July 21, 2022

Mark Achler (MATH Venture Partners) - How to Exit Right

Mark Achler (MATH Venture Partners) - How to Exit Right

My guest today is Mark Achler, who is a serial entrepreneur and Managing Partner at MATH Venture Partners. Recently he published his book that he co-wrote with Mert Iseri called Exit Right. which is about how to position and think about a successful exit way before it happens. So on this episode, we discuss how to Exit Right.

  1. What were your biggest learnings from those interviews in “Exit Right”
  2. Trust - we wish CEOs would come to us before
  3. Is there misalignment between VCs and founder/CEO
  4. How should you go about picking the right investors?
  5. Seems like there’s kind of a one way street when it comes to acquisitions with VCs and founders. It’s ok if the VC thinks about it and as it analyzes investing in certain companies, what an exit could look like, but founders aren’t allowed to talk about it or bring it up at all when they pitch because it means they “aren’t focusing on the growth of the business”. Do you both think there is a disconnect and a certain awkwardness that exists in these discussions?
  6. When should founders start to think about building relationships with corporate development teams?
  7. What were your learnings after you conducted these interviews and conduct this research project?
  8. In the FAIR framework, you emphasize how culture and values are critical for success. But it’s hard to know if the culture is the right culture for the team. How do you suggest founders understand the culture of the potential acquirer?
  9. On the fit question, what do you think about culture? How do decisions get made? What are your values? Is there a place where you want to live?
  10. Waterfall distribution - how much money goes through which share of class
  11. Should founders accept money from corporate VCs?
  12. We also talk about being aligned with your VCs. Of course, VCs are looking at a particular exit horizon. It could range from 5-10 years. Of course, it’s hard to know how the company is going to pan out and when you should start shopping for exits when it makes sense. How do you make sure you have alignment as a founder when you’re approaching VCs?
  13. How do you make sure it’s not a phishing expedition?
  14. I had on a founder who was building the business for acquisition and what that meant to him was growth at all costs, but it didn’t happen and he had to pivot to make the business sustainable and profitable. When you do build relationships with corporate development, should that impact how you build your business?
  15. What are ways founders can ensure they aren’t going on a fishing expedition?
  16. What are common mistakes founders make in the diligence process?
  17. What’s one book that has inspired each of you personally and professionally?
  18. What’s one piece of advice that you have for founders?
Transcript
WEBVTT 1 00:00:02.399 --> 00:00:16.559 Oh, hello and welcome to the consumer VC. I am your host, 2 00:00:16.600 --> 00:00:19.800 Mike Gelb, and on this show we talk about the world of venture capital 3 00:00:20.039 --> 00:00:25.160 and innovation in both consumer technology and consumer products. If you're enjoying this content, 4 00:00:25.239 --> 00:00:29.480 you could subscribe to my newsletter, the consumer VC DOT sub stack dot 5 00:00:29.480 --> 00:00:33.159 com, to get each new episode and more consumer news delivered straight to your 6 00:00:33.200 --> 00:00:37.320 inbox. Our guest today is Mark Eckler, who is a serial entrepreneur and 7 00:00:37.359 --> 00:00:41.920 managing partner at math venture partners. Recently he published his book that he co 8 00:00:42.079 --> 00:00:46.840 wrote with Murtazeri, called exit right, which is about how to position and 9 00:00:46.920 --> 00:00:51.799 think about a successful exit well before it happens. So this episode is all 10 00:00:51.840 --> 00:00:55.600 about exits, which is quite unique for this podcast, as we don't typically 11 00:00:55.600 --> 00:00:59.359 talk about how to exit right, what that looks like how to kind of 12 00:00:59.359 --> 00:01:02.719 prepare yourself up for that. So, without further ADO, here's mark. 13 00:01:06.840 --> 00:01:08.760 Mark, thank you so much for joining me today. How are you? 14 00:01:10.519 --> 00:01:14.560 I'm Mike. I'm good. You know, I'm in Chicago and the sun 15 00:01:14.920 --> 00:01:19.040 is shining and life is good. I'm so excited. I was really looking 16 00:01:19.079 --> 00:01:22.879 forward to this conversation. I am as well. I'm really looking forward to 17 00:01:22.920 --> 00:01:25.640 it as well, so excited to have you on the show. Um, 18 00:01:25.640 --> 00:01:29.480 I really enjoyed reading the book that you co wrote with murder exit rights, 19 00:01:29.680 --> 00:01:33.640 and I'm also really excited for this conversation because this is not really an area 20 00:01:34.000 --> 00:01:37.159 we talk about on this show, exits right, and it's not really one 21 00:01:37.200 --> 00:01:41.400 that you kind of think about because you're so focused as the entrepreneur making sure 22 00:01:41.439 --> 00:01:45.200 your business is actually a business right, and actually a functioning business and actually 23 00:01:45.280 --> 00:01:49.519 is like surviving every day. Yeah, you know, it's really interesting the 24 00:01:49.599 --> 00:01:56.480 decisions that entrepreneurs make at the beginning of their journey have an outsized impact at 25 00:01:56.519 --> 00:02:00.799 the end of their journey. And you know what, let's dig into that, 26 00:02:00.920 --> 00:02:05.599 because how they view and think about equity and who they give equity too 27 00:02:05.799 --> 00:02:08.840 and how that's structured really is going to make a difference at the end. 28 00:02:09.159 --> 00:02:14.759 And we don't talk about exits because there's a stigma. You know, most 29 00:02:14.919 --> 00:02:20.879 entrepreneurs think, let's just focus on the building the business and if I raise 30 00:02:21.439 --> 00:02:25.000 the concept of an exit, my investors, my board won't think that I'm 31 00:02:25.039 --> 00:02:30.319 engaged. And so people, you know, CEOS and entrepreneurs, we tend 32 00:02:30.360 --> 00:02:32.719 not to discuss it very much. So I like I'd love to dig in. 33 00:02:34.120 --> 00:02:37.439 Yeah, I mean that actually leads me to my first question here. 34 00:02:37.479 --> 00:02:40.039 And obviously you're, you know, a Serie Entrepreneur, you running founded math 35 00:02:40.120 --> 00:02:44.560 ventures, you have a lot of experience on both sides of the table, 36 00:02:44.719 --> 00:02:47.400 your legend. So I'm also just kind of my legs or shaky just chatting 37 00:02:47.400 --> 00:02:51.319 with you. I'm so excited. But you know, it seems like there's 38 00:02:51.400 --> 00:02:54.080 kind of like a one way street that's happening, especially in the early days, 39 00:02:54.360 --> 00:02:59.120 of talking about exits, right, like if you put exits at all 40 00:02:59.199 --> 00:03:02.680 on your pitch deck, for example, that's immediately a turn off from investors, 41 00:03:02.800 --> 00:03:07.080 right. And but it's okay for investors because, of course, you 42 00:03:07.120 --> 00:03:09.960 know, ultimately they do want an event, right, they do want an 43 00:03:10.000 --> 00:03:14.680 exit because ultimately, like their goal at the end of the day, they 44 00:03:14.719 --> 00:03:19.639 are capital allocators and their goal was obviously to return capital and they certainly have 45 00:03:19.719 --> 00:03:22.360 their own timelines, whether it's, you know, five years, seven years, 46 00:03:22.400 --> 00:03:24.960 ten years, in order to to do that return capital. And yet 47 00:03:25.319 --> 00:03:29.879 it seems like it's fine for investors to talk about, oh well, what's 48 00:03:29.879 --> 00:03:34.879 the ex potential for this company, but not okay once the founder and operator 49 00:03:34.960 --> 00:03:37.520 does it, because you know, as you say, it seems like then 50 00:03:37.520 --> 00:03:39.800 they're not focused on their business per se. I mean as an investor at 51 00:03:39.800 --> 00:03:43.479 math like. What are your kind of thoughts on this kind of subject? 