Lesson: Zero to IPO with George Northup

Step #10 M&A: How to get acquired

The path to taking a startup from inception all the way to M&A, it is about hard work and it starts with a vision about we're solving a problem or meeting a need by solving this and creating a critical mass of customers and perhaps revenues and technology and application and offering. In the long run, this will be valuable to somebody from an exit standpoint. In Silicon Valley, sometimes we see different ways of companies being formed.

And so here's one example. An entrepreneur says there's this problem or there's this need. It can be in the consumer space or the business space and I'm going to fill that need and build to it. Simultaneously, they may think eventually this will become big enough maybe I could go public if it got really big, or it would be attractive for a company to buy. So Mint is an example. Mint is for personal finances, particularly direct to our millennials. I think perhaps that could have on its own become a big company, but it became so compelling in terms of serving this demographic of younger people that Intuit felt it had to buy it and blend it into its system. So I think that's one path where somebody has a vision providing for a need and growing it. By its inherent value, it became valuable to the acquirer.

There is another path that is used to build companies, and this is where an entrepreneur says I really like this product or this application and I'm going to build it. And then after that I'm going to find a way to take it to market. We see this a lot in Silicon Valley where somebody who's very brilliant says I'm going to build this and if I build it, they will come. I think, if you're lucky, you will find that there's a market for it. But it's a more complex way to do this.

So I think that some of the more successful people out there have identified a need that's out there for whatever reason and then built towards that need. In my own humble opinion, it's more the exception where people have said, "I have an idea that I'm just going to build it and then people will want it." In my opinion, yes, that works less often.

Early in my career, the big goal for me, and this is actually a goal for me, was to take a company all the way to IPO. Then my thought was I would do this again and again and just do IPOs every five to ten years or something like that. I would say my thinking has changed on this where now, for me personally, my preference is to work in a private company and every five years sell it. So there's an interesting dynamic going on with the juxtaposition of going public or staying private. So I think, like me, a lot of people who used to think it was very sexy to go public, I'm not so sure that's the case now.

I think there are two things happening in this whole area of going public or staying private. One is that the bar has been raised significantly in order to be a public company. In 1999, as an example, companies that had no revenues were going public, and that would be a company like Webvan who raised a billion dollars. There were quite a number of examples like that, Pets.com. These companies essentially had no revenues to go public. Of course, they went out of business. There's no entry bar for that.

For any number of reasons, the capital markets are much, much more selective, and so the entry gate to be a public company is much, much higher. So typically today I would say just an arbitrary number is $100 million of revenue to go public today. So as a result of that very few companies actually have the numbers to go public. The more likely route for them, as a consequence, is that they will get sold.

So I think that in looking at the exits in terms of venture backed companies, there's a much higher percentage to exit through M&A than IPO, and the reason is that there's a much higher bar to get to an IPO. By default, the only other route is to get sold and acquired.

The other aspect of this is that, particularly, in my view in the U.S., it's become harder and harder for companies, big companies, particularly big public companies, to maintain innovation and creativity and new ideas and new growth. It's very, very difficult in these large companies to have that. As a result, they have to go through acquisition to get new lines of business and new ideas and new creativity.

So there's a reinforcement, which is that it's harder to go public if you're a venture backed company. Although, if you're a unicorn, perhaps you can go. So it's more likely you would be acquired. There's also a need by these bigger companies to acquire innovation and technology and new lines of business. You can see this with a lot of the bigger companies, like IBM, who are trying to buy cloud services now. There's a lot of M&A versus IPOs.

Regarding LiveCapital, I think that it was a really good company. The two co-founders were brilliant guys from Harvard Business School and also Mackenzie, and I still keep in touch with them. The one thing that's interesting is that I arrived at LiveCapital in January of 2000 at the very height of the dot com furor. We had raised, almost with no effort, $50 million, possibly with using a Post-It or something like that. I'm exaggerating, but that was kind of the tenor of the times. We also had about 120 employee, and these employees were working around the clocks 7 by 24. At the time, we were still kind of thinking through what a strategy and a product would be. We are, for all purposes, pre-revenue. What was an interesting thing for me was that we were just working around the clock.

Now, eventually we sold the company to Dun & Bradstreet, and today it continues as a $6 million entity within Dun & Bradstreet. It's probably the biggest single contributor to EBIDA in profits for Dun & Bradstreet. But when the company was sold, it only had 25 people.

The CEO is a very, very smart guy, and very, very good. I think the big lesson for me, looking back on that period, was that there's a lot of hyperbole in Silicon Valley about go 24/7, total commitment at all cost, block everything out. My takeaway over the years is it's about focus on the right things and about efficient execution about those things. So, to me, it's less meaningful if there's a lot of appearance of activity and a lot of bodies. It's about working on the right stuff and delivering it correctly.