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On December 9th, Venture Archetypes and Greenberg Traurig pulled together a panel of some of the top entrepreneurs and most active acquirers in Silicon Valley to answer your questions about start-up M&A. So whether you’d like to know what the serious players are looking for or how to position your start-up for a healthy acquisition, you’ll find the wisdom right here!. Read the rules.
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Elad Gil

Twitter (sold Mixer Labs)
I joined Twitter via its acquisition of a company I was co-founder and CEO of - Mixer Labs.

List of Elad 's answers

Q: How does an entrepreneur get on your radar? Is it better to go in through a business unit or a product unit than to go in to Corp. development? How do they start talking to corporate development folks? check all answers
A: Question: How did the initial discussion start off with Mixture Labs? I guess I'd go back to an old saying, which is: Company's don't get sold; they get bought. And I think our case was an example of that, where we basically had a hostage geolocation service and we were going through a large list of partners that we were actually trying to get on-board as a partner who would actually pay us for the service in terms of, you know, we'd build a monthly kind of thing. After the third or fourth conversation I got an email from Ev, who at the time was a CEO of Twitter, saying, Hey, we don't think it makes sense to have you do this as a partner, but we'd love to talk about having you come in-house to actually work with us. And that's what actually kicked off the discussions.
Q: How can founders go about getting more than one party interested in the deal to improve leverage? check all answers
A: I think, fundamentally, once you have one offer, then it becomes very natural for other people to get interested. That could mean mentioning the offer to advisers. And this is before you sign any sort of exclusivity or anything else, so you need to make sure that you're timing it properly. So if you mention it to advisers or other people who have connections to these guys, and they hear, for example, that Google is looking at a specific company, then they may get interested. And then the company can sometimes end up going through the rounds. Or, alternatively, if it is an interesting enough space where it’s considered a big strategic asset, then often times companies will proactively be going after the company. I don't know anything at all behind the details of what has been happening to Foursquare, but I am assuming that in a lot of cases companies have been going and approaching them versus them having to go and solicit interest. I would also add that you can optimize for valuation, but you don't want to go somewhere that you're going to be miserable. Especially if you have a multi-year vest, because that just means all that value is going to go away because you'll leave early anyhow.
Q: What's the right timing to consider an exit? Let's say you've proven the business model and you what to know whether to raise more money or talk to acquirers. In the case of Mixer Labs, why did you exit as early as you did? What signals do you look for? check all answers
A: Sure. There were four considerations. The first one was the changing dynamics of the market place. Geolocation was heating up as a market and the direction we were heading in was a direction that we thought some very large companies may enter. We thought Google may supplement what they were doing with local. Twitter at the time was thinking about providing geolocation as a broad based thing for its ecosystem. And so we saw these large players with very large ecosystems considering the space. It didn’t mean they were going to move in that direction, but it was one consideration. Second, we thought it was a great place where our technology could actually have enormous impact. There is this massive developer community that we had the potential to access. Third, we thought that there was upside because Twitter was a company that we felt could have a lot of multiples in terms of the valuation that it was at at the time, and I think that's actually proving true right now with some of the rumors that are going around in the marketplace about them. And since I said four, I have to come up with a fourth now. I really like Ev, so there you have it.
Q: Give us an overview of the M&A process at your company. What happens when you are acquiring a start up, what teams are involved, how long does it take? How does it work at your company? check all answers
A: [Question: Representing the founder under M&A since your company was acquired, how does Corp. Dev. work at Twitter?] Twitter has made a number of acquisitions and there was a Corp. Dev. team. Jessica Verrilli works on it and it's under Kevin Thau, who runs Corp Dev and B.D. And there have been a number of acquisitions. I think very early on in Twitter's history, they bought Summize, which was a search engine then. That was when Twitter was about 15 people. And so as a small company they have evolved and it was a pretty large proportion of the company and culture. We were the first acquisition since then, I believe, and they have made a number of other ones including Tweetie, Dabble DB and a few others.
