Latest / StartUp Health NOW Podcast / Exit Strategies: M&A Wisdom From Entrepreneur-Investors Samer Hamadeh and James Marciano

Transcript

Exit Strategies: M&A Wisdom From Entrepreneur-Investors Samer Hamadeh and James Marciano · StartUp Health NOW Podcast

• 0:00
  [ on-hold music] You know, a startup is a very risky endeavor, I just wanna remind everyone,
• 0:16
  and most fail, meaning they return less than the invested capital, and often zero.
• 0:22
  So if you take outside money, like we all do, we have a fiduciary responsibility to care for that money and to use our best efforts to get a return for that outside money.
• 0:30
  So we have to care about M&A because the sale of the company is the main way to achieve return for investors and return for you.
• 0:38
  [upbeat music] Welcome to another episode of Startup Health NOW.
• 0:50
  We've got a very exciting fireside chat today with two of my favorite people, uh, Samer Hamadeh, who is the, the co-founder- Co-founder...
• 1:00
  of Zeel, a startup health company, and James Marciano, who is the founder of Tuck Advisors, also a startup health investor and longtime serial entrepreneur and investor himself.
• 1:14
  Um, it's gonna really be an exciting show today.
• 1:16
  We're gonna talk on the topic of M&A, um, and really dig into all the ins and outs and things that entrepreneurs and health transformers need to think about from the very, very early stages of, of building their business all the way through, uh, potential opportunities.
• 1:34
  So welcome, Samer and James. How are you guys doing? Excellent. Thank you, Unity. To kind of frame things, I mentioned you guys are both, uh, serial entrepreneurs yourself. You're both investors.
• 1:45
  You're both advisors and sit on boards. You've really seen so many different things.
• 1:51
  We'd love to learn a little bit more about your backgrounds just to set the context and then we'll dig into kind of the core of the conversation.
• 1:59
  James, why don't we start at, start with you because you built some companies and now you're, you've, uh, with Tuck Advisors, really work with companies to help them scale and, and work on, uh, M&A opportunities.
• 2:14
  I'd love to hear more about your background, James, and, and Tuck Advisors just to kick things off. Sure. Thanks, Unity. Um, so, uh, as Unity said, we've been friends for a long, long time.
• 2:25
  I started back in 1995, uh, building one of the first social networks on the web called thesquare.com, and then started another company called ReferIt, uh, back in 1997, uh, which was a, uh, uh, first directory of affiliate programs for e-commerce companies.
• 2:40
  And then a third company called Return Path, uh, which was just acquired last year.
• 2:45
  And so it was, I started those three companies, you know, raised angel investment and raised Series A actually for The Square 48 hours before, uh, the market crashed in New York.
• 2:53
  So we were the last, the last company in New York to get funded. It was really an amazing time.
• 2:58
  And, um, you know, through that process had some, some offers for our companies and really weren't, uh, weren't really ready for them. And, uh, we called them UFOs, unsolicited flying offers.
• 3:09
  And we wound up hiring an investment bank in San Francisco, and, and frankly, they didn't do a very good job.
• 3:14
  And, um, so after I sold the, wound up selling those three companies and then I became an angel investor for about a dozen years, and we moved to, moved out of New York to raise our family here in Bucks County, Pennsylvania.
• 3:24
  And I was really anxious to get back to building something, uh, myself. And, um, again, my own experience had been pretty poor hiring, uh, investment bankers for M&A.
• 3:32
  And so five years ago, we decided to start, uh, Tuck Advisors to help other entrepreneurs, uh, make sure they, they maximize their exit. And, and what types of companies do you work with?
• 3:42
  Do you work at companies at all stages or a particular stage or, or sector? Yeah. So I mean, I'm a, I'm a startup guy and I really love working with other entrepreneurs.
• 3:53
  So we work in what's called the lower middle market. So enterprise value, call it five to 100 million. And we, um, uh, you know, and we, we focus specifically on health tech, and we also do some ed tech.
• 4:05
  Uh, and we, you know, we love working with younger companies that are, you know, a year or two away from exit because it's just an opportunity for us to get to know them better and to help them along.
• 4:13
  Sometimes there's opportunities to do buy-side work even for small companies, and we're now also doing capital raises. So we do, um, you know, sell-side, buy-side, and, uh, capital raises. All right.
• 4:24
  And so we'll dig into some of that in a second. But Samer, wanna, wanna also refresh everyone, um, on who you are and some of your background. You've, you've got such a diverse background as a
• 4:36
  longtime serial entrepreneur, member of the Startup Health, uh, Health Transformer ecosystem, uh, investor yourself, board member yourself of different organizations. Um, share a little bit more about, about you, Samer.
