Ryan Caldbeck Profile picture
Aug 26, 2018 23 tweets 7 min read Twitter logo Read on Twitter
1/ Capabilities. That’s the word of the day.

One thing that industry “experts” often miss when evaluating historical M&A or trying to predict M&A, is that the best acquirers often aren’t looking at the financials of the target first- they look at the capabilities of the target.
2/ Let’s talk about what that means, why it is important and why entrepreneurs, investors and strategic acquirers should care.
3/ First- what it means. Capabilities allow the target or acquirer to do something unique that matters. Talk to a new demographic, or same demo in a new way (brand capability), deliver unique value in the product (product cap.), distribute the prod in a new way (distro cap.) etc
4/ The capability being acquired allows them to make progress on a job that needs to be done. @DollarShaveClub wasn’t acquired for $1b because the metrics made ANY sense. They didn’t- the multiple was insane. @Unilever isn’t dumb either.
5/ Unilever was making a bet that they were acquiring d2c capabilities that might be able to be leveraged across a portfolio 100x-1000x as large.
6/ Similarly @Walmart ’s acquisition of @Jet wasn’t backed up by the historical #s Jet was putting up. Saying that they only wanted to work with Marc is careless and overly simplistic (though that acqui-hire was part of the story).
7/ They were buying capabilities- the ability to be an online retailer. Walmart.com’s own employees would say Walmart.com was a bit of a mess and getting crushed. Walmart was making a big bet on acquiring capabilities.
8/ The concept of capabilities is related to @claychristensen Jobs to Be Done framework. The acquirer is “hiring” the capabilities- not necessarily buying the immediate P&L, which often wont make sense in the near term relative to the purchase price.
9/ The best acquirers think like this. They identify capabilities they want and hone in on those- not necessarily only focusing on the underlying financials.
10/ Or you can focus on the same P&L that every other acquirer has access to in that shopped deal- in which case you’re all running the same DCFs and it will be just whoever wants to pay more.
The smart strategic acquirer cares about capabilities.
11/ Sometimes focusing on capabilities doesn’t work out. @Google buying @nest (not great outcome so far but good bet). But sometimes it does (Android, Double Click).
12/ But it is far better for the acquirer to focus on the capabilities than staring at the same #s everyone else has access to and trying to rationalize a bigger price. That path will lead to underpaying for the right asset and overpaying for the wrong one.
13/ What does this mean? For entrepreneurs it means an understanding of how (the best) acquirers think.

Let's be really clear- I don’t like building a business just by thinking about being acquired- those companies tend to be soulless. Soullessness leads to disaster.
14/ But it is important to focus on what capabilities you’re creating and why that solves real needs in the world. What job - that needs to be done - are you actually doing?
15/ If it is just a knockoff of @tide laundry detergent– it may generate some revenue, but why should that similar product exist? What problem are they solving that Tide isnt’? If it’s organic and my 18 month old can drink it without getting hurt? That is solving a problem
16/ Now try to get a handle on how big the problem is- why is it valuable, to whom, when, etc.
17/ Similarly for the investor, when you’re looking at the co. think about what capabilities they are creating that matter. Consumer PE investors often focus a ton on the financials- they should. Those matter in a big way.
18/ But sometimes those same investors miss the forest for the trees and forget to think through what capabilities the target investment is crating.

Why should the brand/product/distribution strategy/company exist in the world and what problem are they solving?
19/ Finding the company that has strong metrics, and is solving real problems by creating unique (and defensible) capabilities- is the holy unicorn.
20/ As strategic acquirers- in any industry- think about their problems, they must focus on capabilities. Waiting for the target co. to have metrics commensurate with their (requested) purchase price will result in dramatically more competition for the asset (thus bidding up).
21/ Think of the old school data co. that is acquiring new school data. The NewCo may have proved unique & valuable capabilities with their data, but their nascent sales/mkt team cant yet demonstrate the metrics that would impress Old School Data Co.
22/ The visionary strategic sees the potential, the dying-Titanic sinking strategic wants to wait until the #s have been proven…..to them and every other buyer.
23/ Macro- make sure you’re building something that creates real, unique value for the world. If you do that, the smart investors/customers/acquirers will see it.

Perhaps it is my Mr. Obvious point of the day, but I am amazed at how few consider it.

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More from @ryan_caldbeck

Oct 5, 2018
1/ I’ve talked several times before about building a systematic fund in the private markets. Systematic quant vc/pe funds are coming, and they will grow quicker than anyone expects.
2/ To build a successful systematic VC/PE fund, several things are needed.

I’m going to talk about two specifically here:
A. Information advantage (IA)
B. Large # of companies (N)

IA + large N = enormous value.
3/ In almost any domain, if you have a small advantage and enough swings at bat, you will ultimately come out on top. Let’s rattle through some examples:
Read 18 tweets
Oct 4, 2018
1/ I am seeing more and more founder secondary in venture rounds (Secondary = founders selling some of their shares before some other shareholders are able). Series B-D. I see both as an investor and through entrepreneur circles.
2/ I like secondary for entrepreneurs. Moderation is key but in a lot of situations I think it helps accelerate the co. Lots of very smart investors disagree. Here are my thoughts.
3/ Magnitude: My basic rule of thumb from what I see is market is 4+ yrs and up to 10% of founder’s equity stake with some $ cap that makes sense given stage etc. (typically <$10m)
Read 24 tweets
Sep 30, 2018
1/ Went to @StanfordWSoccer soccer today v. @USC_WSoccer with my family (wife, 18 mo boy and 4 yr daughter). Dog was invited as well and enjoyed the crowd.
2/ First observation – the crowd reignited a belief in me that Bay Area can have a good sports fan base that isn’t just jumping on the latest bandwagon. Game was sold out.
3/ Second- the @USC_WSoccer were a top 2-3 team I’ve seen in the past few years in terms of communication, how they supported each other, and just general teamwork. It was a master class in teamwork to watch.
Read 6 tweets
Sep 24, 2018
1/ We will see more and more use of data in private markets. Over next 24 months it will become table stakes in most private markets.
2/ The transition will happen much faster than it did in the public markets because publics have paved way, easier to process massive amounts of data, more of a demand now to differentiate yourself.
3/ In early stage tech investing in Silicon Valley, I’m very skeptical that there is a problem to be solved (too much capital- not much inefficiency) or that data is the solution….at least in the short-term.
Read 9 tweets
Sep 22, 2018
1/ @UNFI – a the largest natural foods distributor- reported earnings. Spoiler- they were horrible. zacks.com/stock/news/324…
2/ Let’s be clear. By horrible I mean that GM% was worse than expected as WholeFoods/Amazon (>30% of their business) puts pressure. EPS missed estimates and guidance implied that margin pressure will intensify next yr. Stock hit 5 yr low.

So I guess I call that horrible.
3/ To quote @karenhowland2 : “The company has razor thin margins (2% operating margin) and is buying another low margin, even less differentiated business in @supervalu and saddling the combined company with a lot of debt. Not a good combination.”
Read 15 tweets
Sep 13, 2018
1/ Feeling so grateful to @mahendra_gr and @techcrunch for covering such an important topic: The mental health of founders.
2/ I think almost all founders struggle with these emotional issues-but there are so few that talk about it. Why? Fear of being the only one not “crushing it”, fear of what it will mean with potential investors/customers/employees, fear of not living up to expectations.
3/ I deal with these feelings every day. It is a struggle.
Read 24 tweets

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