Season 2, Episode 10: The Rover-DogVacay Merger (with Rover CEO Aaron Easterly‪)‬

In this episode of Acquired, hosts Ben Gilbert and David Rosenthal, along with Rover.com's founder and CEO Aaron Easterly, discuss the journey of Rover and its merger with Dog Vacay. Aaron shares his experience of starting the dog-sitting platform, initially called A Place for Rover, and the strategic decisions that led to its success, emphasizing the importance of data-driven backend operations over early PR and marketing. The team also touches on the competitive landscape, the challenges of merging two companies with distinct cultures and technologies, and the significance of the 'hard cutover' strategy post-merger. The conversation highlights Rover's focus on optimizing customer acquisition costs and the benefits of consolidating the market, which led to increased efficiency and growth.

• Rover.com is a pivotal company in the history of the podcast 'Acquired'.
• Without Rover.com, the podcast hosts, Ben Gilbert and David Rosenthal, might not have met.
• The episode features Aaron Easterly, the founder and CEO of Rover.com.
• Rover.com merged with DogVacay to consolidate the market of dog-sitting services.

"Today we are talking about a very important company. Without this company existing, there would be no acquired, and it's likely that David and I never would have met. Today's episode is about Rover.com and their merger with DogVacay to consolidate the grand rivals of the dog sitting wars."

• This quote sets the stage for the discussion about Rover.com, highlighting its significance to the hosts and the broader theme of technology acquisitions and IPOs.

• Aaron Easterly was an entrepreneur in residence at Madrona Venture Group during Rover's formation.
• He was also the general manager of network strategy and monetization within Microsoft's Advertiser Publisher Solutions Group.
• Easterly came into Microsoft through the acquisition of aQuantive, Avenue A Atlas.
• He is a dog lover, particularly of Pomeranians, and owned a dog named Caramel for 14 years.

"I spend exactly zero minutes managing my reputation."

• Aaron Easterly expresses a lack of concern for his personal online reputation, which is indicative of his focus on his work and passion for dogs.

• Rover was born out of a Startup Weekend event in Seattle during the summer of 2011.
• The concept of the sharing economy was taking off at this time, with Airbnb gaining traction.
• Greg Gottesman pitched the idea of "Airbnb for dogs" at the event.
• The idea won the Startup Weekend competition, and discussions began about turning it into a real company.
• Aaron Easterly was initially an advisor to the project before becoming CEO.
• Easterly had personal experience with the problem Rover aimed to solve, being a busy executive with a dog.

"I was owned for 14 years by a four-pound fluff ball named Caramel."

• Easterly's personal connection to dogs and his experience with the problem Rover aims to solve are key to his involvement in the company.

• The sharing economy concept was crucial to Rover's business model.
• Dogs had transitionally become more like family members, changing the way owners approached care.
• Rover aimed to formalize and improve the existing practice of dog owners relying on friends and family for pet care.
• The challenge was to estimate the market size for a service that was not being monetized traditionally.

"The big debate was, was more the population of dog owners like Greg Gottesman... or more like Aaron Easterly, I'm going to go down the Rolodex of friends, family, neighbors to find someone I can pawn my dog off on."

• This quote reflects the initial market research challenge and the insight that many dog owners already practiced informal pet-sitting arrangements, which Rover could capitalize on.

• The podcast features an advertisement segment for a company called Statsig.
• Statsig is highlighted for its impressive growth and the scale of operations in data processing and product experiments.
• The advertisement mentions partnerships with notable companies and the expansion of Statsig's product offerings.

"So if your team wants the best platform in the world for making data-driven product decisions, you should reach out statsig.com/acquired."

• This quote is part of the advertisement for Statsig, emphasizing the company's value proposition for data-driven product decisions.

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• The pet care industry has a significant "shadow market" where value exchanges are not reported in industry stats.
• These exchanges may not always be monetary and can include favors or non-monetary trade-offs.
• The shadow market was initially underestimated but later discovered to be much larger than the commercial market.

"That gravy on top is actually ten times the size of the commercial market."

• This quote highlights the initial underestimation of the shadow market, which was later found to be substantially larger than the commercial sector of the pet care industry.

• Venture capitalists may pass on opportunities due to perceived market size limitations.
• Greg McAdoo of Sequoia Capital initially passed on investing due to this, but later regretted the decision as the market size was larger than anticipated.
• The importance of recognizing market potential beyond current market size is emphasized.

"The market size that was relevant was not the existing market size."