• 4:51
  Yeah. Thanks, Unity. First, James, you beat me to the punch on starting a tech company. I started my first one in December 1996, vault.com. And with respect to M&A, I've, I've got two direct experiences.
• 5:03
  So I was right on the front line selling vault.com in 2007 to PE. It was between PE and a strategic done in Broad Street.
• 5:12
  And then, uh, I was right on the front line selling campusfood.com to Grubhub back in 2011 as interim CEO and a board member.
• 5:21
  And I've been part of lots of sales along the way as, you know, as a strategic, you know, angel investor, uh, obviously, and, and advise a lot of founders on, on M&A.
• 5:30
  So I've got a lot of views on M&A, which we'll be happy to share today. It'll be a fun conversation. In terms of investing, yeah, I've got a fund at Lightspeed Venture Partners, a scout fund.
• 5:39
  I'm a venture partner and advisor at, at Alpaca Ventures here in New York City. And, uh, I love Startup Health. I think I was in the first cohort, right, Unity? So, uh- Very beginning. Very beginning...
• 5:50
  yeah, very, very beginning. And, you know, Zeel was always an unusual company, which isn't necessarily the conversation for today, where we're delivering massage therapy to the home.
• 5:59
  And COVID, which kicked our butt, was the conversation of the fireside chat a few months ago, how we're, you know, sort of pivoting and expanding into in-home healthcare with nurses and physical therapy and some other, uh, services.
• 6:13
  Anyway, today's about M&A, so excited to dive into the topic and also answer people's questions. You know-The world's changed, obviously. We're a year into the pandemic.
• 6:24
  Um, I think it's a very confusing time for, for growing companies.
• 6:29
  Um, in one sense, you're hearing about these multi-billion dollar transactions, companies like Livongo and Teladoc merge, uh, you know, almost a $19 billion merger.
• 6:41
  Um, we're seeing even companies in the StartUp Health portfolio, um, big, big, uh, mergers and acquisitions, like doctor.com and, and Press Ganey, um, just announced Gene by Gene and MyDNA, uh, Cloudbreak,
• 6:58
  um, and UpHealth doing a SPAC. Um, but there's also a lot of companies that are going through a transition, um, figuring out what's next. How do you
• 7:10
  guys both view the, kind of the, the moment we're in, um, and what's your perspective? Are you optimistic?
• 7:18
  Are you, um, think there are certain things that the, the broader kind of community should really be thinking about strategically as they're setting themselves up for going into 2021, um, and, and managing their business?
• 7:35
  Would love to hear from both of you on this. Uh, yeah. I'll, I'll jump in. I mean, there's certainly, you know, there's certainly gonna be a lot of winners and losers.
• 7:43
  So as I said, we, we represent, uh, you know, mostly healthcare companies, health tech, and, you know, we had a client this past year that sold to hospitals and, you know, they, they, they, you know, the CEO and the board decided they wanted to go out to market, and as you can imagine, you know, uh, if you sell to hospitals and you're trying to sell your company to, to a company that also sells to hospitals, right, which is a pretty, you know, typical kind of M&A scenario, we're finding a buyer that has the same, uh, customers that you do, um, you know, everybody was just in panic mode, right?
• 8:13
  Like, hospitals are losing tens of millions of dollars, you know, a day, and there was no, there was no appetite for, um, for trying to acquire another asset. There was just...
• 8:21
  People were just trying to stabilize their own, their own companies. You know, I think, you know, and there's a difference there between, you know, PE companies and, and, you know, PE firms and strategics.
• 8:30
  I think the PE guys kind of rolled with it a little bit better. If you're selling a larger asset to a PE firm, maybe had a little bit more luck last year. Strategics, again, were just in survival mode.
• 8:39
  But then we also have, you know, uh, two healthcare companies we're representing now. One in a, a...
• 8:44
  Well, it's gonna be a $10 million series B, it looks like it's gonna be more like 20 or 30 million, that does telehealth, so, you know, huge, huge winner in, in COVID.
• 8:52
  And then another company we've been working with for three years, a behavioral healthcare company.
• 8:57
  We bought, uh, we helped them acquire two, you know, found and helped them acquire two digital assets, uh, last year, and now we'll be taking them out to market, um, just because again, you know, obviously things are super hot for, for behavioral health.
• 9:08
  So certainly, certainly winners and losers, but no doubt that COVID's accelerated lots of things in healthcare and, uh, it's de- definitely an exciting time.
• 9:15
  And I, I, I would add, Unity, uh, that, you know, obviously I'm not a macroeconomist, but with interest rates really low, obviously, and the government spending a ton of money right now, people want to invest in the next thing that could make them more money, and right now that's stocks, private or public.
