This was originally posted on our Merus Capital blog several months ago.  I meant to include here as well…better late than never I suppose.  And check out  the San Francisco Chronicle’s profile on how the company came to be.

It’s 2011 and virtually anything can be purchased online. There have been many innovations in e-commerce in the last 10 years—group buying, flash sales, retargeting, dynamic merchandising, penny auctions (evil!), monthly subscriptions for almost anything, daily deals, just to name a few. But we still have a ways to go to capture in a browser the charm and rich experience of physical retail. Perhaps charm isn’t the right word to describe a trip to Costco, but when it comes to categories like luxury goods and haute couture fashion, the buying experience is part of the product.

While I certainly wouldn’t call my partners and I at Merus experts in the world of high fashion, we have been discussing this year the fact that we haven’t yet seen a great deal of truly engaging or immersive online shopping experiences. Particularly as tablet adoption increases, which are inherently more personal devices than your desktop or laptop, it seems the time is right to improve the typical flow of browsing and buying. Enter ModeWalk. When we first met with the founders of ModeWalk, we were immediately drawn to their vision of providing an emotionally engaging e-commerce experience while affording luxury fashion brands the opportunity to share their unique perspectives directly with consumers. Add to this vision the team’s unique blend of skills, experiences and connections, and we were sold. We recently led the company’s Series A round, which also includes an accomplished group of angel investors and fashion industry executives.

ModeWalk has just launched in private beta. Here is what Vogue had to say. We are proud to partner with the ModeWalk team as they redefine luxury e-commerce.

On y va!

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.

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.

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.

While my friend spoke about the opportunity, a million thoughts were going through my mind about what I had learned in corp dev and all the things I saw that worked and all the things that didn’t.  While I hadn’t expressly thought about it this way before, I came to the following conclusion by the end of our lunch: You can’t do M&A in a half-assed way.  You’re either serious about it or you’re not.  And if you’re not, I guarantee things won’t go well.  Time wasted, dollars and equity misspent, reputation dinged.

So what does it mean to be serious?  If you want to honestly pursue M&A, you should establish and abide by the following rules:

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

It’s easy to do M&A the wrong way.  I mean, how hard can it be?  Look around for some cool stuff, make an offer and we’ll bring the company on board.  They’ll love it!  Wrong.

You always read about the acquisitions that happen–you rarely hear about the ones that were attempted but failed, at least in the world of private companies.  And you hear even less about consummated deals where the acquired employees are totally unhappy, unproductive and despite their initial enthusiasm, are out the door as soon as possible.

So let’s get to the rules and how they can put a company in the best position to source great opportunities, execute quickly, build a strong reputation as an acquiror, and integrate people and products with the best chance of success.  I’ll explain the first few points in more detail here and leave the last points for a follow-up post or two.

Point 1: You have at least one person whose full time job is corporate development/M&A

There are a few reasons this is necessary.  First, and simply, there is a lot of work to do in evaluating the landscape of potential opportunities, working with product teams to identify gaps that might be filled via acquisition, and of course, actually negotiating, diligencing and closing a deal.  Second, it is highly beneficial to have consistency from deal to deal.  Having one person or team with the domain experience–valuation work, deal structures, negotiation experience, integration knowledge–is invaluable in developing a corporate competency in M&A which leads to a positive reputation in the industry as a fair and expeditious buyer.  When deals become competitive, this reputation really matters.  Lastly, having a full-time person or team provides a clear contact point for people inside and outside the company who have acquisition ideas to discuss.

