Tuesday, December 21, 2010

Companies Who Will Buy Companies in 2011

I was recently on a panel about Startup M&A / Startup Exits, and the moderator asked what companies we thought would be highly acquisitive in 2011.

Here are my predictions about companies that will buy lots companies in 2011:
  • Google.  Obviously, Google will continue to sweep up many leading technology companies.  I am guessing social, local, and ads will be areas of high activity.
  • Facebook.  Facebook will buy a company a month or more.  At a valuation of tens of billions of dollars, a $10 million buy for Facebook is equivalent to less then 1/10th of 1% of the company.  Most of these will be small team buys/asset sales.  There is some possibility FB will go for a $50 million acquisition, which would be quite atypical for them (ignoring FriendFeed, which up until now was a bit of a fluke)
  • Salesforce.  With the acquisition of Heroku, Salesforce showed a willingness to bet in a big way on a new direction.  With a market cap closing in on $20 billion and a pile of cash, Salesforce is well positioned to make a bunch of acquisitions.  I am guessing a number of cloud platforms, and social CRM companies, will become part of Salesforce in 2011.
  • GroupOn.  GroupOn will continue to take out competitors in other markets via acquisition, as well as build its technical bench via talent buys.  There is also the potential for GroupOn to buy more mobile assets.  In 2010, GroupOn acquired Qpod, Darberry, uBuyiBuy, Atlaspost, Beeconomic and many others.  Expect this trend to continue in 2011.  

Companies that will buy a handfull of companies:
  • LinkedIn.  LinkedIn bought ChoiceVendor in 2010, and has sniffed around a number of other potential acquisitions.  I expect LinkedIn to continue to make talent buys.  Intriguingly, I could imagine LinkedIn also swooping in and making a larger ($50-100 million+) acquisition if they saw strategic value in it.  I also expect LinkedIn will buy one of the many contact management and social recruiting platforms that have been emerging during 2010.
  • Zynga.  Zynga will continue to buy social gaming assets.
  • Amazon.  Amazon acquired ecommerce 1.0 market leaders Zappos and Diapers.com in 2010.  Expect them to continue to pick up assets through 2011.  Interestingly, Amazon tends to buy more of market assets / market share in key markets, rather then do a lot of small team buys like Facebook or Google. This means their acquisitions are often valued on cash flow / income projections, rather then the more semi-random variables such as "number of engineers".
  • Yahoo!.  Yahoo! will be active in 2011 and will likely take a more strategic approach to acquisitions (e.g. buying a technology asset) rather then doing pure team buys.
  • Cisco.  Cisco was surprisingly quiet in 2010.  They will continue to buy companies in 2011, but maybe at the same pace as 2010 (e.g. 5-6 acquisitions).  Thanks to labboy for the idea on hackernews.
  • Apple.  They will probably do a small number of strategic acquisitions.  Apples usually does middling acquisitions in size, but seemed to be willing to bid certain strategic assets higher with e.g. their bidding war with Google over AdMob (Google won) (Thanks to dccb)
Companies that will make their first acquisition ever in 2011.

  • Foursquare.  As its valuation will continue to grow with its user base in 2011, Foursquare will likely make one to a small number of team buys.  The company is ramping quickly and will need to balance growth with assimilating its first acquisition, always a tough thing to balance.  However, given all the attention surrounding the company, a number of entrepreneurs will be excited to exit into their arms.
  • Square.  Square is rumored to be closing a massive financing round.  This round will give them currency to make a small number of team buys through 2011.  Keith Rabois, their COO, has plenty of experience buying companies on both sides of the table.

Any companies I missed?  List them in the comments section below!

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Wednesday, December 15, 2010

5 Myths To Building an Awesome Mobile Team

This post originally appeared on TechCrunch as a guest post.  Please note, this post is my personal view only, and does not reflect Twitter's view of the same topic.  I have also added a new first paragraph for context. Thanks to the folks at TechCrunch for publishing it.

When I kickstarted Google's mobile efforts in 2004, Google's mobile team consisted of 1/4 of an engineer dedicated to maintaining an old WAP search server on the brink of collapse. Over the following months, I was involved in all aspects of getting the mobile team up and running. This included setting up a product roadmap, recruiting initial engineers (I poached engineers from other Google teams and hired externally), kicking off contacts and early product discussions with mobile carriers and handset manufacturer's, and was involved in three acquisitions (including what turned into Google Mobile Maps and Android).
----- (start TC post)

