A Virtuous Cycle

This was originally a guest post I did this past Summer for Wasabi Ventures, which is a great resource for entrepreneurs.  Finally getting around to re-posting here.

As an investor, what I seek more than anything is authenticity. Actually, simply as a person, that’s what I seek.

I mean a couple of things by this.

First, the smaller picture. To us at Merus Capital, the most critical element of a pitch for any type of startup is that it must come across as something that you are truly passionate about and really, sincerely want to see become a reality. No shortcuts, no BS, no quick flips, and no pretending that there aren’t massive challenges ahead.  Challenges are OK. Finding ways to overcome them is what we’re all trying to do. Otherwise, where’s the fun?

Second, the bigger picture. And this part is more personal to me than just my capacity as an investor. I would love to find startups that are building products and services that encourage, and allow for, greater authenticity. Authenticity of information, opinion and emotion. And hopefully in ways that *help* people–don’t just entertain me, rather allow me to be more productive, make more informed decisions, work or play smarter, be safer, save money, whatever it is that can improve lives personally and professionally. Certainly the social web is helping us get closer to the vision. As examples, I’ll look briefly at three well-known communication platforms through the lens of productive authenticity: Facebook, Twitter, and Quora.

Facebook may be the leader in this light but to me, it doesn’t go far enough. I don’t really have 250 close friends and for me, it isn’t a useful productivity tool. Entertainment and personal connection, yes, but productivity and all the things mentioned above, not really.

I find Twitter to be a better productivity tool than Facebook, and thus a much more integral part of my daily life. And while the ability of Twitter users to spread important and useful information worldwide instantaneously is a fundamental societal shift, the cynic in me would say that at times Twitter can be a self-promotor’s dream–a bazaar of false modesty, feigned exuberance and hollow praise.

Quora starts to get at the issue. Real people with real knowledge on certain topics and events sharing their perspectives. But it still suffers from much of the blatant self-promotion that other services do. No doubt they are working hard to reduce the noise in the signal.

But how about the next communication platform? Can we build one that promotes and preserves true authenticity, exploits deep personal and professional relationships and helps people in their daily lives? I would love to find out.

We’re excited to announce that Merus has invested in the online security company, Authentic8. Guest post by my partner Peter.  Originally posted here.

It’s a Big Idea
The web has become the primary vector for criminals to deliver malware to scam users. Since it’s the browser on your machine that downloads and runs code from the web, it’s impossible for you to know if the code that’s downloaded is secure and trustworthy each time you go online. What’s more, the criminals’ attack “surface area” is even broader than the browser–there’s URL redirection and other potential weak points all the way across the chain from the user’s machine to the web destination.

At the same time, tracking one’s passwords has grown increasingly unmanageable. It seems like each site has different password strength requirements, minimum (or maximum) password lengths, set of characters you’re allowed to use, etc. To deal with this complexity, people end up setting weak passwords, re-using them across sites, or storing them in unsafe places. As a result, online accounts are more easily compromised by criminals.

Dealing with online security is a major pain point for consumers and businesses of all sizes. Authentic8 turns the problem on its head: What if you could simply outsource the headache of keeping your browser secure and managing all of your passwords to a trusted and reliable party? Authentic8 delivers the Simply Safe browsing experience.

Real Software Solving Real Problems
How they solve this problem is quite novel. Each time you access the web, Authentic8 launches a Disposable Browser in the cloud. In essence, you’re surfing the web in real-time from Authentic8’s servers where they manage all security aspects on your behalf. It’s called a disposable browser because they’re “single-use”–Authentic8 gives you a fresh browser instance each time you access the web and discards it when you’re done, a bit like dental floss or latex gloves. The implication is quite powerful: Malware never touches your machine.

What’s more, once you’re using Authentic8’s service, they do all the hard work of validating the destination site you’re trying to reach, as well as securely and automatically submitting your login credentials. So there’s no need to remember any passwords or manually generate new ones, as some sites periodically require. The company precisely fits our goal of investing in entrepreneurs building real software solving real problems.

Exceptional Team
Perhaps what we like most about our investment in Authentic8 is that we get to work with the two exceptional founders again–Scott Petry and Ramesh Rajagopal. Scott and Ramesh worked together for several years at Postini, the company Scott founded in 1999, which was a pioneer in security-related SaaS, where Ramesh was VP of Corporate Development (Google acquired Postini for $625M in 2007–an acquisition sponsored by my two partners, Salman Ullah, who led Corporate Development at Google, and Sean Dempsey, who led the overall acquisition).

The three of us at Merus also had the privilege of working with Ramesh for several years when we were all part of Microsoft’s Corporate Development & Strategy team. We’re also excited to be partnering with Foundry Group, which recently announced their investment in Authentic8.

To be considered for Authentic8’s beta program or for more information on the company:
Click here to be put on the list of future beta invitees. For some great insights and discussion on Internet security (like this one: “Macs & Volvos: Where perception transcends reality“), check out Authentic8’s blog, OSMoSis.

I think the IntoNow acquisition by Yahoo is potentially a pretty smart one.  I say potentially because they have to execute, and doing so inside a big company with a lot of moving parts is never easy.

But I like the deal for 2 reasons:

First, I've never been a believer that people want to interact deeply with their TV.  At least not directly.  I don't think tweeting on your TV, ordering a pizza through your settop box or updating your Facebook status using a remote keyboard are killer scenarios, despite the hype around such things for the last decade.

