a16z Podcast - a16z Podcast: Dealing with Corporate Dealmakers -- When to Talk to Corp Dev

Episode Date: June 10, 2015

Every meeting a busy founder takes is time away from building the company. So it’s understandable why engaging corporate development groups is believed to be a waste of time, unless you’re selling your company. But... there ARE good reasons to engage corporate development. You just have to know when, and how. And what to avoid! On this episode of the a16z Podcast, operating partner Jamie McGurk, and Tyson Clark and James Loftus (veterans of corporate development from companies like Google, Oracle, and Yahoo) share advice for founders talking to corporate development.

Hi, everyone. Welcome to the A6 and Z podcast. I'm Sonal and I'm here today with Jamie McGirk, who runs our corporate development function, James Loftus, who is on Jamie's team and focuses on consumer side of corporate development and Tyson Clark, who focuses on the enterprise side of corporate development. Welcome, guys. So the reason we're doing this podcast is because, you know, you guys wrote a post talking about why founders should engage with corporate development to kind of counter the meme out there that comes up every so often, like, oh, don't waste your time engaging with corporate development. And, you know, you can find that post on our website, obviously, but we thought

it'd be great to talk it through because it really struck a chord with a lot of people, and you guys got a lot of comments and questions on that. So let's kick off by actually just talking about what corporate development is. I know that's kind of a thing that comes up a lot. Sure. Yeah, corporate development has a, it's a generic moniker. I mean, we have a corporate development function here, and you don't usually associate that with a venture capital firm. Corro DeVal means a lot of things. They're focused on the inorganic growth opportunities for a company, so whether that's investing in a company, whether it's partnering with a company, whether it's acquiring a company. It's most known for the acquisitions that they do, but it refers to all of the inorganic activities, so the activities that come outside of a company through partnering acquisition and investment.

Why we said about writing this post and doing this podcast was we got a lot of. lot of questions from our portfolio companies of, you know, should we engage, should we not engaged? And, you know, the meme was out there that, as someone will mention, that, you know, don't engage with the corporate debt. And we agree with that at certain points in a company's life. If you're less than a year old, if you're really kind of pre-product, we generally agree with that. But engaging with corporate development is also about creating options. And, you know, we just think that this is a, you know, it's a good discipline to have, you know, to pick up your head to create options as you go through your company's life. It's not all about selling your

company. It's about partnering. It's about understanding what your big brethren competitors are doing. It's not about hanging out a for sale sign, if you will. So it's about creating options for the company. So why does corporate development get such a bad rap then? I mean, honestly, I think that one of the challenges is that the situations that corporate development teams are involved in tend to be sort of very high stress, very high emotion. And so, sort of people have a lot of stories that bounce around the marketplace, whether they go well or whether they go poorly, they're always very intense times, both for the corporate development teams, but also especially for the startup founders. And so I think that the result

is the anecdotal evidence sort of outweighs what actually happens because people sort of talk about the better stories more. Keep in mind also that these are professional negotiators. So a startup and they go through their life, they may raise money a handful of times if they're doing very well, maybe several times. They will probably and hopefully only be in an M&A negotiation a small handful of times and across several different companies. Corporate development teams do this for a living. So they're constantly having these negotiations.

So they're very sophisticated, very experienced. And there's, as James said, there's the anecdotes that come out every once in a while. So what's the difference between enterprise and consumer corporate development? And this is a bit of a generalization, right? If you look at the corporate development teams on the enterprise side, and so I'm talking about Oracle and Cisco and VMware and those kind of companies, they tend to be more MNA execution focused. And so you hear a lot of times, you know, corporate debt picks up the phone when they want to buy you and that's the only reason why they call. That's not always true, but it's more true for these enterprise companies. And, you know, the following idea there is that most enterprise companies have GMs,

who run businesses, and those GMs are actually the decision makers a lot of times in terms of what companies are by, and then the corporate development team just executes the transaction. I think it's a bit different, James, from what happens on the consumer side. Yeah, I think, I mean, on the consumer side, there are plenty of opportunities to be M&A execution focused, but I think within consumer companies, you also see the general corporation looking to the corporate development team to understand the overall strategic. landscape because obviously in the consumer space you're more focused on building products that a lot of times you're giving way for free in the tech space and you're you're making money

other ways and so what you're really focused on is like what are the trends out of the marketplace what are startups doing what's moving around and and the companies relying on the corporate development team to understand what's going on outside the company and figure out ways that what's going on out there can be additive to their products whether it's through M&A or through other means and I know you guys often tell me that you don't like making generalizations because every case is different. That caveat said, what are some of the things that are kind of the takeaways that you would want our founders and anyone else listening to this podcast to know? Because you guys are always saying, like, God, I wish people knew this. It's so important

to know. Yeah. So, I mean, we always get the, we always get the first question is, should we engage? And generally, we say, you know, you should engage at the right times. I mean, you, you shouldn't have it be a constant cadence of meetings with corporate development teams. It shouldn't, It shouldn't be a time sync. There shouldn't be meeting after meeting after meeting. But generally, yes, you should be on their radar. They should be on yours. And you should understand what they do and how you can engage with them.

