Dharmesh Shah


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Corporate Development 101: What Every Startup Should Know

By Dharmesh Shah on April 2, 2014

The following is a guest post by Chris Sheehan. Chris is COO of TrueLens, an early stage startup in the social marketing space. He is also a board member, advisor and investor in many Boston and NYC startups.  You can follow him on Twitter at @c_sheehan and his blog Early Stage Adventures.

What the heck is corporate development and why should I care?

Back in the first wave of the Internet, I was part of the team at BEA Systems that built up in-house corporate development.  Our charter was simple: add significant market cap value through acquisitions, investments, and partnerships.   Specifically our stated mission: “To support BEA becoming the industry standard ebusiness application platform by leading the process with senior management in developing and managing corporate-wide strategy, acquisitions, equity investments, and selected strategic relationships”abc blocks

For entrepreneurs, I think its helpful to understand the role corporate development plays in larger software companies.  Could be for potential partnerships — maybe an acquisition.  Or, maybe you're growing fast enough yourself to warrant acquiring other companies.  Regardless, it helps to have a basic understanding of what the corporate development team does

What is corporate development?

- most public consumer and enterprise software companies (and increasingly many high growth private companies) have a person or sometimes a team in charge of corporate development
- the mandate varies from pure deal execution to a role that combines strategy, execution, and integration.  Sometimes the charter includes strategic partnerships and minority investing
- for example, at BEA Systems, we adopted the former model.  Each of us were embedded deep in a business unit, working closely with the product, engineering, sales, finance and marketing teams on overall strategy and how strategic alliances, investments or acquisitions could add significant value.  Our team had a solid mix of backgrounds including investment banking, VC, engineering, and operations.  So we covered strategy, deal sourcing/execution (partnership, investment or M&A), integration, and post deal measurement

Is there any point in talking with corporate development unless I am thinking about an investment or acquisition?

- I lean towards the view that it can be very helpful.  It's often hard to navigate Byzantium organization structures from the outside and the corporate development executive can help facilitate who you should be talking to for partnerships/customer relationships.  They can also be incredibly helpful in simply understanding the product and business priorities of divisions
- And most M&A deals typically don’t just magically happen.  Rather, they are often the culmination of bus development/partnership/vendor-customer relationships where fit is tested first, the product is kicked around and deals are somewhat more de-risked.  Developing relationships with corporate development early can prove very helpful later down the line when you might be thinking about investment or acquisition

How would my company be perceived from an acquisition viewpoint?

- the reason for doing an acquisition varies and it’s important to understand where your startup fits.  Some reasons deals are done in the software space include:
            - acquire talent (look at what Yahoo! has done in the mobile space)
            - acquire important pieces of technology (vs build or partner. Quite often time to market pressure pushes companies to buy rather than build)
            - extend the product suite (eg Oracle’s recent acquisition of BlueKai filled an important gap in their Market Cloud suite)
            - acquire new capabilities (eg the acquisition of many cloud/SaaS/mobile companies by larger software companies as they move from on-premise/perpetual license business models)
            - extend the software platform/portfolio into related/new markets  (eg VMWare’s $1.5Bn acquisition of AirWatch is a big bet on the enterprise mobility space)
- I’ve also seen deals that are “change agent” deals, designed to help senior management change the nature and culture of an organization by bringing in new senior executives to be a catalyst for change
- Understanding the “why” from a potential acquirers perspective is key

Types of acquisitions
- very simplistically, software acquisitions tend fall into two broad categories – smaller, tuck-in acquisitions or larger more strategic deals.  Some common characteristics of tuck-in acquisitions:

- small value relative to the market value of the acquirer
- the analysis is often build/partner/or buy
- cash & or stock deals with 1 to 4 year retention packages
- often done in-house (no investment bankers, but sometimes external counsel and accounting diligence)
- simpler integration (but that doesn’t mean it can’t be messed up)

- at the other spectrum are larger strategic acquisitions that will have a significant impact on the acquirer.  Significant could be measured as % of market cap the acquirer is paying, impact on operating margins, earnings per share, etc.
- the much reported on Facebook acquisition of WhatsApp is an example of a significant strategic acquisition, with Facebook spending 10% of its market cap.  These deals often involve investment bankers (Allen & Co advised Facebook while Morgan Stanley, one FB’s underwriters, advised WhatsApp), and investor calls to explain the strategic rationale of the deal (Facebook’s is here)
- prices paid in these deals often reflect the total addressable market opportunity

What’s the typical investment/M&A process?