52 00:03:44.319 --> 00:03:50.400 So let's let's differentiate between before we make an investment and once we make an 53 00:03:50.479 --> 00:03:53.280 investment. Right. So, before we make an investment, all vcs, 54 00:03:54.400 --> 00:04:00.000 you know, we all have our investment thesis and we're all doing our analysis 55 00:04:00.199 --> 00:04:05.080 of how large an opportunity this could be. And so an exit is a 56 00:04:05.159 --> 00:04:10.319 really important part of our calculus. You know, we say to ourselves, 57 00:04:11.039 --> 00:04:15.399 does this deal have at least the potential to return the fund? You know, 58 00:04:15.519 --> 00:04:20.040 is this deal going to be large enough that it warrants one of our 59 00:04:20.079 --> 00:04:26.160 precious slots? And so before and we make an investment, we think a 60 00:04:26.160 --> 00:04:30.639 lot about that. We think a lot about the potential size and scale of 61 00:04:30.639 --> 00:04:34.240 a business. You know, once we make an investment, Paul Graham famously 62 00:04:34.399 --> 00:04:38.920 said, you know, just put your head down, just focus on building 63 00:04:38.920 --> 00:04:43.040 and growing and Scaling Your Business. Don't talk to Corp Dev just like, 64 00:04:43.199 --> 00:04:46.040 just build a great business and good things will happen. And you know, 65 00:04:46.120 --> 00:04:50.040 we disagree. Yes, we agree. Put your head down and build a 66 00:04:50.040 --> 00:04:58.480 great business. But we think that an exit talk and exit conversation is strategic, 67 00:04:58.800 --> 00:05:01.639 not tactical, and we have this idea in the book called an annual 68 00:05:01.720 --> 00:05:09.959 exit talk where once a year it's regularly scheduled and the CEO can talk with 69 00:05:10.040 --> 00:05:15.480 their board in an open and transparent way and say, you know, how 70 00:05:15.480 --> 00:05:18.319 are we doing? You know, it is still early, we still have 71 00:05:18.399 --> 00:05:21.839 lots of growth in front of us, or you know, we're still getting 72 00:05:21.879 --> 00:05:27.279 lots of market share, or things are starting to slow down, competitions heating 73 00:05:27.360 --> 00:05:30.680 up, technology is getting a little bit older, or it's going to require 74 00:05:30.680 --> 00:05:34.199 a lot more resources. Hey, you vcs. Are you in for the 75 00:05:34.199 --> 00:05:38.959 next round and the round after that? And you know what's the best home 76 00:05:39.079 --> 00:05:43.879 for the technology? What's the best home for our customer base? How can 77 00:05:43.920 --> 00:05:48.079 we really continue to grow and reach the potential of the company? And if 78 00:05:48.079 --> 00:05:54.839 you have that open and strategic conversation, it gives you the luxury of time. 79 00:05:55.240 --> 00:05:59.160 And it's not just from the CEO's perspective, it's also from the vcs 80 00:05:59.199 --> 00:06:03.360 perspective. So you already said that all vcs we have. Our agenda is 81 00:06:03.399 --> 00:06:10.199 really simple. We expect why return over x time frame. You know and 82 00:06:10.240 --> 00:06:14.240 if you're near one of our VC fund cycle, yeah, we got plenty 83 00:06:14.279 --> 00:06:17.839 of time. If you're a year ten of our VC fund cycle, well, 84 00:06:17.920 --> 00:06:21.600 guess what, we're going to start having pressure from our lps to return 85 00:06:21.680 --> 00:06:26.879 capital. And it's not just us, but it's all the vcs in your 86 00:06:26.920 --> 00:06:30.279 deal and we all have different fund cycles and we don't really talk to each 87 00:06:30.279 --> 00:06:35.800 other about our own internal fund cycles and when we start having pressure to return 88 00:06:35.879 --> 00:06:42.920 capital. So by having an open and transparent conversation we can build alignment and 89 00:06:43.000 --> 00:06:47.959 that alignment gives you the luxury of planning, because if you have time, 90 00:06:48.240 --> 00:06:54.079 say eighteen months, two years, and you know the buyer is a more 91 00:06:54.160 --> 00:06:59.920 likely a strategic buyer than a financial buyer and maybe they care more about top 92 00:07:00.040 --> 00:07:02.360 line growth, well, you could tweak the you know, you could spend 93 00:07:02.360 --> 00:07:04.839 a little bit more money on sales, spend a little bit more money on 94 00:07:04.920 --> 00:07:10.399 marketing, juice the top line growth, because that's how you're going to drive 95 00:07:10.480 --> 00:07:14.959 the most value. Or if they really care about your intellectual property, if 96 00:07:15.000 --> 00:07:17.680 you have time, you can make sure your house is in order, that 97 00:07:17.800 --> 00:07:24.680 all your patents are appropriately filed, your trademarks, your data room is clean, 98 00:07:25.120 --> 00:07:30.639 that your employees have all signed their employment agreements with their intellectual property transferred 99 00:07:30.680 --> 00:07:33.759 to the company. Or if it's a financial buyer who really cares more about 100 00:07:33.800 --> 00:07:36.959 the bottom line, well then you know you can tweak a little bit and 101 00:07:38.000 --> 00:07:44.399 focus on profitability, but it gives you the opportunity to have that strategic conversation 102 00:07:44.519 --> 00:07:47.839 and to thoughtfully plan and prepare. That makes a lot of sense when you're 103 00:07:47.839 --> 00:07:51.879 playing preparing. So that what if you're one of the big I guess themes 104 00:07:51.879 --> 00:07:57.199 that I took away from in your book is obviously is building trust and I 105 00:07:57.240 --> 00:08:01.160 think very, very different too, different in Paul grams approach in that you 106 00:08:01.199 --> 00:08:05.120 want to actually start building relationships very early on in that process with corporate development, 107 00:08:05.120 --> 00:08:09.720 which I know you pointed in exit right to and kind of build those 108 00:08:09.720 --> 00:08:11.879 trusts. But how do you also build trust, I mean as well, 109 00:08:11.920 --> 00:08:16.040 when you think about okay, you know, if it's a if it's a 110 00:08:16.040 --> 00:08:18.120 financial buyer, we're gonna their focus on top time revenue. Then we're gonna 111 00:08:18.120 --> 00:08:22.480 tweak those numbers. Or you know, maybe if it's strategic, they're more 112 00:08:22.480 --> 00:08:28.720 focused on Ibadah. How do you approach if you're building relationships with corporate development, 113 00:08:28.759 --> 00:08:31.839 teams as strategics, but then also, at the same time, building 114 00:08:31.839 --> 00:08:35.879 relationships to at, you know, maybe some of the the pe shops or 115 00:08:35.080 --> 00:08:37.840 or even, you know, competitors. How should you think about building your 116 00:08:37.840 --> 00:08:43.039 businesses? That kind of make it more confusing to you also, or we're 117 00:08:43.039 --> 00:08:48.320 not really, no, not really. You know, trust is the currency 118 00:08:48.360 --> 00:08:52.639 that flows through deals and all deals have their ups and downs. There are 119 00:08:52.720 --> 00:08:58.879 moments in every single transaction where the deal hangs by a threat, where there's 120 00:08:58.919 --> 00:09:03.080 always a challenge, and oftentimes is that personal trust that looking you, the 121 00:09:03.080 --> 00:09:05.759 other person, in the eye and