Ben and David return to make their first foray into enterprise software, covering Salesforce's $2.5B acquisition of ExactTarget in 2013 with the help of special guest and ExactTarget cofounder & CEO, Scott Dorsey.
Technical note: due to an issue we didn't catch during recording, audio quality is significantly lower than usual for this episode (especially David's voice). We apologize but hope you'll give it a chance anyway— Scott offers great wisdom & insights, and the ExactTarget success story is a inspiring one underdog entrepreneurs, especially (but not limited to!) anyone located in the Midwest or elsewhere outside of traditional "Silicon Valley-style" tech hubs.
Topics covered include:
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The Carve Out
Full Transcript below: (disclaimer: may contain unintentionally confusing, inaccurate and/or just-plain-hilarious transcription errors)
Ben: This is going to be a great episode.
David: This is going to be awesome, yeah.
Ben: I think administratively I might only be asking for reviews. Should we keep doing that? Does it sound needy?
Welcome to Episode 15 of Acquired, the podcast where we talk about technology acquisitions. I’m Ben Gilbert.
David: I’m David Rosenthal.
Ben: And we are your hosts. We’ll be talking about the 2013 Salesforce acquisition of ExactTarget. We have with us today Scott Dorsey. Scott was the founder and CEO of ExactTarget. And I actually interned at ExactTarget for a summer when I was in college. And probably worth mentioning, Scott is also my cousin, so super, super excited to have family on the show. And welcome, Scott.
Scott: Thanks, Ben. Really appreciate it. David, delighted to be on the show and proud to watch how your careers develop and glad that you had a little stint at ExactTarget along the way. That’s pretty neat.
Ben: Super, super fun. I had met a lot of great people there.
David: Wouldn’t be here today without it.
Ben: No. It’s true. I think normally we talk about the acquisition history and facts, and David sort of reviews that. But I thought a really cool way of diving into the show today would be to kind of have David do a little bit of review of facts but kind of go into a Q&A with Scott.
David: Yeah, that’s a plan since we’re lucky enough to have the primary source here sitting with us. So for folks who don’t know, ExactTarget was founded by Scott and your co-founders Chris Baggot and Peter McCormick in Indianapolis in December of 2000. So Scott, December of 2000, how did you guys decide to start a tech company? The bubble had just burst. You weren’t in Silicon Valley. What was going through your minds?
Scott: Exactly, David. It's a great question. And we’re a classic kind of didn’t know any better, against long odds story, and that we started ExactTarget in December of 2000 under the toughest conditions. The internet bubble had burst, VC funding had really dried up and we were three first-time software entrepreneurs starting a tech company in Indianapolis. Actually none of us had a technical background, so were against long odds for sure but we had a real clear vision around what we were trying to accomplish and it was actually my co-founder, Chris Baggot – And while we’re kind of unpacking some family stories here, Chris is actually brother-in-law. So we both married into this great family from Indianapolis. He’s from Pittsburgh and I’m from Chicago, and I had just finished my MBA at Kellogg over at Northwestern and really studied entrepreneurship and internet business models and had just come back from our capstone course which was studying really the Silicon Valley ecosystem and figuring out how to apply that to Chicago and how to apply that to Midwest.
And Chris had this big idea around database marketing and how to apply database marketing principles to the internet Chris is one of these just incredible visionaries and evangelists, and he’s now done it multiple times even post ExactTarget by founding a company called Compendium and the blogging software, Space. And now he’s very deep into food tech and agriculture. But Chris had a real sense that the internet was going to transform marketing and that email marketing in particular and permission-based email was going to be a very powerful way for small businesses to get to know their customers better and be able to build these kind of personalized relationships and be able to deliver relevant content that drove business. And he was right. So he was so passionate about the idea that he really convinced me to kind of quit my day job. I was working for an internet incubator in Chicago called Divine. And we sold the house and had two little ones and put the family in the car and drove to Indianapolis and said, “Let’s give this us a shot.”
David: Wow. That’s a pretty – Did you guys try and raise money from Silicon Valley VCs at that point? So you raised some money from friends and family and a few local individuals. Bob Compton, I believe, was your lead investor. But I got to imagine in December of 2000, not many VCs are making any investments, let alone first time tech entrepreneurs in Indianapolis.
Scott: No. That’s exactly right, David. We spun our wheels talking a lot of different VCs in Indianapolis, Minneapolis. We really didn’t head back to the Valley in a meaningful way but we certainly talked to a lot of VCs in the Midwest with absolutely no luck. And then started talking to Angel Investors who were also kind of slow to move, so our first round of financing was just a classic friends and family around, we raised about $200,000 from those that loves us and trusted us, and that early investor roster was my parents and my brother and my father-in-law and then pretty much all of Chris’ neighbors. Chris has just this infectious enthusiasm and it’s not much of an exaggeration to say he went door to door with the PPM in his neighborhood and collected $5,000 checks. And we were so careful especially with Chris and I being family, we only wanted to raise small amounts of money from family members that if it didn’t work out, there would be no hard feelings, we wouldn’t have any discomfort around the Thanksgiving dinner table. So we scooped up a lot of $5,000 and $10,000 checks and cobbled together the first couple $100,000 in the business.
And a really cool story is that for those investors that put $5,000 into that seed round and went the distance and actually a handful of them did. They held the stock all the way through the Salesforce acquisition. That $5,000 became well north of a million dollars. So, lots of pools and home renovation projects started popping up in Chris’ neighborhood. We had a lot of happy family members.
So that was really our first move. We were a bootstrap startup. The three of us worked without taking a salary for the first 6 months of the business and then we were really fortunate to find Bob Compton. And Bob was a very accomplished venture capitalist and tech entrepreneur in his own right. Bob had invested in a company called Software Artistry which was the first really Indiana software company to go public and then later was acquired by IBM and then he was a venture capitalist at CID Equity and then actually ran one of their investment, Sofamor Danek. And Sofamor Danek sold to Medtronic. It was a big exit. So Bob was a very accomplished investor and tech entrepreneur and he became our lead Angel investor and really became my mentor. He was chairman for the first 7 or 8 years of the business. Once Bob put money into the business, then raising capital got a lot easier. We had that stamp of credibility that we really needed.
Ben: With only $200,000 raised, I mean this was the era before cloud computing, how did you invest that to build the business?
Scott: That’s a great question, Ben. It’s so different. AWS didn’t exist so we were buying servers. We were racking servers. We were buying network equipment. We really had to build the infrastructure and ironically our first $10,00 went to Lyris which later turned out to be an email marketing competitor. But Lyris had a server-based solution for sending email at volume and now is one of our early licensing purchases, so really most of the money went to building the product and building the early infrastructure.
