Align on the product roadmap before signing an acquisition

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 18:58

   The first company or second company I bought, they were spending six months trying to debate product direction after we bought them. I said, well, wait a minute. This is a problem. So, these guys started a company. And rightfully, the founder was like, I started a company with this vision in mind. I already sold the company. That's my vision. What did you think the money was for? Exactly. It's like, no, no, but I sold the company, but I still want to build what I wanted to build.

2. 19:21

   I'm like, it doesn't work like that. But it took me a while to get to realize it doesn't work like that. I felt like, oh, my God, I'm going to cripple a founder. But I had to sit down and say, dude, it doesn't work like that. So then we changed that model. So what I do now is when I sit down with the founder, I agree a deal. And I insist on agreeing to deal with the founder. I don't involve bankers because I'm like, you are going to work with me for the next four years.

3. 19:40

   You really want somebody else in the middle negotiating on our behalf so that there's eventually, oh, that's not what was sold to me. We should have the company. So we had that. The moment we agreed the deal, I tell the founder, listen, let the finance guys, let the legal guys, let the lawyers figure out all the paperwork, go figure it out. Your job is now to sit down with me and my product guys and design what...

4. 20:00

   our joint, how's it going to look like, and we have 30 days to do it. So we literally go back and forth on product direction, product integration. Before the acquisition is closed. I don't think I've ever heard that idea before. I don't sign the definitive term sheet until I get the founder to sign on the joint product roadmap. I'm like, if you don't want to build what I want to build, then we shouldn't do this.

5. 20:20

   It's natural for a founder to want autonomy and to think that they have the right answers. So how difficult are these conversations? You'll be surprised when there's a large check hanging on the other side of 30 days, how much more amenable founders are to aligning their product vision than after they've got the proceeds? It's unbelievable. It's night and day. And by the way, they have the choice to pull the ripcord.

6. 20:42

   They don't have to do it. How many have backed out at that stage? Nobody backed out. We backed out twice. Why? Because in the process, we figured out it'd be hard to get consistent alignment of the product. We figured out it'd be hard to manage the founding team thereafter because they had a very strong opinion on where they wanted to go. We could sense that they were playing ball because they knew that they had to play ball to close the deal.

7. 21:13

   And we just didn't feel that that was going to be the right outcome. In one case, as in the 30 days, as we kept digging deeper, as we kept pushing harder, we figured out that the substance was not as strong as we had sensed in our diligence early. So as you dig deeper, you start looking at architecture, saying, oh, my God, wait. Do the founders typically stay on long after? Some do. So one of the other things we do is, you know, because when you buy something like this, you're buying a team.

8. 21:44

   You're buying a team, you're buying the vision, you're buying the execution. So it's very hard if the founder says, I'm out. So we don't buy companies, the founders say, I'm out. If you're out, you should go, which means you could kill the company anyway if you're going to be done. So you've got to want to be around. What will happen is typically if there are two or three founders, one will slack off because they're doing biz dev.

9. 22:01

   So maybe we don't need biz dev, we do better biz dev. One's doing go to market. We don't need that. So you'll find founders fall off depending on the function that they bring in. But it's never the product guys or engineering guys who fall off because that's what we're buying. We need them. We still have many founders who work at Palo Alto. Some have converted, just continuing to work at Palo Alto.

10. 22:20

    Some have the founding itch and after three years they leave. But the other thing which we always do is when we buy a company, we reinvest the founders for three years, ideally four. Why is that so important? We want continuity. We want the continuity from the execution of vision perspective, right? Because they built something, as I've said, it takes four to seven years to build a great product. Typically, we buy these product companies three years in, two years in, four years in.

11. 22:42

    We think there's another two, three years of consistent product development that needs to be done. And we want that consistency and continuity of the founder and the founding team to keep driving that. So if they're not there to lead it, then this disruption could cause us to lose the lead. It's number one in the category.