Episode 298 | A Startup Acquisition Story

Show Notes

In this episode of Startups For The Rest Of Us, Rob talks about the acquisition of his company Drip, by Leadpages. After finally closing the deal and making it public, Rob is able to talk about the thought process, negotiation timeline, and address some of the commonly asked questions about the acquisition.

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Transcript

Rob [00:00]: In this episode of Startups for the Rest of Us, Mike and I discuss the acquisition of my startup Drip by Leadpages. This is Startups for the Rest of Us, Episode 298.

Welcome to Startups for the Rest of Us, the podcast that helps developers, designers and entrepreneurs be awesome at building, launching and growing software products; whether you’ve built your first product or you’re just thinking about it. I’m Rob.

Mike [00:29]: And I’m Mike.

Rob [00:29]: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. What’s the word this week, sir?

Mike [00:33]: Well, I’m in the middle of testing a pretty large data migration for storing the emails that are kind of on the back end of Blue Tick. So one of the things that customers have been asking for is the ability to see inside the application the emails that are being sent to customers and also the emails that they’ve received from them and whether those emails were sent by Blue Tick or whether they were sent kind of independently.

And because we have access to the mailboxes we can pull that information and display it. But obviously there’s some historical significance to a lot of those emails. So, if you sign up, let’s say today on Blue Tick and you probably want to be able to see the emails that you sent three months ago, six months ago to that person. So, we’re working on making those available inside of the application itself. And it just involves this massive data migration because it’s got to be done for every single mailbox and for every email that they’ve sent, which is “important.”

Rob [01:25]: Yeah, it’s interesting that when you’re building an app for the first time if you haven’t had tens or 100’s of users or you haven’t built something that has a lot of through put, you underestimate how hard it’s going to be to display this stuff and even store it long term. And just how large these data stores can get and how slow they get to query. So, I think by making this change early you’re probably getting ahead of the game here in terms of not having to do it once you have hundreds of customers and gigs and gigs of data.

Mike [01:53]: Well, we already have gigs and gigs of data to deal with. I mean there’s some where there’s like I was just running some local tests and I had to scale things down and say, okay, only deal with like 16,000 of these things because otherwise I would have had to deal with 250,000 and I’m just like, “No, I don’t really need to do that for just an initial testing.”

But, yeah, there’s just a lot of stuff that needs to go on. And I can’t do it all at once. It’s got to be kind of gradual migration for each mailbox which is kind of a pain in the neck. But it also kind of brings to mind that there are certain types of things where it’s easy to do when nothing is moving. And then if you have like a SaaS application where things are constantly being done or moving around or changing in the background, it’s almost like you’re a heart surgeon and the heart’s still beating and you still have to operate on it.

Rob [02:40]: Yup. Exactly. I mean I think that this is why some apps – I mean at a certain scale you just can’t do this anymore. This is why some apps that don’t add certain features that everyone’s clamoring for because it just becomes impossible to do. You know you can imagine being at, let’s say the scale of MailChimp with massive visiting, sending a billion emails a day or ten billion? I mean it’s like incredible the volume that they’re sending.

And so, while I’m sure people have been asking for automation and other features for years, you just at a certain point can’t do it and maintain the app and the throughput of the volume that you’re trying to do. And so, you have to make some of these decisions early because if you do hit scale, it can become a lot harder to do this down the line.

Mike [03:21]: You could probably do it if you were just saying, “Okay, let me toggle a flag in somebody’s account and allow them to do it.” But you still have to spin up API’s that are specific to that account and cross machines or cross data centers or something like that. And I imagine once you get to the point where you have to worry a lot about the scale and redundancy then it becomes even more challenging. And I can see how some companies would just say, “Yeah, we’re just not going to do that.”

Rob [03:45]: For sure.

Mike [03:46]: So, what’s going on on your end?

Rob [03:47]: Not much. Just hanging out. Nothing new.

Mike [03:49]: Nothing new?

Rob [03:50]: No. Oh man. I mean, I don’t want to underscore the importance in both my career and for Drip. And also the difficulty, the challenge of the last several month in that I haven’t been able to talk about what’s actually been going on with me. And I have two podcasts. I have a blog which I haven’t been updating because there’s nothing relevant that I could write about, because we were in the middle of negotiations for months, five, six months was just discussions with Leadpages. It feels really good both to close the deal because this big wave of stress kind of goes away, I started sleeping again, i started living more of a normal life.

But also, just the ability to just talk about it a little bit in public. And, obviously, I’m under NDA as acquisitions always are. Both sides are under NDA’s about specific terms and stuff. But there is still so much about the thought process and timeline and what went down that, I think, is good to talk about. I’ve always liked to share this kind of stuff because I think it helps other people. And that’s really what we’re going to do today. Kind of dive into probably the most commonly asked questions that I’ve heard since Drip was acquired by Leadpages about what, maybe, two or three weeks ago.

Mike [05:02]: So, for the people who may do exactly what I generally do for podcasts is skip the first 30 or 45 seconds. Setting the stage for them, Drip was recently acquired by Leadpages. So, could you walk us a little bit through kind of what the result of that is? Was it like HitTail where you’re selling it and you’re walking away? Are you sticking around with them? What’s going on? How did that happen?

Rob [05:21]: The fun part about this episode is you know the answer to every question you’re going to ask me, but you have to ask them to get the information.

Mike [05:27]: Yes, I feel like a futurist at this point. I’m going to say something and I know the answer.

Rob [05:31]: Exactly. So, yeah, I mean it’s a good point. This Drip acquisition really is more of a – it is a startup acquisition rather than a “sell your app” kind of thing. So, you know, I sold HitTail last November. And it was just the technology and the revenue on the website and the incoming traffic. And that’s where the value was.

And that is a very, very different kind of sale than what just happened with Drip. I think of it as selling an app versus a startup being acquired, like a fast growing successful startup being acquired, not for parts and not just for the people, which is an aqua-hire,not just for technology, which is selling your app; but the whole package. In my experience and my understanding that is definitely where there’s the most value to the acquirer. Those are the startup acquisitions where the purchase price is maximized because you’re not just taking people or technology. You’re actually taking it as a whole entity.