• 9:35
  And so with respect to health tech, which is probably the hottest sector right now it feels like, there's just so much money out there, and I think it's gonna be out there for the next, you know, 18 to 24 months, at least from the experts I talk to.
• 9:48
  Uh, not just because of the money, too. There's also just a ton of innovation.
• 9:52
  Uh, you always said, Unity, you and Steve when you started StartUp Health, that health is one of the last sectors that had not really gone through the technology revolution, through the revolution of software eats the world, that, you know, Marc Andreessen always talked about, but it's now happening and it's happening so fast because of COVID, and it's such an enormous sector.
• 10:12
  So at, at StartUp Health, we focus on long-term and collectively achieving Health Moonshots. So we're always really trying to get to the core of how we can help our companies scale, how they can make a greater impact.
• 10:30
  And, um, let's just dig into this topic of, of M&A.
• 10:35
  I think it's, it's a broad topic, obviously, and I think, um, it means a lot of different things, um, depending on, uh, when and why and how and the stage and all sorts of things. But, um,
• 10:49
  let's just, let's just start, um, digging into some of this and, and really I'd love to understand from both of your perspectives, when or why should, should founders even begin to start thinking about, uh,
• 11:04
  M&A, mergers and acquisitions opportunities, as a way to, to help them accelerate their business or, or really help them achieve their Health Moonshot? Uh, I, I can start off, James.
• 11:19
  Um, you know, a startup is a very risky endeavor, I just wanna remind everyone, and most fail, meaning they return less than the invested capital, and often zero.
• 11:30
  So for the founder or founders, a return of just the invested capital often means the founder gets zero 'cause the invested capital invests with a liquidation preference.
• 11:39
  So if you take outside money, like we all do, we have a fiduciary responsibility to care for that money and to use our best efforts to get a return for that outside money. Otherwise, don't take the money.
• 11:49
  So we have to care about M&A because a sale of the company is the main way to achieve a return for investors and a return for you as the founder.
• 11:58
  Obviously, the other ways are you can create a profitable dividend paying company. That's actually what we did at Vault before we sold it. Um, and that's a rare thing, I, I think, in the tech world.
• 12:07
  The other way is to create enough perceived value, right, that a future fund buys shares from early investors, and you get some liquidity that way.
• 12:15
  And the third way is you go public, right, which is currently a pretty hot way for health tech companies. But that's, that's why we have to care about M&A. That's what it's all about.
• 12:24
  And I would just add to that, you know, y- you should always be prepared.'Cause if you get one of these UFOs against a li- you know, an unsolicited flying offer, you have to be able to weigh that, uh, against what your other opportunities are.
• 12:37
  So if you're kinda caught flat-footed, and you're not paying attention, and, you know, you don't have your, your books in order and, and, um, other things, right, it's gonna be hard to get a transaction done.
• 12:47
  And so, you know, I think that, that's the other thing is, uh, you know, just be ready. And I once had a, a colleague of mine, I remember it was, uh, it was on the West Coast.
• 12:57
  Um, and, uh, he was in my office at 55 Broad Street across from the New York Stock Exchange. It was, it was Christmas Eve 1998, and, uh, it was probably like 11 o'clock at night. We're both working.
• 13:08
  And he said, "You know, um, you should always know who you're gonna sell your company to before you start it." And, you know, maybe that's not entirely true, but I think there is some wisdom there.
• 13:18
  And I think it's important to remember, you know, that half of all M&A transactions happen because of an existing strategic partnership.
• 13:24
  And so, um, and I think the primary, you know, reason for that is that as a, you know, as a sell side advisor, the hardest thing for me to do is explain to somebody that's never heard of your company why they should care, right, what you do.
• 13:37
  Yeah. So if you're already in the mix, right, and you're working with people and you're in their stack or whatever, you know, forming those relationships can be a really helpful way to get your...
• 13:45
  you know, potentially, you know, get an exit. But again, I think, Unity, the, the key message is, you know, kind of be prepared and be thinking about it and be open-minded.
• 13:53
  You, you mentioned this concept of UFOs, which I, uh, I'd love you to unpack a little and, and really explain what that is. Are you seeing more of them? Um, and how...
• 14:04
  and, and then leading into how can companies or founders start to be prepared, as you say? Yeah, you know, uh, we- we're all startup folks here, right?
• 14:14
  And so you have this constant, uh, push and pull between, hey, I wanna build a product, and I need to go raise money to build my product, right? And I...
• 14:21
  what I always say is if, if you build something of value, the investors will find you, and the same is true of, of buyers.
• 14:26
  And so when a company gets a UFO, right, that's a signal to us at Tuck Advisors that they've built something of value, right? 'Cause I like to say that good companies don't go unnoticed for long.
