20VC 3 Things Acquirers Look For In Startup M&A's, How To Price A Startup Acquisition & The Biggest Risk of M&A with Matt Switzer, SVP of Corporate Development @ Hootsuite

In this episode of "20 minutes VC," host Harry Stebbings interviews Matt Switzer, Senior Vice President of Strategy and Corporate Development at Hootsuite. Switzer shares his journey from a computer science graduate to a VC and eventually to Hootsuite, where he has been instrumental in raising over $200 million, acquiring eight companies, and launching four products. The conversation delves into the strategic approach to mergers and acquisitions, focusing on Hootsuite's 'three T's' evaluation framework: Technology, Talent, and Traction. Switzer emphasizes the importance of aligning company strategy with M&A objectives, the value of early partnerships, and the critical nature of trust in transactions. Additionally, he advises startup founders to concentrate on customer value and sustainable business growth, while considering M&A as a potential exit strategy at the right stage of product-market fit. The discussion also touches on the role of VCs in guiding founders through M&A processes and the significance of personal relationships in these transactions.

• Harry Stebings hosts the 20 minutes VC podcast.
• The podcast focuses on venture capitalists and startup acquirers.
• Matt Switzer, the guest, is the Senior Vice President of Strategy and Corporate Development at Hootsuite.
• Matt has experience in venture capital and has helped Hootsuite raise $200 million, acquire eight companies, and launch four products.
• Boris Vertz at version one facilitated the introduction for the podcast episode.
• The podcast also highlights First Republic and Segment as examples of successful startups.

Welcome back to the 20 minutes VC with me, Harry Stebings and you can head over to Snapchat and you'll find me on at htebbings with two B's.

Harry Stebings introduces himself and invites listeners to follow him on Snapchat.

At Hootsuite, Matt and his team have raised over $200 million in funding, acquired eight companies and launched four new products.

The quote summarizes Matt Switzer's achievements at Hootsuite, indicating his expertise in corporate development.

• Matt Switzer was interested in computers from a young age.
• He graduated with a computer science degree in 2001 and joined a promising startup.
• The startup grew significantly, and Matt experienced an IPO and acquisition.
• After completing his MBA, Matt worked in investment banking, focusing on M&A and other financial dealings.
• He transitioned into venture investing, started an accelerator, and later joined Hootsuite due to an inspiring founder.
• At Hootsuite, Matt has a diverse role encompassing fundraising, partnerships, M&A, product innovation, and developer ecosystems.

So I was a big computer nerd in high school. I built pcs with my friend Al and then went into computer science.

Matt Switzer shares his early passion for computers, setting the stage for his career in tech.

And about two years into that, and I think this is a common story for lots of people that are involved in venture, is that I met an amazing founder and I wanted to get involved beyond just in an investing capacity.

The quote explains Matt's transition from venture investing to a more operational role at Hootsuite, influenced by meeting an inspiring founder.

• The M&A process starts with a clear company strategy.
• Strategy is often solidified during fundraising or M&A activities.
• For B2B software companies, the focus is on providing solutions to customer problems.
• Solutions can be developed by building, partnering, or acquiring.
• The M&A process involves identifying companies that align with the acquirer's strategic goals.

Yeah, it's know, I think first it has to start with company strategy.

Matt Switzer emphasizes the importance of having a clear company strategy as the foundation of the M&A process.

And so I think when you figure out where you want to go, you need to chart a really clear path to get there.

The quote highlights the necessity of a strategic plan to guide the company's direction, particularly for M&A decisions.

• Companies must decide on acquisition areas by creating market maps or sector overviews, which are comprehensive and essential for forming an acquisition thesis.
• Market maps outline the market, identify key players, and pinpoint opportunities for integration within the market.
• These maps require meticulous work and are foundational to the acquisition process.

"We ultimately decide what areas we want to make acquisitions in, and we build what we call market maps or sector overviews that lay out what exactly that market entails, who are the players in it, what are the opportunities for who suite within that market?"

The quote explains the strategic approach to acquisitions, emphasizing the importance of detailed market analysis and the identification of potential acquisition targets within a market.

