How to Execute Product-Based Acquisitions

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0:45I'm Kisan Patel, and you're listening to M &A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies, and what actually happened during M &A deals.

1:09hello m &a scientists here at m &a science our goal is to continuously expand our understanding of m &a and use that knowledge to create top-notch training programs and resources by visiting mascience.com you'll find all the information you need to take your m &a skills to the next level get started by signing up for a free weekly newsletter to stay up to date on the latest courses, upcoming events, and expert interviews. Again, that's mascience.com. I'm your host, Kisan Patel, CEO and founder of M &A Science. Joining me today is Andrew Morbitzer, VP, Head of Corporate Development at Typeform.

1:45Typeform is a software as a service company that specializes in online form building. Today, we're going to talk about how to execute product-based acquisitions. Andrew, how are you doing? Awesome, Kisan. Thank you for inviting me and including me. Thanks for taking a break from doing deals to have this conversation. Can we kick things off with a little bit about your background? First, I want to say it's fun that you came up with this idea around product focus to M &A for a few reasons. I love the connection to your informative work and a shout out for your book on Agile M &A. There is a direct connection to Agile product world and how Agile can absolutely increase the quality of deals that are made.

2:27So I just want to help folks make that connection then. So thank you for that. I started off life, and the reason I'm telling this is just because a lot of people, like 90 maybe percent of people, come to this role through either some kind of a strategy and consulting firm or maybe even more likely through investment banking. And I started off life different. After graduate school, I was actually an engineer, engineering leader working on applications, databases, hardware with large enterprise customers at IBM. And I got beyond engineering, just it was a necessity of the job to find the connection with customers and work through their needs.

3:07So it wasn't just programming to a spec, but it was actually testing a lot of things with customers and figuring out what worked and what didn't. And it was illuminating to take what was words on a page and really figured out what was disappointing or angering customers. And I couldn't describe it well at the time, but it was a learning lesson on differentiation and what makes somebody who's a customer or who knows their customers express love and be able to take action off of that customer love. Or where do you get the milquetoast response or even something that's anti-love, which is often hard to hear, but super informative and helps you make much higher quality decisions much faster.

3:49And this product foundation got me into marketing because then I was in a role where I had to figure out how to get customers to respond and purchase and actively participate. And I knew somewhere along the way that I had to get better at leading people, leading businesses. And I went on a mission to find somewhere where I could go get better. And that was Intuit, which I had to work hard to find my way into. It's an amazing shop, amazing people in business leadership facility. And I got in there. I met my first real godparent in the working world, Steven Aldrich. Special shout out to him. He's also a godparent for the Oakland Roots or the Oakland Soul soccer teams, if you want to look them up.

4:27It's a love of passion and investment and time and expertise for him. And he thought my background in product and marketing and strategy, along with personal attributes of loving to meet new people and really understand people what would make them tick would be a good fit for strategic partnerships and M &A. He later sold a company he was CEO of to GoDaddy as KKR and Silverlight were taking GoDaddy private, where I went to work then for my second godparent and worked for him for nine plus years, longest that I have worked or probably ever will work for somebody. Nine joyous, action-packed, learning-filled years for David Popowitz, who is just amazing.

5:06look them up. That led to a long string of successes at GoDaddy. It's quite the background. I like how you went from this essential engineering product to marketing strategy, now M &A. How does that particular background that you have, because it is different than the traditional go through investment banking, private equity, end up in corp dev. How do you think that brought in some maybe different elements or perspectives in your role today? There's some things that you still have to have. I, through MBA and on-the-job training, know corporate math at its basics and fundamentals of what makes a company run.

5:44And certainly when I'm doing M &A, I always have an amazing business analyst as a partner, somebody who has come up through the more traditional analysis and iBanking side of the world. I will say on the product side, first, anybody can learn this. So it's fun for me to talk about for you to invite me here. It's not magic. It's time developing expertise. This is the old 10 ,000 hours idea of what makes something go. You play to your strengths. Playing to strengths for me around the Product and Marketing Foundation, it has allowed me to do some things that have been very helpful in attracting the right targets and setting them up for success.

6:21One is that when I go and I meet founders, and I meet a lot, I meet tons, hopefully talk to a new company every day, And often with founders, to build the relationship, it's around their product dream. It's why they started the company to begin with. Sometimes they're not product people, but for the most part, they are. And they had a vision. I'm able to most often build a bond with them over the sheer view of their dream around the product, what that can do for the customer, how it's differentially better than what's in the market. And then how that would match up with the company that I'm with, who's the acquiring entity.