- at any point in time, corporate development has a pipeline of opportunities which they are tracking.  Some of this is inbound, some outbound (as I was writing this, I looked at one of my old BEA pipelines which had close to 50 opportunities listed, categorized between very high priority, high priority, low/medium priority, no interest)
-  while corporate development plays a key role, finding a sponsor is critical, which could be the CEO, business unit president, head of product/engineering, etc.  This person is the one raising their hand to champion the deal – and being held accountable for the results. How hard or easy this is within each technology company varies greatly.  Knowing insiders can be very helpful (talk to other entrepreneurs who were acquired to give you a sense of process and key players)
- how long it takes to close a deal varies.  Sometimes it’s a relatively quick process, other times it takes months, often driven by the complexity of the diligence and integration process, and the competitive dynamics

Can your VCs help?

- yes, by making the appropriate introductions to companies of interest, either at the corporate development or operations level
- an interesting, early trend, is the institutionalizing of a corporate development team within venture firms, to assist portfolio companies with their sell and buy side strategies.  I think this is a smart move and has potential to add significant value to portfolio companies and help drive a VC firms returns and overall track record.  See Andreessen Horwitz team here.  Their pitch: “helping companies plan their strategic and financial future.  It’s all about anticipating needs, and architecting the right way forward for your company”.

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Expectations vs. Reality: 8 Lessons From The First Year As CEO

By Dharmesh Shah on March 4, 2014

I started working on Foundersuite in the Fall of 2012, and we launched our MVP in early 2013. Prior to this, I'd spent 10 years consulting to startups as a fractional CFO / BD / Ops guy, so I thought I had a pretty good idea of what to expect for my first real rodeo as startup CEO.

I was completely wrong. Here are eight areas where reality diverged the most from my expectations.car bump

1. Identifying customer needs is only a fraction of the product-market-fit battle.

I'm a fan of the lean startup model and we are diligently striving to "build things that people want." But identifying customer needs and creating a solution for those needs is only part of the equation. The other half is removing the 1000 small friction points and barriers to adoption, which is in itself a Sisyphean task.

For example, we launched our Investor CRM product as a tool to keep track of investor discussions- it’s basically a way to bring some “order to the chaos” of fundraising. It’s a slick tool, built on top of APIs from AngelList, LinkedIn, Google Calendar, etc., and we were getting a lot of love-mail when users first signed up, but ongoing engagement was anemic.

It wasn’t until we probed deep via 1-1 calls that we discovered a lot of “blockers” to adoption—for example, many users already have lists of target investors they’ve collected in excel, so we needed to make an import function. As another example, people told us that since the CRM was an empty, blank slate, they didn’t know where to start; so we will soon be pre-populating it with “starter packs” of investors. It’s an ongoing process, but the good news is that every time we remove a major hurdle or friction point, we see a meaningful spike in adoption. Instant gratification!

2. Nobody gives a sh't about what you are doing (at least at first).

IMO, there's an entire generation of entrepreneurs who have a skewed perception that "a great product markets itself." That's bullshit. Sure, there are a few born-viral products like Mailbox or Pebble, but these are the extreme exceptions, not the norms. Most startups, even really good ones, have to make a ton of noise and hustle like hell to get anyone to pay attention. The founders of Xobni put it best a few years ago: "nobody cares about your stupid little startup."

Naturally, I thought we'd be different, that we’d be one of the immediately-viral outliers; I mean, we were a startup making software for startups-- how cool is that, right? Surely we would launch and immediately hit the hockey stick ramp...right?

We did get a nice little bump in adoption when we debuted at Launch.co and were written up in VentureBeat. But the growth spike was short lived, and like most startups, we had to start grinding away; we had to start building the business, brick by marketing brick; we had to, as Paul Graham would say, do things that don't scale.

In our case, this meant building distribution partnerships with incubators, co-working spaces, hackathons, etc. This is high-touch and long sales cycle relationship work (it takes us 2-3 months on average to close each deal); but it’s an effort we believe will lay a solid foundation for future growth.

3. Early evangelists are worth twice-- no, make that 3x-- their weight in gold.

There's a great quote by Brian Chesky of Airbnb where he says: "it's better to build something that 100 people love than 1 million kind of like." It's great advice, and we definitely didn't focus enough time or energy on cultivating “champions” in the early days; instead, I was addicted to vanity metrics like page views.

Why are these early, passionate users so insanely important? Many of the reasons are obvious: they tend to tell others (= free marketing), and they give you really valuable feedback on your product. But the real reason they're worth 3x their weight in solid gold is because their positive notes of encouragement will keep you going every time you take a beating by the universe (and this happens with surprising frequency). I’m pretty sure there’s a feedback faerie out there that knows exactly when to fire over a positive, encouraging note.

Bottom line, the next time I launch a startup, I will religiously spend 75% of my time hanging out with early evangelists, really getting to know them, and making them happy. I'm playing catch-up now.