And then this was interesting. You always have to leverage your timing and your unique assets. One of our unique assets and an element of the era was that we had a lot of awesome friends and colleagues that were looking for what was next and a good number of them were with .coms that didn’t work out. We ended up hiring our first sales team as kind of independent contractors where we convinced a friend that we had big vision and this was a neat opportunity and they would sell for us, and we gave them the equity in the company, and they would sell for us really as an independent contractor. No salary, commission only. They had to do it all there to find the lead, put the pitch deck together, sell the deal, collect the deal, implement the customer and if they made it all the way through, we paid them a commission.
So we actually felt this really kind of seasoned sales team early just on the back of the fact that we had a lot of really good friends that were kind of looking for something that was next to their career. Then once we got funded, they became real employees and we were able to provide benefits and all that good stuff. But we build a verily scalable sales organization before we really could afford to.
Ben: How much do you think that sort of original DNA of totally giving pure commission-based sales to those early sales folks do you think kind of helped shape the way that the organization was built?
Scott: Great question, Ben. A huge influence. We from day one were a very sales driven, customer driven organization and just the nature of the three founders, all sales marketing leaders, kind of general management background. Everybody sold, everybody spent time with customers. And early on, we would describe ourselves as marketers building software for marketers. We had a very keen sense for what problem we were solving and what we wanted the product to look like and how we wanted to function. So that was product management. V1 was really all driven by the founders but we created a sales culture early on where the three of us were very aggressive and selling and working with customers. And it’s perhaps my very favorite element of software as a service is that if you are a good listener and you work closely with customers, they will reveal your product roadmap for you. And it’s really your job to certainly bring your vision and your point of view, but you’re really distilling feedback from many, many individuals and organizations, your customers and your prospects in the marketplace. And if you can distill that feedback in the right way and take action upon it, you can build an amazing solution that clients really want.
I think one of our real strong suits was being very close to the customer and being great listeners and really helping them shape our product. But we were incredibly sales driven and because of that kind of independent network of sales representatives that we built, we were very sales heavy early on. Actually I look back, I did a history of ExactTarget chat a few months ago and I looked back at one of our early decks. This was even staggering to me but at the moment where we had 44 employees, we actually had 26 in sales. That’s heavy. So we were very sales driven.
Then we also unlocked a channel far earlier than most software companies. We realized that digital agencies could be great partners of ours. They were building websites, they were writing copy and content but they really didn’t have tools for email marketing specifically and we built a big channel program that allowed these agencies to leverage our tech platform, rebranded our white label where they needed to and build these reoccurring revenue streams that were advantageous for them. And that allowed us to start reaching into big Fortune 500 companies like General Mills and Home Depot became clients of ours through their trusted agency at a time when we were still a small and scrappy company. So it helps us kind of punch way above our weight class early on. That was a big driver of our early success.
David: On that front, we should say for our listeners too, this is I think really our first or one of our first pure enterprise technology companies that we’ve covered.
Ben: Actually I’d be curious on Scott’s take on saying that.
David: But I want to come back to that because – And I say that because as VCs, they’re sort of this like trope when you’re looking at investments in the enterprise that there’s this matrix of what your target customer is when you’re an enterprise and you’re a software company and who you sell to. It’s like a test. You need to have that nailed and it’s like are you enterprise, or are you mid market, or are you SMB? Do you sell direct? Do you sell via the channel? And typically, you need to have very clear answers to those.
But it sounds like from the get-go you guys were like yes to all of those. Was that deliberate? How did you think about that?
Scott: Great question, David. We were very small business focused. Very small business focused. In fact our first wave of customers were literally restaurants, dry cleaners, pizza shops. We were very SMB and very retail-oriented. The original problem we were trying to solve was that when the retailer turns their lights on and opens their door in the morning, they often have little visibility into who’s walking in the door and who their customers are and how to build deeper relationships. That was part of the background that Chris brought to the business.
So early on, we were a $1000-a-year subscription and very small business focused. Actually, a good number of the reasons why those early VCs said no is they just couldn’t picture that this could become a large business. And then over time through I think being a crafty and agile and very sales and customer oriented, we started to realize – Actually our first wave of expansion was to grab lots of small businesses at one time. You need to start selling to franchise organizations. So we started evolving to franchise organizations where the franchisor carried a great deal about centralized branding and content but they wanted to give autonomy and authorship down to the franchisee. So we started to build kind of this parent-child relationship and this kind of enterprise architecture to serve franchise orgs, and that gave us a big boost.
Then we started realizing that really every organization in the world is going to need to use email and digital marketing to communicate with their customers whether you’re a nonprofit or Microsoft and the enterprise side, there really were a common set of needs. We just built more and more sophisticated technology and then ironically, we were a Salesforce customer from the inception of our business. So we were students of Salesforce. We really watched how Salesforce built and scaled their business and we admired that they were a multi-tenant SaaS platform that served small businesses all the way up to large enterprises. I just fell in love with the idea that you could essentially build software once and sell and deploy it over and over again and that you could build features that could be – Every feature we ever built had a switchboard. We had an on and off button where we could deploy the software and package it in a really flexible way that was very simple for the small business or we could turn on all the advanced capabilities for the more sophisticated enterprise and have essentially one code base where we have clients paying a thousand dollars a year. We had a lot of seven-figure clients and even some eight-figure clients essentially using the same platform. That’s just a remarkable level of scale and flexibility. And there’s a lot of tension that applies to the organization around segmentation, who are you building products for, how do you build your services, or what are your support models.
David: These are all the things VCs are afraid of, right?
Scott: Yeah, absolutely. So we started small and then we really disrupted the incumbents by kind of engineering our way up market and I think they often underestimated us. But it was that flexibility they have strong, and I really – I wanted to be part of that democratization of software. I wanted to deliver compelling software to small businesses in an affordable way. I always felt like our market opportunity would be a lot bigger if we could continue to serve SMB enterprise.
Then the really neat thing is small businesses become big businesses and marketers leave small companies and go to big companies. So we had a lot of pull-through. Actually one of our largest customers over time was Groupon, and Groupon came into our small business inside sales team when they were barely just getting started and they were able to scale with us nearly every step of the way. So there are a lot of neat success stories where that SMB enterprise range was a big differentiator for us.
David: So you have a few years of bootstrapping and start really small – dry cleaners, pizza shops as you’re saying, and things go well a couple of years. Well, four years later in 2004, you end up raising $10.5 million from inside. By 2006, you raised another $7 million and at that point you’re doing sort of 40-ish million in revenue. On that kind of stair step up, how long did it take to get to from the individual little guys to the franchisees up to – I would assume by the time you’re doing 40-ish million in revenue, you probably are already starting to hit the enterprise at that point. Were there specific rate points along the way? I’m thinking like Microsoft is one of your biggest customers. How did that conversation start? How did they come into the fold?
