Category: Insights

Revenue is everything to a startup. It’s hardly surprising that founders tend to focus on the obvious ways to improve revenue. Every dollar spent on direct sales, marketing, and demand generation will, if handled correctly, yield a consistent return. On the surface, this approach makes a lot of sense. Why invest in something that’s less predictable, like business development, when you can generate a reliable ROI for the same money?

The problem with this line of thinking is that it’s more short sighted than you may realize. If you want long-term success for your company — particularly if it’s a SaaS startup — you need to be investing in business development from the start.

The real value of business development isn’t always easy to see, particularly in the early stages of a company’s life cycle. Hiring a new salesperson, for instance, provides the benefit of generating more sales. What exactly is the benefit of a business development person — never mind an entire biz dev team — when you’re still trying to win customers, establish your brand, and improve your products? Most founders don’t really see why business development is a smart investment in the near-term, and they would usually rather take that same money and spend it on more sales hires and marketing dollars. 

Here’s the thing: Every month that you aren’t investing in business development, you’re really just delaying your own success. It’s another month without thinking strategically about the kinds of partnerships you will need as your business grows. It’s another month where you’re not establishing and developing those key relationships. It’s another month where you’re not learning about what kinds of partnerships will work best for your organization over the long run.

As your company grows, the lack of business development is going to start setting you back in ways that you might not realize at first. For instance, when you start to fundraise, your potential investors are going to want to know how you acquire your customers. While they definitely care about your direct acquisition channels, they will also want to know about the other ways you plan to acquire customers, as the direct side gets expensive over time.

Partnerships Matter

If you’re a SaaS company, few things will be as valuable to you as a direct partnership with a larger tech company. By making your product available to them, they make their customers available to you. It’s a classic business development-driven relationship.

A good example of this would be a company I once worked for, Constant Contact, which has thousands of reseller and deeply integrated partnerships.  It took years for Constant Contact to develop those relationships, and the long-term benefits weren’t always clear. As our direct channel growth started to slow, however, we began to rely on these indirect (i.e. partner) channels to boost our revenue. When I left back in 2015, those indirect channels accounted for about 30% of Constant Contact’s revenue.

Consider this: The cost to acquire an SMB customer directly is always more expensive than it is to acquire them through a partner. Sometimes, the cost of acquiring a customer through a partner can be next to zero. If you can establish a great partnership, and invest in the product and the marketing, you can acquire hundreds of customers every year — maybe even every quarter — for almost nothing. Trying to acquire those same customers via Direct Sales, it might cost you $500 to $1000 each. If you want to keep your costs low, it’s a necessity in SMB SaaS to develop partner channels.

Preventing Internal Inertia

The longer you punt on these investments, the harder it becomes to switch the organization’s mindset towards making business development a priority. It’s not just about sales. Supporting a channel partner requires internal resources from other parts of the company, particularly the product, marketing and engineering teams. Even if you’re just creating simple reseller relationships, those partners are going to need basic tools to help them be successful. 

The last thing you want is to miss these opportunities, with other departments dragging their feet because they don’t see the value in them. The earlier you invest in creating these relationships, tools, and strategies, the easier it is to get everyone within the organization bought in.

Partnerships also require commitment from both sides. If the other side is going to invest their time, money, and resources in a deal, they need to know that you’re going to hold up your end of the bargain. Without a business development person who’s accountable to its success, those deals can quickly fall apart.

To be clear, signing and launching a partnership can be relatively easy. It’s the post-launch management where deals go to live or die. Without a dedicated resource to stay in front of the partner and ensure they stick to their commitment and you stick to yours, most deals will end up not going anywhere. It’s already hard enough to get a channel going, and without active management of it, your chances are pretty slim.

This is particularly true if you’re looking to partner with a larger tech company. At a minimum, you will need to invest marketing resources in the deal, but you may also need to invest some engineering resources. This could mean integrations if they have an API, or even direct access to tech stack. Those partnerships simply don’t happen if a company doesn’t have a relationship with you, not to mention a certain degree of trust.

BD Investment As An Exit Strategy

There’s also one final danger to not investing early in business development: It makes an eventual exit far more challenging.