Point 2: There are clear processes of evaluation and approvals in place

This might actually be the most important rule as without this, everything else is doomed. Processes need to answer questions like, Who needs to approve before we can issue a term sheet?  When can I start talking price?  What internal meetings are needed?  Who’s going to own this deal post-integration?  More on this last point below.  I don’t think it’s a one-size-fits-all kind of solution here but there must be agreement on what steps are necessary in order to move quickly, not waste time on deals that don’t fit strategy and maximize the chances for integration success.  A simplified approval process might look like this:

• Initial assessment or Approval to negotiate meeting: the point here is to make everyone aware of the deal being contemplated, the rationale, who owns it, the valuation range,  and ultimately get approval to negotiate a term sheet
• Final go/no go meeting: By now you’ve largely negotiated the term sheet and this meeting is to verify prior assumptions about deal structure and price and get approval to sign the (non-binding) term sheet; note assume 2+ weeks to negotiate a detailed term sheet
• Deal close: no approval meeting required unless red flags are uncovered in diligence which might cause the buyer to walk away; note it’s often 2-3 months from term sheet sign to deal close

Working in tandem with these deal approvals is a diligence and integration process.  More on this below under the topic of a cross-functional team.

We’ll get to the rest of the rules in part 2..

Among many institutional investors who invest in the venture asset class, there is a perception that a “trickle down” effect is at work in venture.  By trickle down, I mean that a handful of well-known “top tier” venture firms see all the best deals, select the most promising opportunities for themselves, discard the others to the next set of firms who do likewise, until only the least promising ugly duckling deals are made available to lesser known venture investors.  Pity the firms at the end of the line who appear doomed by design.

Fortunately for firms who are still building a brand and the LPs looking to invest in such emerging firms, the trickle down theory doesn’t work in early stage venture.  And the primary reasons are personal networks and firm structure.

First, regarding personal networks.  Venture capital is very much a personal relationship driven business.  An entrepreneur looking to build a business will first talk to investors he or she knows and respects.  And the odds are good that most of these investors aren’t employed by the small number of firms that LPs often assume get to see “all the best deals first.”  So right off the bat, there is a mismatch with the trickle down theory.  Not to say that brand or firm reputation don’t matter, they do, or that entrepreneurs won’t also seek out well-known firms, they often will.  But the notion that dealflow follows a predictable pattern from well known to lesser known firm is false.  Case in point, the ability of the new class of super-angel funds to attract healthy deal flow should provide a good counter-example to the trickle down notion.

Quick aside: who’s to say what the “best” early stage investments look like anyway?  I like to say that while some opportunities can appear obviously inferior (utter lack of compelling product, seemingly hypercompetitive or tiny market, disorganized or untrustworthy team, or other admittedly subjective reasons), no deal appears obviously, and unanimously, good.  Yes, an investor may instantly like a pitch but there is always some challenge that the business must overcome and it’s the investor’s job to decide for themselves whether they believe it’s a hurdle that can be cleared and weigh this against the perceived reward.  What’s “best” may become a bit more evident in later stage investments when market traction–breakout user adoption, brand recognition, revenue growth–is more readily discernible.  Of course, valuations rise markedly when this is the case.

Second, firm structure.  In order to scale the firm and better manage partner time, larger firms hire junior partners, principals and associates.  While partners at the firm may have decades of venture and tech industry experience, the newer folks may be only a few years out of business school.  And when entrepreneurs show up to pitch these firms, who do you think they meet with?  Typically not the senior partners with whom LPs are most familiar.  Instead, it’s the job of the relative newbie to decide whether this first impression merits a follow up “partner meeting.”  So what’s wrong with this?  Early stage venture investing is a nuanced business.  A yes/no decision doesn’t hinge on quantifiable or structured data that can be quickly or easily communicated inside an investment partnership.  You need direct engagement.  At Merus Capital, we’ve invested in companies that we thought initially looked highly unpromising and we’ve passed on opportunities that seemed like great wins at first.  The point is that as an investor, you need to take the meeting.  You need to hear the pitch, ask the questions, read the body language.  The most interesting opportunities are usually in the gray areas that can only be fully understood through direct conversation, debate, and deep diligence.

And just as importantly, this works the other way too.  Coming out of this initial meeting, the entrepreneur’s impression of the firm is tied directly to the quality of that discussion.  Did this investor really understand my business and constructively challenge assumptions?  Do I think they could effectively sell the opportunity inside the firm?  Do they have any decision making power?  Is this person genuine or a bullshit artist?  Would I want this person on my board?  So even if an opportunity could be clearly communicated up the chain of command inside a firm, it doesn’t matter much if the entrepreneur left the initial meeting with a sour taste.

