Validating the Acquisition Plan

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0:40Revolutionize your M &A process with Dealroom, the modern M &A solution. Learn more at dealroom.net. Again, that's dealroom.net. I'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.

1:16Hello M &A scientists, welcome to the M &A Science Podcast, where we learn from the best in M &A to uncover proven techniques for enterprise value creation. If you're interested in learning more about how to optimize your M &A practice or want to get involved with our community of forward-thinking M &A practitioners, visit mascience.com and subscribe to our free weekly newsletter for the latest industry trends, insightful content, and community events. And if you want to keep up with us on the go, head to LinkedIn and follow M &A Science. I'm your host, Kisan Patel, CEO and founder of M &A Science.

1:51Joining me today is Adam Harris, CEO at CloudBeds. Cloud Beds is a cloud-based hotel management platform, which includes tools for managing reservations, availability, rates, distribution channels, payments, guests, housekeeping, and more. Today, we're going to talk about validating the buy plan to get board approval. Adam, how are you doing? I'm doing well. Thanks for having me. Thanks for taking the time to have a conversation. Can we kick things off a little bit about your background? I've got a mixed background. It's fun. Everything from being called Gizmo and my fraternity at Berkeley, being a tinker of technology my entire life to doing some Wall Street stint and coaching soccer and ultimately working in technology and building software for others until my good friend and I, Rich, decided why not start our own SaaS company and here we are with CloudBeds.

2:39You're a two-time founder because you started a company prior to CloudBeds that acquired. I did, yep. And now CloudBeds, what got you involved in the hotel industry? Glutton for punishment, I think. I had a full head of hair when I started this thing. I'm I'm quite envious of you. We realized a couple of things. One is there's a trillion and a half dollars gets spent inside hospitality travel every year. And it's a ginormous industry. It's also one of the most complex. And at the time, we had a hotel group approach us saying, hey, I've got this problem. And their problem was they had a bunch of different concepts in this big master development down in Latin America.

3:16What they were trying to accomplish was, how do I centralize all the reservation experience for a consumer in one place? Now, the issue was there was like nine different technologies that were doing one element of that flow. And we built from scratch this woven technology into one unified experience for a consumer. Rich and I looked at each other and we're like, it can't be this bad. Like, it really can't be this bad in an industry that will put a billion people into a bed for the first time by 2020, 2030. How on earth is the technology this horrible? Fast forward today, what we realized was travel as a whole has some of the least digitally adopting individuals.

3:58I love the scientists. So the hotel scientists are not very tech forward in their thinking. They are very much old school. They like to keep things as normal. And I think our peer group for digital adoption in about 50 industries is forestry, prison incarcerated services, and construction. I'll take Procore all day long. Not too sure about forestry and prison services. I didn't know they had tech. And to be honest with you, I'm sure they do. But if you think about that, here's an industry with a billion and a half people who are going to stay in a hotel this year. The consumer is incredibly savvy.

4:33The hotel operator is not. And so we saw this opportunity to take advantage of some tailwinds in the market. And so we went vertical. We built a vertical SaaS company. It took a lot of years to prove that this thing was actually doable and possible. We strung a lot of technology together. We bought six companies along the way. We're actually in exclusivity on another one right now, which is really exciting for us. And part of that M &A practice was accelerating our capability from a product perspective. is can we get to market quicker than a build, for example, scenario? And I'm happy to walk you guys through some of that thought process.

5:08I'd love to. What catches my attention right away is the tech company. I run a tech company now. And I'm curious too, we'll probably get in the conversation about managing their organic growth with these inorganic activities, especially you're still at the earlier stages and balancing that out where it doesn't become such a major distraction and throughout all the organic efforts. We tend to be a platform kill M &A approach, meaning when we buy platforms, we tend to roll off all of the customers into our ecosystem, even if that means deteriorating revenue. That's not in all cases, but in most cases, we also like to find earlier stage MVP.

5:47That earlier stage MVP needs to be proven, needs to be completely reliable and scalable from an architecture perspective. But I don't need the big go-to-market engine. I have that. I have the logos of customers already in our ecosystem being one of the largest in the world. And we can also take advantage of the fact that our ecosystem is used by so many different types of properties. I don't need another interface. The interface basically becomes the one inside our core user experience. And so really what we're looking for is technologists who have mastered the practice of whatever they solve for.

6:23So for example, our first M &A deal was MyAllocator. We had just raised our first$2 million. $2 million. And we stumbled upon this technology that allowed hotels to take inventory, so rooms and availability, and then prices, and send it out to the major OTAs. That's Booking.com, Expedia, and others. They were doing maybe$400 ,000 in revenue, recurring, something like that. We bought it for$1 million. Now, great multiple if you wanted to accelerate to today in the way we think about things. But at the time, it was half our cash. We basically just raised money and took half our cash on a bet. Now, it was one of the best things we've ever done in this company history.

