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How To Start a Business with the Intent of Being Acquired by a Larger Company

The following is a transcript of an audio podcast interview with Jeff Fisher on Strategic Entrepreneurism

Every entrepreneur's dream is to create the next big name success story like, or Google. While everyone should dream big, the reality is that most startups fail precisely because they're trying to become the next big name success. The real secret to entrepreneurial success lies in Strategic Entrepreneurism where you design a company specifically to be acquired by a larger one. That's why the founder and CEO of several successful high-tech startup companies, multi-millionaire Jon Fisher, has written down his success principles. Strategic Entrepreneurism shows entrepreneurs how to design their companies towards the path of least resistance, maximum payoff, and lowest risk. Starting a small business and managing that company specifically with the end goal of selling to a large company is something many entrepreneurs think about but rarely make a priority. Our interviewee today, Jon Fisher, believes that doing so offers Founders and their investors the greatest chance of success. In this interview, we discuss how to blend the needs of the company with the needs of their customers and ways entrepreneurs can structure their companies to be better acquisition targets. Take a look at his book here. Hello everybody. Welcome back to the Small Business Podcast at Thanks very much for joining us for another show. It's been a few months actually since we did our first show back in February. It's good to be back and we'll be doing these on a more regular basis going forward now. Our guest today is Jon Fisher. He is the author of Strategic Entrepreneurism: Shattering the Startup Entrepreneurial Myths. I want to just read with you, for you just a quick paragraph to get a basic of what the premise of the book is. We are going to talk to Jon about why he wrote the book and his background as well. It starts out, "Every entrepreneur's dream is to create the big names; a successful story like or Google. Well, everyone should dream big. The reality is that most starts fail precisely because they're trying to become the next big name success. The real secret to entrepreneurial success lies in strategic entrepreneurism where you design a company specifically to be acquired by a larger one." We thought that was an interesting premise. We hear about starting a company to make money obviously and grow the company. But Jon's premise is you should always have that end game in mind about creating the business to be sold to a larger one down the road. Jon, thanks very much for joining in the show today.

Jon Fisher: Thank you for having me. You've got obviously some real life experience here. You sold your company to Oracle, correct?

Jon Fisher: Yes, in 2007. Did you initially start that business to be sold to a big company or is this something you learned in that process?

Jon Fisher: Well, I serve as CEO of three companies in the last 17 years and I think, intuitively, I have always tried to at least think about steering the company. I was leading in a direction that would eventually bear fruit. We can really do this as startup entrepreneurs one of three ways. We can continue to raise money and indeed an initial public offering is just another form of financing, if you think about it. We can kind of perpetually divest ourselves of the business as it gets more profitable, more successful. We can pay ourselves higher salaries or bonuses. But really, in the end, I think the highest propensity method is a successful acquisition. I think that's where most of us end up that work out well and so why not plan for that event. I'm certainly not confirming that we had in our sights this last time Oracle or any one company in mind from the very beginning, but we certainly architected the company financially and otherwise to make sure it would be a good fit for companies like that when the time came. Can you bring though basically the needs of the customer versus the needs of the business to prepare for that sale. Do they ever conflict in ways that you had to make a decision which way you wanted to focus?

Jon Fisher: Yeah. It's not so much a conflict but it's really, I think, a function of discipline and persistence. It's very tough to attack a market filled with all kind of opportunity as a small company and have the discipline to focus only or primarily on really the strategic types of customers that can serve you best in the end. Typically, these customers are customers that in eventual acquire once they get close to us well. We were securing, for example, in my last company's case, in [Barossa's] case, primarily US banks from online fraud. That's a pretty good business to have been in, in the last x number of years but it took some discipline to focus pretty much all of our energy on the most important banks given how vast and fragmented that is. We could have tried to go after thousands of banks and perhaps that would have not served us as well. When you are just getting started, you have a good idea; do you think there's an unmet need there; what kind of things do I need to consider, to look at, to make sure I'm positioning myself to be acquired down the road? Is it strictly competing head to head with them or maybe just a niche that maybe they're not doing well, that it would be a nice complement to them or how should I be thinking of this?

