Building Corporate Development Muscle

20:39I think you've got to go through those experiences and you got to have people shut down deal after deal. And you go, okay, I'm understanding what really matters most to them and why these things haven't fit for them. Or maybe why we haven't made the case clear enough for the aspects of it that matter for them. Got any tips and tricks on how to get my team excited about doing a deal? I think you could do that very easily. Just tell him that you're guiding me. Kyle says it's a good deal. Exactly. We're on a bias. Yeah, that's why I'm just curious. I always feel like those early deals and when you're dealing with folks have just never done it.

21:09And you get, some are really excited about it because they just see the opportunity to deploy capital and accelerate the growth. But they think like you mentioned, you get the other flip side, maybe more of the engineers. They don't want to deal with the tech. They don't know how they built it, how that's going to integrate. You're really playing the long game. The proof's in the pudding. You've got to actually execute on some deals and share the value that you're getting from bringing in these great people and that you can run an efficient process to bring in great people and technology. You can get that integrated and they're successful.

21:36And I think after you do that time and time again, then the proof's kind of there that you can do that. With that said, you probably need a few people who actually do think favorably of acquisitions to get it going. It's a cold start problem. You need somebody in the organization at a senior enough level that is willing to help you get it going. How is it getting the team aligned? You have all these function leads to get them knowledgeable and comfortable doing diligence and integration planning. Yeah, that's taking some time for sure. Some people bring in backgrounds and experience in this, which is great.

22:09But sometimes also that experience or the way that they would do it, it doesn't fit for what we're trying to do or the way we prefer to do it. I don't have any brilliant tips, but it just takes some time. There's a lot of playbooks and a lot of information out there about deal execution, about deal integration, depending on industries and size and shape and different things like that. I think there's a lot that you can learn there, but it's similar to the deal negotiations and the upfront filtering and the execution that we talked about earlier. I think you've got to get reps in. I do think there is actually a point which is over time, we developed our own playbook and our own style.

22:41We didn't start off and just say, this is the style we're going to do. We just things that worked and things that didn't. And then we codified that. So I do think that actually, if you're able to codify it or at least train people up in a certain way for your company's style, I think that's useful. Because like I said, I think people do have different styles of doing these things. And there's nothing wrong with them. I do think you just got to figure out what fits for you and your culture. When you say codify it, when do you end up documenting? And I've seen this very company by company, or some will actually create a whole freaking handbook about how the company does M &A, explain the previous deals they've done and why.

23:18We've been a little lighter on that. I think it's kind of like, I love what they say about planning. The value of a plan is the exercise of creating it, right? And I think that's the same thing of a playbook. I'm pretty sure most people have not looked at it since we did it. And it's light. I'd have to say it's probably 10 to 15 pages maybe. But the exercise of doing that, the exercise after a deal or after a couple of deals have closed, sitting down with our people team and saying, okay, let's go through how we do recruiting, how we do interviewing, how we make offers, how we do relocation, how we do visas, different things like that, when it's in the context of an acquisition and a number of employees versus a one-off hiring situation.

23:53That exercise has been really helpful. But again, afterwards, I don't think anybody really looks at it. Were there surprises you came across on your early deals that were eye-opening? There might be some points and aspects that matter more to the other side than you would have thought at different points. One is titles, for sure. You have some very capable senior year people who've been doing amazing things with their startups. And we bring them into our ecosystem and we run them through the normal leveling process. One thing I think we do a pretty good job of is that we really take the time to understand them and level them appropriately.

24:25So that way, other people in the organization don't look as people who came in from acquisition as separate or different because they got an elevated title or level. But understandably, for those people who were CEOs and founders and CTOs and stuff, getting maybe a different title, which they don't think is in line with their experience can be a tough thing. I say that it's completely separate from their compensation or the deal value. Those things could be locked and good to go, but actually the title that's on it. And I understand that. Titles matter to people more or less at different points in their career.

24:53And I'm not judging that, but it's just one of those things that's come up that you've been like, ooh, this is a sticking point. We really should have set that expectation earlier. Reporting lines can be another one. I think we do clarify that pretty well, but you could imagine through the process they're meeting with people at lots of different levels. You're having group brainstorming sessions, one-to-ones, different interviews at different levels. And so it can be unclear where you fit in the organization and who you report to. And then even after you do that, you still don't know the rest of the company.

