20VC How Great VCs Handle Themselves In An M&A Process, Why M&A Has Become The Primary Method of Exit & How The Best M&A Teams Operationalise Their Process with James Loftus, Corporate Development Lead @ Square

In this episode of 20 Minutes VC, host Harry Stebbings interviews James Loftus, Corporate Development Lead at Square, about the often under-discussed realm of corporate development and M&A. Loftus shares his journey from being an M&A lawyer to leading strategic acquisitions and investments, including significant roles at Google, Yahoo, Andreessen Horowitz, and STX Digital before joining Square. He emphasizes the importance of relationship-building between startups and corporate development teams, not just for potential M&As but also for partnerships and knowledge exchange. Loftus also addresses the emotional aspects of M&A for founders, the role of VCs in facilitating deals, and the critical nature of post-acquisition integration, measuring success against original deal theses. He highlights the current M&A landscape, noting a shift in acquirer profiles and the need for startups to actively engage with corporates to stay on their radar.

• Harry Stebbings hosts the 20 minutes VC podcast, focusing on venture capital insights.
• James Loftus is the corporate development lead at Square, with experience in acquisitions and investments.
• Loftus has a background in strategy, business development, and operations, with previous roles at STX Digital, Andreessen Horowitz, Yahoo, and Google.
• Matt Switzer from Hootsuite facilitated the introduction to James Loftus for the podcast.

"And as you know, I love speaking to vcs, but there's a crucial element of our business that I think simply not covered enough and that's corporate development and m and a."

The quote highlights the importance of corporate development and mergers and acquisitions (M&A) in the venture capital industry, which is often underrepresented in discussions.

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"All Lisa mattresses are 100% US or UK made, and for every ten mattresses they sell, they donate one to a shelter."

The quote emphasizes Lisa's commitment to local manufacturing and social responsibility through mattress donations.

• James Loftus began his career as an M&A lawyer in New York, working mostly on banking and private equity deals.
• He transitioned to the tech industry with a role at Google, where he was part of a team that completed over 120 acquisitions.
• Loftus moved to corporate development at Yahoo, and later joined Andreessen Horowitz's operating team.
• His career path included a stint at STX Digital and consulting work before joining Square's corporate development team.

"I started my career as a lawyer. I was an M A lawyer in New York for about six years."

The quote outlines the beginning of Loftus' career in law, setting the stage for his eventual move into corporate development.

• Corporate development involves strategic planning, partnerships, and M&A activities.
• Loftus' experience spans both the buy-side and sell-side of M&A transactions.
• He emphasizes the importance of relationship building and strategic positioning for companies considering M&A.

"I enjoyed the business piece of the acquisition world a lot more than I did the legal part."

This quote reflects Loftus' shift in interest from legal aspects to the business strategy side of acquisitions.

• Loftus challenges the notion that companies are simply bought and not sold, highlighting the complexity and nuance in M&A.
• He argues that proactive relationship building and market positioning by the company and its investors are critical for successful M&A outcomes.

"I hate that saying because I think it's a trite way of describing the m a world and I think it really ignores almost all of the nuance."

The quote conveys Loftus' disagreement with the oversimplified view of M&A dynamics and emphasizes the intricate work that goes into successful acquisitions.

• In 2016, the majority of VC-backed exits were through M&A.
• Loftus discusses the potential slowdown in tech M&A activity, comparing it to previous years.

"So I think there's a couple factors going"

The quote is incomplete and does not provide sufficient context or information on the factors influencing the current M&A landscape.

• Big tech companies are secretive about their M&A activities and don't always disclose acquisitions in public filings.
• The "big five" tech companies seem to be slowing down the pace of acquisitions, especially those under $200 million.
• There's a trend of non-traditional acquirers entering the M&A space, such as car companies acquiring self-driving tech firms.
• The M&A market is expected to remain robust but will feature different players than in the past, complicating the landscape for founders and VCs.

"But that said, I do think there's a couple of factors going on. So I think I agree with Emily in one sense, which is that it does feel like the large tech acquirers or the big five have at least slowed down the pace, like a number of acquisitions they're doing."

This quote highlights the observation that major tech companies are slowing down their acquisition rate, which is a significant shift in the market dynamics.

"But I also think what you're seeing, which is another interesting trend, is you're seeing non tech acquirers come into the marketplace in the self-driving car space."

This quote emphasizes the new trend of non-tech companies becoming active in tech acquisitions, specifically in the self-driving car industry, indicating a broadening of the M&A landscape.