• 14:35
  So how do you guys know when to take one of these unsolicited flying offers seriously? You know, time is, is so valuable to all founders, as everybody knows.
• 14:47
  Um, you know, you don't wanna waste any time on just random things that come in. How do you start to decipher the signals that there's, there's something r- worth investing time in?
• 14:59
  What are some, some lessons learned from both of you? Well- Well, I want, I wanna add to what James was saying. It, it does partially go back to being prepared, Unity.
• 15:09
  So, you know, obviously, if you get a call from a brand name strategic or one of your partners or a, or a PE shop that's well-funded, you, you know that they're probably taking it seriously. Um, you know, UF...
• 15:20
  I, I call them UFOs 'cause a lot of times they're just a hoax, right? And they come in, and we've had these experiences where, you know, they, they, they drag the team into it.
• 15:28
  And it's not only time and energy but also emotionally, right? As a founder, you start to kinda get one foot out the door, and it's really hard to then re-engage if that UFO flies away.
• 15:37
  We typically get engaged when a company has one or two or more UFOs. You know, we come in and we look at it, and, you know, most of the time, you know, they, they've signed an NDA, but it's not really sufficient, right?
• 15:48
  There's, there's, there should be a carve-out for a, for a new approach clause for, for employees and for customers, and sometimes that's missing if it was sent over from the other side.
• 15:56
  So we always first look at those NDAs. But then you really try to, you really try to put structure around the process because, again, you don't wanna waste time.
• 16:02
  So by the time we've gotten to the conversation, often it's been, you know, a couple of weeks or months that they've been talking. So in one, with one healthcare company, they'd been talking to two UFOs for six months.
• 16:12
  We came in and we shut it all down, and we said, you know, "LOIs are due, uh, in 10 days," right? "You guys have talked enough."
• 16:19
  And so we got those two LOIs in, and one f- one was for, um, 6.9 million, the other one was for 12 million. Client was really happy about the 12 million. We started marching down.
• 16:29
  You know, they flew 14 other people out to three different conference rooms at our client site, and three weeks before we were supposed to close, they got involved in a, you know, multi-hundred million dollar acquisition in Europe.
• 16:40
  And they said, you know, "Can you, can you just wait for us," right? "We need to do this other thing first. Can you wait for us? We'll be back in six months."
• 16:46
  At that point, I said, "Look, we've been completely transparent with you that if you slow this process down, we've built a book, we've built a buyer list, we're gonna go out to market."
• 16:54
  So we went out to market, wound up getting, 10 weeks later, we got an offer for 24 million.
• 16:58
  So, you know, that's the idea of kind of making sure you put structure around the process, putting in time limits, and having a second best alternative, right?
• 17:05
  If we hadn't had that buyer list in that book, we may have st- we might have stuck around for six months, but our client knew that we were ready to go and put some pressure on the deal, and, you know, it turned out very well.
• 17:15
  James, could you share kind of a tale of two companies, one when you first look at it, it's like, wow, the, this company's really prepared, and then one that isn't?
• 17:26
  And with the, with the goal here of we obviously want as many founders as possible to be thinking early, really from the early stages of building their business, on what they should be working towards to package their, their operation up in a way that really shows that they're on the one side of, of value versus the other.
• 17:47
  Yeah, well, on, on the CFO topic, I've spent the morning interviewing with three different CFOs for a client of ours where we're doing a Series B capital raise because they don't have good financial controls in place.
• 17:58
  So I'm literally on the call with the lead investor interviewing the CFOs so that we can get this transaction across the finish line by February 15th. That's not the place you wanna be, right?
• 18:08
  Like, we're, we're trying to find these numbers. The worst thing that can happen in an M&A transaction is the numbers start to shift and to change.
• 18:14
  And so I'd say, you know, Samer hit the nail on the head with, with making sure that the books are in order, financial is in order. You understand how you book a contract.
• 18:22
  If you have a SaaS business, how do you recognize that, you know, that ratably over time? All those things. It doesn't cost a ton, right, to do it the right way.And so, so you really wanna be prepared there.
• 18:32
  And so this is just an example of a really great company doubling in revenue every year, right? You know, they did seven million last year in SaaS, they'll do 14 million this year, and they just don't have...
• 18:42
  You know, founded by two engineers, uh, super brilliant people, you know, PhDs, but they didn't have the business people, you know, in the company to be able to handle this type of stuff.
• 18:51
  And then we have another client where, you know, they have the, you know, they have the team, they have the controls, uh, you know, they outsource their taxes and that sort of thing, but all the books are there.
• 18:59
  Everything's neat. They've got a... Everybody should have a dashboard, right? A management dashboard. You're looking at daily, weekly, or monthly. You know, all the KPIs in place.
