Follow me

Corporations speak: How I think about buying your startup

Cat against analog photography

I’m kicking off a new series on this blog: detailed notes on events of interest to the investing and technology community.  Conrad Wadowski, Business Development at Xamtech, is initiating  with his detailed notes on the inaugural panel of the new Enterprise Tech MeetupLivestream video here.

—————————–

In startup land, consumer internet startups have gotten quite a bit of media attention. But if you’re not interested in the idea of building the next great dating app, there’s always the option to turn to the $230b B2B market for pain points to solve.

As companies like box.net, which just raised $50 million, stimulate the imagination of entrepreneurs, corporations are also making an effort to start conversations with early-stage companies.

Given the mutual need, a group of organizers in the greater New York area (myself included) have launched a meet up called Enterprise Technology Innovation that’s designed to connect enterprise entrepreneurs with a panel of corporate executives.

Our inaugural event, “Corporations speak: How I think about buying your startup” was live streamed on September 28th from the Cooley office.

Panel:

Moderator: Safa Sadeghpour, McKinsey

Fionna Dodd Simmonds, VP M&A, American Express

Bill Taranto, Managing Director, Global Health Innovation Fund, Merck

Greg Merkle, VP Product Strategy, Corporate Markets, Dow Jones

Michael Monson, Senior VP of Performance & Innovation, Visiting Nurse Service of NY

Ben Boissevain, Managing Partner, Agile Equity

Safa Sadeghpour: Through my other life working at McKinsey, I realized there are some real challenges for corporations working on ideas internally. Someone once said there is no monopoly on great ideas. I noticed a lot of passionate and driven people that have had difficulties reaching out to corporations so I thought, let’s create an interface to connect the two. While there are a million exciting events for consumer oriented companies, in New York there aren’t any for the enterprise, so we started this.

For our first event we wanted to start from the backend. I want to ask about what you see as new trends in the M&A world. Secondly, what makes a startup attractive for acquisition? Is it sectors, stages, geographies, or is it a revenue or growth issue? Thirdly, from your experience what are the big deal breakers?

Fionna Dodd Simmonds, VP M&A, American Express

What are the current trends in start up M&A?

  • The point of sale is being revolutionized. 10 years from now you won’t use a piece of plastic with a number on it. We’re looking for anything having to do that that next step. Of course no one really knows the next step so we dabble in different types of companies to have a foot in the door when we find out the company actually is the next best thing.
  • Another is understanding social or behavioral information. Understanding the reason customers transact the way they do through social data. When you use your card, the issuer can typically see where you spend, what time you spent and how much you spend. Having this data can help create value for merchants. The information can then be tied into loyalty programs in a point of sale coupon or deal.
  • Any technology that helps us gather data or data analytics is important as we try to understand how customers spend and how we can get them to spend more.
  • Emerging markets is hot. US consumer tend to be behind the curve in terms of using their cell phones to transact, whereas Asia is probably ahead of the curve.
  • India and China are also significant focuses given the sheer number of people that are unbanked and use their cell phones for many other things such as paying utility bills, transferring money. Being able to tap into that network, and get to those countries logistically isn’t easy because of regulatory concerns, and is also very much a hot area for us.

What makes a start up attractive for acquisition?