4. Some people are just not that into you.

Cold reality: many of the people you really want to like you / your company / your product, simply won’t. This came as a something of a shock, since in my previous career as a consultant, I enjoyed really close relations with my clients and was consistently closing upwards of 75% of new prospect inquiries (probably since they were coming pre-qualified as referrals).

But marketing a consulting business is very, very different from marketing a SaaS product, and it’s taken some time to get used to the level of failure / rejection. With Foundersuite, I'm lucky to hit a 25 - 30% success rate with my partnership/BD work. To put it in perspective, this means that literally 7 times out of 10 that I pursue a distribution deal, I get a “no” (or more likely no response at all).

This was hard to adjust to at first, as I tend to get obsessive about winning a deal. It consumes me. For example, there’s an incubator in Palo Alto that we’ve been talking to for months about partnering up with (and we’d even got to a soft verbal "yes"). But then everything suddenly went silent, and it drove me f’ing nuts.

I've now come to realize that although persistence is indeed a critical trait for entrepreneurs, at some point it’s time to recognize when a deal's not going to happen. In short, don’t let “Deal OCD” become a detriment to your overall business.

5. A full sales funnel cures all ills.

I've learned that the best remedy to #4 is to keep the top of the sales or BD funnel overflowing with prospects; in other words, it's all just a numbers game. I've come to view BD work like dating, and as with dating, there are infinitely more potential prospects / partners out there in the world than you could possibly tackle in a lifetime. So when you’re chasing a target that's "just not that into you" move on, and quickly. Move on, and sometimes you'll even find they come around later (always a nice surprise). 

6. Don't sell the product-- sell what users can do with the product.

This is borrowed / stolen directly from Steve Jobs, and it's something I have to beat into my brain every day. There are numerous layers and nuances to it: pitch the benefits not the features; sell the "why" vs. the "what" or the "how."

Ashton Kutcher’s motivational rant in the movie Jobs sums it up nicely: "You can make a great product; but you have to convince people that what you're selling is greater. We're not selling computers; we're selling what they can do with a computer. A tool for the mind. And that, ladies and gentlemen, is limitless. Because people will never stop believing that they could get more out of something; that no matter what you dream, you can do it. And Mac will help you get there." ‘Nuff said.

6. “Thought leaders” are like supermodels—great if you can land one, but…

Our original marketing plan was based on a variation of what Chris Dixon calls the "bowling pin strategy"-- we would get tech influencers and thought leaders to adopt our product, and the startup masses would follow suit. Sounds great in theory, but getting a Paul Graham or equivalent to trial, adopt, use, and endorse your product has about the same probability of success as getting Oprah to plug your book. In short, the odds are long, and although we did land some partnerships with luminaries like TechStars, Launchrock and Startup Weekend, these deals took months of nagging / begging / calling in favors; these guys are simply so bombarded with stuff, its all just white noise.

Instead of adding to the din, we started reaching out to areas of the startup ecosystem where the noise was significantly less; we started pinging incubators, hackathons, and co-working spaces in places like Atlanta and Pittsburgh and Indiana and Hungary and Australia. Dozens or even hundreds of areas have thriving entrepreneurial communities where the need for startup productivity tools is huge; the hunger is real, and we've seen fantastic adoption.  The lesson here is to skip chasing "trophy partners"-- like trying to date a supermodel, they're expensive, time consuming and a hassle to deal with when you do land them. Instead, chase those who need you the most.

7. Building product is waaay more fun than expected.

In my next reincarnation cycle, I want to come back as a product manager. I had no idea how cool this job was until I was forced to step into the role when my original PM left to launch his own thing.

I’ve found that successfully completing the cycle of idea -> prototype -> feedback -> design -> build -> launch -> feedback -> iterate -> collect payment is hugely rewarding and gratifying; I think I'm rather addicted. I'm pretty sure it taps the same pleasure centers in the brain as winning on a slot machine.

8. People will surprise you in awesome ways.

If you've read this far, you'll notice that most of the lessons learned involve accepting failure or overcoming roadblocks and rejection. But a nice takeaway is that people-- often strangers-- will surprise you in delightful ways, too. Literally as I'm writing this, a Foundersuite user emailed me to say he just posted a glowing review / offer on the Facebook page for all Startup Weekend Organizers.

This is a guy who, on his own volition, decided to promote us to a powerful set of folks who collectively touch tens of thousands of entrepreneurs and potential customers. So cool. But it's not that unusual…if you're doing something interesting, and doing it for the right motivations (e.g. ours is that we want to make tools that help entrepreneurs succeed), then people will go out of their way to help. It’s a beautiful thing.

Good luck and thanks for listening,

This is a guest post by Nathan Beckord, CEO of FounderSuite.com

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