7:03It was one of the smartest things. And so that just became a service. That technology became a service to CloudBeds, which meant there was no interface long-term. It was just the connectivity that enabled the rest of the mothership, meaning CloudBeds core, to do everything else and connect to that ecosystem. And so Whistle, which is one of our latest acquisitions, which is a guest communication platform, that user experience has now been interfaced into CloudBeds. And so that interface of old will slowly be sunsetted into the fields. But from the perspective of what we're looking for is we're looking for great practitioners of technology who understand the needs of the consumer, but have built it in a way that we're able to flexibly take that and integrate that in many different ways.

7:46That's just been one of our approaches. Not every situation is the same. We've definitely bought tech that we've completely rewritten. For the most part, that's what we're looking for. You have this vision as a vertical SaaS serving hospitality, but a real platform model. 100%. That you're doing acquisitions and they're different expertise of capability that they've matured to. And when you acquire them, you're adding that capability to this core platform that is all driving your sort of core organic growth, your current go-to-market, basically. I think a really good analogy would be Salesforce.

8:20However, Salesforce keeps all those interfaces separate. So as you look at their laundry list of acquisitions they've done in the last decade, Slack is still sold as a third party, but Slack has now been deeply integrated into service cloud and sales cloud and stuff like that. So our approach would be slightly similar. We're looking for things that we can bolt on to the product ecosystem. I just want to get rid of the interfaces long term. How do you approach M &A? Oh, man. So we are religious about our M &A practice. It's something that we've perfected over time. And it's been fun. We were a little more cavalier early in the days.

8:54And now I think we've done enough motion where we sort of have a system. There's six steps that we go to validate. And really along those entire six steps, what we're doing is trying to write a thesis. And we're also trying to write that thesis with the other party in mind. So we actually want them to participate in that process. We want them to give us insight to how they see the two businesses working together. What they see is the value add of one plus one equals hopefully three or four or five. And so what we do is simple and probably makes sense. One, we always are surveying our customers.

9:28I don't think you can ever survey your customers as a tech company enough. Constantly be asking questions in different ways, in different formats, sometimes full surveys that are five minutes long, sometimes just one quick question in back and forth interaction. Sometimes we do polls inside webinars. We are literally trying to collect as much data on our customers as possible. We even bring tablets to big conferences and we have interns walk the hall asking hoteliers questions around buying trends and things like that. So we're very forward thinking around how do we understand what the need analysis is today?

10:01So we always started the need analysis. The second thing is we look at what trends are happening in this big industry. This big industry with a bunch of different influences. You've got outside party influence. You've got inside party influence, meaning macro things, micro events. And throughout that entire first two steps, we begin to start formulating ideas of, okay, who could the targets be? Or is this something we should build ourselves? You got to keep in mind, we've already originated themes throughout the M &A practice to this point. So even before we start serving the customer, people might be on this call being like, how do you know what to ask?

10:41We're asking such a wide array. We're looking for topics. Like if, for example, we were interested in car transfer software, someone in our ecosystem, meaning it could have been support teams are fielding a bunch of inquiries on why doesn't your booking engine enable car transfers, meaning I can book a hotel. Why can't I also prearrange a car transfer? Well, that keeps feeding up in some. It could be on the sales side. It could be on the support side. It could be in our marketing team. It could be partnerships bringing a lot of car transfer companies coming to us. I'm using such a poor example, but I couldn't think of anything else that wasn't revealing.

11:16All of a sudden, we then go and start surveying our customers. All right, car transfers keeps coming up. Is this a theme? So then we survey, do you want this? Yes or no. And we're looking for buying trends. And then we go industry trends. Is car transfer plus hotel reservations a theme? I don't know. Let's go find out. And so we then start surveying industry people. We'd start looking at what other competitors are doing in this area. We'd even look at what the OTAs are doing. And so we start to formulate a little bit of step one and step two to go, yes. To go back and forth. Yeah. This is triangulating into something real.

11:48So then we go, cool. This is a build or a buy. In this scenario, how long would it take us to become experts, like actual experts at building out car transfers? Or is there some startup or some company that has become the expert at car transfers and is already partnering with companies like ours? And can we just go partner with them? And so we then just go build and partner. So we haven't even explored, do we try to buy? We just go, hey, how do we get an MVP? heat? How do we test it in real life? So we know that the industry is saying something. We know our customers are saying something too. Those are triangulating correctly.