One answer to this structural problem is a small fund managed by equal partners with little or no supporting cast.  Each investment affects everyone equally and therefore each deal receives equal scrutiny before making the investment and equal help from all partners post-investment.  There is no chain of command problem or career risk issue because the decision makers hear pitches directly.  Entrepreneurs appreciate this principal-to-principal interaction right from the start and know how this can greatly accelerate the fundraising process.  This approach leads to better investment decisions and a strong rapport with entrepreneurs.  And isn’t this how top tier firms earned that reputation in the first place?

M&A is not a strategy, it is a tool.  It is a tool to help support a strategy or set of strategies.

Before explaining this statement in more detail, I’ll posit that there are two primary acquisition types that technology, particularly software, companies contemplate and execute: “bolt-on” deals and “big” deals.  Bolt-on deals are the bread-and-butter acquisitions for any software company.  These deals are typically small, as defined by dollars spent and people employed at the target company, and are almost always championed by a product or engineering team at the acquiring company.  Almost by definition then, this means that the team and product (or feature!) being acquired will slot into an existing product roadmap at the acquiring company.  Often these deals involve acquiring a small company whose business is hardly proven, but where there is high perceived value of the product or team by the acquiror.  These bolt-on deals will always be the core acquisition type for software companies because the number of available targets is high and the deal success rate is high, relative to M&A overall.  Success in this case is defined by integration into the buyer organization and by value extraction, i.e., the acquired team remains employed by its new parent for a significant period of time, and the IP developed by this team has been integrated into a product.  Put another way, there are no signs of NIH (not invented here); the body has not rejected the organ.  This is success for the bolt-on deal.

Big deals are much more difficult.  A big deal is simply one that doesn’t fit the description of a bolt-on deal.  Big may indeed refer to size: large deal price, number of employees being acquired, geographic sprawl of the target, or the size of the balance sheet inherited.   But it also may refer to deals where there is no natural internal sponsor.  This may be because there is no existing product team who is in the same business or serving the same customer as that of targetco, or where there is an existing product team, but whose product is losing ground in the marketplace to the target company.  And who wants to put themselves out of a job or admit to having an inferior product?  For big deals to work, they should be sponsored by senior company executives who can help smooth over the internal speed bumps that naturally arise.  Furthermore, to build a long term competency in doing bigger deals means building a long term competency in deal integration.  Integrating people, technology, and operations for big deals is an entirely different and more time-consuming process than is required for bolt-on deals.  Integration of these deals, whether it be complete or just at the product development, or sales or G&A level, is particularly important because technology deals are almost always revenue synergy driven.  And some level of integration is required to achieve these synergies.  Whereas a steel producer acquiring another steel mill is largely about cost savings via elimination of duplicative functions or broadening the asset base to lower borrowing costs, etc., in the world of software, where hard assets are not at a premium and the marginal cost to produce a good approaches zero, acquisitions are about revenue synergy, not cost synergy.  So thoughtful consideration must be given to how the companies should integrate and who at the acquiring company is responsible for it.

Getting back to the central topic of M&A and strategy.  A corporate strategy may be something like “build products that customers will love,” or “enter the enterprise software business by end of FY08,” or “grow overall revenue by 40% next year.”  In each of these cases, the primary way to go about achieving a given strategy is to utilize the talent we have in-house to execute on product development and sales & marketing initiatives, hopefully in a long term profitable manner.  Simply put, acquisitions come into play when we determine that we cannot economically build the products we want to offer.  Period.  That is as close as you can come to an M&A strategy statement.  This is particularly true for large software companies, who theoretically can build anything given sufficient time.  A company may come to a decision to acquire for a few reasons–for example, we don’t have the domain expertise in house and we can’t hire rapidly enough, we don’t understand the customer in a given market (geographic or product) well enough to build useful products in a reasonable time frame, or we sense a window of opportunity in a given market and we need to capitalize on it quickly.  Software companies acquire primarily for talent, IP, and speed-to-market.  This is true of both bolt-on and big deals.  Acquiring revenue (read customers) may also come into play for big deals, but it still gets back to acquiring what the company cannot economically build in the time frame desired.  I think about the M&A process in the following way:  The strategy is to build a given set of products that our customers love.  The exercise is to identify the product areas where we cannot economically build what we want to offer these customers and the tool available to us for filling these gaps is M&A.

