Nasir and Matt welcome business guru Roy Daya. They talk about why a business might fail after an acquisition and answer the question, "I have put in many years to get my business profitable and just reached that goal this past year. We have a sound business model in place and secured investments so we have enough cash. What sort of challenges should I expect to face in scaling my business from here?"
NASIR: Welcome to Legally Sound Smart Business.
This is Nasir Pasha.
MATT: And this is Matt Staub.
NASIR: Welcome to our business legal podcast where we cover business in the news with a legal twist and also answer some of your business legal questions where you, the listener, can submit to firstname.lastname@example.org.
Today, we have a fun guest today. We have a nice startup guru for some of your high-tech startups listening out there. His name is Roy Daya. I call him a startup guru because pretty much every successful startup has one of these consultants in their arsenal – one of these guys that can get them through the process that has been through these serial entrepreneurial cycles before.
Roy, welcome to the program!
ROY: Hi! Thank you for having me!
Matt, what store are we covering today?
MATT: On this show, we talk a lot about startups and we talk about a lot of big public companies, too. Typically, the problems or the mistakes they make. But we don’t spend a lot of time necessarily in the middle.
We’re past the point where they’re a startup and we’re getting to the point where the company might be acquiring something else or they might be on the other end and they might be acquired by a bigger company. It could be in a variety of ways – revenue, maybe a product line, maybe the actual people of another company, or maybe the intellectual property.
From what I understand, Roy, you deal a lot in working with these companies on either end. I don’t know if you’ve had any experiences from your perspective in the acquisition phase for these companies.
ROY: Yeah, I have experienced both with companies getting bought or acquired and with a lot of companies that wanted to get acquired and for some reason or it didn’t happen or they’re still waiting.
I know a lot of startups are obsessed with getting bought out by large enterprises and, you know, I can understand them.
NASIR: The thing with these acquisitions though, we’ve seen a lot of these big corporations acquire companies. I know Yahoo! acquired Tumblr a while back and that hasn’t done much. A lot of times, I’ve read statistics with these mergers and acquisitions where, a lot of times, these startups and acquisitions don’t meet their marks. I’ve read up to 60-some percent or even 83 percent in recent years where these acquisitions are just not meeting these goals.
You know, I wonder, with the Googles of the world and even Facebook, they’re just acquiring like crazy. They’re just betting on some of these are going to hit the marks and some of them aren’t.
ROY: I think, on one side, it is kind of a bet. Sometimes, you know, you buy something to make sure nobody else buys it. Sometimes, you buy a company to reduce future risks. For example, if you need that other company in your operations and you rely on them, you buy from them, you want to make sure that nobody else buys them and triples the prices, for example, and it’s kind of an operational cost reduction, risk reduction.
There are different reasons – not always long-term. Sometimes, it’s short-term. You’ll have a problem with your stock and the risk operation and you want to show that you’re innovative and you’re moving forward. There’s a lot of different reasons and I think not always the marks that are checked to be successful or not are the reasons why it was done in the first place. I think there’s so much information we just don’t know about. It’s very exciting.
NASIR: Yeah, absolutely.
I think, from my personal experience, I’ve been less representing clients that have been acquired but more on the acquisition side of the acquiring. But it seems to me, especially when I’m working with startup companies, they are obsessed – and maybe it’s because of the news and the culture that we’re in, especially on the West coast – they’re obsessed with getting acquired.
I don’t know what your thoughts are but sometimes I think this can be distracting to actually reaching some of their goals.
ROY: I think that’s absolutely right. I think startups should focus more on doing their own thing really, really well and, if they operate in a market that is big enough and is growing and have some big players, the big players will notice them and they’re going to get on some shortlist and somebody is going to look at that and it’s going to happen. But they should focus all their effort on making as much impact as possible. If they just distract themselves and keep thinking, “How should we restructure our company to make it more lucrative?” or something like that, the effort is going to take from them. They should really use that to build their business better.
NASIR: Yeah, absolutely. 100 percent agree with that.
NASIR: Let’s go to our question of the day. What do we have today?
MATT: “I’ve put in many years to get my business profitable and just reached that goal this past year. We have a sound business model in place and secured investments so we have enough cash. What sort of challenges should I expect to face in scaling my business from here?”
We always do the legal side of it. But, Roy, I’m pretty interested to see how you would answer this question.
ROY: I think one of the most confusing aspects of what they call “scaling up the business” is when you have a visual image of scaling up something, it’s like inflating a balloon and making it better or trying to take something and stretching it to make it larger. That’s really the worst way you can scale your business.
