In your quest to build a business of scale, evaluate opportunities in the lens of your mission
Co-Founder of WordPress, Founder of Automattic, Investor with Audrey
Acquisitions are made for the team.
Does everyone around the table have the same expectations?
No company ever went out of business for having too much cash on hand.
Lesson: Building a Unicorn with Matt Mullenweg
Step #8 Going Big: In your quest to build a business of scale, evaluate opportunities in the lens of your mission
I don't think that there's anything intrinsically good or bad about an acquisition. It just should be evaluated in the same light of the lens of your mission. Will you be more or less able to democratize publishing and development as part of this other company than you are today? Will you be happier or less happy as an entrepreneur and conversely your entire team?
As acquisitions, I think tech is full of them. They made so much sense, and if you look at the path of YouTube which was seen as crazy when it happened, but I think it's one of those ones where as an independent entity it wouldn't have been able to fight the content providers who pay for the banner and can do all the things that they've been doing. So, in particularly, at that time. Now they could probably raise a couple billion dollars like Facebook or a Dropbox. At the time it wasn't really an option. So being part of Google helped it realize its mission and become, I think, one of the top brands in the world, right around Google itself as it is today.
Automattic, one of the things we're passionate about is building web scale businesses. So things that we feel should exist on the Internet. Blogging and WordPress is certainly one of those. There are lots of other things as well. So a number of our acquisitions over the years have been things that I felt like should exist and perhaps maybe in their independent state wouldn't have continued existing. As to how we make the decision for an acquisition or not, pretty much every time it's a team, and I think we've made one acquisition, it was just a product, and not a team. But by and large we're looking to have people join the company.
So it's not dissimilar from the thought process we go to when we're hiring. It's just it's hiring plus maybe some existing users and product funding.
I think when you are raising money or setting up a structure of the company, it is important that everyone around the table has the same expectations. Around structure, who is going to be running the thing? Time frame, is this a company that does expect some sort of liquidity event in five or seven years, or could it be longer? If it goes longer than both sides expected, what happens?
The earlier you have these conversations the better. Just like if you were going to enter a relationship with someone. It’s good to talk about what to do if things go wrong while you are excited about all the things that are about to go right. That's advice that I would give to anyone entering into this. This is a long term relationship with investors and companies.
I don't think that owning the majority is necessarily important and often could be distracting to actual terms that have more influence on the outcome of the company than just a person that you are voting or things like that. There are lots of terms in s term sheet. Liquidity preferences, dividends, there is lots of things there some of which control terms for sales.
These things are just, if not, more important than what percent what each shareholder has. It is also the rich versus king. I did a body research saying that trying to hold on to every share is not necessarily the best thing for long-term success of the company and an extreme example is you can have 100% of nothing.
I think that valuations are totally arbitrary. It's often a multiple on revenue, or it's some sort of made up number that strategically values the future potential for that when you really break it down to things. That has probably has more to do with the market and the environment that you are in, the perception, than it might have to do with the fundamentals of your company.
Now the good news is no company has ever gone out of business for having too much cash on hand. Building a business, which is profitable and sustainable, is in fashion no matter the economic cycle. If you can focus on that, particularly try to keep in mind black swans, or unforeseeable negative events that could maybe disrupt some of your main revenue streams, you can build a resilient company that will outlive its competitors and have an opportunity to do serious work over a number of years. I do think that building big things does take time.