How to Acquire for Capabilities

‍Text Version of the Interview

What’s your Driver for doing M&A?

There are a set of criteria that I think about when we do M&A transactions. 

The first is, is it close to home? We sell to salespeople, marketing people, professionals, and then recruiting professionals. So if there's something that's really great for IT professionals or sells into an IT buyer, that's not our wheelhouse, not something we're particularly interested in.

The next is how broad a swath of our customer base can get value out of this service or this technology, or this piece of software. Because ultimately we have 25,000 that we built one-to-one relationships with and we want to have an opportunity to leverage those relationships to get them the next piece of their sales stack. The next piece of their marketing stack.

Our third criteria is when the data asset that we've accumulated can make a piece of software competitively differentiated. 

At the core of what ZoomInfo does, we've created an incredible company and professional data asset. We profile about a hundred million companies. Those are worldwide. 

• Firmographics
• Technographics 
• Numbers of locations 
• How many IT employees 
• How many engineering employees 
• How much funding they have received 

We do that across a hundred million companies. And then within those companies, we also profile 150 million professionals at those companies. And that data asset is the industry's best. 

And when we make a software acquisition, what we're looking to do or understand is, does that data asset make that product really differentiated in a way where it doesn't matter how much more software you build, you’ll never catch up to the competitive differentiation of the data asset embedded inside that software. 

A perfect example would be Airpods. They connect instantly and they work. And that's a really interesting thing to like the most when we're talking about headphones because it’s usually about the sounds, microphone, or bass. Before Airpods, those are the things that differentiate headphones.

But since Apple owns both sides of the equation: hardware and software, all of a sudden, the differentiation becomes it connects quickly and it works. And so when we think about acquiring software, they need to be differentiated enough when we plug our data in. 

And then finally, can we sell more of it? Can I leverage our go-to-market motion? We built one of the most efficient go-to-market motions in the world. 

We have Sub 30 day sales cycles, our customer lifetime value is 10x, the customer acquisition costs. And so can we leverage that go-to-market motion to bring whatever product that is to market in a much faster way. That's a key part of our analysis.

Buying vs Building

Before we buy anything, we always consider whether we should build it in-house first. 

We launched a recruiters platform, and we'll launch a platform for marketers in 2022. And those are platforms where we're leveraging all of the core assets that we built over the years. 

In those instances, we're not making a buy, we're not buying something because we can organically build it.

But as a contrast to that, last year we acquired a conversation intelligence solution. What it does is it sits on a call and it records the call the video, the audio, it transcribes it, and then it analyzes it for key moments. 

And then it's built a UI and UX layer around that that makes it easy for sales managers or executives to ask for the five biggest deals this quarter and look for key moments in the call. So they get to hear the customer's voice right during those sales calls. 

And in order to do the transcription and analysis really well, you have to have thousands and thousands of hours of recorded calls, business calls with business conversations to build your models around. 

So we can build conversation intelligence, but it won't be very good for a long time until we have the hours and the thousands of hours of calls to build our models around. You might be three years out before you have something that has any real value. 

Meanwhile, you can make an acquisition today that has tens of thousands of hours of calls that they're building the models around and you could just hit the ground running. And so when there is some asset that has to get built up over time in order for the product that you're delivering to be really valuable, you just have to do M&A there. 

Deal Sourcing

A good amount comes inbound. We went public in 2020, we’ve done five acquisitions, so companies that play in and around the sales and marketing space know that we are a potential strategic acquirer of theirs. 

We obviously pay attention to the space and we're listening to our customers. We hear a lot about companies that they like and that they're using. And when we see a lot of that bubbling up, we're reaching out proactively.  

We have a strategic finance team with an SVP of strategic finance in M&A and then a number of analysts below them that help us source and do outbound outreach to companies. They offer to be investors and at some point, maybe a good strategic acquirer too. 

For most of the acquisitions that we’ve done, I reached out to their CEO because I know them and had previous relationships with them. I don’t just hand it off to our Corp Dev. I am very proactive.  

I believe that for an M&A deal to get done, it needs internal sponsorship. And in our company, that internal sponsorship will either come from me or it'll come from our President and Chief Operating Officer. 