• The quote indicates that the potential market size, rather than the current market size, is crucial in assessing an investment opportunity.

• Personal motivation for joining a startup can differ from the perceived market opportunity.
• Aaron (A) joined the team for the challenge, impact, and the opportunity to contribute unique skills.
• He was motivated by the potential to add value and learn, despite not knowing the exact size of the opportunity.

"I think it's a big enough opportunity to be interesting to throw myself into was basically the extent of the thought process."

• Aaron expresses that his decision to join was based on the opportunity being sufficiently intriguing and challenging, rather than a precise calculation of market size.

• The original name for Rover was "A Place for Rover," inspired by "A Place for Mom" and chosen due to available domain names.
• Rover.com was acquired through connections and negotiations with Clearwire, who owned the domain but had discontinued the related product.
• The domain name was initially leased and then purchased at a relatively low cost.

"So we initially leased it for next to nothing and then bought it pretty cheaply, actually."

• The quote explains the process of acquiring the Rover.com domain name affordably, which was a strategic move for branding and market positioning.

• The first live dog stay at Rover took place in the Madrona office, leading to an incident that hastened the company's move to its own space.
• Team members, including Aaron, participated in dog sitting to understand the marketplace and refine the service.
• Experiencing the service firsthand helped identify what worked and what needed improvement.

"I was an active sitter for the first several years...experienced a lot of awkward situations in the early days."

• Aaron shares his personal involvement in dog sitting, highlighting the importance of understanding the service from a user's perspective.

• Rover's success inspired the creation of Madrona Labs, a startup studio within the venture firm Madrona.
• The experience with Rover influenced the broader scale and thesis of Pioneer Square Labs (PSL).
• The company's journey demonstrated the viability of investing in companies from inception and the disruptive potential of marketplace businesses.

"Rover is really to thank for many, many things that have happened in David in my life since meeting the genesis of Madrona Labs."

• This quote acknowledges Rover's role in shaping the future direction and success of related ventures and investment strategies.

• Rover faced skepticism from the tech press, with comparisons to the infamous Pets.com and doubts about the viability of the idea.
• Despite initial ridicule, the concept attracted numerous competitors, indicating potential market interest.
• Dog Vacay emerged as a credible competitor, raising significant funding and validating the marketplace concept.

"We went from kind of, oh my God, this is almost laughably bad idea to at the same time having like ten companies announce that they were going to do it."

• The quote captures the shift from ridicule to recognition as multiple companies entered the market with similar concepts, signaling a growing belief in the business model's viability.

• Rover focused on marketplace mechanics and data utilization rather than just scale to gain a competitive advantage.
• The company believed that economies of scale in their business would come from backend data analysis and marketplace design.
• The recognition that consumer behavior change is gradual influenced the strategy, emphasizing the importance of data over aggressive marketing.

"Our view is that it is always going to come down more to the backend piece."

• Aaron emphasizes the belief that long-term success in the marketplace would be determined by the backend operations and data analysis rather than just scaling quickly.

• Speed bumps in markets can initially seem negative but can become a competitive advantage if the ultimate market size is believed to be significant.
• The perception of initial difficulties as opportunities can create a competitive moat for a company.

"These speed bumps at first blush can seem to be negative factors in markets, but if you believe in the ultimate market size enough, they become a competitive moat."

• Speed bumps can be reframed as competitive advantages when a company has a strong belief in the potential of the market size.

• Rover's reputation for excellence in engineering, data science, operations, and customer segmentation.
• Emphasis on optimizing the conversion funnel and investing in areas that reduce customer drop-off.
• Preference for funnel optimization over brand advertising to improve short-term and long-term performance.

"If there was a dollar that Rover could spend on a brand advertisement versus a way to further decrease a drop off in a funnel step. It was absolutely going into that funnel step every single time."

• Rover prioritized funnel optimization over brand advertising, investing resources into improving customer conversion and retention.

• Dog Vacay had a faster start in the market with better initial PR, marketing, and a strong investor base.
• Despite initially lagging behind Dog Vacay, Rover managed to surpass them in key markets like LA and New York.
• The narrative highlights the importance of resilience and strategic focus for startups in competitive markets.

"Dog Vacay got a much faster start, did a much better job with initial PR and marketing and graphic design, had a group of well-known Valley investors and got out to a fast start."

• Dog Vacay initially outperformed Rover in marketing and PR, leading to a faster start in the market.