Jon Fisher: Certainly, competing against a much larger company is not always the way to go. I think these companies, we've mentioned Oracle, Cisco, Microsoft, some of these guys have multibillion dollar R&D budgets and are going to do most if not everything better than we can ever do as a startup and perhaps the reason they are interested in buying us to begin with is to get good teams to save time and money to market. It's just speed. I think it makes sense in that respect to focus on areas that might be ahead of their current initiatives, might be niche, might be focused so that indeed they can take a look at synergies down the road. Is there anything I should do to draw their attention other than just being out in the marketplace? Should I develop some relationships there or should I do specific in that regard?

Jon Fisher: Regarding potential M&A activity, I mean it certainly is an art form. I think announcing that a company is for sale is just like putting signs up on your house. That's pretty definitive and that doesn't always work and we're experiencing some of that in the housing market, of course. I think a couple of things entrepreneurs can do, one is really financially architect the company so that you as the entrepreneur and your founding team can literally approve a merger. Let's not raise gobs and gobs of money deluding ourselves to the teeth-that's not deluding; that's diluting ourselves-so that when the time comes, we're actually not entrepreneurs. Meaning, we don't own the business and we can't approve a merger. How terrible a feeling that is to actually wind up after a lot of hard work in the right time and the right place but because of so much money raised or so much delusion, we can't actually decide to exit the business. I think that's the first thing is really some discipline around the financial engineering side of the business. I think the second thing is it's really nice to have whether it's analysts or customers talking for us. Every entrepreneur has a vision in the future and thinks she is doing something remarkable, but in the end a strategic customer confirming why the solution is special is something that I think resonates with potential acquirers. How about the actual entity itself? Is there any question about whether you should be an S corp, a C corp, LLC, any thoughts there?

Jon Fisher: That's an interesting question. Typically in high technology, the C corp structure makes sense because it allows a company to grow much more quickly, much more fluently than the other structures. But the S and the LLC also have their benefits for much smaller businesses or partnerships. There are roughly 25 million entrepreneurs, perhaps 27 million by now in this country. The vast majority on the 25 million number, 19 million are sold proprietors. I think the S and the LLC structures are much more common but if you're looking to really grow something aggressively then I think the C structure is the way to go. How about employees? That's always a consideration when M&A activity occurs, whether they're going to have to lay them off. Am I best to try and limit that as much as possible so that there is less to lay off or deal with any overlap later?

Jon Fisher: I think the quality of the employees usually, if not always, is a key concern for an acquirer. I think the more talented folks within reason. I mean, you want to be running a profitable organization and you want everyone to have clear mission to find. But that being said, the more quality folks perhaps the better. Again, it just helps that acquirer through a clean and perhaps a creative transaction. It just helps that acquirer to move more quickly. Just as we want to keep control of the business, financial engineering and otherwise, we want to hire responsibly but having a few too many good people on board is never a bad idea. How about myself as a founder or an elder going forward. A lot of times, entrepreneurs are entrepreneurs because they're terrible employees and they don't want to be working for a larger company. Should I expect to have to do that thought as part of this to be able to sell my business and there are ways that I can still keep my freedom? Any suggestions there?

Jon Fisher: I think oftentimes yes, entrepreneurs don't necessarily fit in so well to an acquirer framework especially a larger acquirer. But, certainly, I think the entrepreneur should be prepared to experience that. I have done that for a stretch a couple of times in a couple of different acquisitions including the last one. I can represent - it's a magical experience to see your team and technology that you worked hard to put in motion integrated in a much larger circumstances and get a much larger reach. In fact, when I talk about the issue of genetically designing a company for acquisition, I will inevitably get at least one person in the audience upset at the notion. Shouldn't we at least endeavor to be insanely great? No one is going to try to build the next Intel was the subject of a Business Week cover story a few quarters ago. If no one is going to try to do that, then what's the future of technology? My answer to that is the best way that I know of to at least try to change the world is to put a good team and a good technology in the field and then sell that company to a world class acquirer and then let them do a better job with that team and technology than we ever could ourselves. I want to challenge you a little bit on that because it seems, especially in the past three or four years, that people have built entire businesses around just the model of "we're going to sell to Google" and that's how we're going to make money on this thing. Is that a viable method still? What do you think? Will that continue to be so?