With a strategic acquisition like this where Leadpages – it’s an obvious fit. It’s obvious that Leadpages has landing pages and they collect emails. And the next step in that process is then to send email to people. They’ve always integrated with third parties and in this case obviously acquiring one like Drip is – it’s a pretty natural fit.

Mike [06:41]: Interestingly enough, that’s one of the pieces of advice that you might give to a single founder or a small startup where they have an existing product and they want to develop or launch a new product. And the question is, “Okay, well, what should we do?” And the answer is, obviously, try to leverage your existing customer base and launch something that is going to be complimentary to them. Or more valuable to them down the road.

So whatever the next step of their sales process is, for example, or more advanced features. And Drip really fits into that with Leadpages because Leadpages captures those emails and then you can use Drip to manage those email addresses after the fact. Now, you don’t have to use Drip but you could at this point.

Rob [07:20]: Yeah, and that’s been a big thing. Clay, who’s CEO of Leadpages, has talked about they’re continuing to integratewith all the other email providers and they want to be fairly agnostic to it so that it’s an open playing field for everyone. But there’s obviously going to be more that’s possible because now that Drip and Leadpages are owned by the same company, we can just do more things. You can do provide queuing and API’s and stuff that can just move more data easily than with a third party.

So that’s the thing. To take a step back, there are really two types of acquisitions. There are financial acquisitions where it’s based purely on numbers. And that’s like if you buy through FE International or you buy on Flippa. Those are the types of acquisitions I’ve been involved in.

And then there are strategic acquisitions and those are the kind where it is a strategic fit with someone’s or a company’s vision and their road map. When you look at Facebook acquiring Instagram, as an example, that was not a financial acquisition. They weren’t buying it for the revenue. They were buying it because it was a strategic fit into where they’re headed. It’s thus worth a lot more. Strategic acquisitions tend to have a much higher purchase price than financial.

Mike [08:26]: So, I guess on the concerns that some people might have, especially some of the customers that you have that are listening to this episode – because I think when you first started out with Drip, you kind of reached into your own network of podcast listeners and people who are in your network – one of their questions might be: what does this mean for me as a customer of Drip?

So, I guess maybe talk a little bit about that, because that’s something that you kind of have to take into consideration when you’re selling the product that you have. Whether it’s an acquisition that you’re just going to completely walk away from or you’re going along with. But you also have to take into account what’s going to happen to your customer base. Because you don’t want to make them angry because suddenly they’re no longer being taken care of. What sorts of thoughts did you have around that? And what sorts of things could they expect?

Rob [09:10]: Yeah. That’s a good question. Probably the first one that comes to most people’s mind. An early thought that I had and an early conversation that came about from it was – and Derek, who’s my co-founder with Drip agreed with this as well – is that I absolutely would not let Drip be acquired and have either the customers or the employees get a raw deal.

There are some startup acquisitions where startup gets acquired and it just gets shut down. I think Microsoft did this with Sunrise, which is a calendaring app. And I think Google does this pretty often, where they buy it for the team, they shut the app down and they integrate the technology into their own product. That, to me, hoses your customers who have invested their time and/or money into you.

There are certain deal breakers when you go into something like this. And it’s good if you know what those are. And so, I spent a lot of time thinking about what would I not let happen. What would not feel right to me. And one of them was if any of our employees lost their jobs through no fault of their own or if suddenly our customers couldn’t use the product. Because a lot of people are invested in this app, time and money, and I didn’t want that to happen. And, luckily, Clay and the Leadpages teams was totally on board with that. The whole point was them acquiring it in order to grow the product itself. They want to add more customers rather than shut it down.

And in order to add more customers, you need the team we have in place. Because even though they have a team, ours is specialized in Drip and we know, we have years of experience working on it and experience in the space. And so, that was something that I thought a lot about early on.

We’re fortunate that we’re in a position where I was approached by many potential acquirers. It wasn’t a few, it wasn’t several, it was many potential acquirers over the course of the past two years. And so, I wasn’t going to sell to someone who was going to do one of my deal breakers, who was going to go against that. And so, it was really cool that Leadpages was on board with that and, specifically, Clay was very supportive of that.

So, that kind of sets the stage of where I was coming from. The point of this acquisition is, I think it’s going to mean we can release more features faster; scale our infrastructure faster; and, even within the first couple days after this acquisition, we made a bunch of improvements to the acquisition in terms of doubling server capacity and doing all the stuff that we didn’t have the money for before. We’re bootstrapped, we’re profitable, but very cash limited as a result of growth. Typically, growing companies don’t have a lot of profit and that’s why companies raise funding is to help them manage this growth and scale and do all that stuff.

And so, it’s almost like being acquired by Leadpages allows us – you can think of it almost as we got funding through this – it’s like this indirect funding round without having to go through the funding rounds and all that stuff. We now have more budget to do interesting things. And there’s a bunch of stuff in the works. I can’t talk about that right now, but there’s a bunch of stuff in the works that we just plain did not have the budget to do.

And so, the goal of this – again, my deal breakers were: can’t hose our customers, can’t hose our employees. And then the goal of it – those are the negatives that I wanted to avoid – and then the upside or the goal of it was let’s grow this thing faster. Let’s build it bigger. Let’s do what large funding and large team can do for a product like ours, even though I personally and Derek as well, didn’t want to go out and raise a round of funding.

Mike [12:28]: So part of the goal of this acquisition was really to allow you to create more features faster and scale the infrastructure and provide a better experience and better product for the customers. That’s kind of what you’re getting at with what they can expect.

Rob [12:38]: That is the goal. And I don’t want to sugar coat it. It’s easy for someone to say, “Oh, we got acquired and everything’s going to be great!” I really do believe that and I wouldn’t have gone through with it if I didn’t, that kind of thing. I’ve done enough of these. I’ve built enough products; I’ve bought enough; I’ve sold enough that it was the opposite of a desperation move. If that makes sense. I genuinely believed the entire time and I still believe that this is – this or getting funding – was probably the right next move for Drip for it to be the best product it could be for our customers.

