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Above the Crowd

Grubhub and Seamless: Effecting The Elusive Private-Private Merger

Today, Seamless and Grubhub announced the signing of a definitive agreement to merge two of the nation’s premier services for ordering takeout online. As Benchmark is a large institutional investor in Grubhub, we were actively involved in the merger process, and we are quite excited about the potential of the two companies coming together. There are many synergies – different geographic strengths, different core customer bases, and different product strengths. And of course, we are afforded the advantage of greater scale.

Despite that there may be many obvious reasons for any two companies to combine, most private-private mergers (where both companies are private entities) never come to fruition. Public-public, and public-private are actually much easier to consummate. There are many reasons why private-private is so difficult, but allow me to highlight three specific challenges that seem quite prevalent.

 1)    Structural Challenges

Private companies typically have capitalization structures that are very complex. There are common stock, common options, and as many as three to five different layers of preferred stock, each with a specific liquidation preference. Finding a way to meld two complex capital structures is non-trivial, and may require compromise from many parties involved. But institutional investors are loath to give up previously negotiated rights, and this can be especially true when the investor in a competitive company is the one bringing the request. Even melding two separate option programs can be challenging. There are numerous techniques for bringing together two such structures, but none of them are remotely elegant, and they all involve spending many, many hours with lawyers. At the end of the day, structure is not a show stopper, but it creates a very high bar for consideration – you have to really want to make it happen to be able to sit down and sort through the complexity.

 2)    People Challenges

Prior to a merger, you have two separate management teams (with two separate cultures), and in order to merge, you have to agree on who is going to do what, and what each executive’s new title will be. It should come as no surprise that executives are fairly sensitive when it comes to topics of reporting structure and titles. Plus, you have the natural tendency to view any discussion as an “us versus them” type argument, which is not a frame of mind that is conducive to collaboration. The bottom line is that it is very hard to merge two management teams, especially when you consider the contracted time window typically associated with such a discussion. It’s speed dating. As a result, only if you have two teams with a shared vision for the future, and minds that are open to compromise could you ever hope to be successful. Some pretty high-profile mergers have fallen apart because of this issue.

3)    Investor/Founder Mindset Challenges

Most founders and investors typically think about their personal stakes in a private company in terms of “ownership percentage.” An investor may say “we own 22% of the company”, or a founder may note, “I still own 31% of my company.” These same constituents think about the overall company value in terms of dollars. As an example you might hear someone say, “we closed the last round at $100 million post.” When two private companies began discussions on merging, these overall corporate values are often debated. I call this the “dueling blowfish” problem. Private company valuation techniques are particularly specious (this contrasts with a public company that every day has a definitive market capitalization). Anyone can create any number they want (within reason), as there is no one specific formula or metric for such work. Most models are also based on forward forecasts, which offers another avenue for inflation. Basically, everyone uses loose finance arguments to over-inflate their own company’s valuation so that they can demand a bigger slice of the pie of the new company.

The only way around this is to reverse your way of thinking. First, you have to focus on the dollar value of your new stake in the combined company instead of focusing on the specific percentage. Even in a 50/50 scenario, each ownership stake is half what it once was. Assuming the deal is accretive, this should be “no-brainer” math; your new stock in the combined company is worth more than it was before. However, the “ownership” focused mind has a real problem with their stake being reduced so dramatically. Second, you need to only negotiate in terms of percentages (versus dollar value). One company will get X% of the combined company, and one company will get 1-X%. Taking this approach is the only way around the dueling blowfish problem. Assuming both sides think the merger is a good idea (and accretive) the future value is obviously going to be higher. The real question is how do we split the company amongst the two players, and focusing on this out of the gate will save an incredible amount of time.

These are just the challenges that you meet on the way to the altar. Many mergers fail not in the deal process but in the implementation process, as integration is very difficult, especially when it’s a merger of equals. And the human and cultural issues outlined above continue to exist as you attempt to merge two companies into one. Getting the “deal done” is only the beginning.

Once again, I am quite excited about the Grubhub/Seamless merger, and tip my hat to Matt Maloney, Mike Evans, Jonathan Zabusky, and both the Grubhub and Seamless management teams. Had they not started from day one of our discussions with a partnership mindset, we would have never have reached this milestone. I look forward to working with them both, as well as the investors and independent directors from both sides to help take the merged company to new heights.

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Article from AboveTheCrowd.

This morning, Intuit announcedits agreement to acquire one of Benchmark’s portfolio companies, Demandforce, for $424mm. As with Instagram, Benchmark Capital is the largest institutional investor in Demandforce. Unlike Instagram, which is a consumer application and is extremely well known, Demandforce focuses on local professional businesses and has chosen to keep an intentionally low profile – a strategy that has served them well.

Great entrepreneurs often blaze their own trails, and the founder and CEO of Demandforce, Rick Berry, is no different. In a day and age of social media, where many companies project a persona much larger than reality, Demandforce chose instead to focus on its customers and its products. We never even announced Benchmark’s funding of the company, which I believe is unprecedented. The Demandforce team always felt that the attention should be focused on the customer rather than the company.

Demandforce’s customer mission has always been the same – to help small businesses thrive in an evolving and increasingly complex connected world. Today, they are the leading provider of interactive “front office” SAAS services to thousands and thousands of professional small business owners. The Demandforce product is a powerful web-based application that seamlessly integrates with existing workflow systems, works automatically, and delivers guaranteed results. Through this, Demandforce provides local businesses – like salons, auto shops, chiropractors, dentists, and veterinarians – with affordable and easy access to the tools and platforms that large enterprises use to communicate with customers, build a strong online reputation and leverage network marketing. It you have ever received an automated communication from your dentist, it was likely sent through Demandforce.

Demandforce’s success puts it at the forefront of the burgeoning “Local Internet” wave. The combination of Internet pervasiveness and smartphone penetration has led to a complete reconfiguration with regard to how local businesses interact with their customers. These local businesses have traditionally spent over $125B/year on traditional media, and this is only in the U.S. But the channels they have historically used, such as the newspaper and the yellow pages, are increasingly compromised. These business owners know they need new solutions, and these dollars will be reallocated to these exciting new platforms. Benchmark believes this “Local Internet” wave is many times larger than the “social” and “mobile” themes with which it is often contrasted. In addition to DemandForce, Benchmark is fortunate to have backed such “Local Internet” market leaders as OpenTable (OPEN), Zillow (Z), Yelp (YELP), Peixe Urbano, GrubHub, Uber, and Nextdoor.

It has been an honor and a pleasure to work with Rick Berry, Patrick Barry, Hoang Vuong, Mark Hale, Sam Osman and Annie Tsai at Demandforce. This is truly one of the best teams ever assembled. It was also a pleasure to work with Steve Kostyshen as well as Mike Maples of Floodgate and Peter Ziebelman of Palo Alto Venture Partners, all of whom preceded us in their investment, and all of whom are passionate fans of the company.

It is certainly thrilling to see a team of entrepreneurs reach a significant milestone such as this.  That said, it is equally bittersweet as it means we will no longer be working directly with them on this incredibly compelling mission. Our loss is unquestionably Brad Smith and Intuit’s gain. Combining the leading “front office” small business SAAS vendor with the iconic Silicon Valley small business company is an incredibly compelling combination.

Read more here.

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