Scott: That’s a great question, David. Maybe I’ll first start with just kind of going back to that timeframe. So in December of ’07, we actually filed to go public. We were 48 million.
David: You were getting there.
Scott: Yes, we were 48 million in revenue. We were profitable and we were just starting to kind of reach the enterprise space. We were extraordinarily capital efficient. So the fundraising that you referenced is all accurate but actually can be a little deceiving because each of those rounds was a mix of primary and secondary capital. So we often had a secondary component to our fundraising to provide founders, employees and early investors an opportunity to take a little bit of money off the table along the way and I was so grateful we did that actually because especially because of how we bootstrapped the business and how our three cofounders worked for kind of a very long period of time without paying ourselves, having an opportunity to take a little bit of money off the table along the way was powerful because it just allowed us to sleep on at night knowing that we had some level of financial security for our family and we’d be able to send our kids to college and all those good things. But then it just got us hungry to really want to take the business a distance and make sure we didn’t prematurely sell the business.
So what was interesting is when we filed in December of ’07, we had only raised 6 million in primary capital and we had nearly as much in the balance sheet. So we had been extraordinarily capital efficient up to that point. So we filed to go public in December of ’07. The public equity market just fell apart in early ’08 and we actually stayed on file all of ’08 and ultimately decided to pull the IPO in early ’09 and that’s a whole another story I’d be happy to jump into. But I would say it was that timeframe where we started reaching up into the enterprise and then the nature of our business was shifting. We started building more professional services capability and the fundamentals of the business started shifting and in addition to the equity markets not being very favorable, it actually was a huge blessing for us because it gave us a chance to stay private, bring more capital in the business, and kind of recalibrate toward the enterprise and it was much easier to do that as a private company.
David: That’s where I wanted to go next here, kind of leading up to so you filed to go public in December of 2007, and this was the days before the JOBS Act which is hard to imagine now that, well, easy because we all lived through it but your perspective was out there in the public domain from December of 2007. Well, still to this day but until May of 2009 you were on file and all your competitors could come read your S1 and see all your financials, and you ultimately didn’t go public then I assume because of the financial crisis in large part. There were no IPOs happening. What was that like?
Scott: It was so difficult. You’re exactly right.
David: [INAUDIBLE] could read everything about you and you’re still a private company but you have none of the benefits of being a public company with all the downsides.
Scott: It's exactly right. I would commonly say we had all the burden and cost and pressure being a public company with none of the benefits. Zero. Because you’re exactly right, this was pre JOBS Act and we had to report every quarter just as if we were a public company. So the silver lining is we had a great training ground of how to set quarterly expectations, how to work with the street, how to work with analysts. We had to do quarterly earnings calls with the analyst that would be covering our stock. But it was very, very difficult and a testament to the strength of our team and our company culture that we kept everybody focused, we kept everybody very positive.
And ’08 was just a difficult year for running the business in general given the economic crisis. Our numbers went up because a lot of our small business customers were going out of business, renewals got tougher, up-sells got tougher. In new business there was a lot of price pressure. So we had a good year in ’08 but it was very different year from the prior years of our business. But it was a great learning and growth opportunity.
In early ’09, it became evident we were not going to get out. We didn’t need the capital. We didn’t want to go public unless we’re very confident it was going to be a successful IPO and then to my earlier comment, the business really started shifting more to the enterprise. I also learned a valuable lesson. We were profitable at that time and the public markets really want to see margin expansion and it became really evident that if we were to go public, we were going to have to show margin expansion, both gross margin and operating income. And it was going to make it very difficult for us to make those strategic investments in the business that we wanted. We were very passionate about moving beyond email and to a pure digital marketing platform. We were ready for international expansion. We were ready to start a couple of our acquisitions. All of that became a lot easier as a private company.
So we pulled our IPO in early ’09 in conjunction with a large round of capital led by Battery and Scale and then later TCV came onboard as well. Our internal tagline was better than IPO. We really outlined from employees.
David: Between that and then a later round you did in 2011, I think you raised more money than in the private markets than you ultimately did in your IPO.
Scott: Yes, we raised 145 million in 2009. There was a large secondary component but it gave us a war chest to really get aggressive in expanding in the business. We created a vision we called Accelerate 2013 where we became very specific around the company, what we wanted to look like in 2013. We started with the end in mind and then worked our way back. And very counterintuitive. This was the time where Sequoia sent out their favorite, kind of famous deck around.
David: Good times.
Scott: Yes, good times are over. Almost mandating 20% headcount reduction or cross all their portfolio companies. As all of our competitors were pulling back, we hit the accelerator. We got very aggressive in investing in R&D, development, building, big sales capacity. Ultimately we built a sales organization that was three or four times larger than our nearest competitor. So we kind of hyper invested in the business in ’09 and ’10 counting on the fact that when the economy came running back, we’re going to be in the best position to take advantage of it. And that happened. Then we actually rolled into our IPO which was March of 2012 with just huge momentum. We had accelerating growth rates. We had grown in that ’08 timeframe, ’08-’09 around 30% and then we move up to the 40s and then we were mid-50s as we kind of rolled into the public markets in early ’12. So, that hyper investment and that decision to stay private paid big dividends for us.
Ben: Then talking about accelerating growth, one of the things that always struck me as really unique about ET was how deliberately you expanded the business internationally and using channel partners as the way to grow. I think we haven’t really talked about international expansion at all in this show. It will be really interesting to kind of hear how you thought about that.
Scott: I’ll be happy to. You’re exactly right, Ben. This was kind of a derivative of our channel and agency program and that we knew we could get reach into markets that we likely wouldn’t be able to address directly through channel partners and we did the same thing internationally. So we found a partner in the UK and they spun up essentially an ExactTarget reseller; and we did the same in Australia. As those great teams and later became friends, they built their business and really scaled it around the ExactTarget platform and they started reaching a critical mass of customers and employees, we then acquired the business. So it was kind of a low cost, low risk way for us to expand internationally before we would have been able to do otherwise as kind of a small capital-efficient company and we really validated with these partners that there was a market for our software and our services outside the United States. And then we started working with multinationals like Nike, Expedia, and Microsoft and it became imperative if we’re going to grow those relationships that we had an international presence.
So three years in a row, we actually acquired every August. First, we acquired our reseller in the UK and used that as a beach head to expand through Europe. Then the next August, we acquired a reseller in Australia and in the next August we acquired a reseller in Sao Paulo, Brazil and gave us a great reach into that marketplace. So we did six acquisitions over the course of ExactTarget history and three were product expansion and three were geo expansion.
