20VC Why Strategic Investing Is Slow Motion M&A, Why Valuation Is The Hardest Element of M&A & What Determines Between Cash vs Stock Deals with Chad Richard, SVP of Business & Corporate Development @ Yelp

Harry Stebbings interviews Chad Richard, Senior Vice President of Business and Corporate Development at Yelp, on the 20 Minutes VC podcast. Richard, who previously worked at Apple and co-founded Simplestar, discusses his role in leading Yelp's acquisitions and investments, including the purchase of NoWait and Turnstile Analytics, and the sale of Eat24 to Grubhub. He stresses the importance of strategic partnerships and the complexities of M&A processes, such as valuation, deal structuring, and the influence of venture capitalists. Richard also emphasizes the significance of aligning with passionate teams and ensuring cultural fit for successful integrations.

• Harry Stebbings hosts the 20 minutes vc podcast, known for engaging with the audience on Snapchat.
• He encourages listeners to provide feedback and suggests listening to a previous episode with Mark Pinkus.

You are listening to the 20 minutes vc with me, Harry Stebings and I'm sure you will know by now you can find me on Snapchat at H. Stebbings with two B's.

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• Chad Richard is the guest, holding the position of Senior Vice President of Business and Corporate Development at Yelp.
• Chad's role includes leading acquisition and investment activities.
• Yelp is active in acquisitions, with notable transactions mentioned.
• Chad has previous experience at Apple and as CEO of Simplestar.
• Chad has also advised various companies like Flipboard and Curbside.
• Nico Bonasos of General Catalyst facilitated Chad's introduction to the podcast.

And so joining me today, I'm thrilled to welcome an individual who heads up all things acquisitions and investments for one of the big incumbents of today. Joining us in the hot seat we have Chad Richard, senior vice president of business and corporate development at Yelp.

Harry Stebbings introduces Chad Richard, highlighting his role and achievements in the field of acquisitions and investments.

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• Chad started as an entrepreneur, interacting with the venture community.
• He was active in the investment scene during the mid-90s, a time of opportunity with the emergence of the web.
• Chad's experience includes raising money for companies and selling companies.

Yeah, absolutely. I was an entrepreneur for the first part of my career, so that's where I first started interacting with the venture community.

Chad Richard explains his initial involvement with the venture community and his entrepreneurial background.

• Chad led product initiatives at Apple, particularly in Internet services and mapping.
• He was involved in M&A at Apple due to the absence of a dedicated M&A team.
• Apple's M&A strategy focused on acquiring talented teams rather than revenue streams.
• The company emphasized cultural fit and the willingness of teams to relocate to Cupertino.

Steve Jobs, who was still running the company at the time, had a pretty strong philosophy that if you have an M A team who's being judged on how many deals a year they bring in, then you're going to be doing M a just to do M a.

Chad Richard describes Steve Jobs' philosophy on M&A at Apple and the company's approach to acquiring talent.

• Apple's product-driven M&A strategy is unique and focuses on integrating great teams into the company.
• The strategy is not about acquiring revenue but about finding people passionate about building products for Apple.
• The geographical location of the team is considered important in the acquisition process.

It was never about acquiring revenue streams. It was finding great people who wanted to come to Cupertino.

Chad Richard emphasizes Apple's strategy of focusing on the acquisition of talented teams rather than revenue streams.## Apple's Business Model

• Apple's revenue was traditionally and primarily driven by selling high-margin hardware.
• Services or minor revenue streams were not a focus for Apple's P&L.
• Apple avoided mixing their business model with service upcharges that could be seen as minor compared to their hardware sales.
• Other companies have business models that are more suited to adding new business units with high growth potential.

"Traditionally, and at the time especially, was 100% driven from selling high margin hardware." "Even if someone had 50 or $100 million in revenue associated with the service, it would be such a small revenue stream that it just wouldn't matter on the Apple P&L." "And we would never cloudy the business model with trying to introduce these kind of what might have been perceived as nickel and dime upgrades to hardware through kind of service upcharges."

The quotes explain Apple's past focus on high-margin hardware over services, indicating a strategic choice to maintain a clear business model without minor service-related upcharges that could complicate their revenue structure.

• Chad Richard manages both Yelp's corporate development and business development, encompassing partnerships and M&A.
• Engaging with companies through partnerships before considering M&A allows Yelp to better understand potential acquisitions.
• Real numbers from partnerships replace estimates in M&A models, improving accuracy.
• Networking within the industry is crucial for discovering new companies and growth opportunities.
• Yelp's approach involves being active in the community and listening to ideas that could benefit their business.