6:58I've had multiple founders tell me that was the key in getting them to listen versus other outreaches that they have. So maybe that's hopeful, especially in the last few years that have been a really competitive market. The second is having spent a lot of time looking at product and marketing from different directions. It has enabled me to be competent to at least a certain level at leading the product and the experience and the marketing analysis so that you can identify or I can identify with the team clear strengths, the challenges based upon customer insights, a little bit more about what the state of the market is.

7:36So it's firsthand knowledge, not necessarily magic, but it's just a strength of a lot of experience there I can play to. And then the last I would say is that most often in product based acquisitions, the sponsor is a GM or a CPO who's a heavy product based person. This is an ability to be able to create a connection with them, to create a bond with them around the criteria that are going to matter most, how that accelerates the strategy rooted in what's different about each potential target. And then I can be the one who self-evaluates those targets pretty deeply from a lot of different points of view that are especially rooted in product and customer.

8:15Let me see if I got this straight. I think these are your unique differentiators. The ability to leverage that background to build relationships, understanding the customers in the marketplace, and then also essentially the product strategy and being able to really see how these pieces are going to come together and work with that team to make it happen. I think that is true, but it also matters for product-based acquisitions. Somebody who approaches this, who has more of the traditional M &A background, typically they partner up with somebody. a number of amazing partners at GoDaddy who were day job version of a CPO for the divisions for each of the divisions at GoDaddy that they were in, right?

8:55So they bring all these capabilities too. But there have been times where I've actually been in the role of substitute head of product or PM for areas or where I can bring an additionally beneficial angle to it. So it is a little bit me, but it's also what helps somebody in the role for product-based acquisition. Let's break down product-based acquisition. How is it different from any other acquisition? There's so many good types of acquisitions out there. Market consolidation and buying customer bases and all sorts of fun things out there. For product-based acquisitions, beyond saying that, yes, we want to have a great technology or experience or capability, that it's at the foundation of a product-based acquisition.

9:40It should be absolutely rooted in your company strategy, which I hope is something that most people would agree to. It fits within the definitions of what makes sense, but I've seen that not be true, unfortunately. So I do say it. There should be direct line of sight to the company strategy. And then the criteria should be around how products are actually going to accelerate the strategy or make the strategy happen. Oftentimes, it's not an acceleration. You have a company strategy where there's a hole in it somewhere around product. It's specifically what product's going to do at the foundation, which should be your first criteria.

10:16They're not your only criteria, maybe equally weighted. But it's in the case where product-based is the first thing that you're going to evaluate on. targets have to meet that product criteria first before any of the other criteria should be evaluated and come true. The reason I say that is if you're doing a market consolidation play, you may not care about product. You may be just pulling a number of different companies together to buy share, or it could be you're just buying customer bases to put on your existing product, in which case the other product doesn't matter. So having that product focus, what makes it different is you don't pass go without making sure that the product hits your criteria and that you know why.

10:57Some examples I have of where that's mattered are one where there was a really important growth area that we were getting into. And it ended in the end being a new division. We actually folded some other acquisitions that we've made underneath it and some existing operations. And what mattered most was that the product matched what we had in the company strategy. We had a number of different companies that we looked at. We got down to, I want to say three that we were really serious about, and all of them scored super high on the product, which was what allowed us to move on to the other criteria and eventually determine the winner.

11:36And the winner was determined then based upon other criteria, but it was only after getting the product fit right. Because in most situations, if you're buying in on product, it's been a mistake that I've experienced in a number of ways, both firsthand as well as nearby, to say that you're going to go fix product later. And so you really have to score very high on that when you're de-risking an acquisition. But I'll give you another example of a product-based acquisition where it mattered for us is we had a strategy. We needed deep expertise that was different than hiring some really good programmers that say, hey, this is the product you're going to go build now.

12:14You've probably never built that before, but you're really good in this language, right? That's more of an organic growth, organic development scenario, we were in an area where we needed expertise that had been proven, where people had bumped into the wall a few times and had to retool how they were building the product, how they were developing product market fit in this super particular category. But what we ended up doing was evaluating them based upon their products, customer love around the products. But those weren't the products that were going to be the big scale that we were going after on our strategy.

12:45So we actually bought them and we wanted the technology, but what we really wanted was the team and the proof that team was amazing was in their products. But we needed the team to go build something that we thought was a much bigger opportunity than the existing product category that they were in. But it was having that product first that enabled us to develop super high confidence in that team. So that's just a twist on it. And the last thing that I wanted to say as I was thinking about prepping for this is what's changed in product-based acquisition, especially that makes it different. Everybody who's been to any kind of a business school, one of the early things that you learn is the idea of build by partner to go solve problems, which is incredibly powerful framework because everybody understands it.

