In order for M&A to be effective, you have to be proactive. It is a great tool and should be a part of your growth strategy. Sabeeh Khan, Director of Corporate Development at Infoblox, talks about effective deal sourcing through market mapping.
Effective Deal Sourcing Through Market Mapping
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Effective Deal Sourcing Through Market Mapping
Effective Deal Sourcing Through Market Mapping
"If you want to do successful M&A, you need to be proactive and identify your needs rather than waiting for opportunities." - Sabeeh Khan
In order for M&A to be effective, you have to be proactive. Join me in this conversation with Sabeeh Khan, Director of Corporate Development at Infoblox, as he talks about how to effectively source deals through market mapping.
The process for creating a market map starts first with a couple of conversations and it depends on the industry that you're in. It’s a useful exercise for M&A and it works hand in hand with corporate strategy.
Before you dive into a market mapping exercise, you have to understand what is the corporate strategy. The objective of a market mapping exercise is to increase relevance within the served industries through strategic acquisitions.
Each vertical would have a unique market map. The approach is to identify companies that are wallet share stakeholders within the customer base, you want to group and categorize companies by segment, and by primary function, you want to stack rank them.
And it's an ongoing conversation that you have with the business unit leaders or the corporate strategy team or all of the above. And the result of an exercise like this is that:
You're able to document an ecosystem with all the key constituents defined.
You can really narrow down and focus on your M&A priorities so you're not wasting time.
You get a deeper alignment with the business units on what your M&A strategy is gonna be.
The benefit of all of this is you increase wallet share, you drive stickiness, you increase recurring revenue, or if you're in the software space, you can accelerate your ROI for market share expansion opportunities. And this is a more purposeful approach to M&A.
It facilitates honestly a lot of conversations and it's an ongoing process. So it's one that is not done in a silo. Corp dev isn't off building their own market map on their own and there's a lot of collaboration with the business unit leaders, with the product team, if it's applicable, with the corporate strategy team, if there is one. And you do this while you're building out the ecosystem map or the market map, and then also periodically afterward as well.
So every quarter you might have a reranking of some of these things based upon either your M&A activity or your competitor's M&A activity. Ideally, the categories don't change, but maybe the types of targets that you go after the change. So this isn't meant to be an exercise that's kind of set in stone but more of a helpful guide.
The C-suite may not necessarily be deeply involved in the day-to-day building out the ecosystem map. But certainly, it facilitates a lot of those board-level conversations when they are asking you what's the game plan.
So it actually builds a lot of confidence with the board, as well as the C-suite in terms of them being comfortable that you know what you're doing.
Managing Ongoing Collaboration
When someone on your board is pushing you to do a deal that is a low priority, market mapping helps you identify your strategic priorities and helps you to have something in your hand to refuse.
You have to be somewhat flexible, but it really helps to get other internal stakeholders on the same page so that you're all moving in the same direction and people aren't paddling in different directions.
Market mapping also helps you to broaden your scope of identifying targets that fit with the market map. Because as a Corp dev professional, you may think that you have an understanding of the landscape of what your competitors doing, but your product team they're probably a lot closer to the customer base in terms of trends, in terms of what their demands are, and what they're asking for.
Your CTO or your corporate strategy team might have some other thoughts as well. And so this is an opportunity for each one of those internal stakeholders to influence the direction that the company's gonna go in and the types of acquisitions that the company's gonna choose to pursue.
The conversations that wouldn't normally be happening between, the product team and the strategy team or the C-suite for whatever reason, is now possible. You've created an opportunity for those folks to talk and discuss.
Obviously, there's going to be naturally be some conflict, but at the end of the day, someone has to own it.
How to create a Market Map?
At the center of the map, you have your core software or core solution.
Surrounding that, there may be two or three or more general buckets.
Within each one of those buckets list your subcategories.
Have conversations with internal folks and identify your priorities. Put checkmarks on the solutions that you have currently.
What are your next priorities? You stack rank these things based on a whole bunch of possible criteria. It could be based upon
Any number of things
Go through them individually and identify your order of top priorities
So this is a small sample of what your final work project might look like.
