Building Corporate Development Muscle

When to build an M&A function

The way we did it was very organically and iterative, which I really liked. It wasn't a big top-down mandate where I was told to build a Corp dev team and acquire this and that. It was much more organic.

It was me talking with Dave, the CEO, and saying, 'Hey, we don't really do acquisitions. We've got this external advisor. We've done a few, but it seems like we're missing a trick there. Why don't we actually start doing some of this?' And he said, 'Sure, go talk to some people. I'm not giving you a title. We're not hiring people.'

I just went out and started talking to different product leaders and engineering leaders and exploring what they needed to achieve acceleration. Where do you know that there are great teams or technology out there that could help you? And that's really where it started.

We started getting ideas and then talked with different companies out there and learned as we went. So rather than just saying, 'We're going to have a tech tuck-in strategy. It's going to be roughly this size. It's got to be located here,' we just started talking to companies.

As we talked with them, we said, 'That's not the right size and shape. Actually, maybe big plays like this aren't going to fit or work for us. Maybe this area of technology isn't going to work.' So we did that very organically. And through that, we built up what now is a pretty good playbook and strategy for how we do acquisitions. 

We validated it just by talking to internal product and engineering leads. We basically started building a pipeline.

There's a strategy component that goes with the pipeline, and you have to have buy-in with those leads that if we were to acquire these capabilities, it would accelerate our roadmap.

Most people would say an M&A strategy helps your overall corporate strategy. It's not some separate thing that you're doing. It's all in support of an overall company strategy and vision. So we already had that aligned, and we weren't talking about huge acquisitions.

This is talking with different product and engineering teams, looking two to three years out, and they have pretty high confidence that some piece of technology or some feature is going to be useful over that time period. So that's the tick in the box of - it aligns with the strategy of that product area.

As far as building the function for us, the way it went was we started doing that in the middle of 2020, early in the pandemic, and Roblox's business more or less doubled in less than a year from over a hundred million miles starting point.

So it wasn't small either at that point. My point in saying all of that is the context of it because we were already in fast growth mode. We were hiring like crazy. We were growing very quickly. 

What happened was at the end of the year, we ended up having two acquisitions going on at the same time in Q4. And then we're like, 'We've got something here.' We pulled those off somehow. Those founders are still here and they're doing a great job, which is awesome. And then we kept going with it. I got somebody a little more focused from finance to spend more time with me doing some of this stuff.

And then the next thing I hit was Q2 of next year, we had three acquisitions hit all at the same time. Not super big and complex, but still three of them. So after that point, we're like, 'We've got something here. This is working so far, so we should probably get more dedicated resources.' 

There were checkpoints along the way that we spent time with the execs and CEO and said, 'We're shaping our strategy. This is what we're learning. We're going to keep doing this.' Of course, acquisitions take a while to play out to see if you're getting the value from that. So we were still pretty early in it, but the signals were pretty positive.

Challenges of a high-growth company doing M&A

Roblox is still a decently good growth. We always want to grow faster, but we're still growing pretty well. That's a common challenge that people will face, especially in growth companies. If you put yourself in the shoes of any business product engineering leader out there, they're busy.

They're hiring great people. They've got a plan. They're building against that. Inevitably, things are not going right, and they're having to course-correct. Things are maybe happening in the market with performance, and they're changing. 

So they're busy doing all of that. Acquisitions can be a great accelerant, but there's generally a pretty tight filter for what actually ends up being a fit for an acquisition.

So just like when you go out and hire people, you end up talking with and interviewing lots, and then eventually, you get down to the person that you want to hire for that role. It's an even sharper funnel for acquisitions. And so they take up a lot of time. The point I'm making here is the time cost trade-off.

People bring in their own perspective on whether it's worth that time or not. Part of our team's job is to try and make that as efficient as possible. That's kind of how we navigated that.

Lessons learned along the way

Probably nothing too revolutionary here, but clearly, staying organized is a big one, especially when you've got a small team and you're busy. Product engineering leaders having great external help, particularly on legal counsel, has been incredibly valuable for us. 

We have some attorneys that we really trust and who have helped guide us through this. Another thing, not surprisingly, is that cross-functional partners, particularly the people team, has been a big one for us because in any acquisition, you're hopefully bringing on some great people. 

So, you have to do a really good job of evaluating those people and making sure that they're going to be a fit long term for your company. That requires a lot of people's resources for coordinating that, and of course, there are all the hiring managers and people who actually do a lot of the interviews as well. 

