How to Grow Purely on Acquisitions

‍Text version of the interview 

Are you doing roll-ups? 

It's easy to use the word is a roll-up or consolidator, which means the same thing. In a roll-up or a consolidation, you're acquiring market share within an identified Total Addressable Market (TAM), and you're measuring your success by going from 7% ownership of a market share to 15% or 20%.

Our growth through acquisition through the 31 we've done today has been fairly horizontal, and enterprise software is just such a wide landscape today. We built around seven different functional buying centers, and this is where we focus our time and energy today. And now, our M&A thesis is formed around consolidation around those seven functional buying centers. 

Shaping the Strategy

The first few acquisitions that we've done are all reactive. Over time, we've filtered out buying centers that we want and don't want. Which buying center has a good dynamic, has a good position, or alignment with how we would grow.

So it's evolved over time. Our first acquisitions were around project management software, professional services, and automation. So selling into an IT or financial buying center is where we first got started. And now, those are almost the minority of our presence today as we've expanded beyond that.

Thesis at the beginning

In 2012, we tracked a $20 billion of venture capital investment that had gone into enterprise software. At that point, we recognized that only about a third of that capital exited or was returning on the investment of that growth velocity investment the venture capital investors hoped for. 

And our thesis was, there is a lot of value in enterprise software within those portfolio companies that sit within a venture capital portfolio that are not high growth velocity winners of that fund. Those in the middle have great products, great customers, great teams, and 10, 15, and 20 percent growth. While that's fantastic to us was not interesting or underwritten into that investment business for the VC. 

So our thesis at the beginning was agnostic to what type of vertical within enterprise software, we would step into, but more macro looking at the capital that had gone into enterprise software at that point and what opportunities there would be to find value or create more value in doing that.

Revisiting your Strategy

As a public company, so much of our growth thesis continues to be for growth through acquisition. We target about 40 to 50 million a year in acquired revenue that will continue to grow and scale the Upland thesis. 

We want to focus on doing the right deals as M&A is all about timing. And so it's hard to plan these deals perfectly where we can deliver on a cadence of one deal per quarter. 

We tend to track about four to five closed acquisitions every year, and we'll continue to do that and continue to close on bringing in about 40, 50 million in acquired revenue every year. Our thesis has stayed disciplined to M&A opportunities that fit between 10 and 25 million of revenue.

And what we're intentional about is not going to bet the company on a single transaction. We've all worked way too hard to get to where we are today, and the value that we've created to try and make some big transformative bet on a multi-hundred million dollar type transaction that would be almost a merger of equals.

Our M&A thesis is programmatic. We are very disciplined in our M&A program that it's these kinds of singles and doubles from an M&A thesis versus trying to hit a grand slam in the night bidding.

Sourcing

It was extremely difficult to find our first deal when we first got started in the Upland thesis. It took us a few years to find our first acquisition. While we have the capital and the commitment to grow through acquisition, we lack credibility in the market as an enterprise software buyer. 

Our team had a fantastic experience of running roll-up stories before in a professional services context, but we lacked the credibility from enterprise software, and it was a new vehicle, a new name; no one recognized it. 

And so our Sourcing was all about kissing a lot of frogs. We spent a lot of time out there communicating to the market what we're looking for, focusing on bankers calling as many companies, cold calling as many as we could that would take our call.

And it all started with our first deal, and then right out of the gates after we closed our first one, we had a second one that closed. And then we were really off to the races and now, deliver on this cadence of four to five acquisitions per year, sometimes it's six, sometimes it's three. 

But we now have a nice flywheel of M&A volume that can come in to allow our team to process those deals and in this sourcing today because we've established ourselves as just a credible buyer in the enterprise software market. We still have to work hard to get this deal flow.

And the hardest work for us is just continuing to prove our credibility. And do exactly what we say that we're going to do for these sellers because we respect that. Our reputation is so important in the market. 

Sellers want to know that they're finding the right home for the right business to a buyer that can deliver with speed and certainty. So we're still super responsive to that and spend a lot of time talking to bankers and directly to companies to find those deals. 

I'd like to shift more of our efforts to going directly to companies and being self-sufficient, without relying on the banker network or market for deals, but they tend to be our greatest source today.

Mix of Sourcing

60% of our deals come through sell-side bankers. Then we supplement that with a buy-side activity where we'll have buy-side bankers out there on retainer that are out there helping us find deals.

And then we'll supplement that as well with our own internal efforts of sourcing deals. And we've spent a lot of time the last year investing internally in ourselves and building out our team to go out and source directly from deals, reducing our reliance on, frankly, buy-side bankers first and then sell side.