Lastly, it is instructive to consider proactive vs. reactive, or opportunistic, M&A.  In the context of investments and acquisitions, the word opportunistic often has a negative connotation.  It implies that the buyer or investor is not executing a well-considered strategy, and instead is casting about for deals wily-nily.  The reality is that there exists an element of proactivity and reactivity for all corporate development teams, private equity buyers and venture investors.  What I’ve described in the paragraph above is the proactive part of corporate M&A–seeking acquisitions that directly support a specific product strategy.  But we operate in an environment where the assets we’d like to buy don’t always exist or are not available, or at least not available at a price we’d consider reasonable.  On the flipside, there may be assets that become available that don’t fit neatly into a given product strategy.  But perhaps they fit into a broader company strategy or mission and warrant evaluation.  We should be comfortable with, and prepared for, this dual approach to M&A.

We recently had the pleasure of sitting down with Sean Dempsey, Co-Founder at Merus Capital, to talk about venture capital, M & A activity, and online advertising trends. Sean brings 10+ years of experience in Corporate Development at Microsoft and Google to his role at Merus and to his role as Board Member at AdRoll. You can follow Sean on Twitter or read his blog.

Josh Breinlinger: Tell us a little about yourself.

Sean Dempsey: I’m a founding partner of Merus Capital, an early-stage venture firm. My two partners and I founded Merus in late 2007 to focus on software and Internet investing. The three of us worked together for about a decade at Microsoft and Google prior to starting Merus. My role at both companies was in Corporate Development, where we were responsible for all investments and acquisitions. I’ve been thinking about entering the venture business for about 15 years now, so it’s great to finally be doing it. On a personal note, I’m into trail running, skiing and tennis and think that besides the iPhone, the Sonos music system and the Garmin Forerunner 405 are the best consumer products in the last few years!

Josh: As an early stage VC, what are some trends you see in the types of companies that are getting started and getting funded?

Sean: There is certainly a lot of attention paid to consumer-focused startups. Even though it can be exceedingly difficult to predict consumer behavior, companies with breakout viral growth potential are always interesting to investors. With all the focus on consumer Internet startups, I think there is a tremendous opportunity to fund companies catering to the needs of other businesses, both large and small. Particularly where these companies can take advantage of the social nature of today’s web to rapidly build a brand, attract customers and get product and service feedback.

We also love seeing what I’d call “SaaS 2.0″ companies–whereas the first generation of software-as-a-service companies stored and reported on your company information and could tell you what you are doing, with the computing power economically available today coupled with the right algorithms, companies can take and process all that data and tell you what you should be doing.

Josh: What are the characteristics you look for in a startup before deciding to invest?

Sean: At Merus, we’re pretty focused on investing only where the business opportunity seems sufficiently large. The question we always ask ourselves is: “Is this the type of business that can generate $50 or $100 million in revenue at some point or are there structural constraints to this kind of growth?”  We try to “score” an opportunity along many dimensions–barriers to entry, customer impact, competitive intensity in the market, network effects, market size and ease of implementation among other metrics. And of course, we have to have full faith and trust in the team and they in us. A question we ask about the team is: “Do they strike the right balance of having a deep-seated belief in their vision and yet possess the flexibility to listen to customers and users to make informed course corrections?”

Josh: Let’s talk about the online advertising industry. With your background at Microsoft and Google and now as a VC, what trends do you see in this space and what type of M & A activity would you expect over the next couple years?