12:26Let's go put it into action. Let's go find 100 proof of concept customers. Let's pilot it out. And we'll set some totally subjective number as a target. It could be, we need 100 properties and we need 5 % of our reservations, book a car transfer or 10 % or whatever it is. It doesn't matter. And that probably would be fed by our research. And if it hits it, we're like, okay, that's interesting. This is interesting. Now we can go down into, is there even a target? This whole process is us building up to beginning to understand some kind of strategic rationale. There's a target out there. There's a partner out there that's proving that it works.

13:10There's capability for us to build it. And we begin to sort of really formulate down into maybe there's an M &A thesis here. Maybe it's something that we could bite off. Maybe the revenue accretion is doable. Maybe there's something that's profitable that we could actually extract EBITDA from it. And all of a sudden, we start bringing together targets. That's just one all. We try to go from big to small to medium. We want to look at everything. And ultimately, what that leads to is a lot of opportunities for two groups to begin to fall in love and or fall out of love with this thesis. And it's a product team.

13:46And then it's our corp dev team. So both teams are partnering on this. We always find some type of internal stakeholder. It typically comes on the product or engineering side. It could also be myself or my co-founder or even a sales leader, a partnership leader. It's never corp dev. Corp dev can never be the sponsor of these deals. It has to bring some team into the fold. So they have work to even convince any of us up front. They're trying to remain unbiased. And we do product demos. And these are my favorite thing. I love seeing product demos. I could do product demos all day long. What we learn is we start to learn about the talent.

14:24So we've already done a complete analysis of all their talent, who they are, where they came from. Is there overlap? Is there not overlap? Is there redundancies and synergy of G &A and finance and HR and people? We have a good idea of who these people are, but until they start opening their mouth and until we see how they treat their staff in those conversations, who they bring to the fold for the product demo, because look, they know that we're looking at this strategically. The founders are aware that this might lead to somewhere. And so it's very interesting to see who's in the trust tree when you bring a strategic product demo to light.

15:00And so there's a lot to tell from founders and CEOs and C-level staff. And we really are looking for culture fits along the way. We're also looking for salesmanship. Are they passionate about that product? All the things you would expect, it's like an interview, except they don't realize they're being interviewed because we're just asking questions about the product. After five, six really coordinated, incredibly thorough steps, we didn't write a memo. And the hope is we found a target. They're excited about what we're doing. We're excited about what they are and their culture and their people and all that stuff.

15:33We believe that there's opportunity to bring both of them together. We start writing the memo and we have them contribute. We have them contribute. It could be a deck. It could be a written memo. It doesn't matter. But we want to see where their vision is and how it brings together. We then share our fears. We share our risks. We share as much as we can transparently so that they understand what we're doing is really bringing a document to the table, doctrine, some kind of doctrine, PowerPoint or written. So that they have to show that with the rest of their team or their board or whoever their decision makers are.

16:08And it shows that they helped participate in that. We wrote a lot of it and we're sharing why we came to the equation, what the risks are. And the founders on the other side are pretty revealing. They're like, I'm really scared to go to market. Or we're really struggling in our win-loss ratio right now because of this competitor. And it's just all revealing. That document is meant to be all revealing. It leads to really quick due diligence. Nothing comes up in due diligence because we wouldn't know about it. I'll give you a perfect example. Last year, we looked at a deal where we were told that revenue was in the millions.

16:42Great. This is a founder-led organization, big company, 25 plus people doing millions of dollars profitable. And we started doing our dance. We started doing our process. We started going down. When corp devs started to get into the financial, the quality of earnings analysis, we're like, this thing doesn't even cross a million dollars in revenue. How do they have millions of dollars in revenue? But we're here and they're over here. Something is not adding up. What they were equating to was trials. So if all of those trials worked out, they would have millions and millions of dollars in revenue, not millions of dollars of captured revenue.

17:25They had millions of dollars worth of opportunities that may or may not ever translate into business. That was a weird one for us because of course that would come out in our review. Of course, people would get fired if they missed that in our analysis. And so why wouldn't that have been brought earlier to the table? It was weird. That's the thing where we try to avoid. So ever since that happened, and we've never had something that blatantly obvious where it was just like, no, that's not how you run accounting, but okay. We try to bring things clear. So we try to get them to commit as much as possible.

18:05And that way, we really have a good sort of framework to build off. That's oftentimes us spending two days in person with the teams, whether we go visit them or they visit us in our office. We just want to spend as much time. So that would have come up over a beer, I'm sure. And we had just skipped one of our steps because we were so excited about the tech. Now, granted, we ended up buying that asset, but we bought it as an asset. And there was no team came along. I want to make sure I got the six steps. So you have one, spray the customers. Two, industry trends. Three, build versus partner analysis.