• Acknowledgment of the benefits of PR in creating market awareness and category growth.
• Reflection on the need for balanced investment in PR and SEO to build domain authority.
• The insight that while Rover's focus on backend optimization was correct, a more balanced approach could have been beneficial.

"Looking back, ultimately, I wish we had done a little bit more in PR in the early days. It took us a while to make up the ground on SEO, for example, and domain authority."

• In hindsight, greater investment in PR and SEO from the outset would have been advantageous for Rover to establish market presence and authority.

• Investment in data science and backend analytics led to higher conversion and repeat booking rates for Rover.
• Understanding the importance of lifetime customer value and optimizing the signup to booking ratio.
• Emphasizes the strategic importance of backend optimization in marketplace businesses for long-term success.

"Our conversion rates, as new customers new needs were hitting the marketplace, ended up being much higher over time than our competitors."

• Rover's backend investments resulted in superior conversion rates compared to competitors, contributing to the company's success.

• The distinction between sign-ups and actual customers in marketplace businesses.
• The impact of funnel optimization on the ability to invest in customer acquisition.
• The competitive advantage of being more efficient in converting website visitors to customers.

"You know, if you're twice as good at turning someone who hits your site into someone that completes a transaction, then, you know, if you're competing over the same AdWords, keywords, you can outspend, because you know that you're going to be able to more profitably move those customers through your process."

• Efficient funnel optimization allows for greater spending on customer acquisition due to higher profitability per customer.

• Brent Turner's hiring as Rover COO in January 2014 was a pivotal moment for the company.
• Turner's long-standing professional relationship with Rover's leadership and his operational expertise.
• Turner's role in balancing the company's focus on both backend optimization and marketing growth.

"In a lot of ways Brent's a co-CEO, but the best manager I've ever met, the best developer of talent I've ever met, the best operator I've ever met."

• Brent Turner's management and operational skills were highly valued and instrumental in Rover's development.

• Phil Kimmy's decision to drop out of college to join Rover as a co-founder.
• The challenge of convincing stakeholders, including Kimmy's parents, of the viability of the business.
• The narrative demonstrates the commitment and risks taken by early team members in a startup.

"Phil, of course, did drop out and as a co-founder of Rover, built the engineering side of the business with a great engineering team into what it is today."

• Phil Kimmy played a crucial role in establishing Rover's engineering capabilities, contributing to the company's success.

• The need for a balanced approach between backend investment and marketing efforts.
• Brent Turner's influence in developing Rover's capacity to excel in both areas.
• The discussion emphasizes the strategic necessity of achieving a balance between technical infrastructure and market visibility.

"However, ultimately you need to do both. And that it was Brent's coming on board in 2014 that really built the muscle in the company to be able to do both and be world-class in both."

• Brent Turner's arrival at Rover was pivotal in enabling the company to excel in both backend optimization and marketing.

• Rover and Dog Vacay's parallel fundraising efforts and the ongoing discussions about a potential merger.
• The complexities involved in merging two private companies with different investor bases and preference stacks.
• The narrative provides insight into the strategic considerations and negotiations that occur in the startup investment landscape.

"We actually. The conversation around putting the companies together actually started in year one."

• The idea of merging Rover and Dog Vacay was considered early on, highlighting the strategic foresight in the startup's growth trajectory.

• Entrepreneurs' need for confidence and a certain level of delusion to take on the risks of starting a business.
• The difficulty in negotiating terms for a merger due to the self-confidence and belief held by entrepreneurs.
• The discussion sheds light on the psychological and practical challenges of startup mergers and acquisitions.

"Entrepreneurs, by their nature, especially in tech, have to be a little delusional in order to take on the risk of starting a business that most of the time is going to lose a lot of money before it ever makes money."

• The entrepreneurial mindset often involves a degree of optimism and self-belief that can complicate negotiations in mergers.

• Vanta automates security reviews and compliance efforts for frameworks such as SOC 2, ISO 27001, GDPR, and HIPAA.
• The service is positioned as a solution that allows companies to focus on core product development while outsourcing compliance efforts.
• Vanta's integration with over 300 external tools and AI capabilities are highlighted as key features.

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• The prolonged and complex nature of the merger discussions between Rover and Dog Vacay.
• The involvement of investors in advocating for the merger based on previous successful mergers in similar markets.
• The process of aligning both companies' interests and overcoming the challenges posed by private company valuations and preference stacks.

"It was tough to get agreement at a high level. There's a bunch of things that make getting to agreement difficult on these."