• 19:06
  Again, this doesn't necessarily have to cost a lot as a startup. Um, there's plenty of resources online to figure it out.
• 19:12
  But those sorts of controls need to be put into place so that when you get a situation like Samer had, uh, you know, you, you, you can get through the due diligence.
• 19:20
  Otherwise, again, you're gonna wind up wasting a lot of time, and potentially the deal's gonna break. Yeah. And if you've ever seen one of these due diligence lists, I mean, there are many pages.
• 19:29
  There's, like, 50 to 100 items. The key ones are finance, which we've been talking about a ton here. Tech and product matter, too.
• 19:35
  So I always sit down with our CTO, like, "Hey, we gotta make sure all the passwords are buttoned up, all of the code is, you know, you know, written down and organized into a book."
• 19:47
  I think now people organize everything in GitHub, but in the old days it was a book, and you would, you know, map out all of the systems, 'cause they're gonna do tic- tech due diligence as well.
• 19:56
  They're gonna do legal due diligence. Again, like I said earlier, are all the contracts signed? Are, are the clauses in some of your contracts that say, "This contract will continue upon a change of control"?
• 20:07
  You have no idea how many of those contracts you'll have where like, "Hey, we get to decide if we get... if we will even assign this contract to your new owner." And that could be a significant contract.
• 20:16
  We, we think about those things every day when we're signing contracts now because, again, we're thinking ahead about what will eventually happen in a sale. We wanna make sure we assign all our contracts, all of our IP.
• 20:27
  So, so anyway, there's a long list that you'd go through, and that would be the topic for a different session, obviously. Samer, we have...
• 20:32
  As you know, there's pre-revenue companies, there's companies doing $20, $30 million of revenue, and everything- Right... in between. Um,
• 20:41
  would you both advise, you know, to start focusing on these things, like, from the inception of your business?
• 20:47
  W- I do inception now, 'cause yeah, I've learned the hard way by losing deals when I was, you know, younger and less experienced. So yeah, we, we, we close our books every month, even pre-revenue.
• 20:58
  Just, y- it's in, it's in the ha- you know, we get into the habit. We, uh, we make sure every contract's signed.
• 21:03
  It does cost more money than you probably have initially, but it just, it just, you know, softens that pain [laughs] later that you'll experience if you don't have it together. So you have to do it. Yeah.
• 21:15
  And the co- the contracts one is a great point.
• 21:17
  You know, uh, depending upon if you can, uh, transfer the contract to a new owner, that's oftentimes gonna, uh, predict whether you're gonna need to do a stock sale or an asset sale, right?
• 21:28
  So that stuff's gonna tie into the legal. And I think it's important to also just kinda sequence some of these events.
• 21:35
  So, you know, if you, if you're responding to a UFO or if you're going out through an auction process, you know, you're gonna have a, a book, you're gonna share information, you know, make sure the NDA is signed if it's more information than you wanna share publicly.
• 21:45
  And then you're gonna, you're gonna, you know, you're gonna do a two-step dance. You can have an indication of interest, where people are expressing a range of what they might pay based on the information you know.
• 21:54
  And for those f- companies that are in your wheelhouse, right, they're in the range, you're gonna invite them to management presentations.
• 22:00
  So, uh, you know, this Thursday, for example, I'm, I'm booked for nine hours straight, three three-hour management presentations for a client of ours.
• 22:07
  You wanna do it together so you're not giving one company an advantage over another.
• 22:11
  And then, um, and then from there you're gonna ask for an LOI probably two weeks after that, a letter of intent, so there'll be about two weeks where you can ask questions back and forth.
• 22:19
  Once you get that letter of intent in, you're gonna wanna... You know, it's gonna be hopefully, you know, apples to apples, but a lot of times it's apples to oranges, so you're gonna try to get those...
• 22:27
  You know, try to, try to figure out what the best deal is for you. And then you're gonna, you know, kind of announce the winner. You're gonna keep the other ones warm.
• 22:35
  And, and the important thing is, you know, really the key to getting the deal closed is making sure that you have a good M&A lawyer, right? 'Cause it's a different type of law.
• 22:43
  And you're gonna have an LOI that really sets the roadmap. So that LOI wants to be very specific in terms of indemnity caps and, you know, a- agreements for founders and, you know, all those things.
• 22:53
  We have a list of, I don't know, 15 or 17 things that we want bidders to, to respond to, because if you have that good roadmap, and maybe it, maybe it costs you another week or two of legal fees, but once you have that roadmap, then you can move to phase three, and you can get through those legal contracts much more quickly without, um, without a lot of discussion.
• 23:12
  So, so James, you, you started getting into this, and I wanna unpack it a little. You talked about two, two things. One, the process of, of M&A.