say we got this, we're gonna work 122 00:09:05.799 --> 00:09:09.360 this out together. That gets deals through to the end of you know, 123 00:09:09.480 --> 00:09:15.320 to completion. And when we wrote the book it was so much fun. 124 00:09:15.480 --> 00:09:20.840 We interviewed dozens and dozens of CEOS and we said, okay, give us 125 00:09:20.879 --> 00:09:24.399 the real story, like, don't just tell us the good stuff, tell 126 00:09:24.440 --> 00:09:28.320 us the bad stuff. Tell us what do you know today that you wish 127 00:09:28.360 --> 00:09:33.240 you had known before you soldier company? And if you had an adult kid 128 00:09:33.399 --> 00:09:35.360 who was selling a business, what would you tell them? What are those 129 00:09:35.480 --> 00:09:41.639 nuggets? And we're big believers in empathy. So we interviewed all the stakeholders 130 00:09:41.759 --> 00:09:46.240 around the transaction, some of the TAP M and a attorneys, you know, 131 00:09:46.519 --> 00:09:50.720 at Goodwin, at Wilsonson Cini, we talked to M and a bankers 132 00:09:52.000 --> 00:09:54.600 and we talked to the heads of corpse Dev at all the major tech companies, 133 00:09:54.639 --> 00:09:58.840 at apple and Google and facebook and Microsoft and Amazon and, you know, 134 00:10:00.120 --> 00:10:05.960 twitch and just at last Sean and Snowflake, and we said to the 135 00:10:05.200 --> 00:10:09.480 leaders of Corpse Dev, okay, give us an example of your best deal 136 00:10:09.519 --> 00:10:11.639 and why? What made it work? Give us an example of some of 137 00:10:11.679 --> 00:10:16.440 your worst deals and why? Because deals fall apart even post transaction. A 138 00:10:16.440 --> 00:10:20.919 lot of deals don't achieve their what they were set out to achieve. And 139 00:10:20.000 --> 00:10:24.399 what do you wish? CEOS knew before they came to talk to you, 140 00:10:24.600 --> 00:10:31.480 and the number one thing they said was trust. Is We wish CEOS would 141 00:10:31.480 --> 00:10:35.960 come to us before the Rady to sell their company so we can build a 142 00:10:35.000 --> 00:10:41.120 relationship and we can start to get to know them and that opportunity of building 143 00:10:41.120 --> 00:10:50.240 a relationship over time. It's also bidirectional. Not only can the CEO start 144 00:10:50.320 --> 00:10:56.240 to build those relationships, but they could also learn from the bigger company. 145 00:10:56.279 --> 00:11:01.080 What are their strategic strategic objectives? What do they care about where their holes, 146 00:11:01.519 --> 00:11:05.919 where are they're heading, where are they missing? And it's an opportunity 147 00:11:05.240 --> 00:11:11.440 to learn as well as to share. And when I say share, I'm 148 00:11:11.440 --> 00:11:16.960 not talking about trade secrets or some you know financials, but it's an opportunity 149 00:11:16.960 --> 00:11:24.120 to demonstrate thought leadership, it's an opportunity to add value. Like I'll go 150 00:11:24.879 --> 00:11:28.759 one quick tangent here. So I have an empathy framework, and so I 151 00:11:28.799 --> 00:11:35.320 have three rules of empathy and they are one, it's not about you. 152 00:11:35.720 --> 00:11:39.639 It's always about the person sitting across the table from you. And so most 153 00:11:39.759 --> 00:11:43.080 entrepreneurs, we are just so laser focused on who we are, what we 154 00:11:43.200 --> 00:11:48.159 do, our product does, x, Y Z, and it's never about 155 00:11:48.200 --> 00:11:52.840 you. It's about your customer, or it's about the larger acquiring company, 156 00:11:52.960 --> 00:11:56.200 or it's about the venture capitalists, who's going to invest in you. It's 157 00:11:56.240 --> 00:11:58.559 always about the person sitting across the table from you. It's not about you. 158 00:12:00.360 --> 00:12:05.960 My second rule of empathy is do your homework, really do your homework. 159 00:12:05.440 --> 00:12:09.559 There's no excuse to go into an important meeting and not be prepared. 160 00:12:11.120 --> 00:12:13.919 And let me give you an example. In this case, if you're talking 161 00:12:13.960 --> 00:12:20.519 to a publicly traded company. You should listen to their quarterly earnings call ahead 162 00:12:20.519 --> 00:12:24.519 of time. You should read their s one everything you need to know about 163 00:12:24.559 --> 00:12:28.759 that quarterly company, like they're going to tell you if you just listen. 164 00:12:28.159 --> 00:12:33.000 You know what I would do? I would go to the analysts who cover 165 00:12:33.120 --> 00:12:35.919 the larger company and I'd go talk to the analysts, like what questions are 166 00:12:35.919 --> 00:12:39.840 you asking? What are you tracking, whether their KPI s? Like, 167 00:12:39.200 --> 00:12:45.360 really do your homework. And then my last rule of empathy is bring a 168 00:12:45.399 --> 00:12:50.440 gift. And so what I mean by that is add value to the conversation, 169 00:12:50.720 --> 00:12:54.559 because it's not about you, it's about them. You should be able 170 00:12:54.639 --> 00:13:01.559 to demonstrate your value. It could be you can and talk about market trends. 171 00:13:01.120 --> 00:13:05.480 You could be an understand, deeper understanding of customers. It could be 172 00:13:07.039 --> 00:13:11.759 noticing, Um, where technology is heading and some understanding of the future tech 173 00:13:13.320 --> 00:13:16.679 or market. You know. So it's like there's always something of value you 174 00:13:16.720 --> 00:13:22.120 can add, and so I'm a huge believer in building relationships over time. 175 00:13:22.440 --> 00:13:26.200 I also really appreciate that those Um and I and and thanks so much for 176 00:13:26.399 --> 00:13:30.639 sharing your fue rules and empathy and how as well, you can, you 177 00:13:30.679 --> 00:13:35.440 know, use those free rules to build relationships right. Um, especially, 178 00:13:35.440 --> 00:13:37.279 I mean, as you say, like if it's a public company that you're 179 00:13:37.279 --> 00:13:41.919 trying to build relationship to, you know, all the information is publicly available 180 00:13:43.200 --> 00:13:45.440 pretty much. I mean not, of course, all the information, but 181 00:13:45.919 --> 00:13:48.120 Um, but there's a lot, a lot you can learn from studying s 182 00:13:48.200 --> 00:13:52.039 one, from, you know, studying their their quarterly reports, Um, 183 00:13:52.159 --> 00:13:56.480 and so that makes a lot of sense. Yeah, and listening to the 184 00:13:56.600 --> 00:14:00.960 questions that they're fielding. I know your focus on the Con Sumer. Bear 185 00:14:01.039 --> 00:14:03.039 with me for one second. One, I think questions I asked salespeople are 186 00:14:03.200 --> 00:14:07.080 enterprise sales people is WHO's your champion? It's always somebody and I say, 187 00:14:07.320 --> 00:14:11.120 well, what are their KPI s? And they look at me like they're 188 00:14:11.120 --> 00:14:15.240 crazy. I no, no, no, when your champion gets a bonus 189 00:14:15.279 --> 00:14:18.639 at the end of the year, what's that predicated upon? Because human nature, 190 00:14:18.639 --> 00:14:24.080 as we gravitate to how we're measured and how we're rewarded. And so 191 00:14:24.120 --> 00:14:26.600 if you want to know, you want to know how to solve a problem, 192 00:14:28.000 --> 00:14:30.639 find out what their KPIS are. Find out what the reporting on, 193 00:14:30.799 --> 00:14:35.759 find out how do they measure their business. I think also to like kind 194 00:14:35.799 --> 00:14:41.240 of going back a little bit with this notion of you know, potentially there 195 00:14:41.279 --> 00:14:45.320 might be some misalignment between V seas and encounters around this. You know. 196 00:14:45.519 --> 00:14:48.600 You know we've already talked about you know some of the other content that's Um 197 00:14:50.080 --> 00:14:54.279 that's out there about Um. You know whether or whether or not you should 198 00:14:54.279 --> 00:14:58.480 build relationships with core development teams and, you know, maybe potential acquirers. 