"One of the things I really love about my job is I manage both our corporate development efforts as well as our business development efforts." "The ideal way to build the pipeline, first and foremost, is by being out there talking to potential partners, working with them, and integrating them into our products and services."

Chad Richard expresses enthusiasm for his dual role at Yelp, which allows for a strategic approach to building M&A pipelines through active partnerships and integration, leading to more informed decision-making.

• Yelp traditionally does not make investments, with No Wait being an exception.
• The investment in No Wait was based on the potential value Yelp could add through distribution and integration with their app.
• Strategic investments are seen as a way to work closely with a company and test the partnership's success.
• Founders should be cautious about strategic investments, considering them in later financing rounds and only with companies they know well.

"We made our first investment that would be considered a venture investment last year in a company called No Wait." "For us, it was bringing a lot of value to the table that made the existing investors very excited to have us come join them."

Chad Richard describes Yelp's cautious approach to investments, highlighting a strategic investment in No Wait that was driven by the value Yelp could bring to the partnership and the positive reception from existing investors.

• Founders may worry about exclusivity in strategic partnerships, limiting their ability to work with other vendors.
• Deep association with a strategic investor can make it challenging to collaborate with competitors.
• Strategic investments should be considered carefully, as they can significantly influence a company's future direction and potential acquisition outcomes.

"I think it's a very real concern that entrepreneurs need to consider once a company is so deeply associated with a strategic investor." "You're choosing a camp, and it's probably hard to remove yourself from that camp to go sell to a direct competitor."

Chad Richard acknowledges the legitimate concerns founders have regarding strategic partnerships, emphasizing the commitment and potential limitations that come with such alliances.

• Yelp's investment and acquisition processes are closely linked, described as "slow motion M&A."
• Investments allow Yelp to acquire a portion of a company and conduct due diligence as if preparing for a full acquisition.
• The investment in No Wait allowed Yelp to validate product integration and technology before considering a full acquisition.

"They're very intertwined, and the way I kind of looked at it, in retrospect, I think it was especially so is, I view it as what I call slow motion M&A." "We wouldn't have made the investment had we not been interested in acquiring the company."

Chad Richard explains how Yelp's investment decisions are a precursor to potential acquisitions, allowing the company to assess compatibility and performance before committing to a full acquisition.

• The internal process for investment decisions involves collaboration with product peers at Yelp.
• The standard procedure includes building a pipeline, validating potential investments, and progressing towards signing off on acquisitions.

"Yeah, I think it's a pretty standard process in that what we really do is I like to work with my peers who run product here."

Chad Richard briefly touches on Yelp's internal process for investment decisions, suggesting a collaborative approach with product teams to ensure alignment with company strategy.## M&A Excitement and Alignment

• Ensuring key leaders like the CEO, CFO, and COO are excited about M&A opportunities is critical.
• The excitement for the potential outcome must outweigh the headaches of the process.
• The group's enthusiasm is necessary before proceeding with the deal.

"M&A causes a lot of headaches. So you need to be very excited about the potential outcome because it's always going to be a crazy process getting there."

This quote emphasizes the importance of having a positive and committed attitude towards the M&A process due to its inherent challenges.

• Close collaboration with the CEO of the target company is essential.
• Negotiations cover price, compensation, geography, and other crucial factors.
• It's vital to ensure the entrepreneur and their investors are satisfied with the deal.

"Then it's working closely with the CEO of the target company so that the basic package of price compensation, geography, all the factors that are going to come into play that are going to really matter to both the entrepreneur and their investors are worked out."

The quote highlights the importance of working closely with the target company's CEO to agree on deal terms that are crucial for both parties.

• The board of directors must back the strategy and provide input.
• Finalizing a deal involves extensive due diligence, negotiating, and legal paperwork.

"And then it's obviously important at that point to really bring in our board of directors, make sure they're really backing the strategy as the management team sees it, and getting input from them."

The quote underlines the necessity of having the board's support and contributions to align with the management's strategy for the deal.

• Valuation for product-driven acquisitions is challenging due to the absence of standard metrics like price-to-earnings ratios.
• Considerations include the target company's funding structure, cap table, and the enthusiasm of the entrepreneurs and team.
• Acquisitions focus on buying a motivated team aligned with the acquirer's mission and culture.

"I think it really has a lot to do with the funding structure of the company and what the cap table looks like."

This quote points out that the unique financial makeup of the target company significantly influences the valuation in product-driven acquisitions.