Mike [13:09]: Couple of things that you mentioned earlier were that there’s different types of acquisitions that can happen where – you mentioned Microsoft as an acquirer for Sunrise and they bought it and then shut it down. I think that there’s different viewpoints for that where a company will come in and they’ll just buy a product or a technology specifically for that one small piece that they want to integrate into a much larger suite of products that they have. And then they stop selling it as an individual product because they want to sell it to the suite and they want to sell it to enterprises.

And it’s interesting that this was much more of a boxed purchase, I’ll say, where they wanted the entire container. They wanted everything in it and they want to say, “Okay, let’s plug this entire block” as opposed to, “Let me just grab this one small piece of it or these ten people over here because that’s what important.” It sounds more like it was, “We want everything.”

Rob [13:53]: Yup. And it kind of makes sense if you think about what they’re up to. Leadpages announced publicly that it was, what 18 months ago or 2 years ago, they raised a big round of funding. It’s on TechCrunch, but I think it was 27 million or 30 million or something. And they said this is for strategic acquisitions. And so, it’s not a surprise that they would buy an email marketing company.

Mike [14:11]: Let’s talk a little bit about the timeline itself. I’m pretty sure you can talk about this because I saw it on Facebook and it wasn’t you that posted it, I don’t think. It was a screenshot of an email that Clay Collins had sent to you and it included the date, which I thought was interesting. So let’s talk a little bit about the timeline because right now it is July 13th of 2016. When was that email sent?

Rob [14:37]: Yeah, Clay’s first email was early June of 2015. So it was 13 months ago.

Mike [14:42]: So, it took 13 months for the acquisition to go through. Now was that 13 months of negotiation? Was it 13 months of legal work? Was it three months of this, six months of that? What does that approximate timeline look like?

Rob [14:45]: Yeah. The cool part about this is from all the research I’ve done and the reading and the talking to founders – I’ve talked to several founders who have been acquired. As soon as this started ramping up that’s where I went, was to try to get myself educated on this process. And the neat part is, my experience here or our experience getting acquired, I think is fairly typical. It tends to take a long time. It’s the dramatic exception to the rule when – again, Facebook buys Instagram for a billion dollars over a weekend – that just never happens. That happens once a year, once a decade. It’s just completely anomalous.

So for you to hear an announcement that Leadpages acquired Drip, everybody probably saw it on Twitter a couple of weeks ago and thought, “Well, that came together fast.” It actually was, again Clay emailing me 13 months ago, we emailed back and forth casually for a couple of weeks and then just kind of nothing happened. It was just radio silence. And then, I think it was in September/October, something else came up where we started talking again. And then it kind of just trailed off. We never got to a point where things got serious.

And then, I think it was November/December, things got serious again. And then we started talking more about some detailed points and how things might look. And you really started getting into the nitty-gritty. And then, eventually, there was another four or five weeks of silence. And so, it wasn’t until really until late January where things ramped up in a way that I would call active negotiations from then on.

So it was probably five/six months of pretty heavy negotiating. And I guess, to put a spin on that, it was more like three to four months of negotiating and then, the way it works is you sign a Letter of Intent. That’s what you’re negotiating upfront. And then you sign the Letter of Intent. And then you have due diligence which can be anywhere from – for companies it’s 45 days to 90 days or 120 days. They could be pretty long. As the seller, you want the shortest due diligence as possible and typically the buyer wants the longer one. But the range for startups our size would probably be 45 to 60 days.

And so, that’s when you get legal involved. It’s less negotiation. There’s still negotiation going on but it’s a lot more of like contract negotiation where you’re not negotiating these high level terms. You’re actually negotiating sentences and paragraphs in contracts. You’re trying to negotiate liability and who absorbs what liability where.

So that gives you an idea of how long this takes. And it seems like how could this possibly take this long? That’s really the question that came to my mind when I would hear these stories about – how can it take six months of active stuff? When I hear people saying it took a year, it’s like, yeah, but the first six months is really not that much time. But how does it take four, five, six months to close a deal? And now I understand.

Imagine you sell your house and there’s stuff going on constantly. There’s contracts going back and forth. And think about how much is standardized in a home sale. How that entire contract from the Realtor’s association is just done and everybody, generally, agrees on it. You don’t go through and read every sentence and red line that contract and go back and forth. Well, that’s what happens with acquisition because there are no standards. Nothing is standard. And so, every sentence and every deal point and every contract is essentially created from scratch. I know they use boilerplate and everything but they’re negotiated back and forth from scratch by the lawyers and the people involved. That’s why this stuff takes a long time.

And it can also take a long time to arrive at – you think about one point is price. And that’s the one that everybody puts on the press release, “It was acquired for this much.” But there are hundreds of other points to negotiate. It’s like, does the team stay on? Does the team have to move? How long do the founders have to stay on if at all? Well, what about stock options? Is the price paid all cash? Is there stock involved? What happens to different assets? Is it an asset-only acquisition? And it it…? On and on and on, and all of these things. That’s what takes the time, is negotiating and then once you’ve negotiated and the founders on both sides have shaken hands, it’s like, “Alright, those are the terms.” Now the lawyers get to put that into writing and that literally takes another couple of months just to sort that out.

Mike [18:48]: I remember talking to my attorney at one point about a couple of different contracts that we were working on and I distinctly remember he looked at one particular line. He was like, “That’s interesting. I’d never agree to that but let me put that in as boilerplate in some of my other contracts.” And it’s just interesting that because there aren’t really any standards to those agreements people are just kind of going on what other Edge cases or exceptions they’ve seen. And that’s really where a lot of these contracts come from, it’s like the Edge cases and the exceptions and the ways that different customers or – I don’t want to call them opponents – but people on the other end of the contract agreements that they have worked on have gotten screwed. And it’s just a matter of trying to figure out how can you get the best deal for the person who you’re working for and minimize the downside for it?