David: So you go through this period of kind of from a dead IPO that wasn’t going to happen you pulled back, you raised a bunch of money at a time when nobody could raise money, you accelerated the business, and you go public in March of 2012. Then it’s just a little over a year later that the acquisition happened. The topic have I showed it – and we’ll get to category and tech themes and everything else in a minute – but I want to spend a little bit of time. We were talking with Scott before the show one of the things we love to do on Acquired is dig in to these court cases and SEC documents and all sorts of stuff. And luckily in ExactTarget’s case, I don’t think there are any major court cases, but one of the things that happens when a public company is acquired is they’re required – and this will be coming out for LinkedIn soon, I can’t wait to dive in – you’re required to disclose to the SEC a play-by-play of exactly how the acquisition happened. So then we’ll link to it in the show notes. It’s this amazing document about how the ExactTarget acquisition happened and l would love to just ask you to talk a little bit about that process of how it started and again, all of it is documented publicly like there were three other bidders that we can’t talk about their identities. They’re referred to as Party A, Party B, and Party C in the document. But multiple offers going back and forth, I mean that must have been such a stressful time for you. How did you navigate through?
Scott: It was incredible. It was an incredible learning experience and exhilarating and nerve-racking at the same time for sure. So, we had been a public company for five quarters and life was good. We had a great time. Our IPO was super successful. We came out of the New York stock exchange at north of a billion dollar valuation and our IPO was heavily oversubscribed and we felt like we had all the right investors supporting us from day one. All that learning that happened in 2008 and 2009, we’re able to really apply to the S1 and filing process and IPO and how to pick the right banks and the right analysts. We had an amazing time going public and really loved it. Then five quarters as a public company, more of the same. We kind of met and exceeded plan every quarter. We were really embraced by Wall Street and had a great investor base. We had completed two acquisitions; one called iGoDigital in the predictive analytics space and a second, Pardot in the B2B marketing automation. And life was great. We were very happy as an independent public company and we were growing north of 40% year over year.
What started to really happen across the kind of software ecosystem is that marketing cloud solutions started really garnering more attention and I would say really the largest probably five or six software companies in the world were really all shifting to the cloud and publicly stating an intent to go a lot deeper into marketing. So that started happening in a big way.
For us at ExactTarget, a big part of our strategy had been to build a very open platform, robust APIs and lots of integrated partnerships. So, our premise was that marketers need one place to store all the data they have on their customers and then to use that data to drive more personalize and relevant communications and relationships.
So, even literally before the AppExchange even existed, we integrated into Salesforce and we integrated into Microsoft Dynamics and we had great relationships with Adobe and Omniture and kind of many others across the industry. So it was very logical that we were attending shows and conferences and co-selling and co-marketing kind of with all these companies.
But Salesforce, we’ve had this really rich relationship with from being a customer being an integrated partner to doing lots of things together in the market. We got to know Mark and the team. Salesforce had made a big push into marketing with the Radian6 and Buddy Media Acquisitions and really had a social first strategy. Over time, it just became apparent that their customers wanted more, that social was an important channel but they really wanted a multi-channel platform. They wanted greater data capabilities and they wanted a platform that was not only oriented for B2B customers but also B2C. So, we always had a close relationship with Salesforce and we’d always kind of share product roadmaps and vision and direction and it just became apparent they were going to make a bigger investment in marketing and knocked on our door and said, “Hey, we’d like to collaborate and take a closer look at and kind of joining forces.”
You’re absolutely right, David. When you’re a public company and you get that kind of inbound inquiry, the level of governance and process is at a very different level.
David: Yes, and I’m curious and really for our listeners. We’ll link to this document and you should read it. It’s like a legalese version of like high drama, of like Shakespearean drama, but did somebody hand you a playbook and be like, “Okay, here’s what you do in this situation,” or were you guys figuring it out as you went along?
Scott: Clearly it was a first time experience for me but fortunately we had an excellent set of advisors and board members that had quite a bit of experience in this area to make sure that we really follow the right process and it was ultimately in the best interest of our shareholders. For me, as founder and CEO, it certainly can be kind of an emotional and even a bittersweet process. I had hoped that the premium we’re offered would be so substantial that it was really an excellent outcome for our shareholders and for our employees and then I’d really hope that we ended up with an acquirer that was very strategic and would continue to invest in the business. Salesforce became that and a whole lot more.
So, the process was amazing. It was fast and exhilarating and certainly had a lot of pressure associated with it. But I was very, very comfortable that this was the best decision for our shareholders and for our employees and all of our constituents. Now that we're able to see what’s transpired over the last three years, I have 100% confidence that this was a huge win for Salesforce and ExactTarget and everybody involved with the company along the way.
Ben: I’m really curious. You guys sold for about a 50% premium over what you've been trading at publicly. There’s got to be a bunch of offers sort of coming in from investment bankers or perhaps even CEOs calling you and saying, “Hey, I think this might work out.” What number do you start actually paying attention and listening? When do you form the subcommittee?
David: We should say too so the acquisition happened in June of 2013, $2.5 billion with $33.75 a share, and your IPO price I believe was $19 just over a year before.
Ben: And I think trading at 22 or so a day before.
Scott: Yes, that’s about right. Our IPO price was 19. We came out at 23 and a nickel, and then largely traded in the 20s and we’re kind of in the low 20s. And Salesforce first put their first offer of $26 a share in front of us. I’ll tell you, Ben, it was less about even coming up with a number that was interesting, we were really just focused on making sure that when you get that first level of inbound interest that we take it seriously and really handle the process in the way that’s above reproach and that we’re kind of following every step you need to as a public company and let the process run and then ultimately let the subcommittee and the board make the best decision at the end of the process.
David: It helps to – I think you guys during the negotiation process release your Q1 earnings and up to guidance, and that’s always a good thing to do. It’s as you were saying too about like when you pulled the IPO the first time and then went out, raised all the money and then went out afterwards with the accelerating growth, great acquisitions happen when companies get bought, not sold, when you have a bright future ahead of you and things are going great and didn’t need anybody.
Scott: That’s exactly right. Really, you maximize value when you are operating from a position of strength and you have multiple parties that are really interested in either making a venture investment or ultimately requiring the company. Fortunately, we had that in a big way and we just fit so beautifully into Salesforce. They had the big vision around the marketing cloud. We were a perfect complement to the two acquisitions they had already made and we really brought this data architecture that was very consumer-oriented to the table. So we give Salesforce a big entrée into the B2C side of the industry. We brought this multi-channel marketing platform where by that time we had expanded beyond email into mobile and social and web analytics. We had a really broad kind of digital multi-channel platform. We were the largest and the fastest-growing marketing software company really in the world and we were able to fill a big gap for them.
