Managing partner at Upfront Ventures, Upfront Ventures
Mark Suster on getting acquired
Mark Suster explains, how does the pull model of acquisition works, who and why do companies acquire other startups.
About Mark Suster
Mark Suster, managing partner at Upfront Ventures, has been active in podcast and media appearances discussing venture capital strategy, market conditions, and advice for entrepreneurs. He has argued that success in venture capital requires believing in something few others see and developing a unique knowledge edge, and he has advised young people to focus on owning a niche and becoming one of the few people founders need to call. Suster has also discussed the importance of forming relationships with investors before raising capital, and he has described his firm's investment philosophy as focusing on founder-market fit and market timing rather than following popular trends. Suster has commented on the current venture market, stating that the Series A round is the most overvalued round and that his firm is focusing on seed-stage investments and secondary purchases at discounted valuations. He has identified space technology, national defense, and healthcare as promising sectors, and he has noted a resurgence of energy in Los Angeles for hard tech and space startups. Suster has also discussed the exit landscape, arguing that the IPO bar has moved higher and that private equity and corporate acquisitions are becoming more common exit paths for startups.
Transcript (14 segments)
✨ AI-enhanced transcript with speaker attribution
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Mark Suster0:00
I'm friends with many Corp Dev departments and I have great respect for them, so that's not about this. The point is that Corp Dev is more of a push model. When Corp Dev does a transaction, they have to find a place within the business that's going to own your company once it's bought. So even if you get Corp Dev excited, it's then their job to figure out a way to push you into the org.
A much better way to go is to find a buyer within the organization who will pull Corp Dev and Finance and everyone else through. One of the places companies get bought is in the product organization, in product management. That kind of purchase is a product leader saying, 'We have a roadmap, we know what we're going to build in the next 18 months, we will never get to this opportunity, and we know we need this capability in our organization. So we can build it or we can buy it. We have other priorities, let's just buy.' If they've made this decision that they'd rather buy you than to build it internally, then they go to Corp Dev and pull Corp Dev into it.
So if you want to sell your company, one of the places you can focus on, if you have a great product, is a product development department. It's very easy to have a discussion with a product development group and ask them about the roadmap and where you fit into their roadmap.
A second potential place to sell your company is to a sales organization. The sales org excels when the organization has a bunch of products they're selling to customers and realizes that with your product, it could close more deals. It's the classic case of synergy. If you're doing $10 million a year of sales and it's a multi-billion dollar company, their view is they can take 10 to 50.
The third place that you can sell a company is into the tech staff or infrastructure team. This is a very hard sell because it's a core part of the company where they usually believe they can build it themselves, so it's a much harder sell.
Of course, the best place, the fourth place, is to sell to the executive suite or the CEO. That's where the biggest prices are paid. That's where you're considered a strategic action. Of course, though, it's hard to get to the CEO suite.
I did this little matrix of value to acquirer on the y-axis and purchase price on the x-axis. The lowest value are what we call acqui-hires or talent hires. There's the lowest value to the acquirer and the least purchase price. That's basically when your investors aren't going to support you any longer and they're basically just recruiting you. The rule of thumb is about a million dollars per developer. Usually investors get washed out in these deals. Investors hate these deals; they're notoriously hard to pull off no matter what you read in the press. But acqui-hires do happen and they're certainly better than shutting down your company. So that is one route, is a talent hire where someone sees value in your people.
Moving up the stack is where there's a product gap. You certainly get more value than an acqui-hire and a better purchase price when you fit into a product suite. Of course, you get more value if you can really show that you're going to be a revenue driver for the business. And there's a reason, and I'll explain that even though it's kind of obvious. On a product basis, it's hard to justify the premium and price they have to pay to acquire your company. But on a revenue basis, they can do a synergy model, so they can justify paying a higher price because they're going to sell more of your product through their channel.
Much more valuable acquisitions happen if there's a strategic reason to buy you. That could be a strategic threat or strategic opportunity. I'll just come up with a random example: if you're a consumer product company that doesn't want Dollar Shave Club to exist because it's cutting into your core business, you might pay a premium to take them out. In order to have a strategic sale, you need to be in the CFO or CEO suite.
For sure, examples of this might be Salesforce acquiring Buddy Media or Radian6, where they really wanted to be in new markets like social. The reason I use those examples is it's places where premium was paid on price relative to revenue because the CEO was very interested in the space.
Another example of a strategic threat was Microsoft buying Yammer. Actually, it was more of a strategic opportunity where they felt that was a big business they could grow. Another strategic opportunity is Facebook buying Oculus Rift, knowing that strategically as an opportunity they wanted to get into virtual reality.
Importantly, at the strategic level, it can also include that maybe buying this company would help the purchaser's share price, so they can justify paying a premium. Or maybe not having a play in this space is hurting the company's share price because the market is beating them up for not playing. Maybe this is GM investing in Lyft.
The most valuable, the biggest prices are paid for defensive moves where you just can't afford to have your competitor own this asset. I think the recent moves by Facebook to buy WhatsApp, or what they would have paid for Snapchat, or even Instagram, are defensive moves. Don't take it the wrong way, of course those are great companies and great opportunities. You could also define them as strategic, but I'll tell you why I put them in a differentiated bucket. You get to the point that you just can't afford for your competitor to own somebody. You will pay a super premium to own them, and I think that was the case with WhatsApp.
In the case of strategic or defensive purchases, often the buying company has a premium on its purchase price because of its own stock.