Having good cross-functional partnership is essential. It's the nuts and bolts of executing on deals. It probably takes different flavors at different companies, but ours isn't significantly different. But it's just about building that and learning that. And of course, you make mistakes along the way.

To shorten that learning curve, you bring in people who have had the repetitions from other places and then you talk to other practitioners. Your community does a great job of that. 

My experience with acquisitions is they all take a slightly different flavor and style. There are, of course, patterns and commonalities, but there are always slight nuances because, at the end of the day, it's about people, and people are different.

Because of that, it's really hard to climb that learning curve just by reading stuff and talking to people. You have to be there, going through it and experiencing it live.

Importance of the people side in M&A

What we're acquiring for is people and technology. It's less about the commercial business that they've built because it's really a tuck-in. On the technology side, that's the product and engineering leaders that we dig into. And that's been pretty straightforward. On the people-side, I hope all companies would say this, but we're a pretty long-term oriented company.

We want people to be here for multiple years doing great things. If you think about a tech tuck-in, typically, you're not going to see the value just from bringing the people over and the technology in the short term. 

At the extreme, if the people left and you just had the IP and the code, I don't have a technical background, but most engineers I would talk to would say it's pretty useless.

You need the people who know how they built it to actually integrate it and get it running. Because of that, we try to avoid some of the bias of getting excited and getting ahead of ourselves and trying to just close a deal and really make sure that we feel like these people would be here for multiple years.

We want to keep good retention.  I'm obviously biased here, so I'm patting myself on the back on this one, but what we do a good job of, and what we've heard, at least from the founders that have come in, is that we try to be very practical and down-to-earth and human about the whole process.

People who practice deals a lot can get caught up in deal lingo and become more mechanical about it, where at the end of the day, this is about people who have been building a company maybe for many years, and this is a huge decision for them, and it's about their future. 

It's more than just the money; it's the direction of their life because if they move or are part of a company for X years, that changes the trajectory of a lot of things.

So we try to be very human and practical about things. We try to be low pressure. We probably do more upfront than other people would. And I feel like that sets us on a good trajectory for later.

More time upfront is, of course, diligencing things, brainstorming through what they would do, and evaluating the individuals, but it's trying to do it in a bit of a low-pressure environment as much as we can. If the company's under certain pressure, then we have to speed up. 

But we try to do it so that we have a really strong conviction that these people are a good fit and they've had sufficient time with a sufficient number of people around roadblocks that they feel like they really understand the company and the culture.

Integration planning

We set expectations early. Similar to when you're interviewing people and sometimes use case studies. I find that the more you use case studies based on real challenges you have or that they'll face in the role, the more insight you gain.

What we do at the beginning, when we're spending time with these different companies and founders, is we're actually brainstorming through what they would do and how it would work. 

As we do that, we learn more about their technology, their team, and how they're set up. We're also sharing more about our technology and our vision for the domain that they would be part of.

We're understanding how they think because they're thinking on the fly and we're brainstorming how things would work and where we see opportunities and other aspects. That is basically integration planning right there. But it's part of the diligence and getting-to-know-each-other process.

It’s like validating the investment thesis by going through the exercise of thinking about what integration is going to look like. We’re not actually doing the work of integrating at that moment. 

But as much as possible, it's important for us that the startup founders coming in have a good understanding of the area they're going to be operating in and that they've actually participated in envisioning what they would do and how their technology would fit. They should be the domain experts.

We're bringing them in because they've got some degree of expertise and specialization in technology as well. So we want them coming in saying, 'I understand what you're doing, and let me tell you how this is going to work best because I have this product. I've been running this company for X years, so I know this domain pretty well.

Working with business leaders

It's a big part of what we do. In our case, it's mainly product and engineering leaders. The first point I'd make is just to put yourself in their shoes. They're busy. They've got certain goals and pressures; they're hiring. So when you come in with an idea, you've just got to understand the context in which they're operating and where you fit within that, and where your idea fits or doesn't fit within that.

The more you can understand their context, their roadmaps, their plans, their headcount growth, their targets, things like that, the better you can also filter out. You're not bringing in crazy ideas that they're like, 'You're just wasting my time.' So, you build some credibility from that. That's just a starting point.

I've seen where people, with all the best intentions—and this isn't just true of corporate development, this could be marketing or different areas—have their own agenda and their own ideas and their own plan that they really want to get done. And they just go to other people and try to drive it into them.

It just doesn't land as well. Maybe that's not surprising, but the more that you can understand their context and then make sure the things you're bringing in are relevant. Side note on that one, it's okay to try to influence them. 