Then the silver lining was that we had recently acquired Pardot. Pardot was just this gem of a company in Atlanta that we acquired for right around $100 million and they were a B2B marketing automation player tightly integrated into Salesforce. So, Salesforce not only was able to get all the benefits that ExactTarget brought to the table but Pardot was a great snap-in that put Salesforce in a position where they could compete with Eloqua and Marketo and other players in kind of that slice of the industry as well.
Ben: Cool. Well, I think it's about time we move to our next section of acquisition category and what we’ll kind of do is Dave and I, we’ll kind of make our picks between people, technology, product, business line or other. And Scott, we’ll get your take.
David: The all-encompassing other.
Ben: Yeah. It’s always kind of cheap.
David: Yeah. Well, I think for me, Scott, obviously your word is most important here but clearly this is a business line acquisition for Salesforce going from – And it’s interesting this is going to go into my tech theme in a minute but having been selling into the sales organization for so long and developed these huge accounts and big-scale business that Salesforce that had to pick up ExactTarget and as you were mentioning, Pardot and everything else along with it to not be able to sell into the CMO and the marketing side was clearly a business line and a great one for them.
Ben: I’ve nothing to disagree with there. ExactTarget clearly had – It was not just a product but a suite of products. I think when I was finishing up my tenure there, we were launching the digital marketing hub and that included SMS and email marketing, micro sites; we had social; we had CoTweet. It became clear that ExactTarget had a channel to a lot of different customers that then Salesforce could expand into, but really a whole suite of products to add to Salesforce’s repertoire too.
David: If it weren’t more clear that this is a business line, Salesforce actually still calls this the Salesforce marketing hub business line, that they break under the results. And Scott, you ran it when you came there, right?
Scott: Correct. I would absolutely agree, guys. There is no question that we brought a tremendous group of people and talent and culture to Salesforce and a lot of really unique and proprietary technology. But I would agree if you had to classify the acquisition into a category, I would call it business line because we just fit so beautifully into their marketing cloud strategy and brought a sizable amount of recurring revenue. We were 300 million in recurring revenue moving to 400 and for Salesforce with their size and their growth velocity, and now you see it with Demandware, they have to make large acquisitions that are meaningful, that are actually relevant and can contribute to that top line growth and we were able to do that in a big way.
It's made me really proud that Mark on a number of occasions with Jim Cramer on Mad Money and other places and said that ExactTarget has been the most successful acquisition that Salesforce has ever completed, and I believe that to be true. It's just remarkably well and the leaders that were on my team that are now leading kind of big functional areas within Salesforce and the marketing cloud, they’re happy and having a tremendous amount of success and really growing the business in a big way and coming in to Indianapolis which is really, really cool. Salesforce just recently announced that in addition to the 1400 employees they have in Downtown Indy they’re going to add 800 new positions over the next few years. I don’t know if you've heard this, Ben, but the tallest building in Indiana is the Chase Tower. Salesforce is going to consolidate and move employees into that tower and it’s actually going to be renamed The Salesforce Tower.
David: They have a thing about towers, too.
Scott: Absolutely. Mark likes his towers. Mark and the team, they love their towers, but it’s going to be so fantastic for our tech community that the tallest building in the city in the state is actually a tech building, so it’s going to be a big boost and accelerated our tech community which I’m very happy about.
Ben: I always remember too there’s so many unique things about ExactTarget for the region. There’s this big drumbeat from, I think, maybe your first or second office that it was about being an urban company and that people needed to – We’re in Monument Circle which is like this really incredibly cool, historic center of downtown. Big statue. ExactTarget had a building with this cool roof deck that looked out over it. I remember thinking well, I never want to work in an office park again. And I think that a lot of ExactTarget employees got super spoiled in that way
Scott: That’s exactly right, Ben. Our real estate strategy was to really build around this urban core and build a campus and a work environment that was super appealing really to the millennial, the younger generation and it’s been really fun over the last decade, downtown Indianapolis has had this huge resurgence of housing and amazing restaurants and kind of lots of arts and culture and sports. ExactTarget has been a part of that fabric of downtown Indianapolis and I really felt that to build a high growth category leading company in a market like Indianapolis. We had to be in the urban core to really take advantage of just the energy, the vitality, the ability to recruit topnotch people from all over the country and then even to bring in partners and VCs and customers that could fly in to Indianapolis and take a 15-20 minute cab ride to Downtown Indy and then be able to just enjoy all the benefits that that downtown setting has, and that’s been neat.
I’ll tell you one of the neat legacy elements of ExactTarget is for years we’ve worked on getting a nonstop flight in place to Indianapolis to San Francisco and not having – It’s been a real barrier. Our west coast investors have to jump through lots of hoops to make it in Indy for a board meeting and makes just fundraising for all companies here in Indy more difficult. Right around the time of the acquisition, we actually got it done with United Airlines and have had a nonstop flight back and forth to San Francisco, which might seem trivial but it’s actually been a game changer for our tech community and Salesforce has appreciated it as well.
Ben: I totally believe it. I think a lot of credence is paid to Seattle’s proximity to San Francisco as a competitive advantage in fundraising and starting a company in general. I think that kind of quick direct flight has a tremendous amount to do with it.
Scott: It’s so true. The same is happening at Salt Lake City. Salt Lake is this amazing tech ecosystem with Omniture and Adobe. Now you've got almost a dozen. It’s kind of unicorn level valuations and so much of that is Salt Lake and Park City are kind of a wonderful place to be but it’s such a short hop away from Silicon Valley that you’re able to raise capital and get those investors really engaged in the business.
Ben: Moving to the next section, what would have happened otherwise? Sort of two alternate features here and I kind of want to post both questions to you. One is do you think ExactTarget, would’ve it made sense with any other acquirer? And then two, ExactTarget competed against responses and many other companies that started as email marketing solutions for a long time, do you think there was any one besides ExactTarget that could have made sense at Salesforce?
Scott: I think yes to both questions. We certainly could have fit in well with a number of kind of the other larger software companies in the world that have been focused on going a lot deeper into marketing tech and saw it as a big growth area and then there’s no question that Salesforce looked at lots of different players over the course of time to potentially acquire.
One element that’s interesting when you go through that evaluation process as a public company and really try to make the best decision for your shareholders is you really have to do a lot financial modeling and a lot of thinking about what does life as an independent company look like and we ultimately did come to the conclusion that being a part of Salesforce was a better outcome, higher probability outcome for our employees for our shareholders. But there are a number of different ways that our future could have played out, but we’re very, very happy the way it played out.
