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the netpreneur's perspective on the
anatomy of an acquisition

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oron strauss: always an entrepreneur

Thank you.  It is a true honor to be here.  This is my second time speaking at a event.  The first time was more than two years ago.  Then, we were in the middle of a big change in our business plan, and I guess that it worked.

          I want to quickly go through seven key lessons that we learned going through the acquisition process when we sold Net.Capitol to Netivation:

  1. It takes forever

  2. It ain't easy.

  3. It's personal.

  4. You learn who your friends are.

  5. Don't forget your people.

  6. The future matters.

  7. Remember, you're always an entrepreneur.

          I'll go through them quickly, interspersed with questions for the audience to win some prizes.  Before I do that, however, I want to say that, from my perspective, we have been extraordinarily lucky.  First, in building Net.Capitol and being able to find an incredible team of people who have been dedicated and emotionally invested in it.  I can't underscore Raj's point enough—the value of having people who buy into and go through this process with you is just an amazing thing to be part of.  To be able to walk down the hall and see the expressions on people's faces; to be able to go back to investors who made a bet on you, personally, and nothing else, and say, "You have a 5 times, 10 times, 20 times, 50 times return on your investment."  That's a very powerful thing.  I won't ever forget it.


          OK, the first lesson, "It takes forever," and the first question for the audience.  Multiple choice.  Any guesses on how long it took?  We were not a big company—35 employees with a little over $1 million in revenue, although no official numbers are being disclosed here, of course.  How long did it take us to do our deal?  Three months, six months or 10 months?  Anyone want to take a guess?

Participant:  Ten months.

Mr. Strauss:  All right.  You are the winner of a Net.Capitol Tech Team T-shirt.   These are sentimental gifts now.  [Strauss tosses the shirt into the audience.]

          It took a very long time.  One of our first meetings in New York coincided with a trip I was taking with one of my partners to see an opening day baseball game at Yankee Stadium.  Come October, as we were in the final stages of negotiations and trying to really push the deal through, I was sitting with the same friend watching a World Series game, which the Yankees won.  We said to ourselves, "Do you remember when we started this process?  It has been a whole baseball season."  That gives you a little perspective.

          The point is, these things take time.  That is not a necessarily a bad thing, however, because there is a lot you learn in the process.  You need to be patient.  Sometimes you need to be impatient and push things through, but, in our case, it was a 10-month process and we got there eventually.

          The second point is that it ain't easy.  It's a hard process.  Negotiation is tough.  Bringing your people around is tough—inside the organization; your investors, being able to convince the outside people—and you as the entrepreneur, the CEO, you are right in the middle of it.  It is an incredible balancing act of trying to bring together a bunch of different constituencies.  You have to make as many people as you can happy.  You have to go to the other company and get them invested in who you are, then you have to go back to your team, after beating up on the other side for so long, and sell them on why it is a great deal and why this team is so great.  It is a real balancing act, and it's also very complicated.  You bring in investors, the legal team and the accounting team, even when it's a tiny deal like ours.


          Here's another multiple choice question.  Our final legal agreement was: 50 pages long, 100 pages long or 200 pages long?

Participant:  200.

Mr. Strauss:  All right, another T-shirt.  Since Net.Capitol is no longer around, these are things you'll want to keep on your wall.

Ms. Lajoux:  By the way FindLaw has sample agreements posted, starting today.

Mr. Khera:  So does, as well as business plans and many other resources.  Go there first.

Mr. Strauss:  The value in those first two lessons is that it forces you to build a relationship with the acquiring company, especially if you are going to work with them going forward.  That's extraordinarily important.  As contentious as the negotiations can be, as long as they can be drawn out, as frustrating as that can be, it is still part of a process of building a relationship.  You learn a lot about the people that is truly valuable.

          Third lesson is: It's personal.  This is a very emotional decision and, more importantly, it is about the people.  My first investor and my mentor with Net.Capitol is someone I interviewed while writing my thesis at Dartmouth—Brad Feld, a general partner with Soft Bank Ventures.  I first presented the acquisition to him and said, "These guys have approached us.  We need to talk it through."

          By the way, it is kind of funny how Netivation approached us.  We had an employee leaving who called Netivation and said, "Hey, I was working at Net.Capitol and I'm looking for a job."  They said, "Well, we're not really interested in hiring you, but we would love to talk to your CEO."  Funny how things work out.

          Anyway, Brad said to me, "Stock prices will go up and down; valuations will be all over the place.  It is going to be complex, with a lot of back and forth, but, at the end of the day, this kind of deal is about the people.  Are these people you want to get into bed with? Are they people you want to be a team with?  Ultimately, that's the personal decision you and your management team have to make."  It's the best advice I got throughout the process.