  • This is really the difference between pre-revenue, pre-EBITDA versus EBITDA.
  • A lot of times we’re looking at companies that are profitable, that have PTI, but these companies are incredibly expensive and so I think that there is a general sense that there tends to be inflated valuations in the sectors we’re currently looking at.
  • Cost is a very big issue. We’re willing to pay for something that’s good, but I think there is a general sense that valuations keep going up and up, and we’re wondering is that bubble going to burst?
  • Companies that have open APIs where you encourage developer community use are interesting for us. One topic we weigh is investment versus acquisition. We can use an investment to get our foot in the door as opposed to doing an outright acquisition.
  • IP is actually really important for us. Do you have any patents that are really interesting and that are defensible? We look at IP, which is one of the first questions I’ll ask a startup. Are you in the patent process, is there something that differentiates you and that you’d be willing to get a patent for?
  • I think a lot of times, even if we’re looking at a company that’s pre-revenue and the technology is good, but maybe something that we wouldn’t want to acquire — what kind of talent is behind that? And how would they do at American Express? We’ve looked at acquisitions purely for talent but we have to balance that because we’re a large company. I’ve got into some start up meetings where you’re in a tiny room and it’s great — you have people innovating and creating new products, and if you want to do something you hit enter and it happens. At American Express, 17 people have to sign off on hitting the enter button. We don’t want to stifle that innovation, so there’s a balance, and that’s something we consider when acquiring talent.
  • We also think about what type of product development pipeline you have for the next 6-18 months. Overall revenue, let’s be honest, EBITDA and PTI are important. It’s great to have it, it’s great to make money, but it’s not a deal breaker. A lot of companies that we look at are very small, but have great technology. If we were able to take that and feed it out to our network, we could provide a lot of value.

What are the deal breakers?

  • Other than price, operating illegally is actually a big deal breaker. You laugh, but there are a lot of companies that are very small and you can fly under the radar. Maybe you need a license to do something and no one really knows you exist yet. In the financial services industry, you have anti-money laundering and government all over that. Another aspect is succession liability, if we bought it would we still be on the hook?
  • Lax KYC or AML standards, know your customer or anti-money laundering for American Express, very important. When you’re dealing with transferring money. For example mobile payments has money laundering written all over it, so you have to have good procedures in place to ensure that this doesn’t happen. It does’ t need to be American Express standards, we understand you’re not Amex, but having some processes in place and making an effort is very helpful. Because if not, the cost of getting a company up to speed to where we need it to be is incredibly high.
  • Also, an ability to integrate with a bank holding company regulations. This is an American Express specific issue. We are a banking holding company, and because of that, if we own greater than roughly 10% of a company, this may have changed to 5%, but roughly 10% then we have to push out all of our bank holding regulations on that sub regardless of we having a non-voting stake. It doesn’t matter, we’re still controlled for BHC purposes. Being able to understand how a company can adapt to that. And this is something we usually discuss in negotiations, but the ability to institute those practices is important.
  • Finally, one key thing we think about is how do you balance the cost of acquiring a company versus building it ourselves internally. This is a big decision and argument I have to make internally. Why should we go out and spend X number of times EBITDA to buy this company, when we could spend Y dollars to do it internally, and yet it will take 8 months. Where is that trade-off, what’s the time to market?

Ben Boissevain, Managing Partner, Agile Equity

What are the current trends in start up M&A?

  • Seeing a lot of cross border activity. China’s active, India is certainly active. They still see the US as a hotbed of innovation.
  • For enterprise IT, cloud is certainly hot, Verizon just bought CloudSwitch. Verizon is a multi-billion dollar company, so everyone is looking at the cloud and figuring out what to do. Also, mobile.

What makes a start up attractive for acquisition?

  • As a general statement corporate america has spent four years cutting their R&D budgets and are looking for growth and innovation.
  • If you’re a startup with revenue, growth and believable milestones, you can become very attractive.
  • Another key in early-stage cloud and mobile is talent acquisition. It helps to study the company buying you and it helps to create competition with potential buyers.

What are the deal breakers?

  • We’ve seen deal breakers where the CEO of the talent acquisition doesn’t want to stay with the company afterwards. I’ve also seen it where the seller wants a 1-year term and the buyer wants a 3-year. As management it’s better to be upfront about this.
  • Financials are also important. You don’t have to be audited by E&Y, but you should have your financial house in order. A regional accountant can be enough to look at your financials and make sure you’re GAAP compliant.
  • Groupon modified their S-1 for the third time and their revenue went down by half. This is because they were booking the money they had to pay to merchants later on as revenue.