But we recognize that Upland today has got a thousand plus employees and an extensive network of enterprise software professionals all within the markets we're trying to buy within. And so, we've been actively communicating internally about what our shopping list looks like. And it's great if you've got a team of a thousand-plus people that all have a pretty clear perspective of what your mandate is and what we're all trying to do and create value together, and they can send us some ideas.

So recently, my inbox has become flooded in a great way with great ideas from our team, from our product team. Emails from our customer success teams and our account management teams who are talking to customers every day about what else they need? Is there a product that they use alongside one of our existing products?

And we love that because as we consolidate around these seven functional buying centers, we want to have just a more significant presence within that existing buying center today.

If they're buying email marketing software, they're probably also using SMS software. They're probably using a customer data platform underneath that to help organize and orchestrate that content.

We can go pick off those little pieces around that and know that our brand, the Upland brand, provides value to that customer, and they know what they're going to get from us as a vendor. And we can sign enterprise-wide agreements to continue to sell and cross-sell and expand more products within these large enterprise customers.

How have you competed with PE firms lately?

We want to be more self-sufficient in creating our own direct deal flow in response to these auction processes and these sell-side mandates with crazy software multiples, especially in 2021.

There's just a lot of crazy stuff happening out there. But we were still able to get several transactions done last year, despite expanding multiple environments. 

And when I look at the transactions that we've been most successful with, especially the ones that we completed last year, so many of them are companies that we've had conversations with over the past four or five years. 

If we're reading about a company and learning it for the first time, we're three steps behind because of all of the private equity, and buying activity that's out there with strategics. It's the recognition. And we're able to win an auction process and close that deal within 30 or 60 days, and it's a multi-year process. 

Once we get active, we offer speed and certainty and our deals. We can show a high commitment and credibility of a close rate. That's much higher than most of the private equity buyers. We're proud of that. 

Socializing your Sourcing to Every Employee

Uplands has been a very remote organization since the beginning. So we have a regular cadence of virtual all-hands meetings. And after working with our team, I was given an opportunity to be on the mic with all thousand plus employees. And take them through the story and educate them on what we're looking for.

And the majority of our employees, given our growth through acquisition, have come through acquisition themselves, meaning they worked for a different company or a product that Upland has acquired. So M&A has happened to them, and they're excited about the opportunity to be on the other side of the table to help inform, to help drive that thesis. 

And we want to encourage or empower everyone on our team that no idea is a bad idea. We provide a little success fee or a little bonus as a referral fee for sending us a successful idea. 

But then we'll go tell everybody about it. We'll go tell the whole company that it was this person's idea. We want people to feel like they're part of the strategy and that their part of the success.

Standing Your M&A Team 

The nice thing with Upland is that M&A is core and fundamental to our thesis at the very beginning. So in many ways, our entire organization is empowered and is part of that M&A team. 

Because at any moment, if we complete an acquisition within their product line or their functional area, they're going to be called upon to help us in that acquisition either in due diligence or an integration. 

So everyone is very much involved in our M&A team. But dedicated to M&A, it's me and our VP of M&A who is like myself, Sourcing, negotiating, and executing against deals. And then, we have a team of directors, managers, and analysts underneath us to help support the due diligence, and we've stood that up over time. 

At the very beginning, the M&A team, which was me, was responsible not just for the Sourcing and the diligence and negotiation of the deal, but also for the financial modeling, the financial analysis, and the forecasting. 

Integration

Integration is really where the success is. It's where good deals can turn bad really fast and where bad deals can get salvaged and turn into great transactions.  

Through the 31 acquisitions we've completed, we've built a disciplined process that represents our past sins to improve upon our integration thesis and philosophy. 

We've made plenty of mistakes having a good sense of what works and what doesn't work, and our integration thesis or philosophy has informed our Sourcing now as well.

So through just the acquisitions that we've done, we know that companies with a high cash burn, a growth at all costs mentality tend not to fit well with the Upland thesis.

So we have a fully dedicated integration team led by Ian Burk. And every deal has an executive sponsor, whether that be a general manager within one of our seven different functional centers or an executive on our executive team. 

Every deal will have an executive sponsor that owns that deal from the point of LOI from the term sheet to 12 months post-acquisition and forever after that. They'll have ownership over that.

And so, the head of M&A and head of integration will support them throughout that process and have that handoff. We bring in integration very early in our conversations. 

Sometimes there'll be around there if it's a complex deal, pre LOI, pre-term sheet, helping us think about that, what's the operational complexity, and how do we scope that out with respect to integration budgets to make sure that informs purchase price. 