• Pricing tech companies is difficult due to the focus on talent and technology rather than traditional financial metrics.
• New entrants in the market could drive up prices, but the softening of activity from large tech firms may moderate this effect.
• M&A has become the primary method of exit over IPOs, influencing pricing dynamics.

"So I think that pricing tech companies in particular is incredibly difficult."

This quote explains the inherent challenges in valuing tech companies, which often don't follow conventional pricing models tied to revenue or profit.

"I haven't personally noticed prices going up."

Despite potential factors for price increases, this quote indicates that there has not been a noticeable uptick in acquisition prices from the speaker's perspective.

• Building relationships with potential acquirers is important for founders.
• Corporate development teams are overwhelmed by the number of startups, making it beneficial for founders to get on their radar.
• Engaging with corporate development can lead to acquisitions, partnerships, or idea exchange.

"I think Paul is very, very smart guy, and I think that his advice in the article is much more nuanced than the title of his article."

The speaker disagrees with the idea of avoiding conversations with corporate development, suggesting that the sentiment of the article by Paul Graham is more nuanced than its title suggests.

"It behooves you as a founder or a CEO of a tech company to build those relationships, to get yourself on the radar of the teams that matter to you."

This quote highlights the importance for founders and CEOs to proactively engage with corporate development teams to open up potential opportunities.

• Square narrows down potential M&A targets by aligning with product team roadmaps.
• A top-down approach is also used to keep an eye on new business opportunities.
• Relationships with venture capital firms and influential founders are key to understanding market trends and identifying growth opportunities.

"So we approach it from two different ways. At square."

This quote introduces the dual strategy Square uses to track and manage potential M&A targets, involving both a bottom-up and top-down approach.

"We spend a lot of time talking to venture capital firms."

The speaker emphasizes the importance of communication with VCs to stay informed about market trends and potential opportunities, highlighting the role of VCs in the M&A process.

• VCs can provide a balancing and calming influence for founders during the M&A process.
• Founders often lack M&A experience, so VCs can offer valuable advice and support.
• VCs need to recognize their experience limits, as overstepping can lead to issues during M&A deals.

"I think that the best vcs, especially in the m a process, can act both as a balancing and a calming factor for founders."

This quote acknowledges the positive role that experienced VCs can play in supporting and guiding founders through the emotional and complex M&A process.

"The only times I've ever run into trouble with investors is when they, based on a small sample size of M a deals."

The speaker warns that VCs can sometimes be problematic in M&A if they overestimate their expertise, based on limited experience, which can lead to challenges in the process.

• Investors often play a crucial role in M&A by introducing companies to corporate development teams.
• Good investors usually provide valuable advice and support during the M&A process.
• A strong relationship between corporate development and VCs can lead to successful acquisitions.

"My experience by and large is that companies that have good investors get great advice and help during the M&A process."

This quote emphasizes the positive impact that good investors have on companies during mergers and acquisitions, providing helpful advice and support.

• Building relationships with the venture capital community is not about immediate acquisitions but understanding market trends.
• A mutual exchange of insights between corporate development and VCs can lead to valuable synthesis of acquisition ideas.
• Corporate development prefers a dialogue with VCs to understand market trends and potential opportunities over a simple review of VC portfolios.

"And so for me, it's absolutely invaluable to have a good back and forth relationship with VCs on what are they seeing, what's interesting, what's real, what's not real."

This quote highlights the importance of an ongoing exchange of information between corporate development professionals and VCs to stay informed about market trends and identify real opportunities.

• The M&A process can be challenging for founders, involving many people and complex integration issues.
• Acquisitions require thorough due diligence for risk management and successful integration.
• The corporate development lead is responsible for managing the process efficiently to avoid overwhelming the startup.

"Because if it's going to be grueling, it might as well be fast. Grueling and slow sounds awful, right?"

This quote reflects the understanding that while the M&A process is inherently tough, it is the corporate development lead's responsibility to ensure it proceeds as quickly and smoothly as possible to minimize the burden on the startup.

• Founders should establish a trusting relationship with someone on the acquirer's side for open communication.
• Founders must carefully consider when to inform their teams about potential acquisitions to avoid disrupting work.
• Transparency with the team is essential, but it must be balanced with the deal's progress and likelihood.

"And so you need to be very careful about that and balance wanting to be frank and honest with your employees, with what you think the actual likelihood of a deal is."

This quote advises founders on the delicate balance of maintaining transparency with their team while managing expectations about the outcome of the acquisition talks.

• A product champion's buy-in is crucial as the first step in the internal decision-making process.
• A deal memo is prepared after initial interest, followed by an early executive discussion before issuing a written offer.
• A term sheet signifies a high likelihood of deal closure, but nothing is certain until signed.