199 00:14:58.600 --> 00:15:01.519 In your book you mentioned how the majority of I think, I think you 200 00:15:01.559 --> 00:15:05.679 say that the majority of software deals are seventy million below right, and there's 201 00:15:05.720 --> 00:15:09.960 not like a need for a banker, of course, depending on you know, 202 00:15:11.000 --> 00:15:13.639 how you're capitalized and you know maybe who the vcs are. It's not, 203 00:15:13.840 --> 00:15:16.720 you know, that's typically not, you know, a great outcome for 204 00:15:16.879 --> 00:15:22.240 VC right there looking for it's not like the outlier that you're kind of chasing, 205 00:15:22.600 --> 00:15:26.080 right. And so you know, in the vcs mind, if those 206 00:15:26.320 --> 00:15:30.039 maybe are likely outcomes, like why should you maybe, from their perspective, 207 00:15:30.039 --> 00:15:33.000 why should you actually build relationships with these pendicual requires, even though it could 208 00:15:33.039 --> 00:15:37.240 be a great outcome for the founder? Right? How do you think about 209 00:15:37.240 --> 00:15:39.399 like this in terms of when you think about like exit potential? Well, 210 00:15:39.519 --> 00:15:43.240 first of all, how much time do you think a founder spends raising money. 211 00:15:43.279 --> 00:15:46.519 You know, if they're on a fundraising cycle eighteen months, you know, 212 00:15:46.759 --> 00:15:50.080 once every eighteen months, once every two years. And how long does 213 00:15:50.080 --> 00:15:54.200 it take to raise? Three months, if it's good, six months if 214 00:15:54.200 --> 00:15:56.440 it takes a little bit longer. You know, think about how much in 215 00:15:56.519 --> 00:16:00.080 it, let's say in a ten year cycle, how much of the ten 216 00:16:00.200 --> 00:16:06.159 years of founder is spend raising money? It's a really good chunk of time. 217 00:16:06.559 --> 00:16:10.960 Now think about how much time they're spending selling the company. Weeks, 218 00:16:11.600 --> 00:16:15.519 months, right, it's crazy. You're spending all this time raising money and 219 00:16:15.720 --> 00:16:22.720 very little time when maximizing the return. It's it's kind of like asked backwards. 220 00:16:23.159 --> 00:16:27.320 And so, from a VC perspective, look the reality is, according 221 00:16:27.360 --> 00:16:33.840 to the National Venture Capital Association, Sixty of the companies who receive venture backing, 222 00:16:34.200 --> 00:16:41.799 knowing that most can't get venture backing, six return less than a of 223 00:16:41.840 --> 00:16:47.399 the capital they receive. So think about that. Sixty percent failure rate. 224 00:16:47.799 --> 00:16:52.799 Now it could be they received, you return a dollar or they return nothing, 225 00:16:52.960 --> 00:16:55.039 but there's a you know, in the middle. I mean there's a 226 00:16:55.039 --> 00:17:02.399 continuum there, but fail so the ones that succeed and the vast majority of 227 00:17:02.399 --> 00:17:06.920 the ones who succeed. They're like two to five x return. They're not 228 00:17:07.079 --> 00:17:11.000 the giant home run, you know, they're the sub million dollars. You 229 00:17:11.000 --> 00:17:15.640 know, statistically, the headlines Are Great, Oh yeah, there's another Unicorn 230 00:17:15.680 --> 00:17:21.200 today, right, but the reality is for everyone Unicorn, there's tens of 231 00:17:21.240 --> 00:17:26.039 thousands of companies who don't deliver. And so look, we care, vcs 232 00:17:26.079 --> 00:17:30.799 care. We care about maximizing return on every deal and we want the founders, 233 00:17:30.920 --> 00:17:33.359 you know, even if it's a two X or three x, it's 234 00:17:33.359 --> 00:17:37.079 still a creative and it's important, and so we want to make sure we 235 00:17:37.119 --> 00:17:41.319 get the best the most we can, the most value we can, which 236 00:17:41.359 --> 00:17:45.920 actually probably brings us to the most important part of the book, which is 237 00:17:45.960 --> 00:17:48.000 our fair framework. Yeah, no, that's I mean, those are all 238 00:17:48.039 --> 00:17:52.880 great points, and it's funny too, because I think that a phrase that's 239 00:17:52.880 --> 00:17:56.559 become really popular vcs that were founder friendly. But I think that what's actually 240 00:17:56.599 --> 00:18:00.880 kind of interesting is the founder friendly to me would be as well, like 241 00:18:02.000 --> 00:18:04.440 hey, go out and also develop these relationships with, you know, corporate 242 00:18:04.440 --> 00:18:07.759 development. People think about, you know, these types of things, because 243 00:18:08.119 --> 00:18:12.079 even if as well, even if you aren't, you know, the Unicorn 244 00:18:12.440 --> 00:18:15.960 Right, you can make a really healthy return for yourself, right, and 245 00:18:17.119 --> 00:18:21.279 life changing money, even if you know as a fund this might not return 246 00:18:21.319 --> 00:18:26.119 our fund themselves right. Yeah, by the way, this concept of founder 247 00:18:26.160 --> 00:18:30.400 friendly. So I'm kind of, I don't know if you remember the muppet 248 00:18:30.440 --> 00:18:33.000 show, I'm kind of like those old guys on the balcony, you know, 249 00:18:33.279 --> 00:18:37.680 like hey, you kids, get off the lawn the like. I 250 00:18:37.720 --> 00:18:42.720 believe in the business fundamentals and I think the business fundamentals always matter eventually, 251 00:18:44.240 --> 00:18:51.559 and we've been in a historic run where many vcs have never lived through down 252 00:18:51.559 --> 00:18:57.160 economic times and down markets, and this founder friendly is just sort of a 253 00:18:57.240 --> 00:19:02.519 substitute for saying I'm not going to negotiate with you, I don't care about 254 00:19:02.599 --> 00:19:06.559 valuation, because as long as the markets are going up, the greater, 255 00:19:06.640 --> 00:19:08.720 full theory, the next guy down the line is going to pay more. 256 00:19:10.000 --> 00:19:15.160 Me, personally, I think the fundamentals always matter and I think that we 257 00:19:15.319 --> 00:19:21.039 if there's a pendulum, and the pendulum was one way where it was very 258 00:19:21.160 --> 00:19:25.799 founder friendly. I think in the next couple of years, as cash tightens 259 00:19:25.880 --> 00:19:32.319 up, I think that you're going to find the terms to be more appropriate 260 00:19:32.759 --> 00:19:37.960 from a risk management perspective, and so most entrepreneurs really focus on valuation these 261 00:19:38.039 --> 00:19:44.440 days because in a standardized nvc, a doc, where the only term really 262 00:19:44.440 --> 00:19:48.559 to focus on is valuation. Great, you focus on valuation, but boy 263 00:19:48.759 --> 00:19:56.119 founders out there, beware, when cash tightens up, it's not just valuation, 264 00:19:56.599 --> 00:20:02.039 it's, you know, participating preferred. It's preferences are two X or 265 00:20:02.119 --> 00:20:07.359 four X. it's a dividend with the high dividend coupon. You know, 266 00:20:07.880 --> 00:20:11.319 one of the things in the book we talk about is the waterfall distribution, 267 00:20:11.799 --> 00:20:15.599 which is just a fancy way of saying at the end of a transaction, 268 00:20:17.000 --> 00:20:19.759 who gets what? How much money goes to which a class of shareholder? 