Rob [19:32]: Right. As well as be reasonable because there are certain things that you’ll throw in a contract and, in a perfect world, that would remove all liability and risk from you. And the other side would be insane to accept that. And so, at a certain point, both sides accept some time of risk, some type of liability. I mean, I’ll throw some crazy things like, what if we get into this and suddenly Rob gets killed, Rob dies from something? What does that mean for this whole thing? What does it mean for the deal and subsequent payment and all the terms of everything? It creates complexity and you have to sit down and think about that and talk back and forth. What does that mean for my family? That’s the kind of thing that lawyers have to think about. They’re anomalous. They’re not likely to happen. But if they do it sucks if you don’t have something in place to deal with that.

One other thing I want to add is throughout the timeline – and this probably a topic I will dive more into with Sherry over on ZenFounder – is I’m making it out like, “Oh yeah, it was a year and then five months of that was hard negotiation or whatever.” It was one of the most stressful things I’ve ever done. You’ll probably hear this over and over from people who were acquired. It was extremely stressful. And at the beginning I was able to continue to do my day to day work and run the company and do all that. Towards the end, it was pretty much my full time job. It was between 30 and 40 hours a week of what I was dealing with.

It’s really nice, to be honest, that I have the team that I do because those [?] were able to keep the company running. I just didn’t have the focus to push things forward and it was cool to see things still being pushed forward even though I was involved in a lot of phone calls; a lot of meetings; and a lot of getting documentation for the acquisition.

Mike [21:09]: One of the pieces of feedback that I had heard actually at MicroConf was there were several people who would listen to your talk at this most recently MicroConf back in April that they saw the talk and they said, “Oh, I’m a little disappointed because I’ve been watching Rob’s talks over the years and every single years he’s talked about the numbers and the snapshot of where he was at. And this year he didn’t.” Is that why?

Rob [21:33]: It’s interesting. It wasn’t why. I suppose it was probably good that I didn’t share revenue. But that was not the reason. The reason was – there were two things. I don’t like talking about revenue specifically. I don’t like sharing it. I feel like maybe that’s a whole other podcast. But the transparency thing can cause problems. And the people who are all into the transparency, I think you may want to go listen to the episode that I recorded with Josh Pigford a while back and how transparency came back to bite him in the butt. And it can bite you in butt in a lot of ways. One it can bring in competition who can much more easily replicate what you’re doing. Two, it can result in you not raising funding, VC’s – I’m not saying all of this are like this – but I know that some funders and some VC’s they don’t want all your metrics public. And it can impact acquisitions. Some acquirers do not want all that history up online.

And so, those are the reasons, to be honest. The reason for me was because stuff that I’ve released in the past couple years, intimate details of Drip has been – how do I say this? It has been commandeered and used to replicate what we’ve done and compete with us. And that had never happened at this scale. And so when I had HitTail or when I had these little businesses, DotNetInvoice, if people competed with me it didn’t really make that much of a difference. At the scale of Drip where we have ten people working on it and I’m paying people’s mortgages, the stakes are much higher.

And as more things started to come about that it was obvious had been used based on things I’ve been teaching and intimate details that I had exposed, I made a decision to do that less and to be a little more guarded about it. And I had long conversations with folks who are respected in the startup space and asked them, “Hey, why don’t you share this?” And they had similar stories of, yeah, I did that and then this happened.

It can happen to you eventually. That’s not a reason not to do it but it was my reason not to do it. I had hit the point where it made more sense not to share the revenue than it did to share it. And, in fact, at MicroConf I did give kind of a revenue range and said how many employees. And you can tend to figure that stuff out anyways. But, no, I didn’t give the big revenue graph. And there was definitely a thought process behind it.

Since I didn’t, like I said, I actually think that’s probably better in terms of the acquisition. It didn’t complicate things, but it probably wasn’t a major factor. I don’t remember it being a major factor when I put my talk together.

Mike [23:46]: So let’s move on a little bit to the thought process behind selling Drip. Because, obviously, there’s a lot of consideration that you need to put into the different components whether the employees are going to stay on or not; whether they’re going to move with the company. I think one of the biggest considerations is your family. Because you said that this was probably the most stressful thing that you have ever gone through. And I would imagine that it’s probably more stressful than selling your house. Because selling your house, hopefully, would only take a couple of months and once you find a buyer you can generally get those things straightened out in a month or two.

But with selling your company, that was 13 months of back and forth and ongoing stuff and you probably weren’t sleeping well near the end. That’s got to have some kind of an impact on your family. And in addition to that, there’s considerations for your family afterwards. So, can you talk a little bit about what role your family played in the acquisition and whether there were active discussions about it. Was there a lot, a little bit? Were they involved early, late? Talk a little bit about some of those things.

Rob [24:43]: Yeah, sure. There’s a lot to consider there. It was stressful and it definitely made me less pleasant to be around, as stress will do to most people. And that was a bummer. I think Sherry probably has a lot to say about that. I mean, if you’ve ever been through a really stressful time for an extended period of time, it changes the way you feel about the world and about yourself and about people around you. And it just puts you in a bad place. You can be in a bad place mood or whatever all the time. I don’t feel like it was that constant until closer to the end where things just really ramp up and they get really serious. It was something that I knew was a season.

Some people, when they’re just growing their startup, that’s how their life is. And they’re stressed all the time just building the company. I would not sacrifice myself for my company that way. I know founders personally who put on a lot of weight, as an example, because you’re so stressed and just eating like crap and they’re working all the time and they don’t have time for exercise. I know founders who’ve had divorces due to funding their company. I know founders who developed health problems and ulcers and that kind of stuff. And that has never been something I’ve been willing to sacrifice in order to grow a company.