In the early days of Google’s mobile team, we needed to navigate a series of misunderstandings most people have about consumer mobile app development, and how to build a great consumer mobile team and product. Given the ridiculous growth of mobile today, many companies I know are trying to start their mobile divisions and they are making the same mistakes over and over. Similarly, many mobile consumer startups are making a series of common mistakes. This post draws on my experience building Google’s early mobile team to point out how to overcome the myths people still believe about making super successful mobile applications.
Myth 1: You need to hire mobile experts.
Reality: Hire great athletes; mobile “experts” will be useless in 6 months
The natural impulse of someone doing mobile development for the first time is to assume that mobile is somehow different from other software development. This leads to the hiring of mobile “experts”, many of whom lack solid consumer product experience. They may have worked on handset design, SMS based services, or for a large carrier. While mobile client development obviously differs from web development (since you can’t just push a bug fix to all devices), it is very similar to any other form of consumer client development.
This means that while people with deep mobile experience may bring knowledge about a specific technology or the limitations of mobile clients, they often lack the deep consumer experience that is actually much more important for the success of your consumer app.
Additionally, any specialist knowledge the expert may have had will be learned organically by your team within 6 months. This means the value of a “mobile” person will diminish dramatically over time. As with all roles, I would advocate hiring great consumer generalists to fill the spot, as they will have a much larger positive impact over time.
a. Don’t hire “mobile engineers”
The first thing people want to do is hire an “iPhone engineer” or “Android developer”. The best mobile engineers I have ever worked with were great generalist engineers who picked up iPhone (variant of C) or Android (Java) development. By focusing on hiring great engineers and having them pick up the programming language and platform (including learning its limitations) you will:
  • Expand the pool of potential people you can hire. Grow the team faster!
  • Avoid a “specialist” culture at your company. In general, I think it is good to build a culture of great generalists/athletes rather then specialists for your company. You want people who are hungry, brilliant, and adaptable, and who can move between teams and contribute to the next big thing for the company once they jumpstart your mobile efforts.
  • Ensure the quality of your team stays high. Your existing engineers should interview the potential mobile hires and test them on general computer science skills.
For example, on the early Google mobile team we had a PhD student from Yale with no industry experience, an expert on enterprise Java from BEA, and a research scientist at Google. These people helped form a formidable core for mobile engineering at Google.
b. Don’t hire “mobile” Product Managers (PMs)
Just as you should hire generalist engineers for your mobile team, you should similarly find a great consumer product manager to run it. The worst hiring mistakes I have seen people make is to hire PMs with telecom or handset backgrounds to run their consumer products. You need people who understand that the phone is primarily a social device—for example, people love to take photos and share them with their friends (see Instagr.amPicPlz, and PicBounce)—and that the screens are still small, so focusing on a few key features or interactions is key.
Myth 2: Your mobile codebase is different from regular code.
Reality: Its just code. You should treat it as such.
Obviously, developing for a client app that can’t be fixed via a push to AWS has its own challenges. But the mobile codebase should be something any engineer can contribute to at any time—even if it is just to run internal test apps to try out new features.
Similarly, don’t let your team use mobile as an excuse to avoid following good software engineering practice. A good release process can apply anywhere.
Myth 3: You need carrier or handset deals to distribute a mobile product.
Reality: Focus on standard consumer distribution first, not carriers or handset manufacturers.
When launching a mobile consumer product, many companies make the mistake of focusing on carrier or handset partners for distribution rather then just putting it out there for users to try.
a. Focusing on carriers means you will build the wrong product.
When dealing with a new consumer app, carriers and handset manufacturers will have all sorts of ideas, some of which may be bad, about how you should change the product before they agree to distribute it. This will likely ruin the consumer experience. They may also ask you to support a wider variety of handsets than makes sense for you to build for. Further, all the time spent negotiating with carriers will also distract you from spending your time building things that will delight users.
b. People naturally spread great consumer products.
Think of all the consumer apps that have widespread use and adoption from scratch (Angry Birds, Foursquare, Gowalla, Bump). None of these launched with any traditional teleco deals.
c. If your app is a big success, carriers will come to you for deals.
If your mobile app is being used (or your desktop app has wide enough distribution), carriers will approach you to add your app to their phones. Think Facebook, Twitter, Google, etc…, as well as, back in the day, IM clients.
Don’t get me wrong—carriers and handset pre-installs can widen your distribution dramatically. However, as a startup or new mobile effort, you should focus on direct-to-consumer distribution first. Only deal with these intensive partnerships once you have proven traction with your core app experience and want to reach out beyond the relatively large population that discovers apps via the app store and friend recommendations.
Myth 4. You must build for all platforms from Day One.
Reality: Start with iPhone or Android only first.
One of the big fears when building a mobile property is that only a subset of the market can be addressed via each platform (iPhone, Android, Blackberry, Symbian, XHTML, SMS). These days, the best consumer apps are launching on iPhone or Android only first. This provides enough distribution/addressable devices to see if the app can gain traction. Once it gets traction, other platforms can be supported. A great example of this is Foursquare, which launched exclusively on iOS and grew from there.
In part you should choose your platform based on your market and distribution approach. iPhone or Android (as well as increasingly HTML5) are good bets for the US, and increasingly, the rest of the world. You should only build XHTML or SMS based apps if you are focused on the low- to mid-range of developing markets.
Myth 5. (Once the app launches) We are mobile geniuses!
Reality: Stay hungry and keep questioning your mobile directions.
Congratulations! You got your mobile app out the door and it is growing 50% month over month. There is an old saying that a rising tide floats all boats. The rapid growth in the overall smartphone market may make your mobile efforts look brilliant due to this ongoing, massive market shift. Make sure to challenge your team’s thinking on their mobile choices, and don’t believe the mantra that “mobile is just different”. Focus on building an awesome consumer experience and you really will end up looking like a genius.
Mobile is a huge opportunity and will be the primary way many services are accessed in the future. Hopefully as you start a new mobile consumer startup, or build a mobile team for your existing web property, with the tips above you can avoid the mistakes people frequently make for mobile app development.
----- (end TC post)
What do you think?  Any other myths to overcome for mobile development and team building?  Let me know in the comments.