13:28So you can move through it in about five seconds. The buy part of that has traditionally been often looked at as the most heavy weight or the one that's got the highest set of hurdles to it because people think that acquisitions, they think a bunch of different things about acquisitions, but it's just looked at as heavier weight. Again, another plug to your concept on agile-based M &A, certainly we know now how to make acquisitions more successful. We know how to make them lighter weight. But I will say, as you think about software always getting compressed in the stack, what was great capabilities last year are table stakes this year, and you've got to add up.

14:05You're able to buy product-based capabilities that enable you a certain tempo that is much more accepted. I've seen it be much more accepted in the market now. It does call for a more agile, but very much methodically driven approach to product-based acquisitions so that you can do it with also a high success rate while you're trying to move with the tempo of the market. That's something that's new is that capability-driven, higher-tempo acquisition around products that's now totally okay and expected by many acquirers out there. Why is that? M &A for a lot of time was very well developed on the finance and financial analysis side.

14:47The history I had seen when I read everything I could when I first got into the field was hit or miss from a product perspective, whether it was really going to work out or not. There's a great story that I point people to. It's old now. It's an HBR study of Pitney Bowes when they were doing a corporate transformation. And the HBR story is called Rules to Acquire By. And it's very template-driven, methodical, learning-based approach. And it's older, so it's not as agile as your agile approach is. So it could use some updating, but the concepts hold true there. When you apply those to product-based acquisitions, you go through a number of steps, learning steps, get better each time, de-risk, figure out what matters so that you can focus on that and where to be super time and resource efficient with the rest.

15:40And I think that was just hit or miss before. And more companies that I've talked to practitioners at, as they've gotten methodical on this, and now it enables this higher tempo while not being hit or miss on the fit with the product against their specific strategy. I want to go back to when you talked about the product market fit in general. Tell me more about that and how that fits into this. How do you gauge it? I have strong experience and evidence-based opinions on this that when the market is hot, don't often allow for the approach and the specifics that I'll share to get exercised. Companies, people, cultures get pushed to move fast.

16:20I'm not making a judgment on that. I've got a couple of things that I'll share that take time and they take resources, but I found them to be super affected. The first is when I join companies, and this is important too, because this helps people calibrate whether it's right for them or not. I want to go somewhere where there's a special focus on the customer, a special mission that they have, something that's different. There are companies that I've looked at, that's not the case. They're out there for things that are probably far more valuable to investors in Wall Street around just super focused on profits and say profit margin expansion.

16:56If customers like it, that's okay. But that doesn't necessarily get me ticking when I go to a new job or when I get up in the morning to go to my current job. So I want to find somewhere that customers really are the focus of the company. And within that, when we look at targets, we look very hard at what I call customer love metrics. The shorthand, very scientific approach is net promoter score. Are these nines and tens? Are these things that customers love so much that they can't help telling friends about it? Many, many, many times, to the point where at GoDaddy, we had this for a while until I left as a best practice for each acquisition, is we ran a, for shorthand, what we would call a net promoter survey.

17:37That was a survey that we would get the targets, if there was two or three on the shortlist, we many times ran this with all of them, to do for their customer bases. And yes, this can be potentially a little disconcerting to them because it could be make or break based upon what we learned. But it also gives them tremendous insight into the customers that they have in a way that they probably don't have the time or money or resources to go figure out. And typically, companies that are on the short list are really confident in their product and the experience and the customers love them. So they're happy to show that off.

18:13So it really should not be seen as a threat. So we'll develop a whole survey that is all about the product, all about the shopping and the purchasing and setup and first use experiences and what the customer care experience is like. And we're trying to pull out as many things that we can that match our strategy to help us evaluate, but that also point out where the company and its products are special and different. Anybody watching this, your product teams are already doing this today as they figure out new product categories to get into or even major new capabilities. So you should be doing this too for product-led M &A to match what your company to build on those strengths, to take advantage of the belief that your product teams have in this.

18:56So it's all for the same reasons. Second thing is spend time talking to the customers. When I go and I talk to customers, it takes a lot of time. This is probably the hardest thing in the world to carve out. It's a skill that Scott Cook taught us at Intuit. He did it. Brad Smith, when I was there, talked to customers. Not just talked, but went out. Scott's methodology was very much around direct customer observation, because what you can see is often different and richer than what the customer is going to tell you. And so we would go do direct observation. Try and do both. It is so time-consuming that almost nobody does it, honestly.

19:29But the stories that you have in your head enable you to personally build confidence and it builds your credibility. You'll find yourself reusing these stories when you're getting other people on board with why this is a great product acquisition category to be in, why this is a specific target that is especially better for you. While it's hard to carve out the time to go do and maybe push people out of their comfort zone, it's just fantastic what it allows you to do to set an acquisition up better for success. Another point is roof at scale. So this is an important one. At every company that I've been at, people want to talk about doing acquihires.