          The next lesson is: You learn who your friends are, and who they aren't.  I had one former employee threaten to sue us.  It's about money.  Greed becomes an issue that you have to be ready to deal with.  There have been cases of companies where employees brought totally bogus lawsuits just as the IPO was about to go out.  At the end of the day, they are holding you hostage.  Your job, as the entrepreneur, as the CEO, is to get the deal done.  You can't get caught up emotionally in knowing that someone is doing something wrong, something you perceive as evil or whatever.  You have to get the deal done.  Those people will come out of the woodwork.


          Another example is that I had a board member who had invested some money.  It was a name kind of a person to bring on my board, and he had some real problems with the deal.  I would get these phone calls where he would literally harangue me for 45 minutes about why I was just going after the money, that this is a bad deal, that I was in over my head, that I couldn't negotiate this deal because I don't have any experience—personal, really going after me.  On the one hand, it kind of makes you angry, but, on the other hand, you recognize that he is doing his job as a director trying to get you the best deal.  You have to separate the emotional from the business deal, but you learn about people and you take away that lesson going forward.

          I'll go back to Brad for another example.  This was a tiny deal in his total portfolio.  He is a top venture capitalist doing huge deals, but, because of the personal, mentoring relationship that had been established, he was totally involved in the deal.  He sat with us through the negotiation sessions, helping us do the deal.  He was behind us 100%.  When we went through it with the other board members, he said, "Look, this is Oron's deal.  He has to run with it through his management team.  I'm not going to sit here and rubber stamp things, I'm going to ask the tough questions, but, by the same token, it's his deal and he's going to run with it."  He's been a terrific supporter.  When you find those people, you really want to latch onto them.

          The fifth lesson is: Don't forget your people.  As the entrepreneur and CEO, you probably have the most at stake.  You probably invested the most, you have worked the hardest and you really feel it is your decision to make.  However, for the most successful deal, you want to bring your whole team in on it.  The whole team is your employees, your customers, your investors and everyone who is associated with it.  If you do that, if you get buy-in from these people, it makes the deal that much more powerful.


          At Net.Capitol, we had a pretty flat management structure and kept our whole team abreast of the situation every step of the way.  Obviously, you have to enforce confidentiality and be careful, but the point is that this is their lives, too.  Maybe they didn't invest as much as you did, but they bought into your vision, your dream.  They made sacrifices and commitments to make it happen.  It impacts them directly, so you really want to get them involved.  Also, because they are not directly in the middle of the process, they are going to give you valuable insights if you open those lines of communication.

          The sixth lesson is that the future matters.  You have to think about the next steps and what's involved in the process.  In the last two months since we closed our deal, we have helped close five other acquisitions.  We opened three new office spaces, launched E-Primary at and hired a dozen new people.  I have grown from managing a staff of 35 to 80. In the meantime, we've also hit our revenue numbers. There's been an extraordinary acceleration of things to do. You have to be prepared to deal with that going forward.  You can't just say, "The deal is done; now I'm going to rest."  You must be ready to make the commitment—or not make the commitment, in which case, make sure you're honest about it through the process.

          The final lesson: Remember you are an entrepreneur.  Here's kind of a goofy question for the last prize.  Is "Bonzo" the name of my dog, the name of our intranet association management product, the nickname of Led Zeppelin's drummer or all of the above?

Participant:  All of the above.

Mr. Strauss:  Exactly.  You get a Net.Capitol hat.  The point is that you have to have fun through the process.  Don't forget who you are.  Don't forget what this is all about.  It is about your life, about chasing your dream, about living out your destiny.

          Here's a little story about how I announced the closing of the deal to our company.  We have a weekly staff meeting every Monday and the team was gathered in a big room outside my office.  I pretended I was on the phone with the CEO of Netivation and was yelling at him saying, "I can't believe you are doing this to me.  We've been through this so long."  People were standing outside the room listening with some strange expressions on their faces.  I slammed down the phone after cursing at him—and I never curse, never get upset.  People were wondering, "What's going on with Oron?" I said, "Mark, Nick, come into my office.  I need to talk to you."  I had these two people on my management team kind of involved with this thing.  We're talking in my office, it's kind of quiet and everyone in the outside room is wondering what's going on.  After a little while we started yelling at each other and saying, "I can't believe you would do this."  They're telling me how I screwed up the deal, that this is their lives and asking what they are going to do.  This is an Oscar winning performance.

          Finally, Mark storms out of my office, slams the door and storms out of the main room.  We waited another couple of minutes, then we went out to the group.  I had a very serious, somber expression on my face and started explaining how we'd been through hard times before, that this has been a long roller coaster ride, how you have to persevere.  I went on with this for a good five minutes.  Everyone was really shocked and nervous.  You could hear a pin drop.  Finally, Mark came back in the room, swings the door opens and hands me an envelope and saying, "Here's the letter you wanted."  No one can believe that Mark is actually going to resign.  I open the letter and hold it up for everyone to see.  In big letters it says, "Congratulations.  The deal is done."