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Friday, December 10, 2010

Financing approaches most likely to kill your company (if it is already on the edge)

Too Many Seed Companies Chasing Too Few VCs
Over the last 6-12 months there have been a crapload of seed stage companies that have been funded.  In another 6-18 months these companies will be running out of money, and all will be pitching the same small set of VCs at the same time.  While the number of angels (and the amount they have available) has expanded dramatically, the sames does not hold for venture funds.

What does this mean for your company?
There will be 3 tranches of companies:
  • Superstars/Hot Companies.  These are companies that have traction, and/or are perceived as market leaders, and/or are in a hot space (e.g. Foursquare in 2010 or GroupMe recently). VCs will cherrypick these companies and will compete aggressively with one another to fund them.  They will have massive valuations reported in TechCrunch and long comment threads about how the company "suxxxx" and does not deserve such a crazy valuation (remember all the comments every time FB raised a round?).
  • Middle of the pack.  These companies will not have had break out traction yet (e.g. will have 50K users), but will have built a  reasonable product and have a "great team".  Some of these companies will be able to raise additional capital, or be able to survive based on cash flow (and may need to cut their teams from e.g. 6 people down to the original 3 founders).  Some of these will end their lives as "large small acquisitions"  - e.g. sell for $5-$20 million depending on timing, technical assets, size of team, and market.
  • The dead or talent hires.  These companies will shut down or, best case, will be "acquisitions" where the team is paid a slightly larger then normal hiring bonuses or option packages to join an "acquirer".
Your Funding Structure Today Impacts Whether You Are Middle of The Pack or Dead Tomorrow
The line between "Middle of the pack" and "Dead" will be a fine one.  One of the characteristics that may tip companies from Middle of the pack into Dead is the existing cap table/financing structure of the company.

Worst Financing Structure to Have:  Equity round, high price, with multiple VCs
  • Multiple VCs.  Having multiple VCs in the round is going to lead to very bad signaling characteristics for you if your company is only doing so-so.  
    • These same VCs who a few months earlier were competing with Superangels to get into your round will suddenly realize you did not grow into the hot company they were hoping ("We love you and the team", they will say "This is strictly a business decision.  We are big fans of yours but can not invest any more")
    • They are used to doing $5 million investments.  The $100K they invested to you does not impact their fund economics.  And the opportunity cost of partner time is too high.  They will not do a follow on round with you (as they can invest the same $3-10 million in a company with real hockey stick traction instead).
    • All the other VCs you pitch will ask why non of the 3 VCs who invested in you are driving the round.  They will call said existing investors who will say "we love the team, but they just don't have the traction we are looking for".
    • This will kill your ability to raise money unless you are a "Hot Company".  Goodbye company!
  • High priced equity round.  The second worst thing to having too many VCs in your round and the associated signaling risk, is to have a high priced equity round. 
    • Doing a down round (raising at a lower valuation then your last round) often invokes a lot of dilution due to the equity financing deal terms.  You may go from owning 30% of the company each as a founder to a few %, depending on the terms and the next round you do.
    • This will kill your incentives as founders and early employees.  Do you really want to work 14 hours a day for so little of the company?  
    • Have you read your equity financing docs closely?  Do you really understand all the terms? Make sure you read the section about down rounds closely.
    • People with low equity valuations will be fine.  If you raised at a $2 million valuation, the next bump up does not need to be huge to de considered a success.
Best Financing Structure to Have:  Convertible note, no VCs (i.e. only superangels and individuals)
  • No VCs in the round.  The fact you did not include VCs (despite their promises of all the value they will add) means you have no signaling risk.
  • Convertible note.  Many recent convertible notes are structured with a cap but no discount rate.  This means if you have a convertible note with a $6 million cap, but you raise a round at a $3m pre-money valuation, the note will convert at the $3m valuation.  As an entrepreneur you get diluted more then expected, but no ratchet is triggered, and no big penalty is paid.
Obviously, what financing structure you have is secondary to whether the company hits it out of the park or not.  If your company is doing awesome, or is perceived as such, your existing cap table becomes pretty unimportant.  However, if things are only going so-so, your past financing events can impact things a lot.

What do you think?  What besides past financings can tip a company from being "middle of the road and fundable" to "walking dead"?

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