"The first check is always that there's buy in from sort of product champion."

This quote underscores the importance of having an internal advocate or "product champion" who is passionate about the acquisition target, which is a critical first step in the decision-making process for an M&A deal.

• Executive discussions are collaborative, with an opportunity for all executives to provide input on potential deals.
• The decision-making process at Square involves open discussions rather than a unanimous voting structure.

"I think what's important for us is that we have an opportunity for all of our executives to weigh in and give us really good input on these deals, and that's sort of what adjusts our process."

This quote reveals the collaborative nature of the decision-making process at Square, where the emphasis is on collective input rather than unanimous agreement.

• Success is tied back to the original deal memo and its thesis.
• Metrics for success vary depending on the acquisition's goal: talent, technology, financials, or unexpected benefits.
• Regular systematic check-backs on acquisitions are essential, occurring 2-4 times a year.
• Success is evaluated by whether talent has remained and contributed, technology has been adopted as expected, financial results align with projections, and any unforeseen positive outcomes.
• Unanticipated risks are also assessed during these reviews.

"What we try and do is we try and keep ourselves honest and tie success back to our original deal memo." "Is, if it was a talent deal, are the people still here? Are they contributing? Are they an important part of square?" "And if it's sort of a whole company deal or financially driven, then we're measuring it against a model that we had put together at the time of the deal and looking at it and saying, are the financial results, what we expected them to be."

These quotes explain the process of measuring the success of an acquisition by referring back to the initial objectives set out in the deal memo. The success metrics are specific to the type of acquisition, whether it's talent, technology, or financial, and include unexpected benefits and risks.

• M&A is highly emotional for founders, contrasting with the less emotional corporate America M&A.
• Founders often have significant personal investment and sacrifice in their companies.
• It's crucial to be aware of and sensitive to the emotional investment of founders during the M&A process.

"I think the thing that I do know now that I wish I had known was how emotional the M & A process is for founders and CEOs, especially founders."

This quote highlights the emotional investment of founders in the M&A process, which is often underestimated by those coming from a corporate background. The speaker emphasizes the need for sensitivity and awareness of this emotional aspect.

• CorpDev aims to advocate for startups within the company.
• Engagement with CorpDev is encouraged even if a startup is not looking to sell.
• CorpDev is involved in facilitating connections within the ecosystem and bringing entrepreneurial spirit into the company.

"Corpdev wants to be your advocate within the company, not just for an M & A deal."

The speaker encourages startups to see CorpDev as a partner and resource, not just an entity for acquisitions. CorpDev is portrayed as a bridge between startups and larger companies, fostering relationships and knowledge exchange.

• James Loftus enjoys reading fiction, especially works by Julian Barnes, to gain perspective.
• Reading fiction is seen as a way to understand different viewpoints, which is valuable in his role.

"I love Julian Barnes, and my favorite Julian Barnes book is a history of the world in ten and a half chapters."

This quote reveals James Loftus's personal interest in fiction and how it helps him in his professional role by providing insights into various perspectives.

• Prioritizing tasks and focusing on the right ideas or processes is a significant challenge.
• Square's involvement in numerous projects requires strategic focus and resource allocation.

"I think the most difficult thing for me always is just sort of prioritizing what we need to do."

This quote discusses the challenge of prioritization in a dynamic work environment where numerous opportunities and challenges are present.

• James Loftus reads Dan Primack's Pro Rata newsletter to stay informed about the deal world and the broader M&A space.

"So I read Dan Primack's Pro Rata every morning."

By mentioning his reading habits, James Loftus indicates the importance of staying updated on industry news and insights, which is critical for his role.

• The recent deal with Eventbrite involved an investment and commercial partnership.
• The decision was based on the potential of combining payments with Eventbrite's ticketing platform.
• The investment was seen as a strategic move due to Eventbrite's strong performance and growth.

"We made an investment in Eventbrite, and we signed a significant commercial deal with them."

This quote explains the rationale behind Square's recent investment and commercial deal with Eventbrite, highlighting the strategic importance of the partnership for both companies.

• James Loftus appreciates the opportunity to share insights on the podcast.
• Listeners are encouraged to follow James on Twitter and the podcast's behind-the-scenes content on Instagram.
• The host promotes Lisa and Zoom as valuable services for sleep and communication, respectively.

"Thanks for having me, Harry. It was a great time." "You can find us on Instagram at htebbings1996 with two b's."

The closing remarks thank the guest for participating and provide ways for the audience to engage further with the podcast and the guest. Additionally, the host endorses products and services that align with the podcast's audience interests.