269 00:20:19.960 --> 00:20:25.119 And you know, the only thing that really it's not about how much money 270 00:20:25.119 --> 00:20:27.559 you raise, because the more money you raise, the higher the bar you 271 00:20:27.599 --> 00:20:33.039 have to return. It's not about valuation because, once again, the higher 272 00:20:33.079 --> 00:20:37.440 the valuation that's just the higher the threshold that you have to return. It's 273 00:20:37.480 --> 00:20:42.880 about how much the are the common shareholders in the money when there's a transaction 274 00:20:42.960 --> 00:20:47.960 at the end of the day. And boy with the world is about to 275 00:20:48.039 --> 00:20:51.839 change. I absolutely agree. One of the big also takeaways, and know 276 00:20:51.960 --> 00:20:56.000 you you brought it up before, is your fair framework. I'd love to 277 00:20:56.079 --> 00:21:00.079 kind of Fit, alignment, integration and rationale. I love to kind to 278 00:21:00.200 --> 00:21:03.960 go through those four with you and how, you know, founders can really 279 00:21:04.200 --> 00:21:08.920 think about this framework as a concept when they're thinking about Um, you know, 280 00:21:08.960 --> 00:21:15.279 a potential acquisition. Well, you know, when writing the book it 281 00:21:15.400 --> 00:21:18.960 was so much fun doing all these different interviews, and part of the interviews 282 00:21:18.079 --> 00:21:23.359 is pattern recognition. We started hearing the same story over and over again in 283 00:21:23.480 --> 00:21:30.839 different permutations and we were able to build a framework for how we thought about 284 00:21:30.880 --> 00:21:36.039 what made a great transaction. And so it's it's fair, so it's fit, 285 00:21:36.160 --> 00:21:41.279 alignment, integration, rationale. So fit is cultural fit, you know, 286 00:21:41.599 --> 00:21:45.440 is my partner Mertz likes to say. If you're sitting on a plane 287 00:21:45.559 --> 00:21:51.039 for five hours with somebody and you're trapped at the end of those five hours, 288 00:21:51.119 --> 00:21:53.640 are you energized or just grateful to get off the plane? Like, 289 00:21:53.960 --> 00:21:59.880 you know, it's really hard to figure out if there's a good cultural fit. 290 00:22:00.440 --> 00:22:03.039 You know, an example might be uh Zappos and Amazon, which were 291 00:22:03.039 --> 00:22:07.880 an amazing cultural fit, like it was perfect. And Bad. Example might 292 00:22:07.920 --> 00:22:15.160 be Um Time Warner and a O L, which couldn't have been more different 293 00:22:15.200 --> 00:22:19.559 from one another. And ended in disaster. So cultural fit is really about 294 00:22:19.960 --> 00:22:23.920 how did decisions get made? What are our values? How do people get 295 00:22:23.920 --> 00:22:26.759 promoted? How do we communicate? You know, is this a place that 296 00:22:26.799 --> 00:22:30.599 you're gonna want to live? Is this a place? I'm a big believer 297 00:22:30.680 --> 00:22:34.839 in servant leadership and so, you know, it's not just about the CEO. 298 00:22:36.279 --> 00:22:40.119 It's are your employees gonna be happy there? Are Your customers are gonna 299 00:22:40.119 --> 00:22:44.680 be taken care of? Right? So the first thing is fit. The 300 00:22:44.759 --> 00:22:51.160 second is alignment, an alignment both sides of the story. So, internally, 301 00:22:51.559 --> 00:22:55.319 is your borderlinned? Are You aligned with your co founders? Are You 302 00:22:55.359 --> 00:23:00.799 aligned with your employees, your customers? Are You aligned ended home, with 303 00:23:00.880 --> 00:23:06.640 your family? We heard so many stories about spouses or significant others who had 304 00:23:06.680 --> 00:23:10.319 just had it. You know, it's been ten years, fifteen years. 305 00:23:10.359 --> 00:23:15.400 It's like the wife is just saying I don't care sell now, like you 306 00:23:15.440 --> 00:23:18.319 know, because we look one of the things we don't talk enough about. 307 00:23:18.880 --> 00:23:22.599 I'll speak for myself. You know, I started four businesses the first ten 308 00:23:22.720 --> 00:23:29.759 years of my marriage and we're coming up on our forty wedding anniversary is I 309 00:23:29.799 --> 00:23:33.839 put my wife through hell. I mean she she I was very comfortable with 310 00:23:34.000 --> 00:23:38.599 risk. She was not very comfortable with risk and you know she didn't have 311 00:23:40.079 --> 00:23:41.799 she had had a voice. But you know, I was going to be 312 00:23:41.799 --> 00:23:45.240 an entrepreneur. So you know, you gotta make sure you build alignment with 313 00:23:45.279 --> 00:23:52.119 your family and you have to make sure there's alignment from the acquiring company. 314 00:23:52.160 --> 00:23:56.039 So it's not just your champion. You know, maybe your champions the head 315 00:23:56.039 --> 00:24:00.240 of product but is the CFO aligned? Is this the EO aligned? Is 316 00:24:00.279 --> 00:24:04.400 The board of directors aligned? Is the head of product management or the General 317 00:24:04.440 --> 00:24:10.079 Manager for that division? You know, a lot of times we've seen deals 318 00:24:10.119 --> 00:24:17.519 fall apart because the champion at the acquiring company can't get alignment internally and the 319 00:24:17.599 --> 00:24:21.319 CEO Thinks, oh well, it's not my job, it's not my job 320 00:24:21.400 --> 00:24:26.079 to build alignment with the acquiring company and we disagree. It's like, look, 321 00:24:26.240 --> 00:24:30.640 you can't outsource that. You can't see like like. If you think 322 00:24:30.680 --> 00:24:36.519 it's going to take our differing opinions about whether or not this transaction should happen, 323 00:24:37.160 --> 00:24:42.240 you should do everything in your power to work and fund build alignment and 324 00:24:42.720 --> 00:24:48.000 the acquirement company side to the extent that you can. So the next that's 325 00:24:48.400 --> 00:24:56.279 fit alignment integration. So integration is the ugly step child of all transactions. 326 00:24:56.440 --> 00:25:00.279 Everybody waits till the end to do integration. It's like Oh, yeah, 327 00:25:00.359 --> 00:25:03.200 yeah, yeah, you know one let's get the transaction done, let's get 328 00:25:03.240 --> 00:25:10.000 the numbers done and we'll worry about integration afterwards. But integration is everything, 329 00:25:10.799 --> 00:25:15.920 like how is this? These two companies going to come together? Um, 330 00:25:15.960 --> 00:25:21.400 and let me make it why? It has economic impact. In many transactions 331 00:25:21.400 --> 00:25:25.960 there's an Urnout, meaning you get paid so much upfront and you get paid 332 00:25:26.000 --> 00:25:30.000 so much in the future based on some objectives, some performance objectives. If 333 00:25:30.039 --> 00:25:37.039 those performance objectives are tied to sales integration or sales forecast of your product going 334 00:25:37.039 --> 00:25:45.599 into the acquiring companies, sales distribution or is based on you building out the 335 00:25:45.640 --> 00:25:49.440 next version of your product, that requires engineers to do it, or you 336 00:25:49.480 --> 00:25:56.160 don't get the resources necessary to grow and scale the business. Integration can cost 337 00:25:56.240 --> 00:26:03.319 you a ton of money and we earned the entrepreneurs to talk about into building 338 00:26:03.359 --> 00:26:08.480 an integration plan before they sign a term sheet, not after they sign a 339 00:26:08.599 --> 00:26:14.759 term sheet, because the minute you sign a term sheet you've lost your leverage, 340 00:26:14.920 --> 00:26:18.559 your negotiating power and leverage. So building the integration plan and we also, 341 00:26:18.559 --> 00:26:22.359 I'm a big believer, once again, a servant CEO, as a 342 00:26:22.400 --> 00:26:26.400 servant leader. Are you taking care of your employees? Are you making sure 343 00:26:26.440 --> 00:26:32.000 they're getting their options vest? Are you making sure that