18:39Proof of concept, yeah. Four, strategic rationale. Define it. This is where you start looking for targets. Number five, product demo, which has some initial culture, diligence, and things related we'll talk more about. And then six, the investment memo and creating that transparency, which lends into more formal diligence. Sounds about right. Can we break them apart and talk through some of these in more detail? Sure. Survey customers. You mentioned a lot of different formats. It could be a one-question thing. You could have folks on the tablet asking questionnaires. Walk me through that. This ties into the second one.

19:12You have investment trends. You might develop a hypothesis and you're validating it. Can you give me some examples or even like what type of questions you would ask these customers? I'll give you a perfect example. We just did a survey middle of last year around AI. We were asking our hoteliers, our real live questions to a real live hotel audience in one of our product release webinars. What does AI mean to you? And there was a series of questions related to AI. What practices of AI do you think it would be useful for? And we gave them a box full of operations or data or revenue pricing. We know where AI is practical in a hotel for technologists like this.

19:50That's pretty straightforward. We just wanted to see their lens. And so we started asking them questions around that. We did that in a live webinar and a poll. We did that as a follow-up survey. We've done that at trade shows, all around the same theme. And really what we're trying to understand is how in vogue AI, the generative AI and open AI and all this sort of talk about it, was translating into an industry that doesn't have a high digital adoption curve. Was it getting through just because the massive amounts of media talk? Or was it something that was very early? And to our correct assumption, it was really early.

20:24Now we've done that same survey again. We've done it each quarter since then and in different ways. Again, trying to pull up. Now, every industry trade show I've been to has talked about AI. Every single one of them. I just went to another one last week. They had a whole panel on AI. It's like you can't escape it. As we watched our customers go through the same surveying behavior, whether it's a pendo notice inside our application where a pop-up shows, hey, take a quick survey. when they go through five questions. We are trying to just triangulate on a trend line to see whether or not this is becoming more and more interesting.

20:58And we're also looking at that from a perspective of what is our future product lines look like in 2024. So we were really trying to understand what are some of the things we're doing? Do we touch AI? Do we not? Can we wait? Is it a little bit too much snake oil? What is the real value here and how much money we have to invest in it? Blah, blah, blah. This is a recent theme. That's just a recent survey. We think it's interesting because AI is interesting, but we've been using machine learning for seven years. We have machine learning built into our application. We will always have machine learning.

21:30AI has just been glamorized because of media attention and all the talk about it. But I wanted to hear real-time feedback. And so when you have a thousand hotels on a webinar, you ask them questions. If you don't, you're just losing this amazing opportunity to get some real-time information. So we always do two polls. We typically do one or two small questions in there. And then we also have a team in the live chat asking questions, following up the questions that are being answered, triangulating around those things. This is us just having conversations. That's the best way of describing it. Have conversations until you go blue in the face.

22:09Because if it's the same thing over and over, you got something. If you're getting a scattered answer list, keep going, go deeper. You're not there yet. You don't have the right answer. Awesome. This is really relevant, by the way, because I'm working on AI for our product and having a lot of one-on-one conversations with customers. I haven't really applied surveys because I'm always like to just get in there first and have those conversations, get some insights. I think you're right, because I can see where we can create like a quadrant of use cases and say, all right, let's get some feedback.

22:40Like where would you fit in this sort of quadrant here? Keep in mind, when you do one-on-ones, you can lead the witness. So if you're very good at asking one-on-one questions, you can create unnecessary bias just by a one-on-one conversation. We always do one-on-ones too. And then we do group think. And then we just try to get obfuscated. They're just answering questions on the whim, depending on the time of day, things like that. It's that whole collection. But I'm listening to you to interview me and I'm changing my answers on the fly just based on how you're approaching it. I could tell you have a influence over this conversation alone.

23:16So now I'm taking that back of like, you got to have a multi-pronged approach. Like let's took the data from different areas, even different formats of surveys, and then start putting it together and see if we can get some visibility and patterns or insights out of it. And then the industry trend. At this point, are you creating a market map? That's the most common thing I see, right? You sort of map out the space and you say, okay, here's the different tech companies specializing in these areas of capability. Is that kind of what you're doing in the industry trends? Are there other elements? Are you looking at some industry publications to see what the talk of the town is?

23:47It's not so much that. Like our corp dev team is responsible for mapping the industries. Okay. We're already doing that biennial. That is unrelated to a specific deal. We are trying to create the largest database of all of the competitors, all of the peer group, point solutions, things like that. We just want to know where everyone stands. And so twice a year, we'll go back and pull how many employees they have and try to triangulate around revenue scale. And we put that into our CRM. When we go into industry survey, there are maybe a handful of places our customers go for information. Only a handful.