Most businesses are bought – not sold – and most often they are bought by companies that they already have strong relationships with. If your potential acquirers aren’t already in a partnership with you, chances are that they won’t feel comfortable enough to even consider buying you.

I saw a lot of this while at SurePath. It’s now become even more clear to me how important existing relationships are in an M&A process. As a former BD leader, I never included that angle when discussing partner opportunities with my CEO and/or fellow exec team. I should have.

If you’re not creating relationships with your most natural acquirers early on, and actively building on those as you grow, finding a buyer is going to be a real challenge. With those relationships, you may even be able to generate inbound interest when it’s time to exit. 

If and when you are fortunate enough to land an offer, other potential acquirers may not be as motivated to counter as there isn’t a strong enough relationship in place. Look at this from a potential buyer’s perspective: If you don’t already have an established and mutually beneficial relationship with them, why would they have any interest in buying your company?

At SurePath, we often used this analogy: Buying a company is like getting married. You’re probably not going to marry someone who you haven’t dated. 

When discussing potential exit options with clients, a first question is almost always “Tell us about your best partner relationships.” It gives us a starting point to better understand how far along they are. We’re happy to help develop those relationships even further, but it takes time. If time is not something you have, it can make the process more challenging. The earlier you invest in business development, the easier it becomes.

A few weeks ago, I had a call with Chris Schulitz, the head of Corporate Development at Paychex. We were talking about one of our new clients at SurePath and how they could be interesting to Paychex at some point, making it clear that we’re not actively marketing them at the moment.  Mostly offering to make an introduction to the CEO if he was interested in learning more about the business and space.

“You know, I really appreciate this kind of early heads up on engagement,” Chris told me. “This is an area we have talked about internally, but don’t yet have a clear view on how we may want to offer something like this. There’s a real difference between strategic fit and strategic readiness.” 

That comment instantly resonated with me, because it perfectly encapsulated our approach here at SurePath and what we often have to explain to our clients when a buyer passes due to timing. Strategic fit and strategic readiness are not the same thing, and just because your company is a good strategic fit for a buyer doesn’t mean that they are going to be ready to acquire you when you’re ready to exit. We try to drill this idea into the heads of our clients and potential clients at every opportunity.  

Strategic fit is an easy thing to demonstrate. If a small company provides a needed solution for a problem a big company has, there’s a strategic fit. Our clients often create products that would be an easy add-on to the existing product suite of a larger brand. All it would take to make everyone happy is for the big company to buy the small one, right. Seems like an obvious win/win, doesn’t it? 

In reality, things are a bit more complicated. At most (if not all) companies, it still takes a lot of resources, time, and buy-in across the business and product teams to move forward with M&A. There are millions of dollars at stake — maybe hundreds of millions — and considerable logistical, technological, and organizational issues to consider. It’s a complex process with a lot of moving parts, and It can take years before a company is strategically ready to make a purchase.

If you want to be acquired by a bigger company, you can’t just rely on the fact that your product is a good strategic fit for them. You have competitors, after all. Instead, you want to build strong relationships and for some, deep partnerships with your potential buyers. This allows you to be at the top of their list when they’re strategically ready to make a move in your particular category.

To understand why this matters, consider the typical reactions we get when we approach potential buyers cold on behalf of our clients. This often happens in an auction situation, or when one of our clients has urgent inbound interest and they’ve asked us to “shop” it to other potential buyers. We usually get one of three responses:

1. Yes, this company does sound like a good fit for us. We’d love to learn more. Let’s set up a meeting.  Unfortunately this doesn’t happen as often as I’d like.
2. We’re interested, but the timing isn’t great. What your client has to offer is just not a big priority for us at the moment, but would be happy to learn more about them. If they decide not to sell now, we could explore how we might eventually work together. This is by far the most common type of answer. 
3. We’re not interested. This is not currently a product or strategic priority for us.

Unless a likely buyer already knows your company, even the best response tends to be lukewarm. That’s why we encourage our clients to engage with potential acquirers long before they even consider an exit.  It’s easy to set up meetings to talk about potential partnerships with the corporate and business development teams at most companies.  That’s their job.  If you have a product they really need, it’s often possible to meet with the GM or Product Owner, which can be very helpful down the road. 