I tell you the other interesting dimension as a public company, we would get an enormous amount of pressure around email. “When is the end of email coming? And these new channels are going to cannibalize email.” Oh my gosh, it’s just kind of like if I had a nickel for every time I answered that question. But it was just a heavy theme and even sometimes I’d say a cloud over our company where we were thought of as such an email-centric company that even as we expanded around the world expanded into all these other adjacent technologies that you referenced, Ben, we were still thought of as an email company and I think often didn’t get credit for being a broad multichannel, omnichannel platform. But email was such a powerhouse for marketers that that line of business just kept booming. Our other lines were growing but they could never even get close to the email side of the business because it’s just the most powerful tool that a marketer has and as e-commerce has exploded with growth, emails become even more relevant.
Ben: I’m curious when you’re forecasting what does life look like as an independent company. Let’s say you could continue to grow 40% year over year indefinitely or at least the top of some S-curve.
David: Easy to say on paper, hard to do in practice.
Scott: That’s right. It gets tougher with a lot of big numbers.
Ben: Yeah. So at what point do you, well, one factor in the top of the S-curve and then two, how many years out? What do you look at as the payback period of that premium and say like well, they’re giving us 50% premium and we don’t think that we will reach that market cap for 20 years and we’re only looking at a 10-year time horizon or something like that.
Scott: I’ll tell you that’s really where the bankers and advisors and kind of independent committee come in because they had a lot of expertise in how to build those financial models and what time horizon makes the most sense in order to kind of predict your independent path versus joining forces with another. So I probably can’t provide a lot more detail than that. But you’re exactly right, Ben, that’s exactly the process that you go through. That’s right.
David: I’m curious. Before you move off from this and this also leads into my tech theme, you don’t have to say whether you considered it or not but do you think looking that most of the big data driven marketing companies of that generation, ExactTarget being one of it, if not the leader, got really big and growing really fast on a great trajectory, but then they all got swallowed up by other big enterprise companies whether it’s Oracle and Eloqua or ExactTarget and Salesforce. Do you think there was any way that maybe there have been consolidation among the companies and could there have been a giant? You know, there are so few giant enterprise software companies. Could one have been built in the marketing category?
Scott: That’s a great question. I think why it didn’t happen is overlapping functionality that when you take a look at, and there was certainly a lot of conversations that ensued along the way could stack together some of these kind of large marketing tech companies become something bigger and something more meaningful. Where it starts to run afoul or kind of collapse is that you just have a lot of duplication of functionality. Omniture got kind of pulled in to Adobe early. There certainly could have been a fit between let’s say email and digital marketing channels and analytics. That would have been a logical connection point but they kind of got pulled into Adobe early. But when you look at responses and some of the B2B marketing automation companies, you often had kind of a lot of redundant functionality. But we were headed down that path ourselves and that’s really why part of that acquisition made sense and we kind of kept moving deeper into data and analytics and the web and really trying to build out that robust platform to make all these channels work together.
What’s really interesting is the big product we built that stitched it all together as a product called Journey Builder and Salesforce has really embraced that Journey Builder platform and is applying it even across different clouds within Salesforce and using it in lots of unique ways.
Ben: Cool. David, you have anything before we go into tech trends?
David: No, I don’t think so. The only comment, Scott, on what you’re saying is it's interesting you’re seeing so many start-ups now that are emerging that are next generation marketing automation. But they’re all taking the approach that you said of marrying it up with data and analytics. I’m thinking anything from mixed panel and segment as part of this ecosystem in a different way, but so many –Customer.io in Portland, Intercom. It’s funny, they’re taking exactly the approach that you’re saying, Scott.
Scott: It’s fun to see it evolve. One other topic that you asked me about, David, but I think I jumped into another category but it's kind of a fun story I’d love to tell you about. It’s just the nature of our Microsoft relationship. Do you mind if I just touch on that real quick?
David: Yeah, I would love that.
Scott: Yeah, so that was a really fun story. So we really became the largest cloud company running on Microsoft technology. We were early users of SQL and .net and really everything we built was on the Microsoft framework and we pushed Microsoft technology I think to the edge as we were building a super transactionally intensive multi-tenant platform. But through that, we really built this wonderful relationship and then we started integrating into Microsoft Dynamics and had a really nice relationship there and then ultimately Microsoft became a customer.
Then it’s a really fun story. Microsoft had an internal platform, an internal email platform called PENS that really kind of powered marketing automation and email marketing specifically for Microsoft business units. The internal solution was not well-liked across Microsoft. So we were fortunate to land Microsoft and really go through our adoption. We built like an 18-24 month implementation period where we would be on-boarding different business units of Microsoft unto ExactTarget and off-boarding them on the internal system of PENS. And we set a joint goal. It was an acronym for personalized email something, something, notification system.
David: It had to be you’re computing against PENS.
Scott: That’s right. Exactly. So we actually set a goal with the Microsoft implementation team and they were incredible to work with that when we got to the end of implementation and were literally able to turn the lights off on PENS, retire this internal system, that was not well-liked across the enterprise so we’d have a celebration, we’ve have a party. And we did. We actually on the Microsoft campus had a huge tent that was erected in the event that was just catered to the fullest. Beautiful. Wine, beer, food. And the Microsoft team, they had to get fire marshal approval but they actually pulled the servers that were running PENS out of Microsoft data centers and seriously brought them to the party and we sledge hammered them. We all strapped on goggles and just beat the ton out of these servers.
Ben: And the office space.
Scott: Seriously, there was. There was total office space. It was just like a spectacular way to retire the internal system. It was a blast.
Ben: Wow. That couldn’t be like a better segue into what technology themes does this illustrate for you. That’s like a very physical, visceral manifestation of the one that I want to touch on, and that’s “businesses using software as a service to outsource anything that’s not their core competency.” This keeps coming up on episodes over and over again where businesses with the advent of cloud computing and the general cost of starting a company going down, companies operate using tens of other companies’ infrastructure and software, often even starting at a free tier or on some kind of premium pricing structure and it’s different at that sort of scale when they’re actually migrating from something they built in-house. But I kind of wanted to open it up to you since what you do at High Alpha is start these new software as a service companies. How do you identify where the sort of holes where we can take something that a whole bunch of companies are doing and do it one platform and then they can all just pay us to use our platform?
Scott: It’s an exciting part of High Alpha. So, High Alpha, we’re a venture studio. We started a year ago and we’re a venture studio focused on starting new cloud companies. We actually have two sides to High Alpha. High Alpha Studio is our startup studio and we’ve signed up to start 8 to 10 new companies over the next 3-4 years. Then High Alpha Capital is our kind of second arm and it's a venture fund that is utilized to fund our own companies when they’re ready to reach scale and then also fund other great SaaS entrepreneurs around the country.