In order to sell a company, I think that you are going to need to undergo a tremendous amount of stress. I think if you don’t undergo a large amount of stress, then you probably didn’t negotiate hard enough, is kind of how I feel. But I knew that there was a timeline to it. That was the thing. I knew that it would have to end within a few months. It did take longer than I had hoped but it did eventually close. And I had to be honest, the weight that lifted off my shoulders when that happened was tremendous. It wasn’t the same day. I remember it being surreal and just being totally in a daze for a few days. But the following week, as we started ramping things and I realized,boy, all that’s done and I don’t have to think about that anymore, my demeanor and my whole outlook changed. And I became back to normal is how I think about it.

So, there were definitely family considerations there. I had a lot of conversations – I had just a few conversations with Sherry early on and then as it got later and later and more stuff was being decided, especially – There was a decision at a certain point and like is it a smart decision to move to Minneapolis, which is where Leadpages is based. So Drips in Fresno, Leadpages in Minneapolis. There was genuinely a conversation of what is best for the long term play out of this deal. What makes Drip a success and what makes this acquisition a success for Leadpages. And so Sherry and I had a lot of conversation about that.

It’s funny, I think some people go into negotiations and they think, “I want to get everything for me, as much as I can. And I don’t care about the other party.” And I don’t go into negotiations like that. Maybe if you’re negotiating for a car, then yes. You just want the highest price, they want the lowest and you go. And you’re never going to see the person again. You’re never going to work with them again. In an acquisition like this where you know that you’re going to be working with that team and you respect that team and you respect the person on the other end, it’s less about maximizing everything in your outcome and it’s more about, in my opinion, maximizing the deal. Maximizing the benefit of this for everyone. And obviously you have your certain minimums, you probably have a minimum price. You probably have some minimum deal breaker terms – I won’t shut the product down, I won’t let the product have crazy features added to it, I won’t let my employees be fired.

But aside from that, it’s like the decisions of should we move and should the employees move were things of what’s best for the deal. And in the end we decided to move and the rest of the company totally had a choice. None of our employees had to move to Minneapolis and everyone was brought on as an employee of Leadpages. Some folks have decided to stay in Fresno or where they are, because we have remote employees. We have a guy in the Bay Area and a guy in New York. And then other folks made the decision that they wanted to move to Minneapolis. They ‘A’ thought Minneapolis was cool or ‘B’ thought being at Leadpages HQ would be a cool experience.

And so to go back to your original question, yeah, the conversations with Sherry were super helpful. Derek as well. Being my co-founder he and I talked a lot about deal terms. I talked a lot with FE International. David from FE was the broker on my side and he gave Derek and I from the broker’s perspective because he had been in investment banking and had done larger deals and so he had a lot of experience with that.

And then talking with Sherry was more about the mental side and it was about stuff that impacted the family because certain things did and certain things didn’t. Certain parts of the deal did and didn’t impact the family. And so, she was definitely helpful during that time for helping me keep a sanity check on things. Because you get so far into this deal and you get a certain lens you’re viewing everything through and it’s helpful to come out of a deal and then have a conversation and say, “Look, this is the situation. They’re asking for this. This is what I think.” And for her to say, “Oh, yeah, that’s totally reasonable.” Or, “No you’re way off base.” It was helpful.

Mike [29:16]: You mentioned that you’re going to be moving to Minneapolis and some of the members of the team had the option to also move. I would imagine that every single piece of that was probably negotiable. Because when you’re talking about an acquisition because there aren’t really standard terms for that stuff, some of that stuff probably could have been negotiated upfront for people or you probably could have gone back to them and asked them, “Hey, would this be okay with you?” But also, you’re looking at it from a holistic perspective of what’s best for the deal; what’s going to be best for the employees; and what’s going to be best for the company moving forward to be able to still do kind of what its core mission was. But the core question there is really is all of that stuff generally negotiable or is it something that you think that other companies might come in and say, “Hey, these are our terms, kind of take them or leave them”?

Rob [30:01]: Yeah, I think it’s going to depend on the acquirer and their goals. To answer your question, I think everything is negotiable and I just think that there are going to be certain deal breakers that certain acquirers have. Where maybe they say, “It is an absolute deal breaker if everyone does not move to our headquarters.” And then, as the founder, you have to decide is that something I’m willing to deal with? Am I willing to kind of force my employees to move and if they don’t then essentially they get laid off? That wasn’t something Derek and I were willing to do for sure. And the cool part, Leadpages never even asked because that wasn’t in their best interests either.

And that was a cool thing. Again, if you’re in a financial acquisition there is some alignment there but I think with a strategic there can be a lot more alignment and our goals for growing Drip and making it the best marketing automation, lightweight marketing automation app was in line. And we both have that goal still. A lot of that wasn’t hard negotiation. It was like, “Hey here’s what I think would be the best. The employees have the choice and it they want to come they can and if they can’t – some people just can’t do it due to family situations or whatever – then they don’t.”

That was a super easy point. It wasn’t even a back and forth because it just kind of was a no-brainer for keeping the company together. We already have remote people. It just made sense. But I can imagine getting into negotiations and having that be a complete deal breaker with the acquirer. And you’d have to ask yourself the question of are you willing to do that. And, again, for us, that would have been a deal breaker. That would have been an okay, we can’t do this deal. And so, if you have the luxury of having multiple acquirers who’ve approached you or if you’re talking to multiple at once then you can pick and choose the deal that works best for you.

And that’s really the position you want to get yourself into, is where there are multiple people because then you can stick to the terms that are most important for you.

Mike [31:48]: As you were talking through there, one of the things that came to mind was, I saw a talk by Eric Sink back in, I don’t know, it was 2011 or 2012 at the Business of Software. And he had talked about how sold his company, Teamprise, to Microsoft. And there’s a lot of parallels that I can draw from my mind from his talk to what it sounds like your experience was. It doesn’t sound like there was anything necessarily out of the ordinary.

Rob [32:12]: Yup. There’s a good podcast I’d recommend. If you are thinking about selling. There’s a good book called ‘Built to Sell,’ get that on audiobook it’s a quick listen. And then there’s Built to Sell radio which is where the guy who wrote that book interviews folks who’ve been acquired. And so there’s a bunch of stories of these real acquisitions. These are not the Instagrams and the billion-dollar blah blahs that are on the front page of Inc. Magazine or whatever. These are the more realistic ones where it’s a manufacturing company or retail company or service company or a tech company – there are tech companies in there as well. And those stories will really level set you for what’s more realistic. And in listening to those, that was also my experience, that Eric Sink’s discussion and then that our acquisition here of Drip was fairly typical in terms of the things that you have to sort out.