Usually, I'll have an Excel file or a spreadsheet of some sort, and I'll have a list of groups and then a group priority.
And so these groups are directly tied to the large buckets that we had identified. The group priorities, based upon the stack rank that we had assigned to them, then within the subcategories of the smaller buckets within the larger ones that we had identified.
7. You would again assign a subcategory priority. You would have sales, lead gen and digital marketing would be a one because this was identified as number one, the most important thing within sales and service.
And then within, let's just say Company ABC and DEF are both, lead gen solutions, within that,
8. Corp Dev would take a look at Company ABC and DEF because they are both, lead gen solutions, within that. They would look at a series of ways to stack rank them in terms of:
how much funding have they had?
How big are they?
What's their technology platform look like?
When was the last time they took on funding?
And you would basically assign your own ranking based upon how actionable and acquisition might be.
9. Repeat this process for each one of these categories that you're in. And in the end, you get a stacked ranked list of potential prospects.
10. Once you've built this out and you've collected some background data on these potential targets you go back to the business unit leader or whoever is responsible for the prioritization of these acquisition targets and ask which ones are most attractive to you? Which ones would you like to do immediately?
If you've done your job with the ecosystem map or the market map, initially, there probably isn't too much reshuffling happening here, but the team may assign their own priority.
And then, you start the process of reaching out. And as a result, you may not follow the team ranking, you may be following your sub-category ranking, in which you have an idea of how important something is or how important a particular company is based upon the team ranking at the end here.
Researching your targets
So there are a lot of different ways of doing that. Industry events are a great way to get some intel and find out who's out there, and who's in that space. White papers, publications, Gartner puts out research reports, things like that, whatever you have access to is helpful. Obviously, nobody knows those lines of business as well as the business unit leader or the product leaders.
So, you talk to them, then you get an idea of potential prospects, and then you start the process of actually doing your homework in terms of finding out data points related to again, how actionable an opportunity might be.
Websites you can use:
But you really just start the process of gathering as much data as you can and storing it. And then making a decision about prioritization based upon all of those factors.
There's a ton of information that's even freely available. It just varies really by industry and there's a ton of resources. You can try whatever works for you.
What does the funnel look like
This varies by industry. If you're in the software industry, your funnel could be huge, right? But if you're in a very niche space or you're in a new industry where there's not a ton of people playing in that space, car sharing, ride sharing type of industry, maybe your universe is much smaller.
I like to use a CRM to keep track. You can certainly do that in Excel as well. Just keep track of kind of all the opportunities that come my way, who they came from? A brief description around what they are. And that way you get a over time, you build up a pretty good data set of where your opportunities are coming from.
And you could focus on those efforts rather than continuing to waste time with potential origination vehicles that just aren't delivering any sort of return.
Proactive versus reactive opportunities
I am a strong believer in proactive M&A. I think there are obviously people out there and companies out there that fortunately have a very reactive view to M&A. M&A, I think has to be a part of your company's growth strategy and the business unit leaders or the C-suite or whatever the case may be.
They need to understand that if they are looking to do acquisitions, it is another tool in their tool belt. You can't approach things on a one-off basis, Hey, one of our competitors or some other company suddenly decided that they're going out to the market and we're gonna look at possibly doing that acquisition.
I think it's very easy to get distracted that way, do bad deals and tie up resources internally that end up really scuttling any potential acquisition. And so, if you want to do M&A and you want it to be successful, which I think everybody does, then you've got to be proactive.
You've got to identify your needs and just as you would hire more salespeople and target a particular geography or whatever, build a go-to-market strategy and focus on organic growth, inorganic growth, it has to be happening at the same time and with the same amount of effort.
You end up waiting for bankers to come to you with opportunities, you may end up participating in auction processes. They can end up paying a lot more for a company than you really have to.
You're proactive, if you're in the lower middle market anyways, maybe you get to a business owner who hadn't really thought about selling this company, but now that you've approached him, his considering taking some chips off the table.
