Season 2, Episode 10 The RoverDogVacay Merger (with Rover CEO Aaron Easterly)

In this episode of "Acquired," hosts Ben Gilbert and David Rosenthal, along with Rover.com founder and CEO Aaron Easterly, delve into the story of Rover and its merger with DogVacay. Aaron shares insights from Rover's early days, including the company's focus on data and marketplace analytics over PR, which later contributed to their efficient customer conversion and repeat booking rates. The discussion also covers the strategic decision for a "hard cutover" post-merger, moving all DogVacay users to the Rover platform for enhanced data usage and marketplace efficiency. Aaron emphasizes that despite Rover's success, the journey is ongoing, and the company continues to strive for growth and profitability.

• Aaron Easterly has personal experience with dogs engaging in unexpected behavior, such as eating inappropriate items and jumping over fences.

"You know, and I've experienced dogs eating stuff that they shouldn't eat. Dogs jumping over fences. You didn't think it would be possible for them to jump over?"

This quote highlights Aaron Easterly's personal experiences with dogs, which likely informs his understanding of pet behavior and the needs of dog owners, relevant to Rover.com's services.

• Ben Gilbert introduces the Acquired podcast, which focuses on technology acquisitions and IPOs.
• David Rosenthal is co-host alongside Ben Gilbert.
• The episode discusses Rover.com and its merger with DogVacay.

"Welcome to season two, episode nine of acquired, the podcast about technology acquisitions and ipos. I'm Ben Gilbert." "I'm David Rosenthal and we are your hosts."

These quotes serve as the opening lines for the podcast episode, establishing the hosts and the topic of discussion.

• Rover.com's existence is crucial to the Acquired podcast and the meeting of the hosts.
• The episode features Aaron Easterly, the founder and CEO of Rover.com.

"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 dog Vacay to consolidate the grand rivals of the dog sitting wars."

The quote emphasizes the significance of Rover.com in the context of the podcast and the personal lives of the hosts.

• Aaron Easterly was an entrepreneur in residence at Madrona Venture Group during Rover's formation.
• He previously served as general manager of network strategy and monetization at Microsoft's Advertiser Publisher Solutions Group.
• Aaron Easterly's age during his GM role at Microsoft is discussed but not confirmed.

"Now, Aaron, there are many rumors circulating that you were the youngest GM ever in the history of Microsoft at age 29. Can you confirm?" "Actually, I can't. I don't know if that's true or not. I was a very young GM for Microsoft at the time and there's no one that's younger than I'm aware of, but I don't know if that's true."

These quotes discuss Aaron Easterly's professional background and the rumor about his age when he became a GM at Microsoft, highlighting his early career achievements.

• Aaron Easterly has a strong affection for dogs, particularly Pomeranians.
• He had a Pomeranian named Caramel for 14 years.
• The Rover office has a space named "Caramel's Den" in honor of his dog.

"Yeah, I love all animals, but I'm very partial to dogs. And I was owned for 14 years by a four pound fluff ball named Caramel." "And we are sitting here in the rover office in Caramel's Den, named for Caramel, with a portrait of caramel up above Aaron on the wall here."

The quotes illustrate Aaron Easterly's personal connection to dogs and how it is reflected in the Rover office environment.

• Pilot offers accounting, tax, and bookkeeping services to startups and growth companies.
• The company is backed by prominent investors and focuses on allowing startups to outsource non-core activities.

"Our next sponsor for this episode is one of our favorite companies and longtime acquired partner, Pilot for startups and growth companies of all kinds."

This quote introduces Pilot as a sponsor and highlights its services aimed at startups, emphasizing the importance of outsourcing non-core activities for growing businesses.

• Startup Weekend in Seattle was a significant event leading to Rover's creation.
• Greg Goddessman pitched the idea for "Airbnb for dogs" at Startup Weekend.
• The idea won the event and sparked interest from Madrona Venture Group.
• Aaron Easterly was initially hesitant but became invested due to his personal experience as a dog owner.