          Have fun with it.  Enjoy the process.  Don't forget who you are.  The money and rewards will follow, and that's what it is all about.

Ms. Lajoux:  Now, we're moving on to Frank Wood, who started out as the President and CEO of ToFish!, Inc. which commercialized a histogram-based image matching technology developed by his partner Greg Pass at Cornell.  The technology allows you to search the Internet for pictures similar to ones you provide by analyzing pixels to a profile, then looking for similar profiles.  ToFish! was acquired by a small company called America Online (AOL) on January 18 for an undisclosed amount of stock.


frank wood: david's slingshot

Thank you and good morning. I want to be the first to announce to all of you that one of the final sticking points in our deal has been worked out as of this morning. There was a small issue with the name, so from this point forward, the company will now be called ToFish! AOL Time Warner.  Just kidding.

          My deal is a little bit different than those of my two friends here since we were a straight technology play.  The best way I can explain it is that AOL was Goliath and we were David.  We had a really cool slingshot that worked better than most everybody else's slingshot.  Unfortunately, their hand was a little too large to use it, so we delivered it to them and we're helping them make the best use of it we can.

          A shockingly short amount of time ago I was sitting way back there in the corner of this room listening to Mario and other speakers.  I really didn't know much about how all of this works then, so it is both a shock and an honor to be sitting up here trying to convey what I learned to all of you.

          Here's our story, very quickly, since we're not quite as high profile as some of the other people up here.  We managed to remain in stealth mode throughout most of our existence.  In November of 1998, we were funded by Steve Walker & Associates, largely due to an introduction from Fran Witzel of to Gina Dubbe.  In about March or April we rolled out a product called CFish, a copyright tracking application using our technology.  It was the first implementation of an actual product, and it didn't go anywhere.  No market.  Around September of 1999, we rolled out another product called ImageFish, which was a direct encoding of the technology that we could give to other search engine and database companies.  There was a lot of excitement about it; unfortunately, we were running out of money and needed to do something.  The companies we were dealing with were very, very large, and in every one of our discussions the subject of acquisition came up.

          When looking at the choice of raising another round of money, given the valuation we could get, or going the acquisition route and cashing in, it was a pretty clear choice to be made.  It was just a matter of getting it done.  I'm an engineer, so one of the things I can tell the other engineers in this group, is that, yes, it does happen.  That is my first five points.  It does happen.


          These kinds of deals happen all the time.  They're common.  When I sat back in the corner of this room  that last time, I didn't know what M&A was.  I know now, and, hopefully, many of you will soon as well.  When you're writing your business plan, which I assume many of the first-timers are doing right now, that little liquidity section is for real.  It really does happen, so pay attention to it.

          Oron stole some of my fire.  I don't have any T-shirts to throw into the audience, but it does take a long time.  Our deal took six months to close, but I think we may have beaten him on the number of pages in the agreement.  It was a monster to deal with, and a lot for us three guys at ToFish!.

          Valuation.  Unlike these other two panelists, we were a straight tech deal which is very hard to value.  It's essentially all "goodwill," and an argument from start to the finish.  What is it worth?  Who knows, but it worked out okay.  As I said, their hands were too large to operate the slingshot, so all of the employees of ToFish!, including myself, are working at AOL operating that slingshot.

          Part of the deal is that you have to worry about how long you get locked up—how long and what are the terms of your lockup.  We managed to negotiate a amenable deal.  But it is something you should keep in mind if you are at a stage where you're considering being acquired.

          I'll finish up by repeating some things that have been shown to be true consistently, that you hear over and over again, but you just can't hear enough.

          Keep your ducks in line; keep them in order.  When you are going through this process, every little ghost in the closet is going to come out and haunt you.  If your paperwork is not right, if your accounting has slipped, if you are not keeping track of everything or if one of your employees has not signed a certain agreement, it all comes out.  Do it beforehand because you are going to eat a huge legal bill if you don't take care of it up front.

Mr. Khera:  You're going to get a big legal bill anyway.

Mr. Wood:  That is true.  But it is going to be even bigger if you don't have things in reasonable shape beforehand.

          You are not going to be able to hide anything, so don't bother to try.  Anything that you can sneak past an investor or during the course of running the business is coming out.

          My best piece of advice is to find somebody to help you through the process if you haven't done it before.  Is Gina Dubbe in the audience?  There she is in the back.  Gina was instrumental in working this deal for us.  She was our primary contact at Steve Walker & Associates and saved the day more times than not.

          Thank you.


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