At SurePath, we work hard to know every major buyer and product owner in the SMB software space.  As we evaluate new clients, one of the first things we do is create a list of companies who might be a great fit for an eventual sale – sometimes even calling buyers to gauge interest on a no-names basis.  If it appears to be relevant, we’ll often facilitate an introduction early in our engagement.  This allows our clients to understand the priorities of their potential buyers, and for those buyers to keep tabs on the company’s situation, product development, and leadership. This not only helps to establish a strategic fit early in the process, but it also raises our client’s profile when the larger company is strategically ready to make an acquisition.

Building relationships with your natural acquirers as early as possible is one of the best things you can do for your eventual exit. This is particularly true when your business is still relatively small as your acquisition isn’t likely to move the needle for a large buyer. If they are going to buy you, it’s because the product you’ve built is already on their roadmap and superior to anything they have seen or feel they can build. They’ve already decided that they are going to buy the solution they need, rather than built it themselves, and they’re willing to pay a premium to accelerate their plans. 

Your goal is to already be on their radar when they decide that it’s time to make a purchase.

Andrew Morbitzer knows a thing or two about M&A. Over the last 6 years as the VP of Corporate Development at GoDaddy, he’s been a big part of the team that has helped transform GoDaddy beyond their core to a leading platform for SMB’s.  He’s always happy to hear about a new technology, or a promising new service that could be the next headline-making disruptor, but that’s not the focus of daily activities. Instead, he’s looking for companies that can deliver exceptional value to GoDaddy’s 18 million global SMB customers.

Morbitzer took a few moments out of his busy schedule to talk with us about how a huge company like GoDaddy approaches their M&A process, and what they’re looking for — and trying to avoid — when purchasing a company.

Josh Scherman: You have an extensive background in technology and marketing, going back to IMB in the early 1990s,  as well as 7 years at Intuit prior to joining GoDaddy, but I’m more interested in talking about your current role in M&A at GoDaddy. Can you tell me a little about what makes the company special?

Andrew Morbitzer: I joined the team just as the private equity buyers were coming into GoDaddy. The thesis when the buyers came in was that there were a couple of magical things about the company. The biggest of those is that we acquire small business customers at a super-high volume, and for a very low customer acquisition cost (CAC). That’s special within our industry. 

The second thing that they liked about GoDaddy was that we had thousands of people working on the phone. We’re always having conversations with small businesses. If we have a secret sauce, that’s it. Our first objective is to help our small-business customers with their problems.

At the same time, we also had a few things we needed to figure out. We were learning how to become a world-class products company, lead the world in small-business products, and go global in the process. But our primary mission, from day one, has been to provide tools for small business. We want them to be far more successful than they otherwise would have been, all because they chose to work with GoDaddy.

How does that customer philosophy inform GoDaddy’s M&A strategy?

We have a relatively small business development team, and that’s on purpose. It forces us to be very thoughtful about what kinds of purchases we look at. The choices we make need to have a big impact, and that means that we have less of a tolerance for wild swings. Everything we do has to be strategic, and really on mission.

This means that we focus on both strategic partnerships and acquisitions. Those acquisitions are either in product expansion, or on customer and market expansion. A good example of the latter would be the Host Europe Group, which we acquired last year. 

The Host Europe purchase gave us the top presence, or close to the top, in a lot of key European markets. Europe is a market that is already very well developed, and by acquiring Host Europe, we were able to gain a strong position much faster than we would have been able to do it organically.

In a market like India, on the other hand, we’ve taken an organic approach. Four years ago, we were nowhere in India. Recently, we just passed our millionth customer there. We’ve got a great team on the ground in India, and they are very focused on understanding the needs of the market and producing specific products and services on the global GoDaddy platform, but tailored to local customers.

You mentioned having a relatively small team, Who are the other internal stakeholders, and who else is looped in as those M&A conversations develop?

The typical, ivory tower-type approach would be that Corp Dev team identifies a need, and then they go out and shop it to the various business units. We don’t do that way. Instead, our team works as an integral part of the business unit teams throughout GoDaddy. If we move forward with something, the business units are already onboard. 