Mike [32:57]: So, I think I have probably two more questions for you. The first one is that you had mentioned that you’re going to be moving to Minneapolis to essentially work for Leadpages as part of this. So, what you said before was, the entire team is staying on and you’re sticking around with Leadpages. What sort of career considerations does that have for you? How do you justify going to work for somebody else as an employee after having been an entrepreneur for what, 10/15 years?

Rob [33:22]: Yeah, that’s a really good question actually. And it’s certainly one that I thought about. The one plus of having all this stuff take so long is you just have a lot of time to sit and reflect. You have a lot of time to think about what’s important to you and what you really want out of the acquisition and then out of post-acquisition. Because, that’s the thing, it doesn’t end at acquisition unless you walk away. And most founders do not walk away right at the end, either because they are required to stick around or because they want to stick around. Because, again, for the success of your product, there has to be some kind of hand off time frame. Can you imagine if the day that it closed, suddenly Rob and/or Rob and Derek were just not around Drip anymore? How would that work? I would have serious fears that things could go off the rails pretty easily. Like the wheels could fall off the cart because the two people who’ve been there since the start are suddenly gone.

Anyways, that’s how I think about it. I think for the long terms success of this, both Derek and I have to be around at a minimum, we’d have to be around for hand-off. And it’s not to say that no one else can run Drip better than us. Because certainly there are people who could take the reins from us at any time and be able to grow it. But the idea of the acquisition is probably shocking to some customers anyways and to hear that the founders also walked away would be a little jarring.

But I think, coming back to your question, which was how can I go work for someone else? The interesting thing – I talked to Clay about this, and I gave a lot of thought to it. Derek and I also went and visited Minneapolis and checked out Leadpages and the first thing is Leadpages is a pretty cool company to work for. And I’m not just saying that because I work there or because I’m going to be trying to hire engineers to work for us at Leadpages. But it’s just a fun environment. It’s not the crappy environments that I used to work at. You work for certain companies and it’s not very fun. You’re there either for the paycheck or the pension or whatever.

It was pretty obvious to me from our visit and from folks that I talked to because I knew folks who had worked there – who work there currently or had worked there – it’s a pretty fun company to work for. And so I figured company-wise I’ll be fine because I don’t have a problem playing well with others. I just never like working for companies that had a lot of red tape and, I don’t know, bureaucracy and politics and that kind of stuff.

And based on my conversation – you know, a lot of stuff comes from founder down or from CEO down – and in my conversations with Clay it was pretty obvious he wants to run a lean organization. I like lean, I like moving fast even though their company, now with the acquisition of Drip, they’re 180 employees, they operate like a smaller company. There’s way to stay lean and to keep moving fast because that’s the fun part. And so, that’s why where I saw it as a company-wide thing. In addition, I’ll continue to work with Derek and my whole team, who I really like. I mean it’s the best team I’ve ever worked with. And I’m able to work with Clay and, then there’s folks on the inside there. And everybody that I met, I really liked. And Derek felt the same way. We’d come back and I’d be like, “We met two or three people today and they were awesome. I would have no problems working with them.”

That’s always been my deal of working with people I don’t like. I don’t do very well with that. Working with people who aren’t on the same trajectory or have the same ferocity of getting things done. That always bothered me. And just the more people we met it was like, “Oh yeah, I cantotally work with this.” The other cool thing that wound up out of this was it wasn’t like Drip was going to be swallowed out and we were going to be distributed throughout the company where suddenly our engineers will report to the head of Leadpages engineering and our support people report to the head of Leadpages support. We got to keep the team together in essence, even though obviously we all work for Leadpages I still get to work very closely with the team.

And so, in actuality, not very much is changing here. Like me working for someone else, you imagine having this slave driving boss that’s like – I think Clay and I have this mutual feeling of we view each other more as colleagues. Just like Derek and I. I hired Derek as a contractor and then as a W-2 employee and then he became co-founder of Drip. But I’ve always viewed him as a colleague rather than some type of employee. And actually everyone on my team, if you ever hear me talk about the Drip team, when I introduce them at MicroConf or whatever, I always say, “Anna and I work together.” “Zach and I work on growth for Drip.” You’ll never hear me say, “Zach’s my employee” or “Zach works for me.” It’s just not how I think about things. I know in bigger organizations you need hierarchy and you need that stuff. That’s not how I personally think about things.

And so the cool part is it seems like Clay does as well. And so, all of our conversations it’s never been I’m going to be reporting to some backbreaking boss who’s making decisions that I don’t agree with. These are all things that have happened to me and all the reasons that I didn’t like working for other people. I like to frame questions. I realize this, I try not to be dogmatic about stuff. So I don’t say, “You should always bootstrap. You should never take funding. You should never sell your company.” That’s just not the way I think. And when people say that it bothers me because I don’t believe that’s the case.

I like to ask myself instead, I like to re-frame it, under what circumstances does taking funding make a lot of sense? Under what circumstances would selling your company make sense? Under what circumstances would working for another company make sense? And the answer may be never. There’s no circumstance. But I believe that there are circumstances where maybe you’re autonomous and you really believe that long term it’s the best thing for your employees and your customers. And you believe that you can be part of something really cool. And maybe there are other factors. For you maybe it’s a big salary. Maybe someone throws a bunch of money at you and that makes sense. Or they give you a ton of stock. I’m just throwing things out here. Any of these could be factors, but I think instead of thinking, “Boy, I’m an entrepreneur. I could never work for another company.” It’s like really? What if your boss was awesome and everybody you worked with was really cool and you didn’t hate the job and you got all these perks and the safety of this and that and healthcare and 401K and things you haven’t had for a long time?” I don’t know. There’s other factors into it and so I asked myself these questions. And I sat there in front of my notebook and I wrote all this stuff down. And as it turns out, it just made a lot of sense.