So I think that's kind of number one. So getting on the radar is a big part of that. Getting on the radar is at the right time, as I mentioned before. So there's definitely a time and a place for it. I think the one question is, you know, how much should I tell them? How much information should I give them? They're always going to ask for more information. And if you give it to them, that's, you know,

they love that. You know, you should treat that as the type of information that you would tell anyone, that you would tell an investor that you would, you know, use on a sales call that, you know, frankly, that you would tell a competitor. So you don't want to give out the, you know, the very confidential information. You want to hold that back. Would you guys, when you guys were at Google, I mean, James, you were at Google and Tyson, you were at Oracle. Did you guys make founders that came to you signed in NDA? So absolutely every time. Before we took an initial measure meeting. So they would sign an NDA and it was a standard that we had and we tracked the changes

that we departed on that standard in D.A. And then how about you, James? And by and large, we would always have both at Google and Yahoo, we would have people sign NDAs when they came in. And quite frankly, it's important, I think, as the person on the corporate development team, it's important because I think you're bringing people on site and you're going to be pretty open with them. But I think it's also important because it sets a standard for the relationship as both

parties are going to share some information, even if it's just in a half an hour or an hour long meeting, you have a document that sort of outlines like sort of what it means, how you're going to treat this information on both sides. And so I think that's the important thing is it does sort of, because of the imbalance, especially in size, usually in these situations, I think it's important to sort of lay out what that relationship's going to look like and how that information is going to get treated. And as the one non-corporate development person from my background, been on the other side of the table more often than being on the corporate development side of the table in this trio, I would say that the one key thing that's often overlooked

is having a non-solicitation of employees in that document, not only for your peace of mind as a founder, like they're not going to come after your team, it's going to prevent them from hiring anyone away, not to say that you should put that in there and then expose your entire team, but you should make sure that that's a standard part. of any indeed. Right. So protect yourself, but then also, at the same time, don't necessarily trot out every single person you're accompanied towards them either. That's also a time-saving thing as well. It's not only a time-saving thing, but it's, you know, that's just great hygiene. Yeah. Yeah, I think, I think, like, because I think it's important to both sort of practically

have a non-solicited in place and that you're protecting your, you're shielding your employees, and then also try and get it picked into the legal document. So what are some of the other pitfalls that founders should avoid when they are talking to corporate development? I think Jimmy made a good point earlier, which is around how much information you give. So the corporate development team would typically ask for as much information as they can get up front. And that can be a bit of a time sync. I think the frustration that a lot of founders experience in engaging with corporate debt may be part of the bad rap is just from how long and dragged out that process is before they sort of have any indication of interest. And I think the advice I give to founders is manage that process.

You know, sometimes, in most cases, less information is better. And sort of a related point is around, you know, why you should engage with Corp-Dev is you can get information, actually, about your space, about how they think about your space, about how you would partner with them, about their technology stack and how your stack interacts with their stack. Understanding their stack tells you a lot about how your competitors might interact with them. So it gives you a lot of information. And in order to get that information, you have to give a little bit of information. And so the paradigm that I think about is give them as information as you can, but keep them engaged, right?

So you can learn about their company and the way they think about your space. But why wouldn't you do any of that through just a standard sales process to get that information? Like, why is, I mean, I guess I'm still quite not getting why I'm really pushing hard on this, is why engage corporate development. Tell me more about why you guys make that case. You know, they're typically not the customer. Yeah. So these are companies that are strategically important to you that they're not necessarily your customer. So you wouldn't necessarily engage with other parts of the organization. And then secondly, I think for what you're trying to achieve. So if it's, I think a byproduct is information, sometimes that's the goal. But, you know, whether it's a partnership, whether it's an investment, whether it's, you know, an acquisition. And that could be an acquisition two years down the road that you're just developing a relationship for. It's, again, to my earlier point, creating options for yourself, this would naturally be the team to do it with. It wouldn't be a, you know, these types of opportunities wouldn't fall out of a sales

motion. If you think about a corporate development team, they're doing transactions across the whole company. And so there are very few places within a large organization where you can go to a single point of contact that has access to multiple executives doing different jobs and different functions. And so, you know, I think, you know, knowing the corporate development team at Google, knowing the corporate development team at Yahoo, probably very much so the corporate development team at Oracle.

