FounderQuest To Be Or Not To Be Acquired - That Is The Question
The guys talk about their experiences with offers to acquire Honeybadger and go over some common structures of acquisition deals (hint - most don’t involve walking a wheelbarrow of money out of your office and never returning). They also chat about things that you should think about if you are presented with an offer to sell your company.
Links:
GitHub
Full Transcript:
Starr: 00:01 It's happening in me. I'm going to remember you silver lady, so don't you worry.
Josh: 00:08 You'll find her some day.
Announcer: 00:10 Hands off that dial. Business is about to get a whole lot nerdier. You're tuned in to FounderQuest.
Starr: 00:21 Somebody tweeted a while back and somebody referenced us and said that we should talk about this. You know, you should run your company like you're going to sell it. So then I thought, "Well maybe we could talk about sort of acquisitions in general, maybe weave it back and forth."
Starr: 00:33 So Honeybadger has had a couple of fairly serious acquisition talks, none ongoing right now, none that panned out obviously. We're not going to name names because I think it might be illegal for us to because we signed stuff. The first one was with a private equity firm that specialized in sort of smaller companies and taking these companies built by developers and then bringing in business people and figure out how to grow them. And then we had another acquisition talk with a pretty well known company in the developer space, and that would have been kind of a strategic thing because they were kind of trying to bring something to the market that was very similar to what we did. And sort of both of those eventually fell through because we just couldn't really come to terms.
Starr: 01:15 But I think we learned a lot while we were pursuing these because starting out I knew about acquisitions, like what pretty much I imagine anybody knows about acquisitions. It's like, "Okay, you sell a company, you make a ton of money, and that's like your happy ending." But it's really a lot more complex than that. Unless you happen to win the lottery, it's not necessarily like this huge, "You're going to be rich and set for the rest of your life event."
Starr: 01:40 Yeah, so I don't know. What do you guys think?
Ben: 01:44 I think that last statement is key. Our business has grown steadily, but not exponentially right? So, if you're sitting on a rocket ship you could probably have one of those acquisition events where you're set for the rest of your life because they're buying based on the future value of the company. They are not just based on what you've done so far, they are based on what they think you could do with them, combined with you. If you have had this exponential growth event, or if you can show that happening with their added resources to yours, then you could probably pull that off. But in our case, that wasn't really the scenario, right? We were growing steadily, the acquirers were interested in us because they knew that it was a reasonable business that could continue to grow, but not that it was expecting like this phenomenal growth. Yeah, so in our case those numbers weren't going to be crazy high numbers, but they were still nice numbers.
Starr: 02:47 I feel like this is kind of a theme in our podcast, in that the way that most people probably think about acquisitions is focused on the VC model of startups and fundings and acquisitions. In a lot of our episodes we're like, "Okay, this is the VC way of doing things," but that's not like the way for everybody. The sort of VC acquisition model that everybody has in their head is, "Okay, you start this company. Your company has a ton of growth and it targets some market that is adjacent to a big, big company. And that big, big company doesn't have their eye on this sort of little market. Maybe they don't realize how much opportunity is there, but then this little plucky startup comes and exploits that, gets crazy growth, and now you have this little company who is kind of edging in on the territory of a bigger company. And so the big company buys the little company in order to get access to that market." I think that's the most common approach. I mean sometimes the bigger company buys you because you've developed some crazy new technology that they couldn't develop on their own.
Starr: 04:04 I think those are the two situations in which you have this really big possible monetary outcome. I mean just listening to stories like that, you kind of see that while in order to that you have to have this crazy amount of growth, to the point where a big, big company worth a billion dollars or more... Actually when I was sort of getting to know about investing, I learned that a company worth a billion dollars is a relatively small company for a public company. So you have to get the attention of one of these sort of bigger companies. And you're not really going to do that unless you have a lot of growth or you have a whole bunch of customers that they really want access to. You've got to have something that they want. And you know we're just not really on that train, right?
Ben: 04:56 Not at that scale. I think one thing to keep in mind is the motivation for the acquirer is to, like you said bring in some new technology, or bring in this innovative team, or have access to a market that you have found a way to have access to. And backing up from that, why do they care about these things? Because they want to increase their own revenue. They want to move the needle on their own business. So if you're talking to a hundred billion dollar company and your revenues are in the ten million dollar range, right well okay, that's interesting, but that's not really going to move the needle for that hundred billion dollar company. They are looking for much bigger things.
Starr: 05:37 Unless they can leverage something that you have to make a lot more money than you are currently making. Right, because I don't think Microsoft really cares about how much money Github was bringing in. I mean I'm sure they do to some degree. Microsoft bought Github because they want to own open source.
Ben: 05:58 &...