• Proper incentives for key team members are crucial beyond financial remuneration.
• Genuine enthusiasm and cultural alignment are necessary for a successful acquisition.

"So making sure there's proper incentives in place for key team members that will be sticking around."

The quote stresses the importance of ensuring that key team members of the acquired company have incentives to stay and contribute post-acquisition.

• The acquirer's available currency, like cash or stock, influences the structure of the deal.
• Companies with significant cash reserves or high market caps use their positions to their advantage in acquisitions.
• The goal is to put cash to work or leverage a strong market cap to build value for shareholders.

"First and foremost is what's the currency that the acquirer has to play with?"

This quote highlights the first consideration in determining whether a deal will be cash, stock, or a combination of both.

• Public company acquisitions offer liquidity and predictable valuations.
• Private company acquisitions involve uncertainty and potential for greater returns.
• Entrepreneurs must consider the growth potential and realistic valuation of a private acquirer.

"You have to ask yourself, what is a realistic valuation for this company today?"

The quote prompts entrepreneurs to critically assess the current valuation of a private company when considering an acquisition offer.

• Founders should proactively build a pipeline of M&A targets.
• The strategy aligns with running partnerships and M&A, ideally as a unified approach.

"I actually like that strategy. And in my entrepreneurial phases of my career, I've always sort of executed on a similar mindset."

The quote supports the idea that founders should actively engage in identifying and cultivating potential M&A targets, reflecting the speaker's own entrepreneurial experience.## Strategic Partnerships and Potential Acquirers

• Building great relationships with strategic partners can lead to acquisition opportunities.
• Becoming indispensable to market leaders increases the likelihood of an acquisition.
• Engaging in meaningful dialogues with multiple potential acquirers can lead to better outcomes.
• Long-term relationships with companies allow for understanding of the business, facilitating acquisition discussions.

"So if you're able to grow your business through great partnerships and become indispensable to those market leaders, they will most certainly want to acquire you at some point."

This quote emphasizes the importance of nurturing partnerships with market leaders as a strategy for potential acquisition.

"You can get three to five meaningful dialogues going on at the same time, and that's almost certain to lead to a better outcome for you and your investors than just having the dialogue with one company."

The speaker highlights the advantage of having multiple acquisition conversations simultaneously to improve negotiation outcomes.

• VCs can provide insights into the strengths and weaknesses of entrepreneurs and businesses.
• Being upfront about a company's strengths and weaknesses can build credibility in the M&A process.
• VCs can help uncover truths and facilitate understanding due to their seasoned perspective and emotional detachment.

"I do find that vcs can be very helpful within the process."

Chad Richard acknowledges that venture capitalists can play a beneficial role in mergers and acquisitions.

"The more upfront that a company who's being acquired is about their strengths and weaknesses of their people and their business model and their business relationships, I think the more credibility they build up."

Chad Richard advises that honesty about a company's situation enhances credibility in the M&A process.

• Follow passions and dig deeply into exciting topics for ease and success.
• Startups should be honest in the M&A process as everything will be revealed eventually.
• "Disney wars" is a favorite book because of its depiction of Disney's business dynamics.
• Street Fight is a favored blog for its comprehensive coverage of the local industry.
• Managing partnerships and M&A processes is both the most challenging and rewarding aspect of the role at Yelp.
• The acquisition of Turnstyle, a Wi-Fi marketing company, was driven by excitement about the passionate team.

"I think just to follow your passions and dig deeply into the things you're really excited about, because that just makes everything a lot easier."

Chad Richard suggests that passion facilitates smoother professional journeys.

"That they can't fake things. Everything's going to come out in the wash and you just got to tell it like it is."

Chad Richard stresses the importance of transparency in the M&A process for startups.

"Recently I read Disney wars, which was just this fascinating story of kind of the growth and decline and then return of Disney."

Chad Richard shares his interest in the business narrative of Disney as depicted in "Disney wars."

"I really enjoy reading street fight. It has a great, basically summation of everything going on in the local industry."

Chad Richard expresses his preference for the blog Street Fight due to its comprehensive local industry news.

"The hardest element is probably my favorite element as well, which is surfing through the chaos of managing partnerships and M a processes."

Chad Richard describes the complexity and appeal of managing partnerships and M&A processes in his role.

"The most recent acquisition we did was a company called Turnstyle, which is a Wi-Fi marketing company, and I was really, really excited about the team of passionate entrepreneurs who are helping to reinvent how people get connected to the Internet within local businesses."

Chad Richard explains the rationale behind Yelp's acquisition of Turnstyle and his enthusiasm for the team's innovative approach.

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