"So Greg dragged me to meet with some of the engineers that were on the team over the weekend, that he wanted some help evaluating whether or not he should invite them on to kick off a prototype program."

This quote describes the early involvement of Aaron Easterly in evaluating the potential of the idea pitched at Startup Weekend, which would later become Rover.

• The initial market size for pet services was estimated between $3.5 to $8 billion.
• Aaron Easterly and Greg Goddessman debated the actual size of the market, considering unmonetized transactions among friends and family.

"So we initially looked at third party estimates of market size, and the answer there, depending upon what you looked at, you could kind of get to three and a half in some sources, maybe six to 8 billion in other sources."

This quote discusses the challenges of estimating the market size for a service like Rover, which includes transactions that are not traditionally captured in industry statistics.

• Initial underestimation of the "shadow market" segment.
• Realization that the shadow market was significantly larger than the commercial market.
• Acknowledgement of the mistake in not recognizing the true market size early on.

"A pitch we put in the commercial market and just said, and there's some gravy on top in this shadow market segment, which looking back was just really dumb because as we found out a couple of months later, that gravy on top is actually ten times the size of the commercial market."

This quote highlights the initial oversight in assessing the market size, where the shadow market was undervalued and later found to be much larger than anticipated.

• Aaron Easterly's hiring was seen as a positive indicator of market potential.
• Madrona's willingness to fund based on perceived opportunity.
• Consideration of involving Greg McAdoo from Sequoia due to his Airbnb investment.
• Greg McAdoo's regret in passing on the opportunity.

"And this is so fun because once Aaron joined, we were convinced there was a big opportunity here."

This quote reflects the enthusiasm and validation felt by the team when Aaron Easterly joined, reinforcing their belief in the venture's potential.

• Desire for fun, challenging experiences with a unique impact.
• Willingness to contribute in areas of expertise while acknowledging gaps in knowledge.
• Interest in the opportunity despite uncertainty about its scale.

"For me, life in general is about having fun, challenging experiences that actually have a unique impact where you're contributing something that's different than what other people could contribute."

Aaron Easterly explains his personal motivation for joining the venture, emphasizing the importance of engaging in work that is both challenging and impactful.

• Original company name "A Place for Rover" and its legal use.
• Connection to "A Place for Mom" and domain name availability.
• Acquisition of the rover.com domain from Clearwire.
• Leasing and eventual purchase of the domain name.
• Significance of the domain name in relation to the service provided.

"Actually, about seven years. Now, our legal name is still a place for Rover."

Aaron Easterly discusses the history and continued legal use of the company's original name, "A Place for Rover."

• The first dog stay taking place in the Madrona office.
• The incident leading to the company being asked to find its own office space.
• Active participation by team members in dog care to understand the business.

"I was an active sitter for the first several years. I think I still have over 100 reviews on the site, so probably booked close to 1000 nights of care."

Aaron Easterly shares his personal involvement in the early operations, highlighting the hands-on approach taken to understand and improve the service.

• Influence of Rover on the formation of Madrona Labs.
• Connection between Rover's success and the confidence to pursue new ventures.
• Role of Rover in shaping David Rosenthal's marketplace thesis.

"Rover is really to thank for many, many things that have happened in David and my life since meeting."

Ben Gilbert expresses gratitude for the impact Rover has had on his and David Rosenthal's professional journeys.

• Public skepticism and ridicule of the business idea.
• Emergence of copycat companies and validation of the concept.
• Recognition of Dog Vacay as a credible competitor.
• The role of human psychology in the perception of business ideas.

"I think we made a list of the top five worst ideas that our vc funded in that year."

Aaron Easterly comments on the negative public perception of the business idea, despite its eventual success and the emergence of similar ventures.

• Importance of marketplace mechanics and data analytics.
• Differentiation of sitters and the impact on marketplace performance.
• Belief that economies of scale would come from data rather than pure scale.
• The inherent speed limit in the business due to the nature of consumer behavior.

"Our view, though, is that most of the economies of scale in this business weren't going to come from just pure scale. It was going to come from the use of data on the back end."