their salaries are at 344 00:26:32.000 --> 00:26:36.519 the appropriate level, their job titles at the appropriate level? The last piece 345 00:26:36.880 --> 00:26:41.880 is the most important piece, which is rationale. Rationale is can you explain 346 00:26:42.599 --> 00:26:48.279 in a very simple way, so simple that your grandmother could understand it, 347 00:26:48.759 --> 00:26:55.359 why one plus one equals a hundred? How does putting these two companies create 348 00:26:55.599 --> 00:27:00.960 more value? And that's how you get your best deal. So most people 349 00:27:00.039 --> 00:27:03.799 think, all right, it's time to sell the company. The best deal 350 00:27:04.599 --> 00:27:10.240 is whoever pays me the most money. Maybe, maybe, but we think 351 00:27:10.440 --> 00:27:15.920 finding the organization to give you the best deal is by building the best rationale 352 00:27:15.240 --> 00:27:21.440 of how these two companies that come together will create extra value. If your 353 00:27:22.079 --> 00:27:27.519 product goes into their sales and distribution, sells into their customer based what would 354 00:27:27.519 --> 00:27:33.160 that be worth? You know, Um, if you had a product that 355 00:27:33.319 --> 00:27:37.480 improved checkout conversion and you had a million in revenue, that's great. It's 356 00:27:37.480 --> 00:27:41.559 a million in revenue. If Amazon had a product, had your product, 357 00:27:41.759 --> 00:27:47.319 that improved checkout conversion. What's that worth the Amazon? So I have a 358 00:27:47.319 --> 00:27:52.920 couple of really interesting stories about that. So the first is is most companies, 359 00:27:52.160 --> 00:27:57.119 when they go to sell, they describe the sale in terms of a 360 00:27:57.279 --> 00:28:02.000 multiple. Could be a multiple of revenue, top line revenue, could be 361 00:28:02.039 --> 00:28:06.000 a multiple of Viba, but it's always a multiple of revenue and that multiple 362 00:28:06.759 --> 00:28:11.599 is looking backwards, not forwards. That's what we did in the past. 363 00:28:11.000 --> 00:28:15.640 What we want to know is what can we do together in the future? 364 00:28:15.119 --> 00:28:19.119 And so you know, Um, I'll give you two stories. One is 365 00:28:19.960 --> 00:28:26.240 one that everybody knows, which is, Um, instagram and facebook. When 366 00:28:26.279 --> 00:28:29.920 facebook bought instagram in two thousand and eleven, I think it was, you 367 00:28:29.960 --> 00:28:33.920 know, everybody thought Mark Zuckerberg lost his mind. They gave him they bought 368 00:28:33.920 --> 00:28:38.799 it for a billion dollars, a billion dollars, and the company had fourteen 369 00:28:38.839 --> 00:28:44.200 employees and no revenue. What was he thinking? How what an idiot? 370 00:28:44.240 --> 00:28:47.119 He bought it for a billion dollars and I think, and if I read 371 00:28:47.160 --> 00:28:53.400 this correctly, in I think instagram represented twenty one billion dollars on the bottom 372 00:28:53.440 --> 00:28:57.519 line for Meta, for facebook. He got it. He stole it like 373 00:28:57.720 --> 00:29:03.960 like he got a borrigain of the century because what he understood the rationale. 374 00:29:03.000 --> 00:29:07.319 The rationale was, look, facebook was on desktops. They weren't in mobile 375 00:29:07.400 --> 00:29:12.480 at the time and instagram really owned mobile, and so most of people were 376 00:29:12.480 --> 00:29:17.720 looking at instagram on their phones and they said what the rationale was. Look, 377 00:29:17.799 --> 00:29:23.279 if you put our customer, our viewership against with your your sales engine 378 00:29:23.480 --> 00:29:29.359 to monetize it, and we can bring facebook into the mobile world, this 379 00:29:29.400 --> 00:29:32.960 is gonna be this is your mobile strategy, this is gonna be worth Gazillions, 380 00:29:33.039 --> 00:29:36.920 and it turned out to be. So that's an example of looking forward. 381 00:29:37.039 --> 00:29:41.079 That's a rationale. And let me give you a much more simpler rationale, 382 00:29:41.480 --> 00:29:48.519 and I love this story. My partner try Hannekoff in he had a 383 00:29:48.519 --> 00:29:52.400 a little Dev shop and it was doing about million in revenue and he built 384 00:29:52.440 --> 00:29:57.160 for Hyatt. He built a little inventory management system that he owned, that 385 00:29:57.319 --> 00:30:00.880 he had the rights to in one day he gets a meeting with medline, 386 00:30:00.960 --> 00:30:07.880 which is a big medical distribution company. They seld. They sold durable products 387 00:30:07.920 --> 00:30:14.119 to hospitals, and the CEO of medline said to troy, when he heard 388 00:30:14.119 --> 00:30:18.559 about this, this inventory management system, he goes, could you use that 389 00:30:18.640 --> 00:30:21.880 for hospitals. Troy SA's true, we could adapt it for hospitals. He 390 00:30:21.920 --> 00:30:25.480 goes, great, I want to buy your company. Try went it was, 391 00:30:25.920 --> 00:30:30.880 you know, an unidentified flying offer like he came in. Troy goes, 392 00:30:30.240 --> 00:30:34.200 H my company is not for sale, but I'm happy to partner with 393 00:30:34.240 --> 00:30:37.440 you, and you know, but and build it for you, but we're 394 00:30:37.440 --> 00:30:42.240 not for sales. Ma'm an offer and troy said No. Ma'am another offer, 395 00:30:42.319 --> 00:30:45.480 Troy said No. Finally, they offered him five million dollars for a 396 00:30:45.559 --> 00:30:49.079 Dev shop. That, with doing a million in revenue, was five X. 397 00:30:49.559 --> 00:30:56.519 and troy what, okay, like like okay, all right, and 398 00:30:56.519 --> 00:31:00.000 Troy Thought, Oh my God, I got the deal of the century. 399 00:31:00.039 --> 00:31:02.559 These guys, they don't know what they're doing. They just gave me five 400 00:31:02.680 --> 00:31:07.480 million dollars. Well, he never asked the question why? Why are you 401 00:31:07.519 --> 00:31:11.839 giving me five million dollars? Like, why do you care about this inventory 402 00:31:11.839 --> 00:31:15.920 management system? So it turns out they adapted the inventory management system for hospitals 403 00:31:17.480 --> 00:31:21.799 and what medline did is they went to their hospitals and they said, if 404 00:31:21.839 --> 00:31:25.000 you you currently are on a one year contract, if you make it a 405 00:31:25.079 --> 00:31:27.839 three year contract, we will give you this inventory management software for free. 406 00:31:29.160 --> 00:31:36.000 In the first year they generated an incremental one hundred and twenty million dollars of 407 00:31:36.119 --> 00:31:41.160 incremental revenue from this inventory management software. Now what's the value of a hundred 408 00:31:41.160 --> 00:31:44.559 and twenty million dollars? To medline? If it's a five x multiple, 409 00:31:44.640 --> 00:31:48.599 just to be consistent, that's over five hundred million dollars. Right, six 410 00:31:48.680 --> 00:31:52.240 hundred million dollars. That was year one. What about year two, year 411 00:31:52.319 --> 00:31:57.160 three, year four? They generated over a billion dollars of value and they 412 00:31:57.200 --> 00:32:02.079 paid five million dollars for it. So so try who thought, Oh, 413 00:32:02.119 --> 00:32:07.400 I got the greatest deal ever. He didn't realize, he didn't understand the 414 00:32:07.519 --> 00:32:12.480 rationale of why putting one plus one equals a hundred. Because, going back 415 00:32:12.519 --> 00:32:15.160 to my empathy framework, you know my empathy rules. It's not about you 416 00:32:15.559 --> 00:32:21.599 do your homework, it's always about the acquiring company. So the way you 417 00:32:21.640 --> 00:32:25.880 build real value in the transaction is not looking backwards, it's looking forwards. 