25:21So then maybe once you get in, you're like, oh, I'm reporting to this level. I thought that was cool. But once I got in, it didn't feel as cool because it seems like that's not as senior as I thought, or I'm not included in some meeting or something like that. Which again, is all understandable. That's been one that we've had to debate back and forth is what's the right level to have them reporting in and why do they fit into this structure versus something else. These are good examples. You got titles, reporting line, anything else? Those are the two that kind of stand out. There's other fine points on deal execution and diligence and things like that, but I don't think there's anything too novel or interesting there.

25:55If there's anything unique that you do when you bring in new leaders to set them up for success. Yeah, that's something that we started doing late, probably. We probably should have done that a little bit earlier. As much as possible, they're exceptional people, And we hire exceptional people every day. We want all those exceptional people to feel the same amount of love and attention as they should for joining our company. With that said, I can understand how somebody who is running a company and has sold that whole company might feel like it's a slightly different scenario as they come in. So a few small things that we've done and don't know if they've made any impact, but we've got a founders group at Roblox and we get all of the founders of the different companies that have come on together occasionally, just more for social sort of stuff.

26:36I think that's actually valuable for them because they are startup founders. They've been in that ecosystem. They know the VCs. They like to keep a track of what's going. And a lot of them can share similar stories from investors and things like that. And we share what we're up to and what we're hearing just from the market because we're spending a lot more time out there now that they're in a company operating. So I found that to be fun and useful. We do, depending on it, we will set up some time with more executives early on. And part of that is alignment on culture. I think more exposure to executives, just talking about what they're up to and what they're doing is helpful.

27:07I have heard of other companies that do things quite differently and will do a lot of different special things for startups that come in or founders that come in. I don't think there's anything wrong with that. But like I said, we're fortunate to hire really exceptional people and we don't want somebody who came in as a hire versus came in through an acquisition to feel like they're materially different because they're all great. I like creating the network for the founders so that they can socialize and complain about common things? I got a tip from, I can't remember who, but somebody gave me that tip who'd been doing that before and said it was valuable.

27:39Again, I think they've got just some good commonalities. Most of them work in fairly different parts of the business, but certainly they've got common experience as startup founders. And then they probably have some common issues and experiences joining the company. How has your CorpDev team evolved? Where do you start off with? Just get somebody as an analyst to build up models and then back on somebody more operationally from there. What has the evolution been like? It hasn't changed much, honestly. It's been me and another individual who's been doing it mainly. And then we've had a couple other people come in and out to help out on different things.

28:13But we keep it pretty lean and it's worked so far for the strategy that we have. I could imagine as we evolve and if we start doing some bigger acquisitions, we might need to add on some more people. But the way that we run it is basically a couple of corporate development individuals. and those are probably what you call deal captains if you had a bigger team with multiple layers. Those people run the end process. Everybody does upfront pipeline development work. Everybody's participating in negotiations. Everybody's participating in execution and integration. And so we quarterback that all the way through.

28:42And the other thing is on cross-functional partners. We've gone back and forth on, should we hire an integration manager or should we get more dedicated resource from a team or two? We haven't done that so far and it's actually been okay. I think we've had to develop our integration chops and our project management chops to be able to do that. And we've had to be really efficient about it because we're also doing other aspects of execution at the same time. And then with the cross-functional partners, we haven't had dedicated resource, but we do have individuals from most of the teams that have a percentage of their time carved out for this.

29:12That sounds pretty efficient. It sounds like a big lift is very product-oriented too. I feel like you're engineering your integration approach. It is. If we were doing things that were a bit more financially driven and we're having to dig into their customer base and quality of revenue, and we're looking at the mixed P &L and all sorts of stuff, we would have to step up because that would land naturally on us. But like I said, it's about tech and talent. Yeah, because you don't have like this, what does a joint go-to-market look like? And you're just really focused on the tech. One of the 12 that we kept as a separate standalone business and have just progressively integrated pieces of it over time.

29:45And that one definitely stretched us a little bit to think about how do we run this business as a separate business and a separate P &L and kind of separate reporting and leveling and comp and different things like that, and then evolve that over time. But you're right. The complexity of it is something that we can manage. The deal sponsor ultimately is the person who's held accountable for this. Of course, we have scorecards that I hold me and the team accountable for. But ultimately, it's them. There's so many benefits to a setup like that because at the end of the day, The negotiation and execution is the easy part.

30:16It's the integration and actually doing the work together is the hard part. So naturally, the person who should be accountable for that and saying, yes, I want to do this, I think this will work. And I'm highly confident that these people in this technology will be able to achieve these goals that we've outlined. It's got to be the person who's managing those people. What do those goals look like? We basically have two categories of goals, people and product or technology. That's kind of the way we run our business. We certainly have performance metrics that different teams are accountable for.