Aaron Easterly explains the strategic focus on data and marketplace mechanics, rather than just scaling, as a critical factor for success.

• Distinction between VC concerns and operational focus.
• The belief that being first to scale is not the sole determinant of success.
• The idea that aggressive marketing cannot create an insurmountable lead.

"All this stuff matters a lot more to vcs than it does to me at the time."

Aaron Easterly contrasts the VC perspective with his own, emphasizing the importance of focusing on the business rather than the competition.

• Rover and Dog Vacay were direct competitors in the pet services marketplace.
• Dog Vacay had a faster start, better initial PR, marketing, and design, and well-known Silicon Valley investors.
• Despite Dog Vacay's early lead, Rover was able to overtake them in key markets like LA and New York.
• Rover focused heavily on funnel optimization and data science to improve conversion and repeat booking rates.
• The importance of balancing backend investment with PR and marketing efforts was acknowledged.

"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 at one time LA and New York, which are large markets, dog vacay was six times our size in both of those markets."

This quote highlights Dog Vacay's initial competitive advantages, including strong PR, marketing, and investor backing, which led to their early lead in significant markets.

"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, so we could have been a little bit more balanced."

Aaron Easterly reflects on the balance between backend optimization and public relations, suggesting that Rover could have benefited from a stronger initial focus on PR to build awareness and online presence.

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

David Rosenthal explains how Rover's investment in data science and backend analytics resulted in higher conversion rates, which was crucial for their long-term success compared to competitors.

• In a marketplace business, a customer is not considered acquired until they complete a transaction.
• Optimizing the funnel from sign-up to booking can reduce customer acquisition costs and increase lifetime value.
• The ability to convert site visitors into customers who complete transactions is critical for outspending competitors on customer acquisition.

"And the important thing to note here is you think about the equation of cost to acquire a customer versus the customer lifetime value."

Ben Gilbert emphasizes the significance of the cost-to-acquire-customer (CAC) versus customer lifetime value (LTV) equation in marketplace businesses and how funnel optimization can impact this.

"You're not actually a customer until they complete the transaction."

David Rosenthal clarifies the definition of a customer in a marketplace business, emphasizing the importance of transaction completion in the customer acquisition process.

• The hiring of Brent Turner as Rover's COO was a pivotal moment in the company's history.
• Aaron Easterly and Brent Turner had a long-standing professional relationship, with varying roles over the years.
• Brent's strengths in management, talent development, and operations complemented the Rover executive team's diverse skill sets.

"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."

Aaron Easterly praises Brent Turner's managerial skills and his impact on Rover's executive team, highlighting his role in the company's success.

• Rover and Dog Vacay had multiple fundraising rounds.
• Discussions about merging the companies began early but became more complex over time due to additional investors and overlapping functions.
• The process was challenging due to the nature of private company valuations and the absence of a public market to set relative value.

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

Aaron Easterly reveals that merger discussions with Dog Vacay started early in Rover's history, indicating a strategic approach to consolidation in the marketplace.

"It just becomes hard."

Aaron Easterly discusses the increasing complexity of merger discussions as companies grow and more stakeholders become involved, illustrating the challenges of private company mergers.

• Negotiating terms for a merger is challenging due to entrepreneurs' confidence and belief in their own abilities.
• Private company mergers lack a public market price to determine relative value, making it difficult to agree on terms.
• Preference stacks from investors complicate the process, as merging two sets of preferences can impact incentives and employee compensation.

"Entrepreneurs typically have a pretty high faith in themselves and their ability to get it done."

Aaron Easterly comments on the entrepreneurial mindset and how it can make merger negotiations difficult, as each party believes strongly in their own vision and capabilities.

"What do you do?"

Ben Gilbert raises the issue of how to handle two sets of investor preferences in a merger, pointing out the complexity of combining downside protections from different funding rounds.

• The complexity of deal terms in mergers and acquisitions (M&A) is highlighted, focusing on the allocation of rights and preferences among stakeholders.
• The importance of having conviction in both the deal terms and the post-close execution plan is emphasized.
• The high failure rate of acquisitions is often attributed to poor execution post-close rather than slight discrepancies in the negotiated terms.