These people are sort of one-stop shopping if you want to know and be connected into different parts of the organization. And so I think understanding what you want to get from the organization is probably the key thing to going into that meeting with corporate development. And that's the first thing you have to ask yourself is, I know what they want from me, like what do I want from them? And that's, I think, where you can start to organize yourself around being affected. There's two other things that I would say are the primary questions that we get are the advice that we give when just kind of making the decision whether to engage or not. And that is, you know, each one of our portfolio companies has, you know, the two, three, four strategics that are important to them. At an early stage, they want to avoid them, you know, at a mid to later stage, maybe they want to engage in some fashion, whether it's for that investment partnership or longer term acquisition. And by strategics, you mean the large corporate investors that come in later, right?

Correct. The large corporate, so, you know, as we've been referencing, you know, the oracles and the MCs, the VMware's, the Yahoo's, Googles, et cetera. The two things that I would say, one is, if you have the two, three, four, you know, if you're talking to one, I mean, you should have a plan in place and not to put a time sync into it, but you should be thorough about it. No, it's not 10, but it's not one. So it's picking that, you know, to the top of the top group that you're most, uh, um, interested in if it's three, you know, three or four, whatever it is and developing those relationships concurrently. So what's the advantage of having that sort of optimal number? Like, why not one? If the whole purpose is to, I mean, besides building the relationships, obviously, to avoid wasting time, because that is the number one priority for founders not to have that time sync. Why that number have even having multiple? It absolutely is. So it's, because that one might

not be the best fit. And you won't know that until you know the second and the third. And again, you know, we're not advocating, you know, wasting a lot of time. But if, if you're, going to make the decision to do it with one. It does make sense to do it with multiples. And I'd say the other thing that I would say is that it depends on life stage. And we always make the comparison of Coke versus Pepsi. So if you are a, if you're a startup and you are going to do, whether it's an investment or strategic partnership with Pepsi, well, Coke's never going to talk to you again. So you have to make the decision that you're at the stage of your life, or maybe you're not in the type of industry where you have that competitive dynamic. But we certainly see

it in storage. So, you know, between HP, Dell and EMC, et cetera, where, you know, if you have to be where they rely more on you than you do on them. So it's not going to preclude you from doing similar deals with their competitors. But in other cases, it can actually create like a sort of a, it's us or that man. I've seen companies die over it, literally, yeah. So doing a deal with Verizon and you can never do another, at an, at a too early of a stage, you know, not being able to then do a deal with AT&T or Sprint or anyone else. How can Flanders kind of get around that dilemma? I mean, besides engaging the number of people,

like how do they know who to engage when? Yeah. So it's making sure you're at the stage, so you're not at, it's typically not at the series A and B stage. And we get that question a lot as it comes to strategic investors. So should we include a strategic in our A round? Should we include our strategic in a B round? Generally, the answer is no.

There has to be a very good reason. And it depends on what industry they're in and who that strategic is. because it's just the fear of conflicting you out of an opportunity down the road that we want to avoid. And so generally the answer is later stage, and every situation is different. So you don't know exactly when that is, but it's usually not at the formative stages. You have to be at the type of scale out in market with the right scale of customers where it's not going to preclude you one way or the other. And then for you guys coming out of Google, Yahoo and Oracle, just as examples,

how did you guys sort of address, like, how did you guys kind of treat that on the flip side, like to kind of ensure that you were getting a sort of an exclusive opportunity from a founder? I mean, so by and large, I think the way corporate development teams approach different spaces in the marketplace from the consumer side is they're usually given, you know, generally broad directive to say, like, let's focus on X. And so say it's Gmail or it's mobile apps for Yahoo. And you focus and you sort of drive down and learn as much as you can about that. that space. And I think that's another interesting opportunity on the startup side is that you, like, in meeting with corporate development as they're learning about different spaces, as they're focusing on that, you have the ability to shape the narrative as they turn it back

inside. But I think a lot of times that's what they're doing. They're going out. They're meeting with a lot of companies that are doing things in a similar space, whether it's companies that they think they could acquire, companies they think they could partner with, companies they think they can invest in. And I think to Jamie's point, when you think about investing, like part of what you're looking at is an opportunity to either have an ability to acquire the company later or to create a situation where you're encouraging that company to sort of focus on your platform. And I think that piece is even more important to investing on the enterprise side. Yeah, so I mean, I'll say, you know, in terms of, so we did a number of strategic investments

at Oracle. And, you know, I think the way, the mechanisms that we use to keep our competitors at bay with the companies that we're investing in are mechanisms like, you know, board seats or we'll ask them to provide financials on a quarterly basis or give us, you know, first write of notification in an acquisition scenario. So, so there's sort of, there's these mechanisms that you can use to sort of, you know, give you leg up on people who would, and the companies that would be competitors. All things that we advise are portfolio companies, generally speaking, against. And so there's a balance there. So it's not those. Those are not things that are automatically granted because they're asked for. And sometimes the right answer is, you know, you won't do the deal under those circumstances. Those are definitely, some of those are deal breakers. We talked before about pitfalls. I think one thing that's interesting, too, and then we mentioned in the post is sort of this, the point that big companies have more time to do meetings than founders do especially. There's just meetings are a thing.