• 23:21
  Um, so just really framing the steps from, from beginning to end in, in time. And, and you talked about the, uh, the way you do it. I think that'd be very helpful.
• 23:32
  And then two, you talked about some of the partners that make sense for you as a, a founder to start surrounding yourselves with, whether it's, uh, a law firm, M&A lawyer, et cetera.
• 23:46
  Who are the types of partners that companies should start to build relationships with early, and what does that look like? And then we're gonna dig into some of the questions that are coming in from the team. Sure.
• 23:58
  I mean, look, I would say there are very few, uh, M&A advisors that will work in the lower middle market.
• 24:04
  So if you have an enterprise value of, you know, 10, 15, 25, $50 million, which of course by the numbers there's lots of those companies, it's just very hard to find somebody who- who's willing to focus on that.
• 24:14
  Most companies are set up to do much larger transactions, which is why I started Tech Advisors to help other entrepreneurs.
• 24:20
  Um, so I would say if you can start to socialize your company with M&A advisors, just to let them know who you are, um, the more they can learn about your company, the, the better they can represent you in the future, right?
• 24:30
  So we love working with companies a year or two before exit.Definitely M&A lawyers. I mean, I, I'll tell you, I apologize in advance if there are any lawyers on this call, but I just hate lawyers.
• 24:38
  [laughs] Drives me nuts. I see one question that's come in, Unity, should we- Yeah, yeah, um-... jump on it? Yeah. From Javier. Yeah.
• 24:47
  Uh, if you're there, Javier, if you could come off mute and frame your question, that'd be great. Otherwise, I'll just ask it. Thanks so much. It's been awesome so far. Um, Javier Evelyn out of Alaviano out of Detroit.
• 24:57
  Um, just kinda getting a sense of... Uh, I had a advisor some time ago kinda saying, "Hey, you can get some insights when you kinda take a look into those 10K, 10-Qs," and that seems like crystal ball.
• 25:06
  We know that there's a lot of, like, um, uh, intangibles beyond that, so relationships obviously. Um, it's kind of like a lot of smoke and mirrors 'cause there's other competitors looking at that as well.
• 25:17
  But from a starting perspective to kinda have an initial list, what are your thoughts on the validity of kind of using that as a filter first and foremost, and then kind of maturing, obviously when you get to the, the level where we start talking to you guys?
• 25:27
  If that makes sense. Sure. No, it does, Javier. I mean, you're talking about public companies, obviously. Yes. There are no filings for private companies, uh, or PE funds for that matter.
• 25:36
  But I, I do, I do as much research as I can when I get a UFO, especially if it's not someone we're currently partners with, to find out if it's a fishing expedition and they've got a, you know, portfolio companies or a strategy inside that there's no way they're gonna partner with us, they're just trying to learn [laughs] a lot, which happens a lot.
• 25:54
  Uh, which is why, again, not...
• 25:57
  You know, I know, James, you can't plug yourself, I'll plug you for you 'cause you're one of those amazing, you know, M&A advisors because you're a former entrepreneur, so you get it, and you charge very reasonable fees relative to what others do.
• 26:09
  But, you know, a, a good advisor will, you know, have, provide cover for you, you know, so they, they can sort of keep, keep some of those bad actors at bay. But yeah, the 10-Ks and the 10-Qs will give you some insight.
• 26:21
  They, they, they often won't really tell you about a skunk works project, 'cause that's not something that has to be disclosed in public filings. So, you know, look at those, talk to other partners.
• 26:31
  Uh, we've also done, uh... A lot of people don't know about this, you ask your law firm to do a litigation search to see if there have been any lawsuits that startups have filed against this potential company.
• 26:45
  Uh, we've found some interesting ones sometimes that way when a UFO comes in. But yeah, the, the broader concept that you should do a lot of, you know, research to make sure you're talking to somebody truly legitimate.
• 26:56
  Yeah, for public companies, you know, I sometimes will listen in to the calls with... You know, they do the quarterly calls, and I've gotten, uh, you know, a lot of good information there.
• 27:03
  I remember one company we were selling, and the deal wasn't done yet, and we were on the call, and the CEO announced it to, you know, all the, you know, all the, uh, people on the call that they were getting this deal done.
• 27:14
  And so at that point, we knew we had them over a barrel, and we were negotiating this one last- And they say, like, yeah, you gotta use that [laughs] to your advantage.
• 27:20
  We got 'em an extra two million bucks because these guys re- revealed it a couple days before we were supposed to close. So knowledge is power.
• 27:28
  Well, I, I think, um, Javier's question also got me thinking about there's, there's two perspectives here. There's...
• 27:36
  Are companies looking to be acquired by someone else, but there's also are companies who are looking to either merge or acquire other companies so that they can maybe scale more quickly.