Jon Fisher: I think we have to watch it. I teach business school these days and the students have the ability to develop some code and immediately upload it to the Amazon cloud. All of a sudden they're in business. I started my first company in 1993. It looks like that's when the internet was just starting in its current form. We weren't able to do that. There were infrastructure concerns. We had to deal with servers and office space and all those traditional pieces of business. I think there are only so many shortcuts that we can navigate. It's good to see the whole board and it's good to try to be smart about things. But if we are so opportunistic to the tune of taking as many shortcuts as possible so that we can just flip the company, then I think we lose some of the value that we're trying to create. I think in the end, we are keeping our heads up. We built something valuable and then just being conscious strategically and otherwise of where we might end up. I don't think that's quite as aggressive as literally sitting down day one to say, we're going to build this thing and sell it to Google as quickly as possible. In terms of when to start accepting those offers. If I'm 18 months into something, I've got investors and a large company is expressing some interest but I see that if I wait another 12 months, we could double the price it would seem because I've doubled my revenue. What was it for you when you first got approached by Oracle and you said, is it time, should I grow this some more and wait. It's a tough question I guess.

Jon Fisher: It is a very tough question. First of all, I don't want to represent that we were approached by Oracle or anyone. That's actually not necessarily what happened. We were approached by a potential acquirer and we thought the timing was right. Then we really took a look at the situation. As far as Oracle, and I certainly don't speak for them in terms of their strategy part from it, but what I've noticed is they really see everything anyway. Oracle, it has been said, maybe the new initial public offering for us entrepreneurs in that they are still doing a deal a month. They are one of the most acquisitive companies in the world. I think they'll see us as we are moving forward in a potential process. But as far as taking a look at a situation and thinking that we can double down if we just work harder the following year. I think that can be problematic for two reasons. You're familiar with the rule of 72. I can invest my capital at eight percent and then in nine years that capital should double. An entrepreneur should keep that in mind that the longer we tie up our investor capital and our management capital, there are basic returns that are owed. We don't get an unlimited amount of time to deliver value. I don't think in high technology we get an unlimited amount of time to be able to continue to innovate. I think there are windows and opportunities for everything. The notion that we can work another year and get more value really has to be studied carefully. I think it's one of the most difficult decisions for entrepreneurs to make, but I'll mention again, so long as we literally can make that decision. So long as we have raised enough money to execute but not too much money where we are no longer in control then those decisions in the end are ours. And I think that's the critical thing. Anything you would have done differently looking back at now 2020 about selling your companies in the past?

Jon Fisher: Yeah. Interestingly enough, I've written about being opportunistic as far as pursuing a merger and architecting a company to make sure that a merger is in sight down the road. I would argue, I would have been even more aggressive about that in my career. I had a win in company number one. I had a win in company number three, but my second company actually did not succeed simply because I may have been six to twelve months too late and that's the company where I actually raised the most money. In fact more money than my first and third ventures combined and I had to eventually repay that money, of course. You have to be responsible for providing a return on investment for every million dollars that we are raising for every $10 million that we are putting together. Yes there should be some celebrating. It's not easy to do that and it's perhaps more difficult to do that in this market than in any other. But in the end, you've got to pay back a multiple of that money and we should never forget that. I would have been even more careful in my second venture to be cognizant of trying to be in the right place and the right time and raising less money. That being said, I have practiced what I preached and I have learned unfortunately, and that was a tough situation in my second company. What happens if you're on the wrong side of that. There have been a couple of instances where companies like Yahoo or Google have purchased companies and then two years down the road they shut down the service. There are instances of founders being frustrated because they weren't getting the attention I think and grown like they thought they would. Anything you would suggest to owners to try to clarify what happens down the road as best you can to kind of avoid that situation?