So you’re right, Ben. We spend a lot on time on just ideation, looking for unmet needs within the enterprise cloud space and we do through our own idea, we do that through entrepreneurs that approach us. We spend a lot of time with corporate innovation groups and universities and just tech visionaries that have a sense for where the market is going. This whole notion that every employer is a buyer of software, something radically different, you kind of think back to the client server days, pre-cloud, and tech spending and buying was tightly, tightly controlled by the CIO and the IT department. Then with the advent of cloud, it starts to kind of open up to different business unit or business line owners can make decisions within a framework
Now we're in an era where every employee is a buyer with freemium and an employee credit care, you can spend up Slack channels and lots of other solutions and it’s creating lots of opportunity but it's also creating quite a few unintended consequences. So you’ll get a kick out of this where you actually have started new business – we haven’t announced it yet – but essentially is a SaaS platform for managing SaaS/SaaS applications. It really is. And it’s targeted at the chaos and kind of the overcrowding of SaaS spend. It’s a huge problem and our MVP is about ready to go live with our first group of pilot customers. But it brings together SaaS spend, SaaS utilization, and then user sentiment, user feedback. So it brings those three variables into one platform so organizations can at a minimum actually understand what they’re using, what are they paid for, what’s being utilized across the enterprise, what have maybe they paid for but isn’t being utilized, where do they have overlapping products and platforms, where’s maybe something cool happening like where’s their innovation happening within one group or department that should be thought about across that organization. So that’s kind of a cool company that we’re excited about to help organizations kind of get their arms around how their business is using SaaS and use it in the most optimized way.
David: So the tech theme that I’ve been referencing a bunch and this is another perfect lead-in is there’s been this sort of historically in the enterprise space, which we again we haven’t talked as much about on the show. There’s kind of been sort of four-ish giants like there’s Microsoft, there’s SAP, there’s Oracle and then there’s Salesforce which has emerged as sort of most recently as one of these giants. There’s this concept of like a count control and there’s lots of startups in this space but ultimately those four companies are by far the biggest and they have the count control with the CIOs and increasingly CMOs and sales and CEOs where they can push all sorts of products through their channel. And ExactTarget as we talked about being a business line acquisition was a perfect fit with Salesforce as one of their first foray into a new product sending through their Gorilla channel or Gorilla-sized channel.
How do you react to that and/or one of the main theses I’d think of SaaS enterprise investors is that with SaaS, that’s changing. People can buy stuff freemium like individual employees and account control is being eroded. How do you think about that being on both sides now?
Scott: I definitely see both sides of it and you’re totally spot on, David. One of the big reasons why the ExactTarget acquisition has been successful is that Salesforce just has these amazing executive level relationships with the biggest companies around the world and they know Salesforce, they trust them. They want to buy more products that are tightly integrated and when you look at the Salesforce marketing cloud numbers, they’re booming and they’re really booming because they have all those trusted CEO and CIO relationships. Mark and the team, they’re just incredible innovators and amazing at executing scaling the business.
So that’s real, there’s no question about that. However, there’s still plenty of opportunity for new innovation and new entrance and the innovators’ dilemma of companies coming up with new ideas and new concepts and software that’s lighter and more flexible and more mobile-friendly and more consumer-like. There’s no shortage of room, I think, for innovation and for new companies to find their groove.
David: And that you don’t need your CIO to approve by it.
Scott: You don't. That’s exactly right.
Ben: Which honestly, you’re talking about ideation and getting ideas for new companies and getting your first customer, obviously something near and dear to my heart at Pioneer Square Labs and as someone that is often going out and transitioning from the customer development to getting your first customer and taking the people that you were talking to about what are your needs and saying “Cool, we built this. Will you pay for it?” it’s become extremely easy to do that when you have an advocate in the organization who for, you know, like you’re going to charge less than $1000 for your product so they just can use their credit card and you don’t have to go through the CIO. So it has opened this whole new wave for us of the ability to land your first customer at a much faster timeframe.
Scott: Absolutely. That’s exactly right. Then all these great cloud platforms where you can really quickly build technology, build MVPs, get it to market and really see if you've got product market fit and you got something that can be viable, and that’s what’s so fun I think then about what we're both doing and coming up with new ideas and launching ideas is you can go from idea to MVP and proof of concept really, really quickly.
Ben: All right. We're going to move on to what was formerly the last part of our show, I think we have a couple of cool sections after, but grading the acquisition. Scott, you can choose to participate in this or not. I feel like you might be a little bit biased. But this is obviously an incredibly successful acquisition. You hear Mark preach it to the world time and time again in some of the biggest stages that he’s on. Obviously a success. We’ve given A’s to things that have ridiculous multiples. You can look at what Instagram did to Facebook, or you look at Pixar’s sort of reverse integration or reverse acquisition of Disney Pictures/Disney Animation. Those are A’s. So I’m going to land on this as an A- for ExactTarget.
David: I think I’m similar. We can talk all about the reasons why this is a great outcome. One thing that we actually didn’t quite – It’s funny, we’re not super quantitative on this show. You know we’re about acquisitions. So, we went through this whole episode and we didn’t talk once about your revenue. But, some numbers I want to throw out. When ExactTarget in 2012 which was the final year, full year of being a single company, I believe you had about 294 million in revenue; and in Salesforce’s fiscal 2016 which ended January 31, 2016, so essentially the calendar year 2015, the marketing cloud division did 654 million in revenue, so over twice as much in less than 3 years. That’s a pretty great outcome and it speaks to the power of this there are many product things that I’m sure Salesforce has done with the acquisition and bolted on many things, but also just the power of these enterprise relationships that they have. I think this was a great deal. I’m also going to, you know, when I think about Instagram went from a billion dollar acquisition price to $3 billion in revenue in 3 years, I’m also A- but I’m on the fence here.
Scott, any comment?
Scott: You guys are tough graders. You guys are really, really – You’d be like that professor that’s really difficult, incredibly stingy about giving away an A.
David: Well, this is fair so –
Scott: I know, I know. Instagram is the bar. That’s a high bar. Yeah, there’s no question I’m biased but I think I’d give you a really fair grade and I’d definitely give a full A. No minus. I’d go with the full A. I’ll tell you the reason, is that this was an extraordinary outcome for ExactTarget. You think about three first-time software entrepreneurs starting a software company in Indianapolis with very humble expectations.
David: Nobody thought this was going to happen. You guys are the definition of underdogs.
Scott: Inconceivable that we would ultimately sell the business for $2.5 billion and what I’m so grateful for is that every employee who is a part of ExactTarget had equity in the company and this was really a meaningful outcome for our employees not only just the kind of experience of a lifetime and being a part of this powerful culture we called Orange, but there was a financial outcome that was meaningful. The neat thing is that at $33.75 a share, every person who ever invested in ExactTarget from friends and family to venture rounds to public investors made money. So, I smile from ear to ear just thinking about what an incredible outcome this was for everyone at ExactTarget.