Even if you're dealing with a business leader, a product leader, and they say, 'This is my plan,' if you've got a good idea and you think you've got a good opportunity, you should try to go influence that, even if it's not fitting with what they were planning on doing.

Anyway, that's the first point I'd make. The second point is just trying to be as efficient as possible with their time, and their team's time. There are various ways you can do that. 

The more you and your team can go up the learning curve on the technology, the market, on their roadmaps, the more you can naturally filter relevant candidates and targets for them. 

Another way that you can be efficient with their time is actually being efficient with their time, not being someone who just goes into meetings, takes notes, and then sends them the notes saying, 'Hey, I met with this company. Here's a bunch of notes. What do you think?' but really trying to synthesize it.

Deal sourcing

I look at the fact that we've done about 12 deals over the past three years. Over half of them were from our network, either internal—employees at Roblox who knew of companies or had previously worked in companies with PhD partners who were now running certain companies—or from our external network, which for us is mainly VCs because we're doing early stage deals.

Then, maybe a third of them were from us actually just doing desktop research, scanning and trying to find companies out there.

My point in saying that is, similar to recruiting, warm leads are generally more valuable. They already go through some degree of natural vetting because they know people or they know the network or they know you. That's how we've done that. 

Overcoming anti-M&A culture

Yeah. If you put yourself in their shoes, it's understandable. Some people may have had tough experiences with it in the past, either on the startup side. So we have a ton of startup founders here at Roblox. A small number of them have come in through acquisition. A lot of them have previously founded companies at different times.

Who knows what kind of experiences they've had and they might have had some pretty rough experiences as well as people on the buy side of things. So we have people who have been leaders at tech companies who've participated in acquisitions and then just said it was a waste of time. And it took me so much time and effort.

People bring in their own perspective, but that's okay. It's up to us to prove our worth really. And so far we've been doing a pretty good job of that. I think people are generally pretty satisfied. Again, we're not executing on huge, super complicated integrations, but I think we are moving the needle.

But starting out, that’s a bit of a challenge. It's easier when there is a top-down mandate. This is our strategy. This is our focus. We're going to do acquisitions. The CEO is sponsoring it, something like that. That's a lot easier. 

It's more difficult when it's a product director who is really excited about the acceleration we could get from this company. Let's meet with the VP and the CTO and get their point of view on this acquisition. That's when it gets a lot more difficult because you don't have that top-down air cover.

I agree with you that it's a complexity you have to navigate. It's kind of part of the fun of the job as well, at least for me. Different people have different things they like. If it was such a clear mandate, which is just go out and roll up all these companies and do that, and the CEO signs off on everything, it would still be fine, I'm sure.

But some of the personal challenges and complications that you have to navigate with lots of different personalities and points of view on things, I enjoy it.

Overcoming it is not a one-size-fits-all. I think it depends on the individuals, honestly. Some people are more worried about the talent and whether they meet the bar that we need. You've got to really emphasize that this is good talent and we've brought them through our full interviews and they've done all that. 

You've got others that are more product and technology-focused that say, okay, this technology isn't going to be as good. It's going to distract us from other things. I'm not sure it's one-size-fits-all. I think, similar to management, influencing people, you just have to understand them and how you can land your messages with them for the points that matter to them.

It goes back to understanding where that skepticism comes from, and it goes back to reps. You've got to go through those experiences, and you've got to have people shut down deal after deal, and you go, okay, I'm understanding what really matters most to them and why these things haven't fit for them, or maybe why we haven't made the case clear enough for the aspects of it that matter for them.

Team alignment from functional leads

That has taken some time for sure. Some people bring in backgrounds and experience in this, which is great, but sometimes that experience or the way they would do it doesn't fit what we're trying to do or the way we prefer to do it.

I don't have any brilliant tips, but it just takes some time. There are a lot of playbooks and a lot of information out there about deal execution and deal integration, depending on industries, size, shape, and other factors. 

There's a lot you can learn there, but it's similar to the deal negotiations and the upfront filtering and execution that we talked about earlier. You've got to get reps in. There is actually a point where, over time, we developed our own playbook and our own style. 

We didn't start off with a predefined style; we just intuitively acted as we went through and tried to get things done. Then we realized what worked and what didn't, and then we codified that. 

So, I do think that if you're able to codify it, or at least train people up in a certain way for your company style, that's useful. People do have different styles of doing these things and there's nothing wrong with them. You just have to figure out what fits you and your culture.