Mike [39:05]: Well, a lot of what you just said there kind of leads me to my last questions which is you probably had a choice as to whether or not to sell the company or to go out and raise funding. And, obviously, being in a position where you were profitable and you were growing the company, you kind of had that option. It wasn’t like your back was against a wall and you had no other choice. You actively chose to pursue the path of selling the business versus going out and raising funding. Why did you do that?

Rob [39:25]: That’s a good question. You are absolutely correct. I mean, aside from the cold emails that I was getting I’ll say maybe on a weekly basis – I don’t know if it’s that often but it’s pretty frequent – from venture capitalists and people looking to invest in equity funds and that kind of stuff. I have a network of people who are into startups and have money. I genuinely believe I could have raised an angel round or a seed round very quickly without a lot of hassle. And so that was something that we evaluated. Derek and I had conversations about that. Because, again, I never say you should never take funding. There are times when taking funding is a really good idea. If you’re growing fast and you know that putting a dollar in here gives you $2 or $3 on the other end and you want to grow and get big, why would you not? There are times when it makes sense.

And so, we evaluated that. And that was not off the table. We may have raised a round in the next six months, twelve months or whatever. There are some things to think about. It’s interesting, once you raise funding, you’re funding valuation is going to be tend to be higher than your acquisition valuation. So let’s just say you could raise funding at a $20 million valuation. You’re probably not going to be able to get acquired at $20 million today. It would be anomalous. It’s going to tend to be – I don’t know the numbers- probably half as much or a third as much. People actually writing you cash for a company versus giving you money based on funding valuations, they’re very different.

So, let’s say you did raise at a $20 million valuation. You can’t sell that company today for $20 million because the funding valuations are really high historically speaking. So as a result, once you take that funding you now have to grow the company to reach that valuation in order for your investors to even break even on their investment. So, if you raise funding you are signing up for three, five, seven years of just hammering on and growth and definitely growing headcount because that’s going to be a big part of why you’re raising the funding.

And so that was a question that Derek and I kept asking ourselves. Do we want to go down that road? Do we want to sit here and plan to go three, five, seven more years and to grow the company because we’re at ten people? On the trajectory we’re at, we’re going to be at 20 people on then 30 people. It’s kind of the natural way you have to go. In addition, there are situations where you do that. You raise that funding. You don’t take funding off the table. You don’t put that in your personal bank account. That goes into the business to grow it. So then you can go that three, five, seven years and if you get killed, if you go out of business, if you get acqua-hired at the end – because some acquisitions really are just a failing company and you get pennies on the dollar- if any of those things happen, you’ve spent many years of your life and basically walked away with almost nothing. And you could spend all that time grow a big business and walk away with literally nothing or hundreds of thousands of dollars which would completely not be worth all that effort.

So there is an advantage, if you get acquired at the price you want, essentially, that makes sense and the terms you want because price is just one of them; and you could also kind of have that funding. Like I explained earlier, we have the advantages of having these extra resources but there was also a fit for us in terms of the terms. And we are able to take money off the table. I actually want to quote Jason Cohen here, who I’ve long respected. He wrote a post called ‘Rich Versus King in the Real World: Why I Sold My Company’. And there’s a quote from it that I think is fascinating. It’s a really good post and it impacted me. He wrote it seven years ago, it was 2009. And just to add a little bit of context, to be king is to kind of run your own company forever and be king of the company. To be rich is to sell it and have money to live for the rest of your life, in essence.

And he says, “See, it’s good to be king but what do you do when you’re at Trudy’s North Star TexMex restaurant tucking into a chili relleno and the guy across the table looks you in the eye and offers you enough money that you never have to work again.” And it’s an interesting thing to think about. There are many paths here. And there are a lot considerations. And you’re going to have a lot of time to think about these things if whether from now until you get acquired or even if you’re in the acquisition process. And that’s probably a question that Jason Cohen just asked that you’re going to wind up asking yourself someday.

Mike [43:18]: I actually remember talking to Jason Cohen at a MicroConf over dinner once and he had talked a little bit about that. Because I told him, “Wow,” because he had mentioned that particular quote in his Business in Software talk. And he said that he had, basically, personal experience with going through that and he knew somebody who said, “Well, let me hang onto my company a little bit longer and grow it a little bit more.” And six months, twelve months later they were completely out of business and were left with completely nothing because they had chosen to go that path.

And I could see that happening if you decided to go get VC funding or angel investment or additional funding of any kind and then you grow it or something happens to the economy and everything just goes out the window. And then you’re left with nothing versus the situation he was in where I’m going to “take the money and run” but it was more of a calculated decision to, essentially, put himself in a situation where he wouldn’t have to worry about money in the future. And there’s really only so many opportunities that each person’s going to have to do that.

Rob [44:18]: That’s right. There are definitely limited opportunities to be able to do it. And the interesting thing is – I’m not even talking about, let’s say maybe you don’t run your company completely into the ground or you don’t get swiped by a competitor and go to zero. What if public SaaS valuations, as an example, they drop 57% earlier this year? There’s a Tom Tunguz article talking about public SaaS valuations and that does impact that ripples all up the chain. Because then venture capitalist’s valuation goes down, then acquisition values go down. And so, what it just that happens? Because right now there’s pretty frothy, there’s talk of bubble, there’s all that stuff.

I’m not saying there is or isn’t but per your own judgment what if we are hitting peak SaaS and things are going to come down on the other side and you can sell for a great multiple and get the terms you want? There’s something to be said for the bird in the hand. What if even broader? I’ve lived through several recessions. I remember the recession of ’93, it was a real estate recession. There was 2000, the dot com bust, 2008 housing bust. It’s 2016.