"For me, there's two simple questions. Do you have conviction on the deal terms, like, is it a good deal terms? Do you think there's going to be more value than what you're paying, whether you're paying in equity, cash, whatever? And the second is, do you have conviction around the post close plan? Can you actually execute it?"

The quote outlines two critical questions to consider when evaluating M&A deals: the quality of the deal terms and the feasibility of the post-close plan. The speaker stresses the importance of having confidence in both aspects to ensure a successful acquisition.

• Aaron Easterly explains the decision to implement a "hard cutover" following a merger, migrating all customers and shutting down the redundant technology and potentially the office.
• The execution plan aimed to consolidate customers onto a single platform to improve efficiency and leverage marketplace dynamics.
• The decision process involved considering multiple options, such as maintaining two brands or integrating backends, and ultimately choosing the most aggressive integration plan to avoid slowing down the company's growth.

"In this case, we decided to do what we called a hard cutover. So basically, we were going to migrate all dog vacay customers on the demand side, all their sitters on the supply side, over to the rover platform, and basically execute a shutdown of the dog vacay technology and probably the office."

This quote explains the strategic decision to fully integrate the two companies by transferring all customers to one platform and discontinuing the other, highlighting the intention to streamline operations and avoid prolonged integration.

• Aaron Easterly discusses the necessity of mutual agreement on the post-close execution plan for a successful deal.
• The Dog Vacay leadership team was involved in deciding the execution strategy, which required a high level of professionalism and courage due to the emotional attachment to their brand and the uncertainty it created for their jobs.
• The hard cutover plan was chosen unanimously by Dog Vacay's executive team, demonstrating their professionalism and alignment with the strategy.

"We thought all this through in advance, and we got agreement from Dog Vacay that we weren't going to close on the deal unless both sides could mutually agree upon the post close plan execution plan, integration plan."

This quote emphasizes the importance of having a clear, mutually agreed-upon post-close plan before finalizing a merger, as it is critical for the successful execution of the integration.

• The conversation touches on the strategic rationale behind the acquisition, including the reduction of customer acquisition costs and the benefits of consolidating market presence.
• The potential savings on marketing expenses were a significant factor in the deal's value, with the merger leading to reduced competition for keywords and thus lower costs.
• The acquisition also provided better data coverage, which improved the performance of the marketplace by providing a more holistic view of service providers and the application of algorithms to evaluate them.

"The answer is yes. A lot of people suggest valuing these types of deals on strategic value. Your multiple as a public company would be higher with the consolidation, and that's not how we did it."

The speaker acknowledges the strategic value of the acquisition, particularly in terms of marketing cost savings and data coverage, but also highlights the importance of basing the valuation on tangible benefits such as incremental revenue and cost savings.

• The execution of the hard cutover was completed in three months, half the anticipated time, resulting in successful migration of sitters and owners.
• Incentives such as stay bonuses and new grants were offered to the Dog Vacay team to ensure a smooth transition and recognize their efforts.
• The post-merger success exceeded initial projections, and the company's growth was not hindered by the integration process, allowing for the launch of new services and international expansion.

"We got done in about half the time and exceeded the goals on the successful sitter migration, successful owner migration. It was well executed and we had given stay bonuses to people in Santa Monica because there was uncertainty around whether or not there's still going to be a job."

This quote describes the successful execution of the integration plan, which was completed efficiently and with positive outcomes, demonstrating the effectiveness of the hard cutover strategy and the value of incentivizing employees during transitional periods.

• Despite the success of the merger and integration, Aaron Easterly maintains a grounded perspective, acknowledging that Rover is still a money-losing startup with much work ahead.
• The company's focus is on continued growth and expansion, with an eye on new offerings and international markets.
• The conversation concludes with an invitation for interested individuals to join the Rover team as it continues its journey.

"Just to be clear, our view is that we haven't achieved anything yet. 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 a humble and forward-looking attitude, emphasizing that despite past achievements, the company must continue to innovate and grow to achieve long-term success.