Q: What about the diligence period? What should founders try to push for here and what impacts this time period from the standpoint of Corp Dev? check all answers
A: I would encourage negotiating as short a diligence period as possible. That does two things: One is that it streamlines the process in terms of ensuring that there are fewer wiggles and waggles around the road. As you're negotiating, fewer last minute things can come up. But second, it also gives you a shorter window so that if things don't work out with that acquirer, and you are really set on doing an acquisition, you don’t become extremely stale as a company.
Q: What are some of the most common reasons deals fall apart? How can start ups avoid pitfalls that could cause a deal to derail? check all answers
A: I have seen it happen more recently with a large private company. A friend of mine was one of their first acquisitions and in this case, there was of a lot of ambiguity in the term sheet and I think it was just a lack of savvy on both sides which led to a lot of heartbreak and issues later on in the process. So that's one thing. The second thing is, we're talking about the deal falling apart, but I think another thing to consider is your company falling apart during the process, because it's a huge distraction. As a founder, you are trying to run a business, and you're trying to go through this process against some well-armed professionals -- sorry, with, not against. Hand in hand. I am just joking with that, of course. I think there are a lot of things that can be really disruptive, including having your employees interviewed by the company. That can go a bunch of different ways. One is if the company doesn't want to bring someone on board, for one reason or another. In our case that didn't happen, but I've seen it happen. Or, alternatively, the people on the team can get really excited: "I’m going to Facebook, Yahoo or Google," or whatever it is. And that can be extremely disruptive. People get extremely distracted, and instead of executing on the business, which is really what you should be doing, people’s minds start to wonder. So that means, as your going through the diligent process, I think you really need to choose the right time for your teams to be exposed to the other company. And it's tricky timing because you don't want your team to get enormously distracted in case the deal falls apart. It's a really fine line and a something to balance. That's why I was for getting quick deal cycles, if you can pull it off.
Q: How do you establish a valuation for an early stage company in the absence of Comps. with early revenue or perhaps even pre-revenue? check all answers
A: I think valuations can be misleading. I have been helping people who have been doing this, especially on the smaller side, let’s say 5 to 10 million dollar acquisitions. Certain things can actually cause really big movements in the value that the entrepreneur ends up with. The first is the lockup period, or the vesting schedule. If you're not going to stick around, let’s say you have a three-year vest and you leave after a year, you just left two thirds of the value on the table. As an entrepreneur, you may have gotten some of that up front, but fundamentally you need to take that into account. So a 10 million dollar acquisition where you own 30 or 40% of the company because you haven't raised a lot of money could be worth one million dollars to you instead of three or four million dollars or whatever multiple on top of that. The second is dividending out cash or not. If you have in the bank a million dollars in cash that you raised, and somebody is buying you for five million dollars and you don't dividend out the cash, you just subsidized the acquisition by a million dollars. So you just reduced the deal value by 20%. The third is the upside of the currency. Some companies are going to have multiples in terms of where they are today, especially certain private companies. And some aren't, so that also impacts the upside that you have. So I think that, ultimately, straight valuations are a little bit misleading and you should really take into account all these different factors when you're considering selling a very early stage company.
Q: How many deals do you expect to do in 2011? What types of deals are they? Also, who else is going to be a very active acquirer in 2011 beyond you guys? Is Apple going to pick it up? Is Amazon? eBay? check all answers
A: Actually, I have no idea how many companies Twitter is going to buy since I'm not involved with that area at all. But to answer the other part of your question, two companies that I personally am guessing will become very inquisitive next year are Salesforce…I think there's a fundamental shift in their strategy and they're going to buy a whole bunch of stuff. And I actually think there's a whole wave of innovation in ecommerce. And so my prediction would be Amazon and potentially Gilt...and I think Groupon will continue to sort of plow through companies.

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