They're very active as we come in post LOI and drive a lot of our operational diligence to help inform the thesis. 

Integration team

We have a whole team. We have six to 10 dedicated within that organization that are extremely capable operators that each have a functional lead. 

We have marketing, for example, someone in marketing that isn't within the marketing department but is focused solely on integration and acquisition. 

So that as each new acquisition comes across, this individual is there, ready to run through what that marketing integration playbook is. As we start to align that company, put them onto our systems and processes and get them plugged in.

And the reason that I want to bring our integration team in early, if it's a complex deal, it goes back to the sourcing conversation that we had earlier about our credibility and just our dependability as a buyer. 

Suppose I'm worried about something in a process. In that case, I want our integration team to raise a hand at the very beginning. We'll kill the deal at the very beginning if we think the integration is going to be too complicated because our reputation as a credible, dependable buyer is so key to us. 

We do not want to be someone who signs an LOI and then very quickly backs out. We do that too many times, and it really hurts our reputation. Someone might call us a private equity firm that retreats all the time, which is not our story. 

So the reason that we have our integration team in early on these deals is to say with credibility that we have a good perspective of how we're going to close. And so that's helpful in our value proposition to sellers. 

Then when they see an integration team working on the deal, they know how we're thinking about this, but the reality of it is going to be complex and too hard for us; let's pull that report analysis, not wasting anybody's time. We process so many deals every year, and we have to be pretty disciplined with how we and what deals we spend time on.

Culture

Culture is hard to measure, but for Upland, having grown through 31 acquisitions to date, we are a melting pot of 31 different cultures. And we recognize that.  

We now have a melting pot of these 31 different cultures that create very entrepreneurial teams' beautiful creative tension. And each company has been about the same size, with 10 to 25 million in revenue.

They all have very much of an entrepreneurial spirit to them. Having the same culture in each one would be impossible to do. But everybody aligns around a culture that focused on customer success. 

If we don't get the sense that the target company has that level of customer focus we want, those deals fall apart.

HR Team

They're super involved, but in the context of culture, that's not just like the HR team; that's everybody. And so our people help us quite a bit in diligence, just around employee agreements and contracts and making sure that the benefits programs that the company has pre-acquisition align with our post-acquisition.

They have some crazy awesome benefits packages, and we try to see how we fit that into our post-acquisition plan. So they're pretty active in that and just helping manage employee and people communication post-acquisition. Because the communication part post-close is so key, and day one is crucial.

So our marketing team aligns with our HR organization to help craft all of our day one communications and day two communication. So to make sure we're trying to answer any question that we know we're going to get right out of the gate.

Public vs. Private Company

I don't think a private company versus a public company changed our deal-making too much. Obviously, now, as a public company, all of our financials are published when we announced the deal. So we'll announce the revenue, the purchase price that we paid, the multiple, the EBITDA. 

And so these are the same metrics that we were looking at pre-IPO so as a private company. But I think the only thing that it changed for us is communication with the employees—and making sure that we communicated on day one to the employees all of these financial metrics. 

Because often, this was surprising to us, but sometimes this is like the first time employees of an acquired company have ever seen the financials from the company they worked for. They didn't know that they were a 15 million revenue company; they thought they were a $45 million revenue company. 

And so you have these fascinating conversations with employees where they obviously knew their products, they knew their teams well, but they didn't know the financials. 

And so we, there's almost like an education component, and that's probably the biggest shift, if you will. From a communication standpoint, we are doing deals as a private company versus a public company.

I think it's easier to do deals as a public company, and we have credibility in the public market, and you can go access all of our findings. I love the transparency, and it's a love, hate relationship.  

Because any seller can self qualify us cause they can look at what we pay for our last 20 acquisitions. And so they have a good idea of how we're not going to surprise them with some different valuation, but the transparency is great.

So much of the M&A process is about building trust, right? With the sellers and with the teams and being able to operate as a public company, you trust that. You can be transparent about everything because that's just how you talk to our investors.

Biggest Lessons Learned

There are so many different stories or lessons that I've learned. The biggest one is the appreciation of discipline in the process and trusting your gut. 

One of the great things about Upland is that we have a well-identified framework and profile of companies that we want to acquire. Bankers do a great job of telling a company story that might be different than what the company's reality is. 

So it is about trusting your gut,  knowing what your profile is that fits Upland well, and trying to cut through the bullshit of some of these stories and just make sure you know exactly what the reality is, and that company is.

And being disciplined to that, not letting someone that is incentivized to sell you their the company, talk you past what reality might be. 

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