30:41But the level of acquisition we're doing, you couldn't assign a whole metric probably to the acquisition. It's people, which is solely retention. We don't look at performance evaluation goals on that. And then it's product deliverables. So we have usually like an 8Q, two-year roadmap with milestones that we map out. And we track against that. And then every board meeting, we update on the scorecards and our batting average. And so we do it. Do you have goals around how many deals you'll do? Nope. I've hung out with a handful of other corporate development people and I haven't heard anybody who said they had that.

31:15Have you come across it? You're in Silicon Valley. That's why. Okay. If you're running off of a real rigid private equity playbook and all of a sudden it's like acquisitions are associated with revenue and you start building those things up. Outside of private equity, do you see other corporate development folks having field targets? That's a good question. You see them, but it's almost like they're operating like a PE firm in that regard, where so much of their growth is driven through acquisitions that they're betting on it. And those would be real M &A platforms. Their business is vastly developed around it.

31:48I think in the Silicon Valley, you see it's tech companies. And a lot of them have strong organic growth. But when they do have that, it's very much of being strategic on all their acquisitions. Strategic should be. But when you're seeing some of these other companies that are just literally created off of acquisitions, then... And I think it's more about incentives to make sure they're doing good quality deals as opposed to acquiring revenues. Yeah. How have you seen corporate development practitioners evaluated individually if you're the leader of that function? How are you evaluating your deal captains?

32:19This is shifting and this would be fun to get more. I know there's folks that do research on this specifically because they have the traditional, here's your base and here's some option package on deals that you would execute. But you're seeing more accountability on post-close. The other flip question I brought up to you is like, do you own success? Who owns success? The larger companies tend to see the business unit leader owns the success of the deal, where if it's more of like a smaller private equity owned company, you'd actually see corp dev that had ownership of the success of the deal.

32:49That makes sense. I think those are some of the things that would define it. And then, again, just general theme. People realize you can negotiate 5-10 % on the front end of the deal, but it has nothing to how well you can integrate the company, which makes the 0-100 % difference. Yep. That's the hard work. Yeah. Aside from comp, which I guess is part of it, but just how they're actually evaluating. If you had three deal captains, how are you evaluating them individually? What I've heard when I've asked people this, and I ask most corp dev people I talk with, I ask them this just because it's something I'm curious about.

33:20Most of them say there's not a target and it's basically qualitative. It's really hard to have objective, quantitative, measurable goals. I guess you can make some qualitative still somewhat measurable. They get a lot into the how. It's how they operate. How are they operating? One thing we do is we measure our pipeline activities well, just to understand the level of activity. So we don't have a target that says, you must have this many outreach, you have this many corporate dev screenings, this many prod eng meetings, this many X, Y, Z. But we do monitor that and track it monthly. And so that's just a way of keeping a pulse on what's happening.

33:54And again, I've got a teeny team, but I can imagine if you have a bigger team, it'd be a good way of understanding. And numbers could change a lot. You could have somebody who's had zero new calls in a month, but they're in the middle of deal execution and that's perfectly fine. But you might have other things that you notice where you're like, wow, we really haven't had many prod-eng meetings in a while. What are we sourcing? Why is that we haven't found anything that's relevant for them in the past month. Have you found anything particularly that works well to incentivize your team? No, nothing other than normal comp.

34:22I know this is an easy thing to say, but ideally, you have ambitious people who are doing work that they really like and that they can see value in their future career, whatever direction they want to go in. If it's corporate development, great. If it's something else, that's fine too. But that they're actually saying, this is productive and useful for what I'm going to continue to do in the future. So I want to do a great job at it and learn. Agree. That's the best driver. I think that's why I like working with corporate M &A. If we only got deal points, then we'd all be in corporate M &A. That's right.

34:48I got a note here about how to combat very common cognitive decision biases throughout the process. You and I first spoke when I was a couple months maybe into starting the team, I think. It was super early on. And one of the things I was saying I would love to be able to do is just to combat some of those common biases, just normal decision-making biases that everybody has, that everybody goes through, that obviously are prevalent and exist whenever you're doing a deal and you're having to make a decision on that one. I don't know that I've actually done anything great on that. It's something we try to pay attention to, but it's just the confirmation bias.