• The merger between Rover and Dog Vacay was challenging due to the complex dynamics of private company valuations and investor interests.

• Negotiating deal terms is complex with multiple stakeholders and preferences.
• Different financing rounds can have varying rights, including veto powers.
• Entrepreneurs are generally optimistic, while facing a lot of uncertainty.
• Key to successful M&A is having conviction in both the deal terms and the post-close execution plan.
• Most acquisitions fail due to poor post-close execution, not the initial deal terms.

"So it becomes a very complicated decision process with a lot of stakeholders, all in the context of entrepreneurs feeling optimistic about the go to loan approach, all in a context of a lot of uncertainty."

This quote highlights the complexity of negotiating deal terms due to the involvement of many stakeholders and the inherent uncertainty entrepreneurs face.

"For me, there's two simple questions. Do you have conviction on the deal terms? [...] And the second is, do you have conviction around the post close plan, can you actually execute it?"

The quote emphasizes the importance of having confidence in both the deal terms and the ability to execute the plan after closing the deal for a successful M&A.

• Execution post-close is critical to the success of M&A.
• A hard cutover was chosen for integration, involving a full migration to one platform and shutdown of the other.
• The decision for a hard cutover was based on efficiency and the benefits of increased liquidity in the marketplace.
• Execution plans need to be agreed upon in advance to ensure a successful deal post-close.

"The reason why they're failures is because the execution post close destroyed a bunch of value."

This quote explains that the failure of most acquisitions is due to poor execution after the deal is closed, not because of the deal terms.

"In this case, we decided to do what we called a hard cutover."

The quote describes the chosen strategy for post-merger integration, which involved a complete migration to one platform and shutting down the other.

• There are multiple strategies for integrating marketplace businesses post-acquisition.
• Options include maintaining two separate brands and platforms, merging front ends but keeping separate back ends, or fully integrating into one unified platform.
• The chosen strategy must balance potential benefits with the risk of slowing down growth and integration complexities.
• Dog Vacay's executive team unanimously agreed to a hard cutover to the Rover platform.

"The options we considered is two brands and two back end. So there's two front ends, two back ends, two front ends, but one back end or one front end? One back end."

This quote outlines the different strategies considered for integrating two marketplace businesses post-acquisition.

"We wanted to be done in six months and not two years, not three years, not a year."

The quote indicates the aggressive timeline set for the integration process, highlighting the importance of speed in the execution plan.

• The integration was completed in three months, half the expected time.
• The merger exceeded expectations in terms of sitter and owner migration.
• The combined company outperformed initial projections and continued to grow.
• Post-merger, the focus was on expanding services and international growth without the distraction of integration.

"It turned out to be the right plan. Execute well. We got done in about half the time and exceeded."

This quote summarizes the successful execution of the integration plan, which was completed faster than anticipated.

"We're expanding internationally, which is wonderful, but particularly not having the distraction of all that at a moment when we were just starting to layer in all the additional services."

The quote explains the benefits of a swift and effective integration, allowing the company to focus on expansion and new services without being bogged down by the merger process.

• The acquisition is categorized as consolidation.
• A major driver of the acquisition was the potential for reduced customer acquisition costs.
• By eliminating competition between Dog Vacay and Rover, the combined entity could reduce keyword bidding costs.
• Savings on marketing were significant, but the acquisition's value also came from better data coverage and economies of scale.

"The answer is yes. A lot of people suggest valuing these types of deals on strategic value. [...] So we modeled it as basically a cash flow."

This quote explains the rationale behind the acquisition's value, focusing on tangible cash flow improvements rather than speculative strategic value.

"We got a decent amount of value from, call it the economies of scale on the data side, in addition to the marketing savings."

The quote highlights the additional value derived from data economies of scale, beyond the savings in marketing costs post-acquisition.

• The team acknowledges that despite early successes, they are still a money-losing startup with much work ahead.
• The company's goal is to continue making correct decisions to ensure future success.
• Rover's journey exemplifies a non-consensus bet that paid off by addressing a clear market need.

"Our view is that we haven't achieved anything yet. You know, we're still a money losing startup that may be more on the late stage side, and there's a lot of work to do."

This quote reflects the company's humble perspective, recognizing that despite past successes, there is still a long path ahead to achieve their goals.

"The way that you win, and that you win really, really big is you do things that are correct and not obvious."

The quote captures the essence of making successful non-consensus investments or starting companies, as exemplified by Rover's journey.