The business unit is ultimately where your M&A resources come from. They have to decide that any purchase is a big enough priority to merit the time of everyone involved. You want everyone to understand the value, from the GM to the Head of Engineering, because they have to carve out time for it. Presumably, all of these people were working 110% on other things, so they have to de-prioritize something else to focus on this acquisition.

This means that you get buy-in very early, and it also allows you to maintain alignment throughout the entire process. There are no surprises. Most of the time, it also means that we’re doing proactive M&A, and not reactive MA. Proactive M&A has a much higher long-term success rate.

Working closely with the business unit is how you scale across the entire company using a small team. More importantly, it’s how you get successful acquisitions in the door.

That sounds like an approach that is driven by a long-term strategy.

It is. There are many different styles of corporate development. One of the stories that inspired me is how Pitney Bowes changed their approach to M&A. They did a strategic assessment a few years ago, and in the process they figured out that their position was not limited to selling stamping machines. They had great relationships with all these large companies, and they went on a corporate transformation centered around acquisitions. Those acquisitions could provide even more fuel for their business.

As a result, they became very methodical about M&A. They even developed a playbook. When you go back and look at that playbook, which they update rigorously after each acquisition, of the very top things they look for is to partner with business units. They won’t proceed in an acquisition without the sponsorship of the business unit. 

Is it more often the case that the GM or business leader identifies a gap, and they bring it to Corp Dev? How do these ideas come across your desk?

M&A ideas are coming to us all day, every day. There are four of us involved in the leadership side of the Corp Dev team, and on any given day we’re talking multiple times with the different business unit leaders, the product leaders, and the marketing leaders. 

We have a written strategy detailing how we’re going to grow across the next couple of years. As the business unit driver, you can see that there’s a talent area, a product area, or a market area where we need acceleration. We then go do M&A in that area. That is a very methodical process, and we have longer-term projects in that area. We develop the longer-term strategy in that area, in most cases. 

You also get things that pop up. Sometimes we learn something unique about a specific market. Or we may have a set of customers from a specific area or market come in, and we then need to get a lot of knowledge about a particular problem they face. That kind of thing happens.

Fairly recently, for instance, we closed a small, unannounced deal that originated from customer feedback. Three of the top five customer asks were in this problem category. There was enough volume that we needed to put a strategy together. We start asking ourselves “What would this product look like at GoDaddy? What would be our unique differentiator in favor of the customer?”

Then, we started looking for the right solution to buy. We talked to maybe 16 or 17 companies before we landed on the right one, and then we made the deal. This whole acquisition came from the needs of our customers, and it only happened because we were listening to them. Other times, we’re ahead of what the customers are asking for. That comes back to having a proactive strategy.

What role to inbounds play in your M&A process?

It’s less likely that we’re going to get excited about something that is inbound. Again, our M&A process is pretty methodical. I want to be careful to say that we’re not passing judgment on what other companies do, but instead talk about what works for us. What works for us is to be really methodical and proactive. It’s how we maintain forward momentum without getting thrown off base. 

We do talk to plenty of inbounds. On average, I talk to at least one new company every day. There’s just not enough time to chase all of those down while focusing on the things we’ve already decided are important.

There are some pretty good statistics showing that the most successful M&A is proactive M&A. When you look at a three-year success rate, you can see it. This is for a wide-variety of reasons. It’s the emotional support and buy-in from the inside. It’s the clarity of thinking that comes through the process of getting feedback. 

People should still bring topics to us. Even if we don’t act on those topics, it allows us to build a relationship. Across time, you may see fits that happen. With GoDaddy, some of those fits can happen quite a bit further out. 

You mentioned the importance of sales tests in your M&A process. What are you looking for in those tests?

If we’re interested in going through M&A with a company, we like to do sales tests. In any of these tests, you have to be extremely careful in what you’re testing. You’re really testing for “customer love metrics.” Do customers love and need the concept of the solution? 

What we’re not testing are things like closure rates or funnel steps. Those are things that require months of iteration, and need lots of feedback. To get anything close to an efficient sales funnel, you’re going to need at least 15 iterations of at each step. This early in the process, testing for those kinds of pure numbers is the wrong approach. What we’re really looking for are indicators of customer interest.