And now you've got a direct line with the owner. You've got a deal that you can move on for hopefully, less than you would in an auction process where you're competing with other financials and strategics in terms of trying to woo the CEO. So I'm a big propeller of proactive M&A.
Reaching out to the targets
Obviously, the first step, when you're doing your research and you're trying to find contact information for who the right person is to speak to at this company, is it the CEO or is it do they have somebody in Corp Dev or do they have somebody. Is it the CFO? Who is the right person?
You make a judgment call on that based upon the size of the company and other criteria. And then I like to just craft out a cold email. And the way that I craft those cold emails is they can be a little bit longer, but I've had a lot of success with this, which is you break it out into three or four main paragraphs:
Paragraph 1: Introducing yourself who you are, and why you're reaching out.
Paragraph 2: This is how we think this is what we've learned about you guys and why we think this could be a good fit.
Paragraphs 3 & 4: The last paragraph is something along the lines of “Hey, let's find some time to chat, even if you're not ready for acquisition right now, no problem. Let's just at least get to know each other and build a relationship. Maybe at some point when you are ready to pursue an acquisition, hopefully, we'll be top of mind for you and you'll reach out to us.”
That sort of approach is very different I think from the approach of a lot of PEs or VCs that will reach out to a lot of these companies and ping them, analysts are pumping out, 30, 40, 50, these emails a day, and they're short emails trying to be very, to the point like, “Hey, your business is interesting. We'd like to acquire it, let's have a discussion. “
When you take the time to articulate what your thesis is and why you think a business would be a good fit for you. What that would mean for the market and you articulate that into an email, we found that business owners are a lot more appreciative of it.
We've had a number of them actually tell us that they really liked our approach. And the only reason they responded to us was that we obviously had done some research and we put some thought behind the email. And it's more than likely led to acquisition because of our approach to those cold emails.
We're very upfront about it and we say look, even if it's not an opportunity for us to acquire you guys, maybe it's an opportunity for us to partner on something. Let's just talk and see where it goes. And folks are responsive to that.
You're not trying to hide anything from them. You're not trying to be non-committal, you're saying upfront here's who we are.
The reality of Corp Dev is it's driven by relationships. And you have that rapport with the business owner, you get to know them, you understand them. I've had CEOs tell me about their family situation right out of the gate, on their very first call. So you learn a lot about the owner and their motivations and that first phone call by leading yourself open to that.
The Three Strike Rule
So I have a three-strike rule, so I'll send you an initial email. I'll wait a week. If I don't hear back, I'll send a second email. Obviously, shorter than the first one, my longest one.
“Hey, not sure if my email got buried in your inbox but just wanted to ping you and see if you were interested in having a conversation again, just to reiterate, we think it would make sense for us to talk for X, Y, Z reason.
Whatever's going on with you, we'd still love to at least have a quick 15, 20-minute chat just to get to know you, let me know what works for you.”
And then let's say you get crickets again, then I'll do one last email. And if I get no response, then either maybe I'll wait six months before I ping him again.
But for the time being, if I sent you three emails and you haven't responded to any of them and they're each one of them is a week apart, then I'm gonna put you on the back burner. I'm gonna move on to the next one on my list.
I don't think a phone call's gonna go over. I've done the hard sell. I used to cold call 500 plus on average calls a day. I've done the hard sell. You get different types of customers that way.
But again, I'm not looking to pressure anybody into a deal. And you're talking about an acquisition strategy or you're talking about acquiring somebody, I don't think that's something that you should be pushing a conversation, pushing someone to have that conversation if they're not ready for it.
There's a chance that they might get irritated and say, stop calling me, stop emailing me. I don't wanna talk to you. And maybe it's just because they're stressed out and it's just a bad time for them. And I don't wanna blow up a relationship before it even begins.
I'll email and then I'll get enough responses and it works. You get enough responses that like, it doesn't make sense for you to sit there in cold call every single person, because on average, again, depending on how proactive you're being, I'm not sending out like one or two emails a week.