Incoming CEO

There’s no blanket answer to that because some CEOs don't want to stick around. If they want to do something else, I totally respect that. But in some of our acquisitions, the CEO stays and wants to grow the business with us.  

In those cases, we try to create more and more opportunities to give them. You want to keep that innovative talent inside the company when you can. 

Also, in every acquisition that we do, we create an option or stock pool for the employees who are coming on. When the deal closes, there are obviously money wires and people make money. 

But we have an incentive pool that sits outside of that that keeps those employees at the company and has clear benchmarks for them to hit to unlock that incentive pool.

M&A Process

So we identify a company that we want to acquire, and that usually starts with me or someone in strategic finance who brings something to me. Then I meet with the founder, I get a management deck, and I can see the vision of the two companies coming together. 

At that point, I start bringing people from around the organization.

• CFO 
• President
• COO 
• CTO
• Chief product officer

And then I have them meet with their counterparts on the other side. And once I meet with them, we gather and discuss their opinions regarding the acquisition and the challenges that they foresee. 

For example, the target company is using an old tech stack. Our CTO will tell us that it takes three months to rebuild so we cannot build a big forecast in those first three months. So our chief revenue officer will start picking up the forecast after the third month, and our CPO will get the infrastructure needed in the right place, also after the third month. 

Once we get an internal consensus, we write a 16-page board memo where we articulate:

• Why we want to make the acquisition. 
• What are the pros
• What are the cons
• How is it going to integrate 

And then a pretty detailed model of our commitment if we made an acquisition today:

• What are we going to sell on this? 
• How we're going to integrate it into the product?
• What we're going to pay for it? 
• What that multiple is? 
• Where the business is going to be years from now?
• Some history about the business 
• What our plans are for the staff? 
• What are the synergies that we see from a growth or profitability perspective?

That memo becomes the guiding light for how we're going to do the integration and how we're going to do due diligence. The integration team is involved in the integrations and PMO is involved in the memo piece.

So they're getting up to speed, understanding the business, understanding what we need to do. They have a really detailed M&A playbook that they run, that runs from IT, HR, benefits, facilities, sales, sort of the whole gamut of what you do once you have an LOI and once you're through diligence. 

And then we write the LOI, we have 45 days of diligence to close. And at that point, I'm pretty much out of the picture. But that 45 days of diligence is where we also do all the integration work. 

• What are you going to do on day one? 
• How are you going to communicate? 
• Who are the employees who are coming over? 
• What is their incentive can look like? 
• Who do they roll up into in the combined organization? 
• What does that team going to work on in the first three months?
• What's the website going to look like? 
• Press release 
• Analyst conversation 

Basically, you run through that M&A playbook over the 45 days. 

Role of CEO in M&A

My role is checking in with the CEO of the other business regularly. So we're probably checking in two or three times a week, making sure things are on track. If there's some issue somewhere that I can unlock, I'm trying to unlock that. 

I'm giving attention to the things that he thinks he or she thinks are behind. And making sure we're getting consensus on little issues like tax issues, or rep and warranty issues. 

Culture

We've had acquisitions where the cultures just match up really well for us. And then we've had acquisitions where there's a cultural mismatch. What ends up happening is if you have that mismatch, it just really slows you down.

I'll give you an example. We typically don't mind if a company doesn't have a great go-to-market motion because we have a great one. We’ll just bring it for them to use. And we talk about this during the diligence process and the LOI. 

Sometimes, the target company refuses to use our go-to-market motion. We insist that it’s going to work, we give them an opportunity to appreciate that, see us in our operation and come along. 

We give it 60 days, and if the business is not accelerating and you're not getting the velocity you expected by combining those go-to-market programs, then you're making changes.

So you're moving people out of the business or into other areas of the business. And you're taking over that motion and running with it. That’s the cultural mismatch.

Because if we get the right people in the room, and they really believe in them in the motion, and they're hungry and ambitious, and they see how big of a company you can build together and how big the opportunity is, you'll never have this problem. 

And what we’re really good at is making the hard decisions. It’s easy to see if the numbers aren’t going in the right direction, but it's much more difficult to make personnel decisions and organizational design decisions that change the outcome. 

Deal Fever

So at the beginning of every year, I write down all of the areas where I think we should do M&A and I prioritize them. I list down eight places where I think we should be looking at strategically from an M&A perspective in 2021 or 2022. 