Jon Fisher: That must be frustrating. I have not experienced that at least to date. It completely negates the part of it that I was talking to about how nice it is to see the teams and technology further through an acquisition. You want to be doing something as an entrepreneur. We all work so hard. That's making a contribution. If you're just commerce driven or if that's the most important thing, I think you will burn out especially year after year. It must be enormously frustrating to have that happen. I guess the one thing that I would suggest is, if you are selling a company to a larger acquirer and your company is set up and run correctly as a function of the financial engineering. You are profitable. Every operation that you pursue, every product the you ship you become more profitable. In fact, I write about at length in the book. Perhaps we raised the first round to prove our product is of value. We get in front of some customers. Perhaps we raised a second round to attract the quintessential customers, the best, in my case, enterprise customer that were capable of getting; we serve that customer well, or that group of customers well in a web 2.0 business; it might be a tranche of users; we figure out what it takes to get profitable; what the net margins in a green company; perhaps we sign a key deal with a distributor, etc, etc. So that's two financings so far. Then the third and perhaps the last financing, at least my experience dictates is we raise around to then scale what we proved in that second financing. We attracted our quintessential customer or series of users. We lock in our strategic value and then now it's just a function of scaling that n times. If we get that process of scaling down, I would argue, then the acquirer can much more model synergy and just plug our already working operation into its wares and then I think there's much lower chances of problems in the future because again the acquirer gets a well run, well oiled machine that perhaps can even run as a standalone business. I'm very pleased that, for example, in the last acquisition the Barossa products are still a standalone product under Oracle's umbrella. It's very nice as an entrepreneur and a team to be able to point to this transaction yielded this distinct product for such a great company like Oracle. You talk about scaling up. In your experience, what is more important to get that top line gross revenues as high as possible, to get the number of customers as high as possible or the bottom line and try and get that to be as efficient as possible and grow that?

Jon Fisher: That's an interesting question. I would argue that it's probably the bottom line as far as something that we should focus on as a key priority versus the top line. I think we all learned our lesson approaching 10 years ago that first mover advantage and eyeballs and growing something just to get large is really a recipe, in many cases, for disaster. There are some arguably great companies out there especially in sort of the Web 2.0 space that are really going for bulk only to monetize that bulk down the road. I think it remains to be seen whether they are going to be successful. I am certain that some of them won't be. If you're trying to change the world, if you're trying by yourself to build the next Amazon or Google, then you maybe you got to go for that top line. I do agree that some of us should at least try to do it but, by and large, especially if you're first time entrepreneur especially in this unprecedented market, perhaps it makes sense to try to get to the bottom line much more quickly, try to run a profitable organization, do something of value that will eventually resonate with the potential acquirer which is, as I've mentioned, I think the highest propensity success option for all of us. Then, if things take longer than we planned, or even don't work out in the vision we expected, we're running a profitable company in the interim, right, and nobody can take that away from us. Good point. So even you don't sell, you're making money which is important. We got a lot of listeners who work for the big companies and are listening to this and wanting to start their own business. This may not be entirely up your ally, but any suggestions for them about, should they go to their company and say, look, I want to start this, whether it needs some financing from their employer. It's a unique situation but we happen to have a lot of people that are in that situation here listening.

Jon Fisher: Well, I certainly categorize myself as a pure entrepreneur in that I have served as a cofounding CEO of these three companies over 17 years but that certainly doesn't preclude me from saying that I think folks can be just as entrepreneurial within large companies and indeed it is interesting to think about it. Perhaps that's even a way to skip this whole step of actually creating a company and having to do that which is not easy. You're already technically acquired. You're already in a great company and now you're trying to put some new processes and products in motion. That may not be quite as lucrative. It may not be quite as fulfilling in terms of doing something for oneself at least in the early stages but then to see eventually a process to position within a big company and to see your efforts leveraged in the same way that an acquisition I think ultimately manifest must be fulfilling. It would be great to get that kind of fulfillment in a lower risk scenario. I think, certainly, managers in large companies can take a look at their operations and figure out without an acquisition or without doing something inorganically; what can they do to help their organizations reach new markets or new processes more quickly. Alright Jon. Well, thank you very much. Listeners of course, you can go and check out the books Strategic Entrepreneurism Shattering the Startup Entrepreneurial Myths. We will link to it in the notes for today's interview. Jon, thanks again for your time. I appreciate it.

Jon Fisher: Thank you very much.