Getting acquired by Yahoo! – Part 1: Getting to know your customer

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So you’ve made it – you had the great startup idea, you pulled together a team, boot strapped your way into being, gained some traction and maybe even raised some funding. Now you want to grow customers and revenue and are thinking of partnering with one of the valley giants (Yahoo!, Symantec, Microsoft, Google etc.) or maybe you have aspirations to sell to one of them.

Where do you start?

Getting a contact at a valley giant can be done by networking or LinkedIn, but what are these companies looking for, how do you pitch and what do you deliver?

First, it helps to understand a bit about them and how they operate. You are after all going to have to sell yourself to them so it is always best to “know your customer”.  I should point out that this post assumes you have an innovative product that is growing fast and you want to sell and one of the valley giants is or could be interested – after all, you have to have the goods…..

With that in mind, here are four key characteristics of valley giants:

  1. Resource constrained: in terms of people and money to invest internally in new products, projects and businesses (and some would argue overstaffed in support and admin areas). As such they have difficulty getting any major new products or innovation done internally;
  2. A strong sales focus and a big sales force with established customer relationships (and a big sales quota to meet);
  3. A great currency for buying other companies with their public stock.
  4. They have huge reach – the number of customers and consumers they have relationships is much deeper and significantly larger than others.

In other words, the valley giants have great distribution but they are really bad at coming up with new products internally to keep their sales channels full of product to sell and their sales teams busy. They need to hit their sales quotas they often end up buying products to resell as their own or creating platforms (Facebook Ads/apps, Amazon marketplace, Google AdWords/AdSense) allowing others to leverage their reach in exchange for a cut of sales revenue on the platform.

What do I mean that these giants cannot innovative? But were they not all founded on the back of some great innovation? How could they lose the ability to innovate?

The short version is that they just got big.

The road from great innovator to managing to Wall Street expectations

These companies started out as startups just like many others, but their vision was different (think bigger) and they happened to stumble upon a product with immediate global demand – they had a product that everyone immediately loved and wanted to use –in the process inspiring us to all become entrepreneurs.

Hitting the jackpot like this generally leads to the following chain of events – or something similar.

  1. Infrastructure costs scale, which then creates pressure to find a business model and revenue that can scale even faster to cover costs. With a business model that scales these companies then set out to conquer the world and target billion dollar plus revenues. Conquering the world though requires a large sales force and maintaining multiple business relationships through people, adding to the costs.
  2. If you make it big and successfully survive the initial high growth phase, your initial investors then clamor for an exit and want your company to go public, creating pressure from Wall Street and introducing a focus on financial results and KPIs that is publically analyzed to death every quarter.
  3. As a public company, you then become a slave to quarterly reporting and your KPIs. Your management team changes from entrepreneurs to managers, from risk takers to risk averse as this is what it generally takes to reliably hit your quarterly numbers.
  4. You are then in effect constrained in what you can do and a prisoner of your financial ratios. People bought your stock based on your historical revenue growth and your expenses as a function of revenue. These need to be maintained as otherwise you lose the confidence of your shareholders, as their expectations when buying your stock are based on a combination past performance and future hopes, with hopes for the future largely influenced by past performance. If they sell, your stock price drops, which impacts you and your employees wealth and put pressure on your Board to replace you.

It all boils down to your needing to generate consistent revenue growth. If you don’t achieve it, then your job will likely be on the line come next time the company is pressured by Wall Street.

The straightjacket of being a public company

Keep in mind that for a company like Yahoo! today, achieving 1% revenue growth on $6.46 Billion in annual revenue means an adding an additional $64 Million in revenue (of course they actually need to generate more than 1% – more likely closer to 10% to 20%). This is what each business manager needs to plan for and propose during the annual planning cycle. Of course, they are submitting these plans 18 months in advance for a business environment that will likely be different, which encourages conservativeness.

If you are Google then you have real scale problems – how do you drive 10% revenue growth when you have $23 billion in revenue?

So what everybody does is pick the safe option, the one that will keep their job secure.

Follow the easy and safe route to hitting your targets

Squeeze the increase it from your existing customer base and sales channels through new product features, line extensions, tactical marketing campaigns or extending to a new market. These approaches will likely get 85% of the available new investment from the less than 1% increase in the expense budget (more like a 0.6% increase) which you are being assigned to generate the 1% increase in revenue.

The riskiest and hardest way, especially for someone in a corporation that has lots of politics and who has a job and livelihood on the line, is to take a chance and invest in a completely new business or product and hit a home run that generates much greater than 1% revenue growth. As a result, these approaches will likely get 5% of the expense budget increase. As you can guess, investment in true innovation is rare and most of these companies are still making the vast majority of their revenue from a single product line or, in the case of Microsoft, two products line.

As such, innovation in the valley giants is driven through acquisitions or partnerships. It is generally much easier to actually get I done this way than it is to get something done internally – both in terms of time to market (getting approval and hiring new resources) and in terms of getting internal buy-in and approval.

So what does it all mean?

So getting back to our initial question after all that rambling, what does this mean for someone who wants to partner with or be acquired by one of the global heavyweights?

They need you.

They need to maintain market leadership, a competitive product and their customer’s interest. They need to maintain prices (hard to raise them) with new features and they need to have new products to sell.  Most importantly, they need to have something to tell their stakeholders (shareholders, internal teams, sales people and others) to keep them excited and believing in the company.

But they don’t need everyone, just a few of you. So how does it become you that gets acquired?

The key thing to remember is that acquisitions rarely payoff and are very risky with typically low returns and it is hard to get an acquisition through without very senior (CEO level) backing (unless it is really small as a percentage of the valley giants revenue). There going to be lots of people inside the company who will try to scuttle or kill the deal. You are going to need to have a good strategy and a great sales pitch tailored to the valley giant’s business needs. After all, why your company now and not one of the many others out there in your space or in another space of interest to the valley giant?

That is why becoming an acquisition target is equal parts luck as it is preparation; one of the senior executives at the valley giant is going to have to decide to sponsor the acquisition and put their name to the deal – the stars will need to align…

You can however reduce this to the point that the deal is 2 parts luck and 8 parts preparation by partnering first. Partnering enables many people at the valley giant to get to know you well, which greatly reduces the risk that some of the execs are going to have to bear in sponsoring the deal. You may actually get to the point where senior execs feel obliged to sponsor the deal if your product and the revenue they generate from it becomes important (remember that need for revenue growth).

See Part 2 of this post for strategies for partnering.

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About Patrick Williamson

A Singapore based independent consultant and startup advisor. Previously in business development at Yahoo! SEA and a global product manager with the Symantec consumer in California.
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4 Responses to Getting acquired by Yahoo! – Part 1: Getting to know your customer

  1. Pingback: Getting acquired by Yahoo! | Patrick's Musings

  2. Pingback: Getting acquired by Yahoo! – Part 2: Partner first | Patrick's Musings

  3. Pingback: Getting acquired by Yahoo! – Part 3: The acquisition. | Patrick's Musings

  4. Pingback: Startup Skills: Why did McAfee buy Singapore’s Tencube? | e27

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