Bill Taranto, Managing Director, Global Health Innovation Fund, Merck

  • Runs a $250M fund. Doesn’t invest in compounds, molecules or traditional products and isn’t trying to sell more Merck products. Rather, I try to invest in companies that serve a broad set of clients, even competitors in the healthcare space.

What are the current trends in start up M&A?

  • Technology is the fundamental driver of the future of healthcare beyond the pill. What makes up the healthcare market is pay, provider, clinical, regulatory and employer — the one asset that links each is data. Data is the currency that will be used to transact in the future. All healthcare is driven by outcomes and this is driven by data.
  • One component is about access, aggregation, integration, analytics. We have to understand what the patient wants, what the physician wants and how that drives value.
  • In terms of investments, we like to see our investments data enabled. Do they capture data, or can they do something with data? You often may hear about data such as electronic medical records, lab data, claims data — that’s a commodity, I can buy that from anyone, this is meaningless.
  • What’s happening is the creation of new longitudinal data in new service industries that tech is supporting. For example, a remote monitoring company. Who owns that data, how do you get access to that data? Then how do you turn that data into something valuable if you’re monitoring a stroke or heart attack victim?
  • Another theme is the power of the patient. We’re seeing healthcare reach beyond the four walls of the hospital and/or physician office. The home health market is projected to be over $350B in 2020. This will all be enabled by technology. How do we move healthcare to the place where the patient wants it? And then how do you turn it into something of value? This is a tremendous market with high reimbursement.
  • Another trend is you hear about personalized medicine. The problem is there isn’t something that you’ll be able to take that cures you immediately — this type of technology is 10 to 15 to 20 years away. Just because they’ve done genome sequencing doesn’t mean they know what to do with this.
  • When we talk about personalized medicine we talk about how do you affect workflow? Right physician, right place, right medicine, right diagnosis, right treatment, right service around it — you can do this through the right use of technology.
  • Regarding emerging markets, we certainly want to be global. We want to invest globally and we want to be sure our investments can be used globally.

What makes a start up attractive for acquisition?

  • Price has a large role, but we think in terms of platform. We want something to be broad based. Many entrepreneurs think very narrowly about a widget, but we want to go beyond this. An example might be diagnostics. Instead of just a one off, we think, can a company do multiple diagnoses?
  • Another example is monitoring. We don’t care about the device, we care about the platform. Multiple devices, being able to go anywhere and monitor anything.
  • Transferrable, we want to go to the emerging markets. The US is the highest paying reimburser in the world. The problem is nothing is transferrable to outside the US. If I can do something at an attractive price point in India or China, that’s easy to bring back to the US or anywhere in the world, and that’s a big business.

What are the deal breakers?

  • Healthcare is extremely complex. Most don’t understand regulatory pathways and how to get approval for reimbursement and how to get clinical validation. What we find is that entrepreneurs get so focused on a particular widget that they forget how they will be reimbursed, whether it’s out of pocket or through a provider or payer. There has to be some type of FDA approval to get yourself to market. You don’t have to get approval yet, just a pathway how to get approval.
  • Data enabled. We want all of our investments or acquisition to have a data component.
  • Talent. If you don’t understand healthcare then you’re not going to make a good investment because we’re going to have to come in and do it for you. We make pills and sell vaccines — we don’t create remote monitoring or technology companies — so Merck’s goal is not to take over the company. We actually want to set up the company as a separate LLC under the Merck umbrella and keep the talent that’s there. We’re very interested in not only your understanding of healthcare, but also the business of healthcare.
  • The whole goal for Merck is to drive EPS and revenue. We want to use the power of Merck to help it grow to a point were it’s actually meaningful. We’re a $46B company, and $1M is revenue from a company isn’t interesting in the grand scheme. We’re looking to see how we drive additional revenue with portfolio companies that is helpful to Merck.
  • The investments we make tend to be more series C or later; however Merck does provide seed capital. We look at the financials and in seeing the company cash flow neutral in 24 months and cash flow positive in 36 months. We see each investment as contributing to its own entity. We’re trying to accelerate Merck’s advancement into the market with the goal being to own these businesses in the future. You can’t be a broad-based healthcare company and own minority positions.
  • Greg Merkle, VP Product Strategy, Corporate Markets, Dow Jones