418 00:32:27.680 --> 00:32:30.039 Well, it seems like I really appreciate, first of all, you outlining 419 00:32:30.240 --> 00:32:34.440 the entire fair framework and as well as how you, Emmert, were able 420 00:32:34.480 --> 00:32:38.160 to create this framework, and I really love those two examples. It seemed 421 00:32:38.200 --> 00:32:45.079 like in both those examples. The acquire really had a vision or understanding of 422 00:32:45.160 --> 00:32:49.839 how the two companies together, as you say, can go. One plus 423 00:32:49.880 --> 00:32:53.160 one equals a hundred and really could, you know, take off, really 424 00:32:53.160 --> 00:32:58.759 really loved, wow, just both those examples, if you're the entrepreneur, 425 00:32:59.519 --> 00:33:06.799 right. And how could you storytell, leverage this to have the company, 426 00:33:07.079 --> 00:33:10.519 the acquire, focus on, you know, the the increasing value that you 427 00:33:10.599 --> 00:33:14.960 could bring instead of focusing on the past? Right, because these examples, 428 00:33:15.200 --> 00:33:17.000 like the acquires, both did. I mean not that the entrepreneurs didn't do 429 00:33:17.039 --> 00:33:19.599 well, I mean they both did, you know, extremely well. But 430 00:33:19.599 --> 00:33:22.839 the acquires, you know, really were able to pull a ton of value 431 00:33:23.480 --> 00:33:28.480 from those two companies. How could entrepreneurs leverage this? Well, that's why 432 00:33:28.480 --> 00:33:31.359 you have to do your homework. So the Jedi mind trick is just to 433 00:33:31.480 --> 00:33:36.279 start asking questions, just like. Well, first of all, if you've 434 00:33:36.319 --> 00:33:40.200 built a relationship over time, you've built some trust and as you build that 435 00:33:40.319 --> 00:33:45.319 trust, you start to understand what they really care about. And so when 436 00:33:45.319 --> 00:33:46.960 it's time, when they finally come to you and say okay, all right, 437 00:33:46.960 --> 00:33:54.119 it's time, totally okay for the CEO to ask the question. Well, 438 00:33:54.160 --> 00:33:59.559 why, you know why? Why are you buying us? How are 439 00:33:59.640 --> 00:34:04.279 you going to use us? How you're like, what's your rationale when you 440 00:34:04.359 --> 00:34:07.719 go in front of your board of directors and you're going to get approval? 441 00:34:08.079 --> 00:34:13.239 Tell me the story, like I want to understand. How are you selling 442 00:34:13.360 --> 00:34:17.320 this deal to your board or two, if it's a publicly traded company, 443 00:34:17.360 --> 00:34:22.199 if it's large enough deal, to your you know, to shareholders and too, 444 00:34:22.239 --> 00:34:27.920 analysts. How is this being positioned? And, you know, what 445 00:34:27.960 --> 00:34:34.360 are your plans for the company? And if you get them to our two 446 00:34:34.400 --> 00:34:37.280 and then like all and let's go build a model. So if you plug 447 00:34:37.320 --> 00:34:43.039 this into what do you think? What's your forecast? And if you get 448 00:34:43.079 --> 00:34:47.840 them to articulate the why, the rationale, and get them to monitoring, 449 00:34:47.840 --> 00:34:52.639 you know, put some numbers against it, they're almost negotiating against themselves by 450 00:34:52.639 --> 00:34:57.960 that, like basically you're saying, okay, yes, like that's a great 451 00:34:58.079 --> 00:35:01.519 rationale. Alright, Christ, this went up. You got it. Yeah, 452 00:35:01.559 --> 00:35:06.159 exactly, exactly, and I think that it also comes back to as 453 00:35:06.199 --> 00:35:08.039 well, having that trust factor right that they're actually going to be very, 454 00:35:08.079 --> 00:35:12.280 very honest in terms of what their vision is with the two companies working together. 455 00:35:12.760 --> 00:35:15.559 They almost have to in order to get the transaction done. I mean 456 00:35:15.639 --> 00:35:20.960 hopefully you know, you talked a little bit about bankers and one of the 457 00:35:20.960 --> 00:35:27.280 things that bankers do is they run a process and they identify potential acquirers and 458 00:35:27.320 --> 00:35:31.320 if you're doing your job well enough, so let's separate out strategic from financial. 459 00:35:31.679 --> 00:35:39.119 Chances are you probably know the top three to five seven. Either they're 460 00:35:39.159 --> 00:35:45.000 your competitors or they're the large players in the field. Like you know who 461 00:35:45.039 --> 00:35:49.480 the likely acquirers are and you've probably already started talking to them. If you're 462 00:35:49.519 --> 00:35:52.920 doing your job well, if you're building those relationship muscles, then you're also 463 00:35:53.039 --> 00:36:00.800 gaining information and learning and you probably can are already come prepared and crafting that 464 00:36:00.000 --> 00:36:06.159 rationale. A financial buyer is different, and actually that's where bankers can in 465 00:36:06.280 --> 00:36:10.599 technology, particularly most CEOS, they probably know who the top three or five 466 00:36:10.639 --> 00:36:15.320 acquirers are in most cases, but they probably don't know have relationships with many 467 00:36:15.320 --> 00:36:19.400 of the financial buyers, with many of the private equity firms, and so 468 00:36:19.880 --> 00:36:24.519 a banker can add value there. A banker also from a venture capital perspective, 469 00:36:24.639 --> 00:36:30.360 one of the things that a banker does is it provides some legal liability 470 00:36:30.440 --> 00:36:35.599 protection and what I mean by that is a disgruntled shareholder. If you have 471 00:36:35.719 --> 00:36:39.920 a banker and you run a process and you talk to, you know twenty 472 00:36:40.000 --> 00:36:45.199 companies and you get the best deal you possibly can, it's much harder for 473 00:36:45.280 --> 00:36:52.119 a disgruntled shareholder to say that wasn't a fair process. So there is some 474 00:36:52.199 --> 00:36:57.159 protection. So one of the reasons that vcs like having bankers. Sometimes, 475 00:36:57.440 --> 00:37:00.079 you know, maybe they can get help you get a better deal, maybe, 476 00:37:00.440 --> 00:37:06.199 but they also provide a layer of legal liability protection. Got It. 477 00:37:06.320 --> 00:37:08.360 Got It. That that makes last sense and it seems like to you know, 478 00:37:08.480 --> 00:37:14.480 I think we're going back to original discussion and I think part of the 479 00:37:14.519 --> 00:37:19.079 purpose of the book about billion relationships, you know, from the very beginning 480 00:37:19.519 --> 00:37:22.679 and devoting you know, a little bit of time towards you know, what 481 00:37:22.760 --> 00:37:27.840 an exit could look like or, you know, maybe just the direction of 482 00:37:27.840 --> 00:37:31.199 the company per year in this kind of way on an exit level, not 483 00:37:31.280 --> 00:37:35.440 like the vision so much level. But it seems like there might be maybe 484 00:37:35.599 --> 00:37:39.880 over reliance on bankers in some ways because you think, hey, like, 485 00:37:40.000 --> 00:37:44.039 obviously we want to as a VC, you want to get your return and 486 00:37:44.280 --> 00:37:45.679 like that, but you kind of just think, okay, let's just put 487 00:37:45.679 --> 00:37:49.880 it in the banker's shelf and then they're going to kind of take care of 488 00:37:49.920 --> 00:37:52.800 everything and run, you know, a though the process, which could certainly 489 00:37:52.800 --> 00:37:54.719 happen, but and not say it doesn't happen. But at the same time, 490 00:37:55.000 --> 00:37:59.000 I think to your point, you have take ownership on your company. 