Sean: Well it’s hard to underestimate the importance of real-time bidding (RTB) in the online display industry. Though I like to call it IBB for impression-based bidding since that’s what we all care about–the ability to tailor advertising and content on a per impression basis.  The recent rise in retargeting is perhaps the first indicator of the power of IBB. There is still much to be done to increase liquidity–boosting inventory on exchanges and more broadly implementing real-time bidding–but the promises we’ve heard for the last few years are finally becoming real.

It will be fun to watch the M&A activity in this space over the next few years. All the ingredients are there to suggest a series of consolidations. Thematically speaking, I think we’ll see a couple things. The first is a flight to technology, by which I mean that networks and other inventory aggregators who don’t possess a highly scalable targeting and optimization platform will look to acquire that capability in order to serve a broader set of display advertisers. The second, which is already underway, is a consolidation of optimization capabilities–media + data + creative + landing page–in order to fully serve an advertiser’s needs and maximize ROI.

Josh: Question for you about data transparency and privacy concerns. Targeting technology is getting really powerful, but there are some privacy concerns out there as well. Do you see any major changes happening in this area?

Sean: Privacy will always be a concern on the web, though what tends to be forgotten is that marketers have long known a lot more about our real, offline lives than our online personas. The best, and perhaps simplest, thing to do is make users aware of how their data is being used. If people know more about what is happening in the background–what preference or historical data is being used, how it can be altered, and how to opt out–and this results in the display of highly relevant ads and content, then I think users will respond favorably. While some publishers and ad networks are starting to provide better transparency, I think an independently-managed “dashboard” to help users manage their personal data across sites and networks could be a very useful tool for cementing user trust and even improve targeting. What’s hard to predict are the actions of an overly aggressive market participant who broadly abuses user trust, sending us down a path of strict regulatory reform. I would hope we could avoid this through improved transparency and user controls.

Josh: Ok, now it’s time for a quick, shameless plug. As an investor in AdRoll, what do you see as the future for our company?

Sean: While Google’s introduction of remarketing has broadened awareness of general retargeting, we’re still in the early stages of what can be accomplished with more advanced retargeting techniques–customizing messages based on shopping, search and other intent-oriented behaviors, social connections, and individual preferences to name a few.

As the lead investor in AdRoll, I’m of course highly biased(!) but I’m really excited to see the company pushing the envelope on retargeting. And doing so in a way that is highly scalable and automated so that the benefits a large customer are also available to the broader base of display advertisers. Couple this with the site-targeted campaigns that AdRoll offers and it’s a very powerful yet simple way for advertisers of all sizes to benefit from display advertising. Companies like AdRoll will open the eyes of search marketers to the power and demonstrable ROI of display and help close the wide gap that exists today between the number of search marketers and those active in display.

Josh: Thanks Sean!

These aren’t lazy or ill-intentioned people mind you, they simply aren’t motivated the same way they were when they were building their startup.  And while a little more money is enough to keep them physically around, they are emotionally uninvolved which isn’t quite what the acquiring company had in mind in retaining them.  The situation isn’t surprising of course–after killing yourself for years to build a startup, no doubt overcoming dozens of obstacles along the way, there is a natural tendency to take a breath and enjoy the view once your deal is signed and closed.  The counterpoint is that now, this newly acquired team has the resources it had only dreamed of before–capital, brand, distribution, technical infrastructure, teams of people!–to get their product or service in the hands of thousands or millions of eager customers virtually overnight.  But even this joy can be attenuated by the fact that this team is now working inside the Borg.  Marketing is done by marketing, selling is done by the global sales force, scaling is an afterthought.  These can be great things indeed but for the founding team, there is typically a loss of control and ownership that can be dissatisfying.  And a bit more cash doesn’t fix this.

So what is the solution?  More money is certainly not the answer.  And to be fair, I do think that in some cases, it’s un-fixable by definition.  If your passion is running the show, then you’re simply not going to be happy *not* running the show.  But ample time should be spent in defining the pro-forma roles for the key employees and determining where their personal drive comes from.  It’s never going to be perfect but with all the back and forth and internal negotiation I’ve seen in determining the right motivational payments, this time would be better spent understanding the right motivational roles for these newly-acquired folks. And maybe even save some money along the way.