal as necessary to take ownership while making sure you don’t get stolen from in the process.
Lesson #7: Be Thankful
Perhaps the most surreal and surprising part of an acquisition process is how impersonal it is. A few examples:
- At the last board meeting to approve the deal, Ron Will said: “it’s been a pleasure serving the board over the past four years.” I hadn’t realized until that moment we wouldn’t meet formally again.
- The night we signed the definitive agreement to sell the company, we were all so tired and underslept from the deal process that we had no party or celebration. We simply walked across the street, had a drink and then all went home to get some sleep.
This dynamic is perhaps most evident on the day everyone gets paid. Due to the fact that everything occurs digitally now (ie, no checks), there is essentially no human interaction involved in the process of sending or receiving money.
In our case, there was a single day when we wired dozens of individuals $1M or more. While this was a moment I had daydreamed about — handing employees, advisors and early investors huge checks, and all celebrating our accomplishment — it was one of the more disheartening moments in the entire process.
This feeling isn’t unique to the BrightRoll acquisition. I’ve recently been spending more time investing in startups, and I recently wrote to a fellow entrepreneur on the day when his acquisition proceeds hit my bank account:
I received your deposit today. One of the surprises from selling BrightRoll was how few investor, advisors and/or employees said thank you. So, thanks for including me as an investor and for all the hard work from you and the team. This money is more than I ever expected to make and I am thankful for benefitting from this incredible ride together.
His response?
You’re definitely a successful entrepreneur when you now how weird today is. I paid out 150 people and you are only the second person that said thank you.
The lesson here is simple. When you sell a company you’ve created for a material amount of money, it’s a rare occurrence and nobody (including investors who do this for a living) know how to behave. It is an important time to lead by example and acknowledge all those who contributed to your success.
Thank your employees. It goes without saying that building and selling a company is a team effort and even technology companies are people driven businesses. An all hands meeting or email blast is nice but not sufficient. A company sale is often a life changing event for many involved so get the group together in person and find a way to thank as many as possible who made an impact. If your company has been around a long time, find a way to get former employees back for an event to say thank you.
Thank your investors and advisors. While it will be tempting to wait for a call from those you whom you just made a lot of money, my experience suggests they won’t call. My advice is to call them, one by one, and tell them how much they influenced your growth and the company efforts at large. This conversation will be reciprocal and will provide important closure for a long journey traveled together.
Thank your competitors (and those who rejected you). While it will be tempting to rub your success in the face of your competitors or write the blog post about all the VCs that passed on your previous venture rounds, there is no upside in doing so. Your company was stronger because you had to compete and desired to prove the naysayers wrong. Thank them for helping you raise your game.
Lastly, don’t hesitate to expand the thank you tour even broader. Find ways to thank your customers, your vendors and anyone else who impacted you or the company directly or indirectly in a positive way. I would bet the spouses of your management team deserve a thank you so find a way to do it.
Being a thankful and a gracious winner is a skill. It is why professional athletes are able to play their heart out in a game and immediately afterward talk in glowing terms about their teammates, coaches, and the opposing team.
While you will never forget the years of hard work, late nights and tough decisions, I assure you everyone else will. I was recently at a party and was telling a friend of mine about a group of us who bought Powerball tickets. She asked, “didn’t you already win the lottery?” While I am confident I don’t like that analogy, I’m also sure I have greatly benefited from good fortune.
Selling BrightRoll was the single most impactful and fulfilling moment of my professional career. I am truly blessed and thankful to have had and benefitted from the experience.
So, thank you!
___________________________________________________________
Reach me @ Twitter | Facebook | LinkedIn | todsac [@] gmail.com
Also, investors can follow my late stage syndicate & seed investing on Angelist.