491 00:37:59.000 --> 00:38:01.519 For the CEO, you really understand this, and their incentives too, about 492 00:38:01.559 --> 00:38:05.840 if someone approaches you, for for acquiring, and not have an over reliance 493 00:38:06.440 --> 00:38:10.079 on a banker and their process. There's certain things you can't outsource with the 494 00:38:10.119 --> 00:38:15.920 banker. They can identify, they can help you tell your story, they 495 00:38:15.920 --> 00:38:17.840 can help you put your data room together, although I would argue your data 496 00:38:17.920 --> 00:38:22.719 room is an ongoing process and it should always be together. They can help 497 00:38:22.719 --> 00:38:30.719 you identify candidates and reach out, although I argue that that's the CEO's job, 498 00:38:30.000 --> 00:38:36.039 not the banker's job in most cases. And they can help you negotiate. 499 00:38:36.519 --> 00:38:45.079 But negotiation, you know, all transactions run into challenges and it's the 500 00:38:45.119 --> 00:38:51.199 CEO, Mano Demano, eyeball to eyeball, looking at their counterpart, where 501 00:38:51.239 --> 00:38:53.360 you're going to get the deal done, and it's not going to be through 502 00:38:53.400 --> 00:38:57.320 the banker. And when we talked to the heads of corpse Dev at all 503 00:38:57.360 --> 00:39:00.880 the major tech companies. Man, they hate at bankers. Now they hate 504 00:39:00.880 --> 00:39:06.519 bankers for the obvious reasons, right, but every single one of them. 505 00:39:07.119 --> 00:39:10.800 I can't stand bankers. Right, they had no value. I just want 506 00:39:10.800 --> 00:39:15.199 to talk to the CEO, and part of that sour grapes because the bankers 507 00:39:15.199 --> 00:39:20.239 are squeezing them. But realistically, to the question is, where's their added 508 00:39:20.320 --> 00:39:23.159 value? And, Um, you know, we, I believe you can't 509 00:39:23.199 --> 00:39:30.880 outsource relationships. That Sami Lawyers. We think that CEO s should get the 510 00:39:31.039 --> 00:39:37.880 very best m and a attorney, not your business banker, not your brother 511 00:39:37.960 --> 00:39:45.400 in law, but the guy who does hundreds of deals, not maybe one 512 00:39:45.960 --> 00:39:50.280 you know in their career. You want the pro when it comes to selling 513 00:39:50.280 --> 00:39:54.400 your company, but even working with the pro at the end of the day, 514 00:39:54.400 --> 00:39:59.079 while you're not a lawyer, when it comes to business terms, the 515 00:39:59.320 --> 00:40:05.400 funding until business terms, you cannot outsource that to your attorney. So like, 516 00:40:05.760 --> 00:40:08.679 okay, CEOS, it's time to wear your big boy pants, like 517 00:40:09.400 --> 00:40:14.280 you know, there's like it's time that you're like, you got to really 518 00:40:14.280 --> 00:40:17.440 step up here. How, also, do you make sure you know, 519 00:40:17.519 --> 00:40:22.599 let's say you're founder, you've built you know, incredible relationships with you know, 520 00:40:22.679 --> 00:40:28.639 it could be potential strategics, it could be evenly pe firms on the 521 00:40:28.639 --> 00:40:32.800 financial side. But how do you make sure as well, let's say like 522 00:40:32.840 --> 00:40:37.119 there's interest in your company being, you know, acquired at some point in 523 00:40:37.159 --> 00:40:42.519 time, how do you make sure you're not going down a fishing expedition for 524 00:40:42.760 --> 00:40:47.000 on the acquiring side? And that happens. Phishing expeditions happened, for sure, 525 00:40:47.679 --> 00:40:52.800 but they're less frequent than you might think. Um, there are some 526 00:40:52.840 --> 00:40:58.199 companies who have a reputation. Most don't, because that reputation, that legacy, 527 00:40:58.440 --> 00:41:02.400 lives on and, by the way, most CEO s no which companies 528 00:41:02.440 --> 00:41:07.039 do phishing expeditions and which ones are serious. But once again, if you 529 00:41:07.119 --> 00:41:10.159 build long term relationships built on trust, you kind of know, you know 530 00:41:10.760 --> 00:41:15.400 and you could tell if you're really focusing on fair and you build the rationale 531 00:41:15.760 --> 00:41:20.440 and you're not getting the answers that you want, if you don't think the 532 00:41:20.480 --> 00:41:27.440 cultures like you just have to be listening carefully and protect your time because I 533 00:41:27.440 --> 00:41:34.559 would say in my experience it's like maybe where five percent of the time there 534 00:41:34.599 --> 00:41:40.159 really are phishing expeditions and then it happens and people steal other people's intellectual property. 535 00:41:40.199 --> 00:41:45.639 It does happen, but it's pretty rare in my experience because, and 536 00:41:45.719 --> 00:41:49.800 that actually brings us to, I think, the last point, which is 537 00:41:50.199 --> 00:41:54.239 your legacy matters. Your relationships matter, and I asked CEOS all the time 538 00:41:54.679 --> 00:42:00.559 when the transactions over and you're going to start your next company, because many 539 00:42:00.599 --> 00:42:02.280 of us, you know, we're serial entrepreneurs. Once we do it once, 540 00:42:02.280 --> 00:42:07.039 we've got to do it a second time. Will your employees come to 541 00:42:07.079 --> 00:42:09.320 work for your next company? Did they feel like you fought for them, 542 00:42:09.360 --> 00:42:15.559 that you treated them well? Would your investors invest in your next company? 543 00:42:15.599 --> 00:42:23.840 Because the CEO There's a lot of room for very nuanced negotiation between payouts today 544 00:42:24.039 --> 00:42:29.760 versus earnouts in the future and who gets what, and the CEO sometimes has 545 00:42:30.000 --> 00:42:35.039 to tread a very careful line there. Would your the leader of Corp Dev 546 00:42:35.119 --> 00:42:37.760 who bought Your Company, would they buy your next company? Your legacy in 547 00:42:37.760 --> 00:42:42.679 your relationships? You know, we think in terms of decades, not in 548 00:42:42.800 --> 00:42:45.840 terms of a moment in time and a transaction, and we don't view life 549 00:42:45.880 --> 00:42:52.119 as a zero sum game. We view the ability to that you will maximize 550 00:42:52.239 --> 00:42:57.719 return, not only in this deal but in future deals to come. Mark, 551 00:42:57.920 --> 00:42:59.760 thank you so much for your time. This has been a lot of 552 00:42:59.760 --> 00:43:02.360 fun. Oh Man, Mike, you're you're good at this. Like those 553 00:43:02.360 --> 00:43:08.000 are great questions. I really appreciated and anytime, any time I can help 554 00:43:08.039 --> 00:43:14.480 you or your listeners and Um, you know, please reach out. We 555 00:43:14.519 --> 00:43:16.559 wrote the book to give back. We wrote the book to help and I 556 00:43:16.719 --> 00:43:20.599 you know, I'm always glad. Both Murt my co author, and I 557 00:43:20.639 --> 00:43:22.920 were always glad to help if we can. Thanks so much, Mark. 558 00:43:22.960 --> 00:43:27.079 I really appreciate this is so much fun. Thank you. Awesome and there 559 00:43:27.079 --> 00:43:29.920 you haven't. I hope you enjoyed our conversation. Again, I think this 560 00:43:29.960 --> 00:43:32.599 is a pretty unique episode for this show because but we don't really talk about 561 00:43:32.639 --> 00:43:36.599 the exit, so I really loved having mark on the show. Thanks again 562 00:43:36.599 --> 00:43:38.519 for listening everyone. If you enjoyed this episode, I love it if you 563 00:43:38.599 --> 00:43:43.000 write a review on the apple podcast. You're also welcome to follow me your 564 00:43:43.000 --> 00:43:45.400 host, Mike, on twitter at Mike Gelb, and also follow for episode 565 00:43:45.440 --> 00:44:05.000 announcements at Consumer VC. Thanks for listening. Everyone should be all what do 566 00:44:07.119 --> 00:44:07.239 all what a