We’re very light on documentation and handbooks. It's like what they say about planning. The value of a plan is the exercise of creating it. And that's the same thing with a playbook. I'm pretty sure most people have not looked at it since we did it. And it's light. It's probably 10 to 15 pages, maybe.

But the exercise of doing that, sitting down with our people team after a deal or after a couple of deals have closed, and going through how we do recruiting, interviewing, making offers, relocation, visas, and different things like that when it's in the context of an acquisition and a number of employees versus a one-off hiring situation, that exercise has been really helpful.

But again, afterwards, I don't think anybody really looks at it.

M&A surprises

There might be some points in aspects that matter more to the other side than you would have thought. Titles are one such point. We have very capable senior people who've been doing amazing things with their startups, and when we bring them into our ecosystem, we run them through the normal leveling process.

One thing we do a good job of is that we really take the time to understand them and level them appropriately. This way, other people in the organization don't view those who came in from an acquisition as separate or different because they got an elevated title or level. 

But understandably for those who are CEOs, founders, and CTOs, getting a different title, which they feel is not in line with their experience, can be tough.

I say that it's completely separate from their compensation or the deal value. Those things could be locked and good to go, but actually the title that's on it matters to people more or less at different points in their career. I'm not judging that, but it's just one of those things that's come up as a sticking point.

We really should have set that expectation earlier. Reporting lines can be another one. We clarify that pretty well, but you can imagine through the process, they're meeting with people at lots of different levels, having group brainstorming sessions, one-to-ones, and interviews at different levels.

So, it can be unclear where you fit in the organization and who you report to. Then, even after you do that, you still don't know the rest of the company. So, maybe once you get in, you're like, 'Oh, I'm reporting to this level. I thought that was cool, but once I got in, it didn't feel as cool because it seems like that's not as senior as I thought, or I'm not included in some meetings,' which again is all understandable.

That's been one that we've had to debate back and forth: what's the right level to have them reporting in, and why do they fit into this structure versus something else?"

Setting up new leaders for success

Yeah, that's something we started doing late. We probably should have started a bit earlier. They're exceptional people and we hire exceptional people every day. We want all those exceptional people to feel the same amount of love and attention as they should for joining our company.

With that said, I can understand how someone who is running a company and has sold that whole company might feel like it's a slightly different scenario as they come in. 

So, a few small things that we've done—I don't know if they've made any impact—but we've got a founders group at Roblox, and we get all of the founders of the different companies together occasionally, just more for social sort of stuff.

I think that's actually valuable for them because they are startup founders. They've been in that ecosystem, they know the VCs, they like to keep track of what's going on, and many of them can share similar stories from investors and things like that. 

We share what we're up to and what we're hearing just from the market because we're spending a lot more time out there now that they're in a company operating.

I've found that to be fun and useful. Depending on the situation, we will set up some time with more executives early on. Part of that is alignment on culture. More exposure to executives, just talking about what they're up to and what they're doing, is helpful. I have heard of other companies that do quite different and special things for startups or founders that come in.

There's nothing wrong with that, but as I said, we're fortunate to hire really exceptional people and we don't want someone who came in as a hire versus someone who came in through an acquisition to feel materially different because they're all great. It's a good way to look at it. 

I like the network for the founders so that they can socialize and share common experiences. I got a tip from someone who had been doing that before and said it was valuable. 

They've got some good commonalities. Most of them work in fairly different parts of the business, but certainly, they have common experiences as startup founders, and then they probably have some common issues and experiences joining the company.

Evolution of corporate development

It's been me and another individual who's been doing it mainly. And then we've had a couple other people come in and out to help out on different things, but we keep it pretty lean and it's worked so far for the strategy that we have. 

I could imagine as we evolve and if we start doing some bigger acquisitions, we might need to add on some more people. But the way that we run is basically a couple of corporate development individuals. 

And those are probably what you would call deal captains. If you had a bigger team with multiple layers, those people would run the end process. 

Everybody does upfront pipeline development work, participates in negotiations, and in execution and integration. We quarterback that all the way through. On cross-functional partners, we've debated whether we should hire an integration manager or get more dedicated resources from a team or two. We haven't done that so far, and it's actually been okay.

We've had to develop our integration shops and our project management skills to be able to handle that. We've had to be really efficient about it because we're also doing other aspects of execution at the same time. With the cross-functional partners, we haven't had dedicated resources, but we do have individuals from most of the teams that have a percentage of their time carved out for this.

This approach is pretty efficient. If we were doing things that were more financially driven, and we had to dig into their customer base and quality of revenue, looking at the mixed P&L and all sorts of stuff, we would have to step up because that would land naturally on us.