    • Traditionally Dow Jones is a publisher, but I run corporate markets or the B2B side. While we are traditional publishers that create content such as WSJ, Dow Jones Newswire, Barrons, there is also another side called Factiva that has a heritage going back to 1977 with Dow Jones news retrieval.
    • We were one of the first search engines around. Pre-internet so an interesting place to be. We now provide business intelligence tools to corporations by aggregating 38,000 sources.  Instead of crawling or scraping, we typically license content from publishers and pay out royalties.
    • We take all those sources and reduce them to a single form of XML and we tag and code it. We categorize by industry, subject, region etc. and now we have a billion article archive. The idea is that you can mine this information. It is all updated by the minute and we have content in 22 languages.
    • We serve consultancies, financial institutions, banks, insurance, hedge funds, small companies, healthcare, retail, etc.

    What are the current trends in start up M&A?

    • The five basic capabilities are searching, alerting, monitoring, analytics, sharing and dissemination, the last two being the hotbed.
    • Getting close to the customer and understanding what they do is important to us and critical to our success.
    • There is also influence of social tools that are now coming to the enterprise. Think of the enterprise as the next frontier of consumer-like behavior.
    • Because as a larger company we can just as easily hurt innovation, what I try to focus on is building an internal innovation center like an agency. The areas I’m focusing on right now is customer intimacy — we’re working directly with consultancies as an example to find out how they work.
    • These large enterprises can’t seem to build their own tools and are looking for partnerships. In many cases there are gaps in terms of the workflow that they are trying to achieve such as sharing and collaboration. Something as simple as moving document around — and while we have Microsoft SharePoint and LotusNotes, we’ve seen lightweight tools such as Dropbox or box.net that address mobility and workflow pain points.
    • We’re also looking at building rich intelligence tools. Going beyond the search box and into rich monitoring views. We hear about big data. Everything can be measured now. How can I correlate news and the events that are happening now with my hypotheses and analysis? How can I bring that in an actionable dashboard? We’re actually dovetailing into a knowledge management strategy that is so far from where we were even a decade ago in terms of information retrieval.
    • Big data is a trend, cloud based services is a trend. Also, globalization — with many major corporations having operating centers around the world there is a need to mine data in different languages and normalize it.

    What makes a start up attractive for acquisition?

    • Talent for acquisitions is important in the mobile space such as HTML5 and iOS5 early adopters. It’s easier to lease talent, partner or acquire it.
    • Build versus buy are some of the challenging decisions we have to make. Many of the partners we work with are able to come to market much quicker.

    What are the deal breakers?

    • IP, copyright issues. Are you violating any? Valuation. You want to keep that founding talent on board — after all, you’re buying skills.

    Michael Monson, Senior VP of Performance & Innovation, Visiting Nurse Service of NY

    • Nation’s largest non-profit home based healthcare company. We do $1.3B in revenue and serve the New York metro area. We’re both a payer and provider — roughly equally split. We have a large payer business that’s focused on keeping people in their homes. Also as a provider we do home care, hospice services  in people’s homes, focused mostly on the frail and elderly.
    • I run our corporate strategy group as well as our innovation office. This is a cross between a venture arm and a development arm. My job is to be on the market place looking for healthcare companies that can provide improved care and outcomes or decrease our cost structure

    What are the current trends in start up M&A?