I'm sending out 10, 15 emails I'm targeting maybe the top 10 or top 15 companies on my list every week. And I'm saying like, who's ready to have a conversation or who's not right. It's an ongoing process.
So there are some factors there where if it was, Hey, this is the one or two that I really need to get after you maybe even taking it up a notch and getting there.
So what I like to do actually, rather than pick up the phone is then if something, if I'm really desperate to do a deal or to get in touch with somebody and they're just not answering my emails, then I'll go to our board or I'll see if we have some mutual contacts and I'll see if I can get a warm introduction rather than pick up the phone and cold call on a guy out of the blue. My goal is to try to get in somehow.
The First Conversation
30 minutes and it's just you basically let them talk, right? You've said your spiel in your email. There's really not much you should be adding there.
Maybe take five or 10 minutes to quickly recap who you are, answer any questions that they might have and go into a little bit more detail and turn it over to them and say, “ you tell me you answered the email
What's going on with you?
Where are you with your business?
What are you thinking?
What are your plans for the business?
Fill me in on what I'm missing.
And that's when they go and they tell you a ton, even without an NDA, you'd be surprised. There are a lot of folks that will maybe won't give you exact dollar ranges for revenue, but they'll tell you their total customers and growth rate per year.
And you treat those conversations as confidential even though you don't have an NDA in place. I'm not going around reselling that data to other companies. I'm just noting those things down for my own records.
Timing and partnership depend on the organization. And it also depends on the company, the industry, and what the appetite is for partnerships. Who handles partnerships? Is that something that Corp dev handles? Is that something that somebody else handles?
If they’re not ready to do a deal and you really want to work with that company, maybe they have a really exciting product or feature that you need and that you're lacking or it addresses a gap and you're offering and you can open a discussion about a partnership.
Getting aggressive on the offer
Rarely but sometimes. It depends on how the conversation is going. Some folks, right out of the gate, are not interested in doing a deal. They are fine. There's no number you can give them, they're young, they're just having a good time.
But then there are some folks that you talk to that are maybe older, maybe it's a family own business, maybe they're in their fifties and they still got another 10 years before they wanna retire. You can tell them they not only get a chance to make some money off of their investment. But at the same time, continue to stay involved in the business and grow it.
Testing your price
You can sense it out. I don't know how to quantify that or say it definitively, if someone gives you this signal, you can get a feel for it. But the reality is that once we put a number out there for folks, they start counting the money in their head.
There are a bunch of different approaches to this, but I have a list of 10 items and I'll get an NDA in place and I'll say, here are the 10 things that I need from you before we do any work in real diligence.
Here are 10 things that I need, it might be P&L, churn report, org charts, cap table, new hires, or any sort of other financial or data that I need to be able to come up with a number based upon my own research.
And then if there's any product-specific data that I need, what tech platform, etc I'll get all of that data and I'll put together a model and I'll come up with a valuation, and I'll say, here's what we're thinking.
And if it's not a flat-out dollar figure, maybe I'll give 'em a range. And I'll say somewhere between X and Y at that point after I've done some research. I'm not in the business of giving people comp information. Oh, your company does 50 million in revenue.
And based upon what the market is saying, it's worth, two X revenue. No, that's not my bag. I'm there to give you a well-thought-out valuation of what your business specifically is worth to me and what I'm willing to pay for it.
And it's a number that I believe in. It's a number that I stand behind. And now the seller as well knows that you've put in work and you've given a number that's real or a range that's real. That helps address a lot of those folks that are on the fence.
Tips on building a market map
Different companies have different approaches and some of them may have already done a lot of this leg work previously. Don't make the mistake of walking in thinking you are their first or second cop dev hire and you’re going to reinvent the wheel.
Just talk to people. You'll find a lot of the times they will have done some of this work already, or if it's not exactly in this format, they'll have some idea about like where they want to go. And then you basically build that map on your own and you start to, fill it in.
But it's an ongoing conversation with those folks. It's never something that where you just hand off to somebody and say, you’ve done the work and this is the plan. Just listen to what they're telling, because they're closer to the business than you are in Corp Dev.
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