And as much as possible, we don’t deviate from that list. That list dictates where should we be looking at, and places we dont need to be paying attention to. And then we stick to that list for a year. 

Change Management

You get key leaders on the other side to drive it for you. 

You really need buy-in from leadership and key stakeholders from the other side to drive change because no matter what change you do, there are people who will object to change.

As for the new people that are coming in, you need communication. And you need to communicate it right away. 

• This is what we're marching towards. 
• This is what we're gonna do. 
• Here are the people who are going to own it on our side. 
• We're going to listen to you as we do it.

The key in most of this stuff is really communicating with a lot of transparency, what you're trying to accomplish, and then sticking to that.

Failures

When culture comes together, you can expect to be slow out of the gates. And then you need to be able to act fast. It’s a very iterative process so if you're not driving change as a result of those metrics or those early indicators, then you're really failing from an M&A perspective. 

There was one acquisition we did where we integrated the product and then we took it out to market. We sold a lot of it and then we didn't renew a lot of it. As it turns out, the issue was it was very hard to demo.

It was very hard for our account managers and our account executives to actually articulate and demonstrate the value of that solution, which goes back to one of the key things you have to be thinking about when you're doing acquisitions is - what is my go-to-market motion on this going to be like post-acquisition? 

• How am I going to sell it? 
• How much of it am I going to sell? 
• How am I going to pump the sales team to sell it?
• Is it going to be an accelerator? 
• Is it going to be part of their core quota?
• How many of our customers can buy it? 
• What percentage of those are going to buy it in the first year? the second year? the third year? 
• How much capacity do our account managers and our sales teams have to be able to bring that to market?
• Our sales cycles are really fast upfront, does introducing this thing actually slow down the sales cycle because you don't really want to do that. 
• How am I going to demo it? 
• What's the talk track around the demo? 
• How do I paint the vision for it? 
• How do I enable a thousand people to take it to market in the simplest way possible?

So thinking through all of the nuances that come with the go-to-market motion is critically important to not failing once you make the acquisition. 

We made this acquisition, we integrated it, it looked great. I was really proud of it and we just didn't get the go-to-market motion right. It never got traction because we realized there was a mismatch in the buyer persona.

We were selling it to the wrong people.  So really understanding your go-to-market motion can solve a lot of problems for you downstream. 

Another thing is, sometimes, it takes a little bit longer to see your vision come to fruition than what you had planned. 

We made an acquisition years ago of a company that plays in the sales automation space. And back then, there was so much demand on the ZoomInfo platform that we never put resources behind innovating or building that acquisition up into something that we could really take to market really until like three years post-acquisition. 

So it just sat around for three years until we put real conviction behind it. And that really took off, that's our engaged product today, which is one of the fastest-growing products in the ZoomInfo suite. But it just came like so much later than what we originally planned. 

So sometimes that's okay, but probably not so much when you're a public company, when you're a private company, you might be able to sit on something that long, but when you're a public company getting consensus on the resources, you're going to put behind something and modeling out what the future looks like is the most critical part of the pre-acquisition motion.

Public vs Private Company M&A 

You're just way more precise when you're a public company. Everybody's all in, nobody can shirk their responsibility. There has to be full consensus and people are making commitments that their bonuses are depending on.

You're doing something similar from a private company perspective, but your precision on the acquisition doesn't have to be as right on as in a public company. 

And then messaging is much more important in a public company. In a private company, I can make an acquisition by talking to six people. 

In a public company, two things have to happen. First, the acquisition can't be a surprise. I can’t veer away from our initial strategy because I've pre-setup all of our investors and all of our analysts to believe that those are the types of acquisitions that I'm going to do.

Public M&A makes you be a better version of yourself because you have to communicate it right. You have to get the vision right ahead of time. Pre being public, I wasn't a big vision guy. I want it to be a great operator of a business. And so I wanted to build a best-in-company. That's what I was focused on.

When you go public that's important, but you also need to be able to articulate a vision for the company's future. And that, by the way, is good for everybody. It's great for your employees because they understand what you're doing.

You're much more crystallized than your explanation of why you're doing an acquisition, how it fits into the overall strategy. That's just better for everybody. 

And so, really elevating your game in that way in the public market is it's just more challenging, so more fun.