• 27:47
  I'm wondering if you guys could both, um, unpack that a little as, as thinking about M&A as a growth opportunity, um, and really merging with other partners, um, in a way that kinda sets you up for the future. Yeah.
• 28:04
  Yeah. Uh, well, I'll just say I, I don't have a ton of experience admittedly.
• 28:07
  The only one I have is I was serving as the interim CEO of campusfood.com, which obviously is in the health tech space, it's a food delivery company.
• 28:16
  And at the time there were a number of players, including Grubhub, and we were all pretty tiny. We were about 7 million of net revenue. So think about that for a moment.
• 28:26
  About, about, about 50, 60 million of gross revenue, and now this space is billions and billions of dollars. So very early, VCs weren't that interested in the space.
• 28:36
  I'll give a lot of credit to Bill Gurley who came to our office, and Grubhub's office, and Seamless's office, and asked us to do a three-way merger, which he would fund 'cause he's like, "I don't wanna pick one of you guys and waste a bunch of time competing.
• 28:50
  I did that with OpenTable back in the '90s and early 2000s, and it just burned so much cash." The founders couldn't get out of their own way 'cause of all the egos to actually do the merger. He got very frustrated.
• 29:01
  It was about six months of dance. So finally he just said, "Screw it, I'm just gonna put money in Grubhub."
• 29:08
  To their credit, they had just launched the first iPhone app for mobile f- uh, for, for food delivery to know to the home.
• 29:15
  So because they did that, they tripled almost overnight, and so he put the money in, which then anointed them as the winner, which forced us and Seamless eventually to merge. [laughs] So we did merge.
• 29:27
  It was, uh, primarily an all cash buyout, but we also ended up investing in the, the merger round, if you will. So at any rate, there... It made a ton of sense.
• 29:37
  We're all competing against each other for consumers and for restaurants, and by doing the merger, as you know, Grubhub then went public.
• 29:44
  And so he took, like, this $300 million merger and turned it into, I think Grubhub's now a 12, $13 billion company. And I thought the space was over by then. [laughs] I really did.
• 29:54
  And now you see DoorDash and Uber Eats and all these other players too, which is just fascinating to me 'cause I'm like, "I don't think the food delivery space is that big."
• 30:02
  But anyway, your broader point that doing a merger sometimes to really attack a market is to stop, like, cutting each other up to death makes a ton of sense. Yeah.
• 30:13
  Uh, and I think, you know, oftentimes smaller companies don't think about M&A, and the fact is you don't have to have a lot of cash, right? In, in Sommer's example, you can do...
• 30:21
  Uh, if the, if the, if the principals can get out of their own way and figure out how to, you know, proportionally rate their companies in a fair way, right?
• 30:27
  You can put, put them together and, uh, and go attack the market.
• 30:31
  I think, you know, one thing that, that we found, and this, this may seem a little counterintuitive, but, but I actually firmly believe that your salespeopleMight be the, might, there might be the, the best ideas for M&A come from your salespeople because they're the ones that are gonna be on the front lines that know who else your customers are working with in terms of vendors.
• 30:50
  And again, because most M&A happens between companies where you have a, a shared customer, right? Like, I'm s- I'm selling, you know, apples, you're selling oranges. We're selling to the same grocery store, right?
• 31:03
  Like, maybe... And I have a hu- I have 1,000 grocery stores I'm selling to, and you have 50, right? I can put your ap- oranges in my, into my apple bag, and now we can sell to 1,000 stores.
• 31:12
  That's how a lot of M&A happens.
• 31:13
  So if you are, you know, if you're talking to your sales team and they're telling you about maybe what other vendors your customers are using, that might be an opportunity for you to gain insight into either a company that you might wanna buy or, or merge with, or potentially could acquire you.
• 31:28
  I, I have a, I have a very, I have a great, very quick story about that, Niraj. I'll just tell you. My, my next door neighbor, I can...
• 31:33
  looking at his house to my left, works at a CRM company, uh, that does, uh, for wealth managers, and there was a company that they referred all their customers to for po- portfolio balancing.
• 31:45
  It's like this piece of the business that they didn't do. They didn't have a native way of doing it. Well, the other four companies in their space all referred their business to this same one company too.
• 31:54
  Well, one of those companies wind up buying that ba- balancing, portfolio balancing companies, and now the other four companies are screwed because now they gotta build it themselves.
• 32:02
  Why didn't, you know, why didn't my neighbor's CEO know about that from the sales team? The salespeople all knew about it 'cause they were referring all their customers to them. Well, I'll tell you why, uh, James.
• 32:11
  I'm so glad you brought it up.
• 32:12
  So as a younger founder, you know, in the '90s, I coveted the information around M&A, and I thought, you know, erroneously, that if you as the CEO and founder hold onto it, like, you'll get the deal done.