• The framework for assessing potential acquisitions is based on three sources of value: technology, talent, and traction.
• Technology includes products, apps, or intellectual property (IP).
• Talent refers to a strong team, a brilliant founder, or specialized knowledge.
• Traction could be revenue growth, scale, market presence, or a strong customer base in a specific vertical.
• The assessment of these values is done objectively to guide the M&A process.

"These are really the three sources of value in a transaction. And everything that we do here through the M&A process centers around these three T's, and they are technology, talent, and traction."

This quote highlights the three critical factors considered when evaluating a company for acquisition, which are the basis of the "three T's" framework.

• Companies do not need to excel in all three T's to be attractive for acquisition; a combination of at least two is common.
• The integration risk is a significant concern post-acquisition, as it determines whether the new addition will be beneficial or detrimental to the company.
• Early involvement of various teams in the acquisition process can mitigate integration risks.

"Not at all. I think what we typically see is that acquisitions will have a combination of at least two of the three, but we've done, of the ten plus transactions we've done in the last few years, I think there is a really varied mix of where that value sits, and we've hit almost every major permutation of those three."

The quote conveys that while not all acquisitions will score highly on all three T's, a mix of the values is typical, and a diverse range of combinations have been successfully pursued in recent transactions.

• Aligning stakeholders is crucial, especially as a company grows and the number of stakeholders increases.
• Engaging different teams early in the process helps build internal support and reduces the risk of integration issues.
• The involvement of product, marketing, and talent teams, among others, is part of a collaborative approach to successful acquisitions.

"So great you get through the transaction that could be extremely difficult to get through, and you're done. But now the real risk hits you in the face, and that is, will this actually create value for the company, and will this new appendage or organ be accepted or rejected by the larger company?"

The quote emphasizes the challenge of ensuring that an acquisition actually delivers value and is effectively integrated into the acquiring company's operations.

• Building trust through early engagement and partnership is critical for successful acquisitions.
• Talent is a key factor in every transaction, reinforcing the importance of relationships based on trust.
• Early discussions and lightweight partnerships can pave the way for future acquisitions.

"I think everybody accepts that. For us at least, talent is involved in every transaction that we do. It's very rare we pursue a transaction without that particular t being in place."

The quote stresses the significance of the talent component in acquisitions and the acceptance of its importance in building trust for successful transactions.

• Engaging potential acquisition targets involves regular discussions and reaching out through various channels.
• The acquisition team actively communicates with hundreds of companies annually to maintain a broad network.
• Initial contact is often made via LinkedIn or email, and many companies proactively seek partnerships and relationship building.

"So I think we did a poll a couple of weeks ago for something else, and I think over the course of a year we will have substantive, and this is probably 30 minutes at least, discussions with over 300 companies over the course of a year."

This quote illustrates the extensive engagement efforts by the acquisition team to maintain a wide network of potential targets through substantive discussions.

• The monitoring process is human-centric and involves regular touchpoints with companies.
• Various mechanisms, including social media and search strings, are used to follow and assess companies.
• High-priority information is disseminated daily to ensure that no opportunities are missed.

"We try to schedule regular touch points with the companies that we're talking to. We have a bunch of mechanisms that we use to follow people."

The quote describes the hands-on approach to monitoring potential acquisitions, emphasizing the importance of regular communication and using various tools to keep track of companies' activities.

• Business and corporate development managers monitor companies and use CRMs to track interactions.
• Critical situations may include funding rounds, growth announcements, and changes in executive positions.
• Personal milestones of organizations are also considered significant.

"But largely it falls upon each of the business and corporate development managers, the guys who are responsible for a particular area or sector. Thesis. M a thesis. And they do an amazing job of staying on top of the companies we use."

This quote emphasizes the role of business and corporate development managers in monitoring companies and sectors, suggesting their expertise in maintaining up-to-date knowledge of their areas of responsibility.

"I think things that are relevant are definitely funding rounds are interesting. It could either signal that know could be open or interested in M A or it could mean they've gotten beyond what we could do a deal in and maybe they're out of our range."

Matt Switzer explains that funding rounds can indicate a company's openness to mergers and acquisitions (M&A) or suggest that the company has grown beyond the acquirer's reach.