    • There is a lot of money in health IT and home health. As a result of this, the valuations in the space have gone up and there are more strategics at play. In the last year Aetna bought Medicity. This type of deal is beyond what most vcs or private equity companies would have been able to pay.
    • Behavioral science is also very interesting from a healthcare perspective. People make bad decisions. You would think a diabetic in bad condition would be more compliant about their diet, but shockingly they’re often not. We’re very interested in companies that allow people to overcome these humps. This is an emerging space and has a lot of promise.
    • We are also very interested in informatics, big data, natural language processing which is exciting for the provider space. It would be easier to have a clinician adopt a system where they can take notes the same way they always have and information could simply be sucked out. We’re also interested in companies that focus on medication compliance. Many patients simply don’t comply and there are a number of new tools that help people with this. Also how do you create an environment that allows you to stay in your home safely and at a reasonable cost.
    • Productivity enhancement is another area in healthcare that is a critical factor. If we don’t use our scarcest resource, our clinician resource, healthcare costs are going to continue to skyrocket. Clinicians are doing tasks they shouldn’t be doing or are not using the skills they have.

    What are the deal breakers?

    • If building something for mobile you need FDA approval and HIPPA compliance. Engineers build great technologies, but because they haven’t spent time studying the customer or consumer, no one may want to use it.
    • Many times entrepreneurs haven’t tested their products. If you’ve built something for the home, it needs to be able to work in many different settings.

    Q&A

    Safa Sadeghpour: When you think about a company, how much value is placed on a product versus validating a market and revenue?

    Ben Boissevain: It’s more challenging to sell a company that’s just a technology. Proving revenue is important, but look at who’s buying whom. Smartest client I’ve ever had, kept a log of who’s buying whom and was sold for 14X revenue with only one product.

    Bill Taranto: It’s good to talk about how broad you can go with your business, and creating a platform — being able to map out where the business can go. For the most part you’ll get a valuation on a single line of business as well as the comps around that.

    Safa Sadeghpour: How do you think about equity participation versus acquisition?

    Fionna Simmonds: There is no easy answer. Minority investments are hard for us, so the default would be — is there some sort of partnership or operating agreement we can do, or otherwise acquire it. Sometimes however, start ups have a particular culture and if we feel that is best left alone, incorporating them under the AMEX umbrella is not the best bet. Typically we are not a financial investor, our goal is find out how can we add value and capitalize on that value. Also for an acquisition, is this a technology we want to own outright?

    Safa Sadeghpour: Pharmacos have expanded, but there hasn’t been that big play by health IT. When do you see this happening?

    Bill Taranto: If you look where the industry is going, it’s going to happen and fast. The traditional pharmaceutical company is really good at clinical informatics, what we lack is post-market informatics which is where reimbursement occurs.

    We know how to get reimbursement for pills, vaccine and consumer products, but when you start to talk about remote monitoring or creating efficiencies in the market, it’s all enabled by IT. For us to survive we have to invest in infrastructure and health IT. We’re looking at Merck, but also the industry — how do we help the industry better manage data. Every big pharma company has an informatics strategy right now.

    Safa Sadeghpour: I hear about two trends in the market. One is a flight to safety and the other increased valuations of early-stage companies. These seem to be pointed in opposite directions.

    Ben Boissevain: I think it goes back to global corporations, they’ve got large cash balances. What they’re missing is innovation and revenue growth. Large corporations are looking for innovative companies because their revenue has been flat on a global basis. The VC and private equity communities are all relatively healthy.

    Safa Sadeghpour: How do they find you and create conversations. When you’re looking for advice you get money, when you’re looking for money you get advice. How do you approach this in a smart way?

    Greg Merkle: The meetup is a great networking opportunity. I’ve found them to be incredibly fertile — semantic web meet ups for example. There is someone like me at every major corporation and I’m actively looking for technologies and looking to invest or build. The meetup is on the leading edge and I try to be as open as possible, and will listen to anyone. You have to have an open mind. Email always works great

    Michael Monson: I’m very active in health 2.0 and we’ve gotten a lot of opportunities through here. Every email that comes across my desk, we’ll read. Even if it’s something that’s too early for us, we’ll make introductions to venture firms to facilitate the conversation and stay in touch with the company.

    ( Photo courtesy of pagedooley .)

    Enhanced by Zemanta
    share
    subscribe