The other thing we do is survey the company’s customers. I’ve probably run five of these in the last few months with companies of different kinds. We’re looking for segmentation specifics, purchase behavior, product usage, and value. Did using this product provide life-changing value to the small business owner? If so, what is that company’s net promoter score? That helps us understand if the service or product that the company has built would be valued by our customers. If so, we may be able to build a big business out of it.

We genuinely look for companies that offer something that can change the small business owner’s life. If we can change it for the better, we’re in. But if it’s just a feature or an attribute, or if it’s a good invention that customers aren’t going to love it and isn’t going to change their life, then we’re probably not in. We’re OK passing on that.

What are some of the other big problems you run into when considering a company for acquisition?

A lack of traction. I would say that the vast majority of SMB product companies that approach us, like 9 out of 10, have a really good product. At the same time, almost none of them have found traction in the market.

If we can’t tell that customers, at scale, like the product, then even the most promising company is much less valuable to us. There are many different ways to value a company. In some cases, like Main Street Hub, it can be much more of a judgment call. We’re accepting the risk that this product is going to work for a large segment of customers, that it’s going to be cost efficient, and that the technology and architecture is going to be able to scale. The less confident we are in all that, the less a company is going to be worth to us.

One of the other things I see in a lot of startups is a reluctance by the founder to bring in a co-equal to help them grab market share. Instead of going out and finding someone who is amazing at sales and marketing, and paying them whatever it costs — a title as co-founder, equity in the company, whatever it is — they instead go and hire a Director of Marketing or a Director of Sales. 

That hire might be a bright, up-and-coming expert, but if they are not a co-equal, they won’t be able to go toe-to-toe with that founder. You need someone who can do that, and who can push back over the direction of the company or how the resources or being used. You need someone who has the confidence and the authority to muscle through and do what it takes to grab customers. The end result is that you have a company that isn’t able to scale, and doesn’t have the level of success in the marketplace for the kind of exit they want.

I see this all the time. I’m not going to say that this reluctance is just about pride and being willing to give up equity, but I suspect that those are two of the bigger reasons. 

That’s one of the reasons we liked Sucuri. Daniel brought in Tony Perez as Head of Security Products very early on, and give him full co-founder status. That allowed Tony to run everything on the go-get-customers side of the business, and to lead the culture as CEO. Tony was able to put together the investors and the board, and it freed Daniel up so that he could stay super-focused on the product.

Together, those two had a successful exit. They had their name in lights at the end. They built something that is great. That’s a model that few startups follow, but they should. It makes the company more attractive to buyers like us when you have a broader set of capabilities. Your company will be worth a lot more money when you’re able to prove that you can scale. It means that the acquirer doesn’t have to take on that risk.

Any advice for companies on how to best approach and prep for a meeting with Corp Dev at GoDaddy?

When we’re approached by a company, most of the time they want to tell us about why their product is great. I make a point of asking them not to do that. Instead, I ask them to tell us what their product is going to do for GoDaddy’s customers. What’s better, different, and more valuable about their product than what GoDaddy is doing on its own today?

I also tell them to spend some time understanding GoDaddy. Try our products. Look at our investor presentations so that you can talk our language. Then, put it into concept with us so that if it were to be at work at GoDaddy, it’s super clear to us how this idea changes our life. Do the hard work for us. That’s what sparks conversations.

That’s a lot of homework, so very few of them do it. When people don’t put in the effort, it makes it very easy for us to say “No thanks.” If you’re an entrepreneur, and every day you’re fighting against a world that is trying to crush you, getting through that “No” is where you want to apply your energy.

I’ve previously discussed the importance of investing early in business development and the potential of that to drive your eventual exit strategy.  While I would never advocate pursuing partnerships unless it is part of your overall strategy, the more you can focus on building strong relationships and partnerships, the more options you will likely have for an eventual exit. A company that you’re partnering with today could easily become your parent company tomorrow.

At SurePath, we tracked all exit activity across the SMB software market, so I decided to go back and look at a bunch of examples over the last few years of acquisitions across the SMB space that started with a partnership. In this post, I thought I’d highlight some of the more notable ones and how the partnership helped to create a foundation for the eventual purchase.