I think the better way of looking at it is, if you had to build a bigger business and you had all the resources that you need, how would you plan it? You have the resources that you already have, you know, you could use your management, your product, and whatever you have and map them into that new organization and see where you have gaps and where you have mismatches and what you’re missing and how much money you need and really plan that new business. Don’t try to take your own current business and shift things around and try to stretch it and make it fit into a different mold. Just break up your business.
One of the examples that I like to give is, if it’s like you take a model airplane that’s small and you want to create a large scale jumbo jet, you’re not just going to glue huge wings on top of your model. It’s not going to work. You basically have to start to build the entire jumbo jet from scratch. You can use what you learnt on the model to put two wings and not five wings, for example. But it’s still strategic.
You have to think of building that business properly.
NASIR: Yeah, I think that’s really good insight and a good analogy. It’s kind of exciting to actually get this question I’ll tell you, Roy – most of the questions we get when it comes to this kind of startup atmosphere is usually: “How do I get funding? How do I set up our formation documents and so forth?”
It seems like there’s some positive news here. They’ve gotten through that hurdle, but what you’re saying is absolutely correct. If you’re going to scale your business, you need the infrastructure and you can’t just say, “I improved my model. Now, let’s just replicate the process.” You need to have those parts ready to go – those so-called “bigger wings” and “bigger wheels.”
ROY: It’s based on where you’re going to get and have all the money and funding and everything and you’re not going to know how to scale your business. So, how did you get all that funding if you don’t know what you’re doing?
ROY: But you might convince an investor that you know what you’re doing and you’re going to scale up the business. They’re going to give you money and now you’re going to sit and think, “Okay, now what?” You’re going to maybe try for a while and see that the graph doesn’t look like you drew it in the beginning and you’re going to think, “Maybe I’m doing something wrong? How should I go ahead?”
In fact, this is something I’m doing with all the entrepreneurs. I’m sitting with them and I tell them, “Okay, forget your current business. Let’s rebuild that and see where we end up.” That’s how we do that.
NASIR: It’s funny how you mentioned investors because you’re right; I think people give investors too much credit. I don’t think investors are as sophisticated – even accredited investors aren’t as sophisticated – as people think they are. I think they get enchanted sometimes with the idea that they’re working with a startup and they’re investing and “Hey! I’m looking for multiples.” But I think a lot of these guys are just gamblers at heart, so to speak. Of course, I’m not talking about the seasoned guys – the VCs and so forth – but a lot of these angel investors, I see the mentality.
To your point, just because you were given money doesn’t mean that you’re going to be successful. It doesn’t mean that you have a great idea that’s going to work. You need to execute and be able to pull that through.
ROY: I think, also, there is an opposite problem where people are trying to get operational excellence or get all the operations to the highest level too soon – before they’re ready, before they know what they’re doing. That usually just makes the company so much more complex than it needs to be and burn so much more money before they know how to bring money in. It’s like sinking the boat and putting a huge engine on it and making it sink much faster.
ROY: I really believe in simplification.
You know, first of all, working just on your business model; finding out how your business fits in the whole ecosystem around you; making sure that it works and everybody likes your connection with them; and then, use your connections to the ecosystem to grow your business properly. Don’t work on something in the garage and go out and say, “Okay, now I have this huge business ready to take over the world.” Do a lot more sharing with the other partners in your business ecosystem.
It takes a whole village to grow a child; it takes a whole village to grow a company. I think people need to be more sharing and more talking to others and not be shy of telling people what they’re trying to do.
NASIR: I think those are great words to end on.
Roy, I know your website is thebusinessmodelpro.com. We’ll post that on our show notes but do you want to take a few seconds to tell us a little bit about what you do? I know a lot of our listeners are going to be interested to see if they can use your services.
ROY: I spent the last fifteen or twenty working with products – some of them were my own companies. One of the things that I really like to do is sit with startups and really help them get to a really good start – to a point where they can actually start generating money and not just running from one investor to the other but having a self-sustaining business and growing and making it a strong business.
I try to do it in as many methods as I can. I try to give them courses and coaching sessions and I give them books – any resources that they can use to actually even do it themselves. I even have a free business model analysis form that they can just submit and they get a free analysis that anybody else would charge a lot of money for. Everybody is welcome to just use it.
I have a blog with insights. Feel free to go there and see if there’s anything useful.
NASIR: Great! Well, I appreciate that.
Thank you for joining us!
That’s our show for today. Thank you for listening.
MATT: As always, keep it sound and keep it smart!