The Biohazards of Startup Acquisitions:
By Clint Gordon-Carroll & Alen Peacock
In October of 2013, my Co-founder and I stopped taking a paycheck. Our CFO had given us a very clear burndown of our (rather dire) cash situation and we came to the conclusion that not paying our salaries might add a couple of extra weeks to our small company’s existence. It was going to be a terrible holiday season for our families, but if it meant landing funding it would be worth the sacrifice.
Things hadn’t always been this tough. For awhile after founding our company, Space Monkey, it felt like we had everything going for us. We won “Best Startup” at the Launch Festival in 2012, we raised over $300k on Kickstarter, and had received a first round of venture capital funding. The technology was obviously valuable and viable, but the environment we were in was rapidly changing. We were like a heart furiously pumping blood in a failing body.
In 2013, the Venture Capital markets were going through a significant transition — it was buzzed the ‘Series A Crunch.’ Truthfully, it wasn’t a crunch as much as it was an adjustment or narrowing of the field goal posts (to use a sportsball analogy). Large sums of money were still flowing from VC’s, what changed was the types of companies they were funding and the success metrics those companies were meeting. Companies in later stages with repeatable and scalable market traction were attracting capital. Unfortunately, we were not that.
At this point, we had a difficult decision to make: Improve key revenue metrics on the short runway we had; extend the runway by trimming down our team to just a couple of people; or look for a possible acquisition. In other words, transplant our product and team into a larger, healthier organ(ization).
We spent some time with Ben Horwitz and his team at Andreesen Horowitz, who gave us some advice that influenced our next decisions. He said, “If you are really interested in pursuing this project, the best option is to find an acquirer who believes in what you are doing and allows you to continue to work on it after acquisition.” He loved our product and what we had been working so hard on, so we took his advice to heart and decided to look for the right acquirer.
The decision to transplant our team and product wasn’t easy, but it was necessary to keep the lights on and the blood flowing. So we started looking for a healthy new home that would let us thrive — Comcast, Google, Dropbox, Verizon, and a few others — and began the process of reaching out to test the waters. With no experience in acquisitions, we put together a pretty simple game plan: Within each of our target companies, find a Senior Executive champion to help guide a deal through, create a timeframe in which you think you can achieve a deal, and apply pressure.
We narrowed the field to two contenders: A local Utah company, Vivint SmartHome, and Google. Ultimately, we pushed for Vivint despite potentially giving up more money because our team liked the promise of continuing to work on our technology, and staying in Utah where skiing on the weekends was a premium.
It was a difficult decision, but it felt like the best way to keep our dream of building the cloud without data centers. And at first, it really did seem like an environment where we could be championed and continue a healthy, thriving career.
After a transplant, it’s common for a new body to reject the transplanted organ. The same thing happens during the acquisition process: The acquiring company often begins to reject a new team and technology brought into its midst.
Our immune systems naturally attack things that they don’t recognize as their own, even if that might be something crucial to our health. This means there will be antibodies actively seeking to destroy a transplant in its new host; or people seeking to destroy an acquired company adjusting to its new home.
Many different reasons motivate these people. It could be that your technology wasn’t built there with their teams, a competition for resources, the fear of becoming obsolete, a competition for executive attention, or just the desire for greater power by making others weaker. Outside the office doors we would call these folks bullies. But in a corporate environment, one thing is very similar to the microcosm of how our bodies function: The acquired company, its team, and technologies are always viewed as outsiders, and seen as a threat to the health of the larger organization.
Despite the difficulties that any acquisition process presents, there are some things that can help ensure the eventual health of both parties.
In my experience, every acquired company needs a champion on the Executive team, and that Executive Champion should have a 3-year dedicated commitment to making the acquisition work. In the real world, organ recipients may be required to take immune-system suppressing medicines for their entire lives. If the Executive team, who were intimately involved in the acquisition process, fail to administer the necessary ‘medicine’ to people who are actively trying to harm or destroy the new team, the acquisition will ultimately fail.
Why 3 years? Because for most acquisitions, the founding team should leave within 12 to 24 months (“leave” could mean either leaving the company, or less likely, leaving the current team to go onto managing or building a new team inside the company).These 3 years are enough time for the team to hit key milestones, while letting those who are staying assimilate to the new culture, processes and management. It also gives key employees who are likely to leave with the founders the opportunity to contribute towards these key milestones.
It’s important to establish key milestones long before the ink dries and the money is in your bank account. Having this established early can help founders build the rallying cry to get folks motivated and the Executive Champion ready to block and tackle. The milestones will likely vary depending on the acquisition target: Customers, technology, IT integration, revenue, market growth, etc. But having them is like having a healthcare regiment after surgery: It defines what health and success look like, and ensures careful monitoring of these metrics over time.
Our challenges at Space Monkey were many. Sometimes it took brute force to solve, and sometimes delicate surgeon-like skills. However, when we look back there was one issue that we never overcame: a guerilla warfare of people-issues. These issues are always compounded by growth; we were around 12 employees at the time of acquisition and then told to grow to 24. By the time we left we had over 50 people in our product team and hundreds of others that supported the group in organizations like marketing, supply chain, sales, finance etc.
Problems came from every direction and we had no real-time method of getting feedback and performance measurement. Like many companies struggling with similar issues, executives and managers rely on end-of-year reviews, 9-boxing, occasional 360 degree reviews, 1 on 1’s, and staff meetings to cull problems.
As our team grew rapidly it was very difficult for our managers and ourselves to keep a high standard of work and performance; measurement seemed to be an impossible task. How do you measure and then set the bar? This led to the proverbial “I know it when I see it” that was made famous by US Supreme Court Justice Potter Stewart when trying to describe the threshold of obscenity protected by free speech.
It wasn’t a surprise when high-performers left our team or the company.
Much of our work as managers and executives was reacting to problems that had existed for a prolonged amount of time. Was this the proverbial big company problem? Too big to move quickly? Yes and no. We were only 50–60 person team we should have been able to move with startup like agility.
Of course the truth is there were many different struggles that stemmed from the acquisition, and there always will be. The tribal divisions that exist when an ‘outsider’ is brought into a new space; a lack of clear milestones and time tables to meet those milestones that are backed by an Executive champion. But most importantly, there was no clear path to measuring our performance in real-time and a mechanism to address smaller issues before they became real problems. At times, I personally lacked the self-awareness of my own performance as perceived by peers, team members, executives or other parts of the organization. We flew blind somehow expecting the team to land at some unspecified location without blowing up.
Along the way we made a lot of mistakes, but looking back I can say that most of them were human and performance related. But like any good entrepreneur, where you see a huge problems you also see huge opportunities. That’s exactly what we are trying to solve in our new venture. Can you create a simple, highly engaging tool to measure and baseline high-performance teams in real-time? Can you solve issues before they become endemic problems in your team or organization? Can you predict things like employees who are a flight risk or measure bias in your promotion or compensation programs? Can you disaggregate performance data to see how you or your team interact with others in the company? Yes, we believe we can, and that’s what we are building at Stretch.
The Biohazards of Startup Acquisitions:
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