Then the neat thing, David, I’m glad you referenced the numbers is that integration is remarkably difficult. It is so difficult to acquire companies, integrate them effectively and when you look at the Salesforce, this was the largest acquisition they had done, first time they had ever acquired a public company and to see the kind of results that had been produced. I just know how delighted Mark and the team have been about the performance of the business. I’d give it an A on both sides, the Salesforce side and the ExactTarget side.
David: As an entrepreneur, you have to love your company, right? If you don’t, who else would?
Scott: Absolutely. That’s right.
Ben: Well, let’s move on to some fun we have at the end of the episode. It’s a section called The Carve Out, and this is where we talk about something that’s in pop culture or media that we read or watched or stumbled upon, or a product that we love, really anything that tickled our fancy in the last couple of weeks. I’ll start with mine. I’m a big fan of The Talk Show. It is a podcast done by John Gruber of Daring Fireball that mostly covers Apple. John does a live show every year at WWDC, the biggest Apple conference and this year, his guests are normally friends of his or other people sort of in the Apple journalism space, and out walks Craig Federighi and Phil Schiller, the Senior VP of marketing and the Senior VP of Engineering all up. Anyway, just like an unbelievable candid interview with two guys that have great personalities on stage and you normally only see these people in the extremely rehearsed, very, very perfectly timed Apple keynotes and getting them off the cuff, like it’s just so fun if you’re a fan of Apple or just like a fan of technology and how these businesses run in general to get that sort of candid look at these guys.
David: Mine is a great book that I’m almost done reading that I’ve been enjoying immensely. I saw this as a recommendation. I went to Y Combinator Startup School in 2013, I believe, either 2012 or 2013. And Jack Dorsey spoke there and he recommended it as above. It’s been on my list ever since and I finally got around reading it. It’s a book called The Score Takes Care of Itself and it’s by Bill Walsh who was the legendary, unfortunately late coach of the 49ers during their amazing dynasty in the ’90s which I remember growing up and watching Joe Montana and Jerry Rice, Steve Young. But the book is just about his kind of philosophy and lessons on leadership. He’s such an amazing guy like he’s not the – You know, you think of like a football coach in that era that’s super hard at yelling and screaming. That’s not his style at all. It’s just this commitment to excellence and that’s all that matters and all the other stuff is just show. But anyway, there’s lots of good gems in the book. We’ll link to it in the show notes.
Scott: I’ll check it out. That’s very fun. I love The Carve Out feature here, guys. This is kind of fun.
Scott: David, I should clarify. Jack Dorsey is no relation. Although I’ve got lots of family connections here on the show, Jack and I are not related to one another although that would be kind of fun.
So my Carve Out was a month ago I was flipping channels trying to find I think probably an NBA playoff game and flipped over to ESPN and caught the end of the National Spelling Bee, the Scripps National Spelling Bee. And it was phenomenal. The two finalists were an 11-year-old and a 13-year-old who were just extraordinary at their ability obviously to spell very difficult words and handle a tremendous amount of pressure and they ultimately tied in the end. The 13-year-old had had an older sibling that had won previously and the 11-year-old was a 5th grader who was the youngest kind of finalist and champion ever. Watching those two operate was incredible and to me – I’ll tell you two little stories. One, it’s just quite exceptional I think how young people are developing so quickly and when we look across our businesses at interns or contributions new college graduates can make, they are able to contribute to businesses in a way today that never existed in the past. Watching these two kind of young students compete was really incredible. One of my favorite parts is that each of the finalists had to share their favorite word which I would definitely have a difficult time spelling any of them, probably even pronouncing one of them. But one of them that stuck with me is indefatigable.
David: Great word.
Scott: Great word. Which really means tireless persistence; to be indefatigable. As I’m working with all these early stage startups, to me, that’s like the number one characteristic for a CEO or founding team is that they have this tireless persistence and they have such a burning fire inside them to succeed and to solve a big problem and make a difference in the world that you just know they’re going to be successful.
David: Totally great.
Ben: David, you want to table follow-ups until next time. We’re running a little long here.
David: Yeah, maybe I’ll do one just real quick which because we’ve mentioned it a few times on this show. Instagram reported latest user numbers this week or Facebook reported Instagram’s later user numbers this week. Pretty incredible. They passed 500 million registered users, 300 million daily active users. Think about that ratio. 3 out of 5 registered users on Instagram use it every single day.
Scott: Wow, that’s impressive.
Ben: That’s engagement.
David: Instagram was one of our very first shows and like I said, it’s canonical-like, but especially with Snapchat and everything going on there, all these existential questions, that business just continues to perform at an amazing level.
Thank you, Scott.
Ben: Yeah. Hey, just to kind of close down the show, anyone listening out there, thank you so much. Tell your friends. Review us on iTunes. Share it on Twitter, Facebook, whatever you like to do. Snap about us if that’s your thing. Scott, how can our audience find you?
Scott: @ScottDorsey on Twitter and then HighAlpha.com. You can learn about the new venture that we’re building here in Indianapolis.
Ben: Awesome. Thank you so much.
Scott: Thanks so much guys, really enjoyed it. Thanks, Ben. Thanks, David.
We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.
Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!
Purchase Price: $4.2 billion, 2009
Estimated Current Contribution to Market Cap: $20.5 billion
Absolute Dollar Return: $16.3 billion
Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…
Total Purchase Price: $70 million (estimated), 2004
Estimated Current Contribution to Market Cap: $16.9 billion
Absolute Dollar Return: $16.8 billion
Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!
Total Purchase Price: $188 million (by ABC), 1984
Estimated Current Contribution to Market Cap: $31.2 billion
Absolute Dollar Return: $31.0 billion
ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”
Total Purchase Price: $1.5 billion, 2002
Value Realized at Spinoff: $47.1 billion
Absolute Dollar Return: $45.6 billion
Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.
Total Purchase Price: $135 million, 2005
Estimated Current Contribution to Market Cap: $49.9 billion
Absolute Dollar Return: $49.8 billion
Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.
Total Purchase Price: $429 million, 1997
Estimated Current Contribution to Market Cap: $63.0 billion
Absolute Dollar Return: $62.6 billion
How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.
Total Purchase Price: $50 million, 2005
Estimated Current Contribution to Market Cap: $72 billion
Absolute Dollar Return: $72 billion
Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.
Total Purchase Price: $1.65 billion, 2006
Estimated Current Contribution to Market Cap: $86.2 billion
Absolute Dollar Return: $84.5 billion
We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”. With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.
That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.
Total Purchase Price: $3.1 billion, 2007
Estimated Current Contribution to Market Cap: $126.4 billion
Absolute Dollar Return: $123.3 billion
A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...
Purchase Price: $1 billion, 2012
Estimated Current Contribution to Market Cap: $153 billion
Absolute Dollar Return: $152 billion
When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.
Methodology and Notes:
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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)
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