What I do think is killer is interacting with content and information that supplements what you're watching and engaging with friends who are watching along with you (though perhaps not in the same room) and doing so with your smartphone or tablet.  The input device is natural, your networks are already in place, and your actions don't interrupt/overlay what's happening on TV.

The second reason I like the deal is that Yahoo needs to do something to stimulate growth and it's not obvious what it should be.  But doing more in TV seems like a natural.  It's an advertiser base they already serve and understand.  An incumbent like Yahoo has the heft to build and extend relationships with broadcast and cable nets.  And there is no clear winner in TV--meaning there is no TV-centric social network or "home page" of any real size.  I'm not yet convinced there will ever be such a thing, but if you're Yahoo, it seems like it's worth a shot.

Last week I did my best to persuade you that if you’re a company planning to pursue M&A, you’d better take it seriously if you want to avoid wasted time, capital and reputational goodwill.  It’s easy just to deal with acquisition opportunities as they arise but if you really want to enhance growth through acquisitions, foresight and focus are required.  Here are the 7 rules I proposed before:

1. You have at least one person whose full time job is corporate development/M&A
2. There are clear processes of evaluation and approvals in place
3. Everyone–management, corp dev, product team, etc–must be committed to moving quickly once a deal is identified
4. A deal owner, who is an operating executive, is on the hook
5. A virtual team of cross-functional employees exists to aid with diligence and lead integration
6. Only one person negotiates with the selling company
7. A lawyer with extensive M&A experience is working for you

We covered the first two last week.  So on to the remaining five.

Point 3: Everyone–management, corp dev, product team, etc–must be committed to moving quickly once a deal is identified

It’s hard to overemphasize this requirement–speed.  Let’s take the prototypical selling company: privately held, fewer than 100 employees and not yet profitable.  Management bandwidth is typically constrained and negotiating to sell your company takes away from running the business day to day.  The seller may also be reaching a point where raising fresh capital is required, which of course takes a lot of time.  Company survival takes precedence, not participating in a drawn out discussion to sell the company–a discussion that may ultimately lead nowhere.  Not to mention the fact that this could be a competitive situation, and typically, the faster, more nimble buyer is the successful one. Another reason to move quickly?  Loose lips.  Every day you’re negotiating a deal is another day for someone to leak the news, which can lead to competitive bids arising, employee confusion and even departure, or in some cases customers walking out the door.  So once a decision has been made to start negotiating a term sheet, speed is critical.  Speed, by the way, might be the best way to show respect for the seller.  If you’re looking to build a reputation as a desirable place for a selling company to land, be upfront and move fast!  (Lack of) speed kills.

Point 4: A deal owner, who is an operating executive, is on the hook

A simple point here, but one that is often overlooked and is probably the most common reason for deal failure–lack of personal ownership.  There must be someone at the buying company whose job will be graded based at least in part by the success of the deal (see the first paragraph here for one definition of M&A success).  In the case of smaller acquisitions, this person should naturally be the product or engineering lead to whom the new company will report.  Larger deals get more complicated but the “personal ownership” rule still applies.  Without it, acquired teams can lose direction (whether intentionally or not), they don’t have a clear point of contact or support, and little is learned the next time around.

Widely distributed responsibility won’t work.  When you’re around the table deciding whether to pursue a deal, ask Who’s on the hook?

Point 5: A virtual team of cross-functional employees exists to aid with diligence and lead integration

Unless you’ve worked at a company that is a frequent acquiror or been part of a sale yourself, this may be the most invisible part of the M&A process. Yet it’s fundamental for smooth integration and avoiding unforeseen bumps in the road.  In addition to the product/eng lead and the corp dev lead, the following groups should be represented in an M&A/integration “cross-functional” team:

1. HR
2. Finance
3. Legal
4. Ops
5. PR/Marketing
6. Sales (depending on the nature of the acquisition)

These folks not only get involved early to identify due diligence issues specific to their area of responsibility, but also make sure the disparate elements of the selling company’s business get integrated into the mothership as quickly as possible post-close.  While the deal leads may change, it’s important that this cross-functional team remain consistent deal to deal as much as possible.  This might be a moonlighting assignment if acquisitions are new or few and far in between but for frequent buyers, these can be full-time roles.  As soon as a term sheet is signed, if not before, this team should be put in motion.

Point 6: Only one person negotiates with the selling company

Easily said, not easily enforced.  It’s the old adage, a chain is only as strong…  The seller will look for any advantage to improve the deal terms, including an impassioned plea to whomever will listen to increase the price, lower the escrow, etc.  So don’t allow a soft spot in your organization to cave on an issue that you’ve been holding firm on. There is certainly a place for good cop/bad cop but the good cop (which might often be the deal owner described in point 4 above, or the company CEO) should play the role of cheerleader and neutral supporter, not deal negotiator.  It’s a virtual certainty that this situation will pop up, so set the ground rules early on: Only one quarterback on the field.

Point 7: A lawyer with extensive M&A experience is working for you

So many of the issues that arise during an M&A negotiation happen every time. Whether it’s indemnity language, treatment of employee options, or other common problem area, often a creative solution exists to satisfy both parties. Having an experienced team on your side will help you quickly identify the range of solutions, package issues together for more efficient negotiation, and understand what outcomes can be realistically expected.  Don’t skimp on legal support.

Well that’s the end of my list.  I’m sure I’ve left a few things out, and if so let me know! Since there isn’t a lot of information on the web describing the nitty gritty of corporate M&A, I hope we can help fill the void.