20:10It's lighter weight to get something that's small. We can get a small team. They'll integrate faster. There's less heavy machinery for us to do on integration. And there's less of an existing customer base that we'll have to figure out what to do with, which are all true. And in cases where you're looking at expertise that you want to acquire to go do something that maybe is a little different than what we're doing there now, fair points and should be considered. But the challenge is if you want to get into a product category that a team is working on, you want scale as much as you can to get proof that this is going to work for you.

20:43So if you're trying to de-risk, you want to see customers, you want to see customers across time to help figure out product market fit. You want to see that the customers are retaining and what their engagement metrics are. And you need a larger data set to do this with. And that definitely helps you figure out product market fit. And then the other thing that I thought of to share is reading reviews. So sometimes there's marketplace reviews, which is good. Not as many as I personally would like, but you can find reviews. G2 can be fascinating to read through. I spend a lot of time, I've always got a G2 tab open, especially when I'm talking to new companies, while I'm talking to them, I'm going through and seeing what their customers say and how it's changed across time.

21:24What were customers saying a year ago versus today? And a part of that is to avoid when you're trying to figure out the fit. If you go to G2, they'll show you what the person's role is, the size of the company, and all that helps because that's the market. You're trying to figure out, do these products fit? But avoid the professional reviews. There's a lot of them out there, like top 10 lists, heavily influenced, if not completely influenced by pay to play. I find that, honestly, I just want to say they're garbage. And so if you're trying to be very clear on your time and avoid gray areas, I would say put those in the do not do category.

21:58When you see them, don't click through. Just keep going for the quality ones that are actually by customers. Can you go back to direct observation? How do you do that? And Intuit, for direct observation, we actually went to customers. Intuit maintained customers. And then we picked this practice up to a degree at GoDaddy, although a lot more online at GoDaddy. Intuit maintained relationships with customers where customers had opted into research to help make the products better, to give feedback on new concepts that were coming out, business models, pricing approaches, that kind of thing. So that you had a mix between the quant and the qual.

22:35And you need both. The quant doesn't give you the context and the qual doesn't give you the data set to have confidence. This is about the qual, but it's more what Scott told. It's the aha moments. And so I will tell you, there was a lady in the East Bay who was using our point of sale service that was desktop software at the time, and she was running a Yahoo store. And sending her a survey on her needs, it was going and seeing her talk to customers as they came in. They were literally sitting on a stool behind the counter and just taking a morning and thanking her for it, trying to buy her lunch, trying to be unobtrusive so that we didn't interfere with her business.

23:16sitting on a stool and watching customers come in the door. And she would jump into a mode where she was trying to help that customer. She would check them out as they would leave and there wasn't another customer. She was over here on a laptop updating her Yahoo store. And when she was showing us inventory in the back, she had to enter it in Yahoo store and our software separately. The sales were tracked separate. She had to redo all the product descriptions. and it was viscerally seeing that pain and seeing where it was and seeing some insights into how she was doing the work that she wasn't even describing to us because while they were a huge pain she was a frog in the boiling pot of water and she realized that she had the pain and that gave us insights into specifically the products which there were two that we needed to acquire to solve her pain in a way that would cut her workload down from literally two full-time jobs to get it back to one where that's where it was.

24:16And if we could accomplish that, that would be a game changer in the market. That was the aha moment where we could do something different than nobody else was doing. It was absolutely right on top of a brutal pain point for the customer. She told us about part of it, but she didn't really tell it to us and we didn't get the pain until we saw it and we could see through it in an even stronger way than how she would describe it to us. What part of the deal life cycle would you do this? So that for us was earlier in the strategy that was figuring out more specifically the criteria around what we needed to go by and how that created a better business outcome for us, how that was going to lead to customers and revenue.

24:58The work that I've done around customer love metrics comes once you've got your short list. It's a sliding scale. You don't stop and go do this stuff. But as you can see, you can ease in, okay, these are likely to be the two companies or the three companies that we're most focused on. And you should be trying to do analysis on the raw data. They're providing you at that point on customer behavior, marketing metrics, efficiency metrics for the company, while you're pulling that apart. In parallel, at that point, your customer love metric analysis will determine do they really make it onto the shortlist?

25:35And if so, do you prioritize one or the other based upon what you learn? At a minimum, it provides an amazing amount of two things. One is validation on who you've picked on the shortlist that's super powerful inside. And that's why it may come later in the stage for that one. The other thing is it gives a lot of input into the integration priorities for the roadmap ahead. This is all part of preliminary diligence then? Yes, this is not, hey, we're negotiating a term sheet or we've signed a term sheet and now we're into formal diligence mode. And are you getting these introductions through the company?