People have a lot of time to do it. And I think one thing that you can do as a founder is you can force the corporate development team to be more efficient. If they think that they're going to need to bring in a product person later, or if there's other people at the company that they're going to be interested in meeting as a follow-up to the meeting, ask that. I think you can say, hey, are there going to be other people that might be interested in this? I'd much rather do that than meet with Cortev and then have another meeting a week later with the VP of product. and the VP of engineering that are going to be important. So I think thinking ahead and trying to force the corporate development person to sort of be efficient when it comes to the number of meetings

and the number of contacts you have can be really important. It can actually make the interaction a lot more efficient for everybody as well. So what are some of the other red flags to look for in these conversations? I mean, I think lastly, when it comes to a term sheet, you know, I think there's a lot of different issues that, you know, points indemnification are always high in the list so companies will always want you to indemnify them against all things you know everything that that they can think of and with unlimited caps on it and that that's certainly one thing to be very cautious of another is how how the company is going

to be incorporated post acquisition so how is it going to be integrated so i mean that's what's the role of the senior management team how much uh authority and discretion are they going to have over decision making what are the budgets and that gets into a whole another set of issues on the structure of if it is an acquisition what is the structure of that acquisition so if their earnouts involved do you have control over those earnouts again you know it's it's bring your advisors in for for a lot of this because they these are these are too complicated to go through and you know at a very high in general level by advisors you mean lawyers only or do you mean like just like board yeah always you

Yeah, your board members, your investors, you know, in Drescent Horowitz, that's our team here. But definitely have legal advice on these things. And the point there, I think, is, you know, for those who aren't as involved in an M&A process is around the difference between the term sheet and the definitive agreement or the merger agreement. And so the term sheet is sort of the initial step. It might be also known as a letter of intent. But in either case, it's really the first step in the diligence process. And an important thing to note is that oftentimes the terms in a term sheet aren't binding and can change. And ultimately, through diligence, the materialist or the content of the definitive agreement is actually what's binding and what's final.

So I think it's an important thing to keep in mind as you negotiate the term sheet. I mean, I think a larger point, too, is if you're engaging with a corporate development team, And it is sort of specifically to talk about M&A or investment, and there's a transaction at the end. And I think a lot of times people just don't ask, like, sort of what is, like, what's the process? Because, like, each of the companies I've worked at, I know Oracle, a lot of the companies we talk to, everyone has a sometimes slightly and sometimes, like, significantly different process. How much diligence are you going to do pre-term sheet? How much diligence do you do after term sheet? Do you issue a term sheet?

Is the term sheet 12 pages long? Is it two pages long? And I think, like, understanding, like, who are the people that are going to have to sign off? on this along the way. And understanding all that is, I think, really important to sort of be aligned on timing and sort of what kind of information is going to need to go forward and how the whole thing's going to work. And I think a lot of times, like, in the rush of moving things forward, especially the entrepreneurs, don't take a step back to say, like, okay, I want you to walk me through every step of the way, like, if we're going to go down this path, what happens? And I mean,

I found when I was sitting on the other side of the table, I was always happy to be really open about that because I think it's important for people to understand the milestones and who's involved and what needs to happen. But that's the, to me, like, that's the A number one question because it is, it is not been the same at any place I've worked at. You know, I've talked to Tyson. I don't think it's this, you know, it's always different at different places because, you know, big companies have different internal organizations. Watching this space and observing the space. One of the things that we think about a lot is it seems like only companies that are not doing very well are the ones that are really seeking

corporate development. Like, why would you in this day and age when you're trying to grow a big company? So, like, how would you kind of respond to that? Yeah. There's a, there's the meme of companies get bought and not sold. But, you know, my answer to that is, you know, strategics don't buy companies they've never, they've never met. So, you know, it's all about creating options for the company.

So whether that's staying independent, that's one option. But you also have to, you know, as John O'Farrell said, you know, you have to know where the exits are. So it's, it's, it's understood. what those options are, creating some of those options, getting on the radar and giving larger strategics an opportunity to preemptively come in and with an acquisition offer. Not to say that you have to take that, not to say that that's the route, the only route that you're building towards, but it's creating an option for you. Okay, awesome.

So that's another episode of the 860s podcast. Thank you, Jamie, James, and Tyson. Thanks, so much. Thanks, guys. Thank you.