But as it stands, it's about tech and talent. We don't have to consider what a joint go-to-market strategy looks like, we're just really focused on the tech.

One of the 12 acquisitions we kept as a separate standalone business and have just progressively integrated pieces of it over time. That one definitely stretched us a little bit to think about how to run this business as a separate entity with a separate P&L, separate reporting, leveling, compensation, and different things like that and then evolve that over time.

But the complexity of it is something that we can manage. The deal sponsor ultimately is the person who is held accountable for this. Of course, we have scorecards that hold me and the team accountable, but ultimately, it's them. There are many benefits to a setup like that because at the end of the day, the negotiation and execution are the easy parts.

It's the integration and actually doing the work together that's the hard part. Naturally, the person who should be accountable for that and saying, 'Yes, I want to do this. I believe this will work. And I'm highly confident that these people and this technology will be able to achieve the goals we've outlined. It's got to be the person who's managing those people.

We basically have two categories of goals: people and product or technology. That's the way we run our business. We certainly have performance metrics that different teams are accountable for, but the level of acquisition we're doing, you couldn't assign a whole metric probably to the acquisition.

It's about people, which is solely retention. We don't look at performance evaluation goals for that. And then it's about product deliverables. We usually have an eight-quarter, two-year roadmap with milestones that we map out and track against. Then, at every board meeting, we update on the scorecards and our batting average, and that's how we do it.

Measuring corporate development activity

I've asked people this, and I ask most corporate development people I talk with because it's something I'm curious about. Most of them say there's not a target and it's basically qualitative. It's really hard to have objective, quantitative measurable goals. You can make some qualitative assessments somewhat measurable. They focus a lot on how they operate.

One thing we do is measure our pipeline activities well, just to understand the level of activity. We don't have a target that says you must have this many outreaches, this many corporate development screenings, this many product engineering meetings, this many XYZ. But we do monitor and track it monthly. This is just a way of keeping a pulse on what's happening. I have a small team, but I can imagine if you have a bigger team, it would be a good way to understand how numbers could change significantly.

You could have someone who's had zero new calls in a month because they're in the middle of deal execution, and that's perfectly fine. But you might notice other things, like if we haven't had many product engineering meetings in a while, you start wondering what we are sourcing and why we haven't found anything that's relevant for them in the past month.

Incentivizing the team

No, nothing other than normal compensation. Ideally, you have ambitious people who are doing work that they really enjoy and see value in for their future career, whatever direction they want to go in.

If it's corporate development, great. If it's something else, that's fine too. But they should feel that this work is productive and useful for what they plan to continue doing in the future, so they want to do a great job and learn from it.

Handling biases in the M&A process

Decision-making biases are normal. Obviously, these are prevalent and exist whenever you're doing a deal and making a decision on it. 

I don’t know that I’ve done anything great on that front. It’s something we try to pay attention to, but it's just the confirmation bias, the sunk cost fallacy. You’re down the line, you've spent a lot of time on something. 

So of course, you want to get it across, and maybe you're getting a few more warning signs and a few more things that aren't as favorable to your thesis, but you push through it. 

There have been a few times where, luckily, nothing's been a big issue, but there have been some things that we've just pushed through. And then later on, as they're working here, those issues bubble up again in some way. That's happened a couple of times for us. 

But when you're in the mix of it, you're excited about it. You genuinely feel like it's going to be a good thing. You're not doing it just for the win, but obviously, there is some bias there because you've put a lot of time and effort into this, and you want to get the win.

At the extreme, you have these red team exercises. This is where somebody pitches the case on why the acquisition is a horrible idea. 

I don’t know that you could do it unless you are a large company, but you could certainly do the exercise to see what the case would be against this and actually articulate that and share that with people when you're discussing the case. And I’m sure people present that as generally listing risks or key assumptions we’re making in this case. You could probably go harder on it than that.

You might bring a skeptical engineering leader and tell them about the deal and see if you can convince them otherwise. Like I said, it’s true of all decision-making, so it’s not necessarily unique here.

I just think in the context of a deal, you’re making a decision that has a bigger impact than probably some of the other decisions you make, like on a new hire or a new product feature. Some of those, at least in our business, are a lot more iterative and less of a risk and easier to unwind if needed."

I don’t like using scorecards, go with the leader’s intuition. If the deal sponsor and the corporate development partner, aren't feeling the deal for whatever reason—whether it's because certain aspects are great, others aren't as good, some elements will be difficult, or it would be amazing if you had it—you've got to weigh those things out in your own head and intuition and make the call.

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