Hot Take #5: Mapping the Waze Acquisition

And considering an alternate route to the deal

If you haven’t already - get the second edition of the MBP here.

The billion dollar acquisition of Waze was a landmark startup M&A transaction. Breakout transactions like Waze don’t live in isolation. They impact the entire startup ecosystem - creating a dent in the universe and causing gravity to shift to adapt to the new reality. It wasn’t just a big deal, it was a big deal. 

Waze was an extraordinary company and I’m sure all involved are exceedingly happy with the outcome. But once we clear out the confetti and balloons what can we learn from the transaction? It turns out quite a bit.

You don’t often get a candid look at the workings of a startup M&A deal. But in the case of Waze we do. Noam Bardin, co-founder and CEO of Waze wrote an excellent post on both the Waze transaction and his M&A advice for founders. The post is spiced with a few LOL-producing side-swipes. It’s also written in an interesting format, blending a linear narrative with his abstractions and insights. It actually reminded me of reading passages from the Bible. I was simultaneously trying to imagine myself as the protagonist in the story, while also attempting to extract the transcendent meaning.

There’s some great advice in the post, much of which aligns very nicely with the MBP. In addition, there are a number of important insights peppered throughout, and I’m going to call out a few of those. And, there are a few places where Waze swerved out of the MBP lane and into risky territory. I’m going to highlight those too.

Let’s get to it.

Product teams drive startup acquisitions

As it says in the MBP book, you want to initiate a stream of open-ended conversations with the product teams at potential strategic partners (“PSPs”). In Bardin’s words: “exploring potential business with the potential acquirer’s product teams is a critical prerequisite…” These conversations aren’t M&A-or-nothing, but are instead about developing big ideas for potential collaboration. 

In MBP-speak, the partner big idea (“PBI”) is a buildup. Acquiring your startup is something that’s considered after the Opportunity and Methodology theses have been developed. Acquiring you is one of several potential paths forward, and is determined by how best to Execute the PSP’s strategy. 

To this end, I’m going to fuse two of Bardin’s six key lessons learned into one. If I take lesson #1: “Acquisitions start years before the actual sale.” and merge it with lesson #3 “Partnership discussions are the best catalyst for an acquisition.” We get pretty much a proxy for how to start building a PBI. In these two lessons Bardin makes the points that you should “get to know your potential acquirers and spend time with their product teams” so as to “imagine what a joint product could look like” - which can essentially be shorthand for the MBP Opportunity and Methodology layers of the PBI. He then transitions to the Execution layer when he says the ultimate outcome of the big idea is the PSP coming to the conclusion that “we would need to own you to do this.” 

Two additional points here: the first is that the “joint product” is the key to the game. What you can do together is the engine of the deal. It’s the magic in the box. It powers every aspect of the relationship from interest, to urgency, to valuation. It’s more than just a subplot, it is the plot.

Second, I like Bardin’s choice of words when he says “partnership discussions” - discussions - as it says in the MBP - partnership discussions can be as, or even more, valuable than partnership implementations. Don’t avoid partnership discussions because you think the actual implementation of the partnership may be infeasible. Be liberal in your partnership discussions and conservative with your partnership implementations. Partnership discussions are a great conveyance for the materials for building big ideas.

Personalities, Method alignment, and exclusivity

There’s a great deal in the post about personalities and trust. This aligns with the MBP. M&A, and particularly startup M&A given its heavy emphasis on working together in the future, is a deeply personal enterprise. Bardin tells the story of how the first potential deal fell apart after the two technical teams came together but mixed like oil and water. Bardin attributed it to an age and experience gap, but I’d also wager that there was also a fundamental misalignment in the Methodology layer of the PBI. 

As it says in the MBP, startup acquisitions live-and-die on method alignment. Beyond just age, there was probably a gap in the way they thought the opportunity should be pursued. Even if the difference was simply cultural, that’s a still a method-misalignment of sorts.

Which brings me to exclusivity.

Wait, how, why, does this connect with exclusivity?? 

The back cover of the MBP book has this leader: The last thing you want from a potential acquirer is a term sheet. Waze’s failed first buyer is a textbook example of why.

Bardin’s account of how the first deal melted away could almost be overlaid on the MBP Prologue - it’s the same story:

“I did not need those hours and immediately signed the term sheet and sent it back..

We began due diligence and it quickly became clear that we had some gaps…

We assumed the deal was done and the due diligence was to validate everything we had discussed…

On the other hand, [they] looked at it as the beginning of a process to determine what they should do with Waze…

We had days where we did not know what the next step was and sat around waiting…

We began feeling we had made a mistake and that [they were] not going to go through with the acquisition…”

If you turned the MBP Prologue into a poem this would be it. This progression is in fact the norm not the outlier for how most startup M&A discussions go. Too fast at the beginning, followed by rapid decay, ending in no deal.

If  Bardin had been following the MBP he wouldn’t have signed the term sheet with the first buyer (at least not at that point). He clearly had an enormous amount of leverage in the negotiation. He could have instead focused straightaway on having the teams dive deep into building the PBI. They would have visited each other, designed the combined product strategy, assessed cultural fit, etc.

As it says in the MBP, the Opportunity and Methodology layers of the PBI are “free conversations.” Use the time (and momentum) to develop the thesis and figure out if this thing is going to work, before you get locked up. Startups too often think buyer diligence is confirmatory when in fact it’s exploratory. Don’t fall into the trap.

In addition, if Bardin had been able to sidestep the term sheet (and exclusive provision therein) he could have engaged in any number of parallel conversations with other PSPs. He would have had both a better shot at closing with Buyer A and a also a better shot at spinning up Buyers B,C, D…

This journey ultimately ends well for Waze, in spite of this traffic jam in the middle. But it may not for you. Your acquirers may not be as patient, nor as eager, as those surrounding Waze at that moment. I’d proceed with caution and design a strategy that keeps each PBI development process in play as long as you possibly can. 

Leaks, competition, and stock

Leaks. Bardin’s warning about leaks are words to the wise. Although it sounds like in this case the leak catalyzed an alternate buyer and an improved price (and a deal that was actually going to close!). That’s an exceedingly fortunate outcome. Leaks can kill deals and there isn’t always another immediate bidder in the wings. Keep your deal team, and information flow, as tight as you can and stress to everyone the criticality of confidentiality.

Competition. Bardin also mentions that he put pings into several other logical buyers, but none of them “could move fast enough.” This is a really important point. It’s so rare that I’m going to call it a myth that you can rapidly shop a startup to several buyers simultaneously. Building a startup acquisition thesis takes a lot of time and PSPs don’t buy a startup because someone else is about to, they buy a startup because they feel they need to. Focus on building strong PBIs. PBIs are what create your optionality, not last minute shopping maneuvers.

Stock. Founders (and their investors) often eschew equity as the form of consideration in startup M&A transactions. This isn’t always smart. As discussed in MBP Spellbook 3: Startup-to-startup acquisitions, there are times when getting aboard a rocket ship might be a great call. In this case there was a world where this deal might have seen a 10x increase in value if they had taken stock in one of the buyers. That’s actually not that uncommon of an occurrence - I’ve seen many people make and miss ~10x times outcomes with the stock/cash decisions. Carefully consider consideration.

And here’s where Bardin and the MBP diverge

Bardin speaks at length about having “a clear framework among your decision-makers.”