35:22It's the sunk cost. You're down the line. You've spent a lot of time on something. So of course you want to get it across. And maybe you're getting a few more warning signs and a few more things that aren't as good to your thesis, but you're like, yeah, but that's fine. Come on. This is going well. And you just push through it. There's been a few times where luckily nothing's been a big issue, but there have been some things that we've just plowed through. And then later on as they're working here, those things bubble up again in some way. So that's happened a couple of times for us. But when you're in the mix of it, you're excited about it.

35:53You genuinely feel like it's going to be a good thing. You're not, I don't think you're doing it just for the win, but obviously there is some bias in there that you've put a lot of time and effort into this and you want to get the win. You'll fever. Yeah. This is it. Yeah. That's a tough one. I don't think there's a cure for it. I think once you get it. No, at the extreme, you have these red team exercise. I think that's what they call it. Red team exercises where you basically have somebody pitch the case on why this is a horrible idea for an acquisition. And you hear both sides of that. Could you do it at like your size and scale?

36:22They feel like, I only have heard of it at like 3M, these really large. Yeah, exactly. I don't know. I don't know that you could. You could certainly do the exercise to see what the case would be against this and actually articulate that and share that with people when you're talking about the case. And I'm sure people present that, the way I've seen it presented is generally risks. People are like, oh, here's some of the risks or these are some of the key assumptions we're making in this case. But you could probably go harder on it than that. I could do a convince my mom this is a good idea as an alternative to a team exercise.

36:51Okay. Pretty skeptical mother. Yeah. She's like, Yeah. How much money to buy this company? You find the most skeptical engineer leader around and you tell them about it and see if you can convince them. Like I said, I think it's true of all decision making. So I don't think it's necessarily unique here. I just think in the context of a deal, you're making a decision that has a bigger impact than probably some of the other decisions you make, maybe on a new hire or a new product feature or something like that. Some of those, at least in our business, are a lot more iterative and less of a risk and less of a difficult thing to unwind if you do that.

37:24I've seen a lot of these larger companies. So they create these pretty elaborate scorecards, have that logic or rationale behind their deal thesis that, hey, they're being very objective and trying to eliminate those kind of biases. I don't know if that's something that you tried or looked at. Say more about the scorecards. I personally don't agree with it. Okay. Because I think you're overcomplicating your assessment of a deal. Yeah. It gets complicated to weight everything. like you're all this and you're creating a matrix of here's all different areas that we're going to assess this deal on and trying to be as very tactical basically and how you're assessing the score to opportunity yeah i haven't come across that but i know what you're talking about and it gets into a lot of false precision at the end of the day you got to go with your intuition as a leader if the deal sponsor and you as the corporate development partner on this one aren't feeling it for whatever reason, for whatever combination of variables.

38:20This is great. This isn't as good. This is going to be difficult. This would be amazing if we had it. You've got to weigh those things out in your own head and your own intuition and make the call. Yeah, almost like you got to find it within of like, where's that tipping point? Yeah. Just being really open-minded to know that there's a tipping point right there. You're in tech. AI is the buzz of the town. You see AI making changes to the way you're doing deals? It hasn't yet, but I think it should. We've briefly talked about this before. I know you're spending time on this. Seems in the initial pipeline and research that you do, seems like that's an obvious area where it should be able to help.

38:53We've played around with some models and tried this before and haven't actually gotten too deep into it. So I'm sure there are models that are pretty capable of doing this now. I don't think it's a super advanced activity. But so far, I haven't spent a lot of time on that one. But that seems like an obvious one. I just feed it lots of criteria. I maybe feed it my previous deal history. I feed it all sorts of information on my company, my culture, all the people that work here, all of that sort of stuff. And then it helps me to filter out good companies, good individuals, good leaders. We'll experiment.

39:21I got a new series called AI Emanate Teardown. Nice. I just pick a public company. We just scrape as much data as we can. We start testing it on these LLM models. I might call you out for that. Yeah, that sounds exciting. Yeah, just be a commentary. Yeah, yeah, sure. And that's what we would do as well. Sometimes we look at what it says about Roblox and find out how accurate we think it is. So that's an obvious one. I think in diligence as well, that's another obvious one where you just have so much data and so much information and text, and you're trying to answer questions like, I believe a lot of law firms are already using AI-assisted tools in various ways through that.

39:56I think that's another clear, obvious one. And then finally, I could imagine it also, if I was a founder, especially maybe a smaller, early-stage founder, don't want to spend a ton on legal fees, but need to navigate something. And maybe it's less about the legal fees. Maybe it's just more about better understanding. but to navigate all the legalese of a deal and an execution, I think that could probably help them a ton. Because we definitely spend a fair amount of time doing that. And we should, and anybody doing this should make sure the other party really is comfortable and understands all the things.