Again, I’m not saying that something’s coming here in the next six months or a year, but we do travel in cycles. The economy is a cyclical thing and we will have another recession. We will have one. Period. It’s just a fact. The timing is what’s in question. But for you to think that you can continue growing your company forever like it’s growing today, I believe is foolish logic. Because you are going to hit – let’s say a recession hits us sometime in the next three years. Those recessions can take a long time to pull out of.

So, again, you just have to ask yourself are you in this for the long haul? I did hear stories of several founders who didn’t sell – they got an offer, they didn’t sell, they decided to grow it – and then then they sold later but at half the price. So it wasn’t that they got nothing but they definitely felt like they had run their business over the top. And, again, I’m not making a comment on Drip. I don’t think it’s gone over the top. I actually believe that we’re going to – and I’ve already seen it – stuff’s starting to accelerate and everything’s continuing to go up and to the right. But I think this is something that the people don’t really think enough about in our space.

People get the vision of this founder who just goes and starts this and they’re just all about not selling their company. And so they look at Mark Zuckerberg. He started and never sold but it’s like, “Yeah but he made buckets of money from it. And he’s set for life, so he doesn’t have to worry about that.” And even like, let’s say Basecamp – formerly 37signals. They’re often brought up as an example of a company that they bootstrapped it and then they just run it forever. There are very few companies like that, by the way, that either don’t get really big, don’t get killed or get acquired. And Basecamp’s one of the few examples that I can think of of a company that’s not just on autopilot. Not some SaaS app someone has sitting on the side but an actual company with people working on it. It exists but it’s rare in a frothy space, I’ll add as well. Because if you’re in a niche, I think of like Moraware software. They are profitable in steady state but they’re in a very small niche and they kind of own the whole thing and it’s different than being an email marketing company where there’s 500 of them.

If you think of Basecamp as the counter example, even them, they got their big take home money when Bezos invested in them. He wrote a check, and I think it’s estimated – I don’t know if it’s public – but it was like $10 million or $20 million. And DHH said on an interview a while back, that was when he got his eff you money in essence. And so for them, to stick on, that makes sense. They were able to take that money off the table. And so they have different concerns then you or I, where you’re sitting there thinking, “I this fails, I’m back to square zero. I have to start something completely from scratch again after all this work.”

And it is, I think, a real concern that the folks should at least keep in mind. I’m not saying you should always sell if that happens or the economy’s going to hell in a hand basket or any of that stuff. But you have to ask yourself these questions, I think. And I don’t think they’re asked enough kind of in the mainstream press. And I think people have this romantic view that you’re going to keep your company forever or that everyone should be in it forever and I don’t think that’s the right way to think about this. I think there’s more realities that need to play into this.

In terms of Jason Cohen’s thing, he talked in that post also about he has enough money to pay for his kids college, to never have to work again. For everybody to be financially secure and like, that’s a good feeling.

Mike [48:19]: That’s the ability to buy your freedom, so to speak. Eventually, the longer time goes on, the more you’re rolling the dice. And, just like Vegas, eventually a house wins. Eventually, you’ll get hit by a bus or you just grow old and you’re not able to effectively run the business anymore. You just don’t want to or the economy goes down – there’s lots of things that can happen. So it’s a matter of risk versus reward. And when do you want to take the money off the table.

Rob [48:42]: Right. And some people do. MailChimps is an example of a company that just kept going. They never raised funding and they’re huge and they’re awesome. I really like Ben Chestnut. I have a lot of respect for him, the founder. And he has stuck with it for long term and they have seen all the recessions. Well, I guess they started in 2007 – so they saw the big 2008, 2009 dip and they’ll weather it through and they’ll be fine. And Ben will probably run that company until he retires. So there are going to be some exceptions to that. But I guess, from what I’ve seen, those are the rare ones. And he was able to – they got profitable. So, obviously, Ben Chestnut, as an example of probably doing really well for himself.

Mike [49:15]: But as you said, that’s an example of an exception and it’s not necessarily the general case rule. And I think that that’s something that people need to pay attention to when considering the risk versus reward for selling the business and taking that money off the table and setting up yourself and your family for the financial freedom. That’s part of why entrepreneurs do what they do. They want to build something for themselves and essentially profit from it. And if you don’t make the decision to do that at some point then what was the point?

Rob [49:44]: Yeah, there’s a lot to be said of that. A closing thought for me is, there’s a lot of considerations if you’re even going to evaluate this as an option. And I think the question to keep in mind is what are your true deal breakers. Not dogmatic stuff you’ve heard or you think always/never. What really are your deal breakers? And then, what is the ideal outcome? And if you can get pretty close to that ideal outcome where the terms of the deal make sense and you wind up really feeling positive about it at the end, I think that’s super important.

And I do. I guess, I’ll summarize by saying it’s been about two weeks I think since the deal closed. And I can say in all honesty, it has been really fun. I’m meeting a lot of cool people. Starting to just get work done, getting things done really quick. We’re ramping up hiring. We’re doing all the things that were harder to do as we were trudging along and I just feel like I’m excited. I’m optimistic about the future and I have a sense of personal calm that I haven’t felt in a long time. Because, of course, going through the acquisition it was – I wasn’t calm for even a few minutes at a time during that.

And so, I think that’s what I would advise someone, don’t take what the press has shown you. Try to be realistic about it and ask yourself what are your deal breakers and what are you really looking for out of all of this.

Mike [50:59]: Well, Rob, thanks for sharing the experience with us. There’re certain things that you can’t talk about but I think that everybody really appreciates the things that you have been able to talk about and the general process and things that you’ve learned going through that.

If you have a question for us, you can call it into our voicemail number at 1-888-801-9690 or email it to us at questions@startupsfortherestofus.com. Our theme music is an excerpt from ‘We’re Outta Control’ by Moot used under creative comments. Subscribe to us in iTunes by searching for startups and visit startupsfortherestofus.com for a full transcript of each episode.

Thanks for listening and we’ll see you next time.

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One Response to “Episode 298 | A Startup Acquisition Story”

  1. It’s been great to hear the Drip journey from idea stage to acquisition. You’ve definitely created a ton of value for other founders sharing your experience and I hope you continue to do so for a long time.