• Founders should focus on driving customer value and building a sustainable business.
• Founders have a responsibility to maximize shareholder returns, which can be achieved through IPOs, dividends, or selling the business.
• M&A should be considered proactively, especially since most startups aren't built as cash-flowing entities.

"So as a general rule, I think founders should focus their energy on driving customer value and building a sustainable and durable business."

Matt Switzer advises founders to prioritize creating customer value and sustainability, indicating these are the foundations before considering M&A.

"Return can be realized in one of three ways. Either you can go public, you can turn into a dividending cash machine and dividend out money to your investors, or you can sell your business."

Matt Switzer outlines the three main ways for startups to provide returns to shareholders, highlighting the importance of understanding these options.

• The right time for M&A engagement is less about the amount of money raised and more about establishing product-market fit.
• Predictable unit economics are key before considering M&A discussions.
• Reaching out too early for M&A can distract and devalue the business.

"I think it's more around the establishing of product market fit and to what degree you've established product market fit."

Matt Switzer suggests that the maturity of the product-market fit is a crucial factor in determining the right time for M&A engagement.

"Businesses that have been built to sell early are really, really obvious to acquirers."

Matt Switzer warns against building a business solely to sell it, as this can be apparent to potential acquirers and may negatively impact negotiations.

• It is generally inadvisable to openly put a company up for sale.
• Building personal relationships with key players at potential acquirers can be beneficial.
• Partnering with other companies is also a strategic move towards a potential M&A.

"I think generally, unless you are in a situation where you absolutely need to sell, I think it's inadvisable to put a for sale sign in front of your company."

Matt Switzer advises against actively marketing a company for sale, suggesting it can lead to devaluing the business.

• Tight unit economics can de-risk an M&A opportunity for the acquirer.
• Acquirers aim to solve problems with M&A, weighing opportunity costs and risks.

"I think to the extent that a startup has tight unit economics, I think there's just a better chance to have derisked that particular path and that particular opportunity."

Matt Switzer highlights the importance of having strong unit economics, as it can make an M&A opportunity more attractive by reducing perceived risks.

• M&A decisions are made in the context of solving customer problems.
• The value ascribed to an opportunity is proportional to alternative solutions.
• Founders' work in establishing product-market fit is highly valued in M&A considerations.

"And so I think when we look at it in that perspective, I think value creation in and around, or the value that we ascribe to a particular opportunity is directly proportional to how we would think about solving it in other ways."

Matt Switzer discusses how the valuation in M&A is influenced by the potential value creation compared to other methods of solving customer problems, such as building or partnering.

• Importance of recognizing the value founders infuse into their startups
• The connection between founders' efforts and the unique value they create
• The challenge of quantifying the early-stage work and its contribution to product-market fit

How do we value that early, early work, that painstaking work that founders have done to establish that product market fit in a way that would be very difficult for us to do?

• The quote emphasizes the challenge of appreciating the nuanced efforts of founders, which are not always easily quantifiable but are crucial for establishing product-market fit.

• The role of venture capital in nurturing early-stage companies
• The significance of VC guidance in the initial phases of a startup
• The importance of a VC's perspective in understanding the startup landscape

As a VC myself, I know that it's not always that it's not always about putting the for sale sign up. As a VC myself, I know that it's not always about putting the for sale sign up.

• The quote suggests that from a venture capitalist's perspective, understanding the early work and its value is essential, highlighting the importance of recognizing the efforts of startup founders.

• The importance of building trust with founders and the startup community
• How trust forms the foundation of VC-founder relationships
• The role of trust in facilitating open and constructive dialogue between VCs and startups

It's all about that trust and the relationship and how that's built on trust and how that's just a really important thing to note.

• The speaker emphasizes the centrality of trust in relationships between VCs and startups, highlighting its significance in fostering open communication and collaboration.

• The contribution of VCs to guiding startups through growth phases
• The potential of VCs to provide valuable insights and support to startup teams
• The constructive part VCs can play in the startup ecosystem

I think there's a real opportunity for VCs to play a constructive role in that process.

• The quote suggests that venture capitalists have the potential to offer significant guidance and support to startups, underscoring their potential to contribute positively to the growth and success of new ventures.