40:26But that's going to take time. And I can imagine, again, AI tool that just synthesizes things and simplifies it. I could help. Completely agree. They're awesome use cases. Yeah. Do you have other areas where you think AI will help with M &A? Templates. I feel like everything in M &A is a template. your investment thesis, diligence findings, report, integration progress. So being able to run a sequence or several different prompts at a time to be able to aggregate a volume of information and really get a head start at compiling it to get those analysis done. That's like the value is taking unstructured data and structuring it.

40:59And then integration planning is an interesting one. But what's interesting is if you look at a company, they typically plan integration. if you're using a large language model, you need to think of it more as a comparison. You need to build a workflow to provide information about your company. Saying, hey, here's Roblox. This is what we do. These countries we operate, the people, this and that, and really provide that context. And then bring in the company. This is the company we're looking to acquire. Let's start thinking through integration. So that's a little bit of a different that just doesn't naturally plug in.

41:33You can just start prompting and get answers. I think that's thinking through that extra perspective of providing that information on the parent company. And then I think there's like an organization AI that as you do more deals, it'll keep learning and carry along. So you have all this historical data for the common red flags that we encounter. How does it take people to get their diligence done? Those kinds of insights that could help optimize the process as you go. Those are probably the main ones I've seen that a lot of people want to automate valuations. It's probably later in the roadmap for AI, but I do agree.

42:05Once you start seeing even earlier this year, being able to start putting large sums of data into a learning language model. It's probably the current bottleneck. Then you're going to be able to do a lot of cool things with being able to synthesize and organize information. Yeah, for sure. I look forward to your next product. Yeah, I'll come bug you. I'll just pop in the office and keep demoing until I can get you to sign. Yeah, sure. We've got a big scale here, so we'll be big customers. I want to figure out how to exchange for Robux. You want Robux? Robux is costing me. I want to figure out how we can barter for Robux here.

42:36This podcast is brought to you by Roblox. There you go. We could probably get you something for that. That's worth something, huh? Hey, if your kids want to learn good professional skills, put them on Roblox. They get to learn how to manage their virtual currencies. They get to invest it correctly and do some fun stuff. Yeah, get them creating on Studio, which is our development environment where you create everything. But yeah. What are the ages that you see kids that are starting to create on that Studio? If I just think about in our, just in the city that I live in, summer camps, I think days six to eight, they'll have Roblox, Minecraft, other coding camps that they do.

43:11I'm not sure what degree they're teaching coding versus just game development and kind of low code environments, but still it's engineering work that they're learning. Awesome. Yeah. This is it. I'm coming to work for Roblox for Robux. We've got a decent economy. We've got a lot going on out there. We'll work for Robux. I need to. I got three little kids. That's all they do. They do. True. That's your retirement plan. Get them building on Roblox. Kyle, what's the craziest thing you've seen at M &A? I've heard you ask this question many times on your podcast. I would say I have not seen many crazy things, honestly.

43:41I've been fortunate. Again, the nature of what we're doing, it's very important decisions that we're making with these startup founders for them and for us. I'm not downplaying that at all. But I don't know if it's as high stakes as probably some of the stuff that the real crazy stuff happens when there's lots of high stakes things involved and big money and bankers and lots of different things. I don't have any great things. I don't know about that. I want to find a little dungeon around this Roblox campus where the bad engineers get tortured. No, none of that. We've been very fortunate. We've brought on some great people.

44:13Craziest thing you've seen a founder purchase after closing. I've seen a few show up in some nice cars. We're in Silicon Valley and people are generally well compensated in this area for the work that they do. So yeah, you see some nice cars rolling through every now and then. Nice cars is pretty common. Pretty staple thing. Yeah. Nothing crazier than that. What do you buy? It's pretty boring. I know. Jetpack or anything. Something. Not that I know of. I'll check back in. I'll let you do another dozen deals. It'll be my first email when I see something real crazy. How about that? This has been great.

44:42I appreciate taking time. I know you had a busy schedule. Thanks for making this happen. Inviting me here on campus. Those of you still with us. Thank you for tuning in. And till next time. Here's to the deal.

45:04Thank you for taking the time to explore the world of M &A with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple Podcasts. We'd love to hear from you. If you need help standing up an M &A function or optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email, Kisan, K-I-S-O-N, at mascience.com, or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter.

45:49Again, that's mascience.com. Here's to the deal.

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