Intuit’s acquisition of TSheets

When Intuit announced that “we are acquiring long-standing partner TSheets” for $340M, few industry insiders were surprised given the excellent product fit and long standing partnership these two had.  TSheets had invested years in this partnership — building both a deep product integration and strong relationships across the Intuit employee base.  Anyone who knows the TSheets brand would often see those iconic TSheets t-shirts at various industry events.  Rumors has it that Intuit employees would even wear them at the Intuit campus.  The TSheets marketing and BD teams were very good at establishing relationships across the board to ensure they always stayed top of mind for the Intuit decision makers.  Relationships matter.

Xero’s acquisition of Hubdoc

Recently, Xero announced they were acquiring Hubdoc for $70M.  This was another purchase that shouldn’t have come as a surprise to anyone following the space.  From a strategic standpoint, Xero continues to battle Intuit here in North America, and is working hard to eat up some of the market share that Intuit has.  This article does a great job laying out the full strategic rationale for why Xero made this move, so I won’t go into too much detail here.  From a partnership perspective, however, is that Hubdoc was a Xero partner since 2014. The company invested a lot of time and resources in driving its success across the Xero customer base.  Also, M&A is not something Xero does very often, so looking to stay close to home (i.e. their partner network) had to give them a lot of confidence that the acquisition would go smoothly, both internally and externally.

Square’s acquisition of Weebly

Square continued to show that they are so much more than just a payments company when they announced earlier this year that they would be acquiring ecommerce platform Weebly for $365M.  As the linked article points out, moving into ecommerce and expanding internationally were two key strategic objectives.  When Square’s product and corp dev team decided to accelerate growth via an acquisition, they naturally looked to their existing relationships.  Given their long standing partnership with Weebly, it was a natural fit for Square to make this move.  This was specifically called out by Weebly’s CEO in their announcement: “Weebly & Square have a long-standing partnership that integrates our services to provide a seamless and powerful experience for our customers. That partnership has been a perfect way to prove out how this relationship could be so much more.”

Endurance’s acquisition of Constant Contact

When Endurance bought Constant Contact, they purchased one of their oldest partners and a proven channel. Many resources — across Product, BD, Marketing and Sales — were spent developing this partnership over the years, and when Constant Contact felt it was time to explore strategic options, approaching Endurance was likely a top priority for their bankers.  Gail Goodman, the only CEO Constant Contact ever had, sums it up best when she said:

“It became clear we could do so much more if we were part of the same company. It really was one of those really great acquisitions that starts from a partnership. And so we go into this knowing each other fairly well and knowing we can cross–sell into their customer base.”

Yelp’s acquisition of NoWait

Lastly, I thought I’d highlight an acquisition that had a different foundational partnership compared to the more traditional ones presented above. When Yelp initially approached restaurant waitlist service NoWait, they were looking for strategic partner to help them test out that space. At the same time, NoWait seems to have been fundraising, and having a strategic partner (as opposed to looking for traditional institutional money) is always something worth exploring. As part of their partnership, Yelp made a strategic investment and likely (as is often the case) secured different levels of exclusivity as they went to market. Ultimately, after pushing the partnership to market, it was clear that the strategic fit was so strong that Yelp decided to buy NoWait a mere six months later.  

What do these examples of partnerships-turned-purchases tell us? From an exit perspective, there’s actually a lot to think about. Here are three key takeaways about how these companies were able to transform their relationships into acquisitions:

1. In each case, the startup was able to fill a key product gap that quickly became a strategic necessity to their acquirer. The partner realized that the relationship gave them a huge advantage that they really couldn’t afford to share. They needed to own it. 
2. It pays to invest in relationships.  Not only at exec level, but across the product, sales, and marketing teams, as they will prove to be your biggest cheerleaders internally.
3. Most importantly, the acquiring companies were all able to mitigate many M&A risks by first “testing” the relationship via a partnership. This allowed them to see what works, and clearly demonstrate the specific value the partnership brought to their respective businesses.  In addition, it gives both senior leadership teams an opportunity to get to know each other prior to getting “married.” As we like to say here at SurePath, it’s hard to imagine marrying someone without dating. M&A is just as much of a commitment, and should be treated the same way.