• 32:26
  No one else should know 'cause you also don't want to get distracted by M&A or somehow to have it leak out. I've done a 180 on that view now, obviously, 'cause I'm older and wiser.
• 32:37
  I let our executive teams know fairly early on, like, if M&A is gonna be the most likely outcome, because that is the most likely outcome for startups who actually end up returning money to investors, as we talked about before, then everybody needs to know about it.
• 32:51
  'Cause ultimately, I can't do it by [laughs] myself. It's impossible. I've tried before.
• 32:55
  So the sales guy and the marketing chief and the CFO and others always know that we've got M&A opportunities floating around, and they're thinking about them. And we bring them up in meetings.
• 33:06
  And I'll talk about, like, a few weeks ago, I said, "Hey, this public company, we, we actually have a partnership with them," and they're talking about it a little bit, you know, with me.
• 33:16
  So I'm letting the whole team know, "Hey, it's early. Who knows if anything will happen. Here's probably why they want us," uh, the CEO told me on the phone.
• 33:26
  And it's good for everybody then to have that, you know, in their back pockets. So absolutely, James, for sure.
• 33:33
  The sales guy, the marketing chief, they, they all know what's going on, so when they hear something now, they're not afraid to bring it to me, right, and talk about it in our team meetings. When...
• 33:45
  And then actually, I wanna dig into David Martin's question here. David, if you're there, if you could come off mute and ask your question. Yeah. Thank you.
• 33:53
  Um, I wanted to know how long a technical diligence process should really take, and kind of how we should chronologically kind of put that out because, um, w-
• 34:04
  we would wanna know, like, if we need a number on the table before we start showing what's under the hood. Well, look, David, I'd say- When do you have a s- Yeah, go ahead, James.
• 34:12
  When do you have a s- when do you have a signed LOI that you're really happy with? Okay. That's the point. Exactly.
• 34:17
  And- And I was gonna say, and I was gonna say, James, in that LOI, you can also specify, you know, like, how much of the, of the back end you'll show, and the confidentiality provisions around it, maybe how you stamp the documents, you know, confidential.
• 34:33
  You, you could say if the deal breaks up, there's a data destruction clause. I mean, none of this stuff is foolproof, of course, you're dealing with humans.
• 34:41
  Um, you could also potentially do, I don't know how many times, James, you've done a breakup fee. I like to ask for breakup fees now 'cause you have so many broken deals in the past, and, like, the buyer has no...
• 34:51
  I mean, aside from some legal and accounting and s- you know, getting some of their team members, you know, involved, they don't really have that big of a cost fishing around, so the breakup fee can, you know, get some of the bad actors, you know, filtered through.
• 35:04
  And then the other thing I've done is in, in, um, in a case where you have information, David, that is so pr- you know, so important, right, and if somebody saw it, you'd be, you'd be in trouble, you can actually use a third party.
• 35:16
  So, you know, there's normally gonna be a third party, you know, technical due diligence team that's being used, uh, to vet your, your product.
• 35:25
  And what you might say is you might get the lawyers to agree that essentially that third party is going to, you know, have a report that just says, you know, "The code looks great. It's backed up," whatever it is.
• 35:36
  "It checks the boxes, and it says it, it does what it says it's gonna do," right? But it doesn't actually reveal the secret sauce. I...
• 35:42
  You know, and another example of that, we had a situation where the buyer wanted to see our, our client's contracts, but we didn't want them to know who our clients were in case the deal blew up, which it eventually did, by the way.
• 35:53
  So I essentially negotiated with the lawyers that the, that their lawyer, the buyer's lawyers, would have access to those contracts, get the information they needed, back to what Samer was mentioning, are, can, can you, can you, you know, can you transfer the, the ownership of the contract so that the lawyers were able to do their job, but the buyers never knew who the contracts were signed with.
• 36:12
  So that might be a way around it. Yeah, I think it's a fair point though, David. You know, paranoia is good. [laughs] I like paranoia, so it's a g- it's a good thing to be paranoid about.
• 36:22
  Well, I just wanna thank both of you for sharing your wisdom.
• 36:26
  I always love talking to people who have the expertise of being founders themselves as well as investors and, and really working with, uh, companies throughout the, the process. So thank you both for sharing your wisdom.
• 36:39
  This has been a lot of fun. [outro music] Startup Health invests in health transformers from around the world who are committed to achieving audacious health moonshots.
• 36:54
  If you wanna learn how you can join this community of entrepreneurs, or if you wanna connect with one of our 330 companies, go to startuphealth.com. Thanks for listening to Startup Health NOW. We'll be back next week.
• 37:06
  [outro music]