Microsoft's acquisition proves tech start-ups are still hot. Want to be next? Learn from what David Sacks did right.
Yammer Founder David Sacks
Microsoft is buying Yammer, a company that provides business-oriented social networking tools, for a reported $1.2 billion. That's quite a jump from Yammer's Q1 valuation of between $500 million and $600 million after an $85 million Series E round of funding led by DFJ Growth and Social+Capital Partnership.
Double your money in just a few months--not bad if you can get it. The question is whether more tech companies might attract that sort of folding green attention. After the Facebook IPO implosion, when the stock price fell by as much as 35% and the company and investment banks Morgan Stanley and Goldman Sachs lost more face than a skateboarder taking a tumble on a sandpaper track, some wondered whether high tech was down for the count--or at least for the summer--in the eyes of investors.
But the Microsoft acquisition at such a premium gives the markets exactly they need more doses of: money-backed confidence on the part of smart giants who know which side of their future is buttered. Tech start-ups, even in the Internet space, aren't a wash-out. But, as Sacks shows, you've got to be smart in what you do and how you do it if you want to attract potential acquirers. Inc. magazine profiled Yammer's CEO in late 2011. Here are some of his best business-building moves straight from Sacks himself.
Useful Is Better Than Cool
A lot of Internet companies have made variations on the same mistakes done more than a decade ago during the infamous tech bubble. People have a cool idea, fall in love with it, and then expect others will as well. And that can happen. Instagram had a neat service that became not so little when it attracted tens of millions of users and $1 billion in acquisition fees from Facebook.
But the company made no money, and if recent tech experiences are any guide, there still isn't a new economy to run on love and links. Someone somewhere has to want something enough to spend.
Sacks came up with the idea for Yammer while working on Geni, a genealogy website he started. His employees needed a way to share information, so they created this tool. Then Sacks realized that if he found it so useful in a corporate context, other companies probably would as well. He was right, as Yammer claimed 5 million corporate users last quarter.
Think of Monetization From the Start
Investors want to know they will eventually get their money back, hopefully with a fat additional return. You might get lucky and get bought out, but you're betting on a company being interested enough in your product or service that it's willing to forget that it's essentially bought a charity business.
Yammer has had an approach to monetization from early on. In its case, people can use the service for free and set up private social networks for their companies. But if the companies want some administrative control over the process, they have to pay. The good thing about selling to companies is that they're often more pragmatic about paying for what they need, unlike consumers, who are often more intent on getting something for nothing.
Listen to Everyone
Sacks knows that to make a product better, you have to be around and willing to listen to people. Those people may work for you. In his case, Sacks used to micromanage product designers, but someone told him that it upset them and Sacks listened. Now there are biweekly reviews, which lets him see enough of what is happening but isn't so frequent that it only serves to annoy the people responsible for moving his company and product forward.
Directly listening to users is also important. Sacks is on Twitter regularly, so he can read everything mentioning Yammer. "I want to know what people are saying, so I can keep improving the product and the company," he says.
Strengthen Your Weak Points
No one knows everything, but a smart entrepreneur has to be willing to learn a lot as quickly as possible. The weak area Sacks faced was in sales, where he didn't get the necessary process, but eventually learned:
When we first started, I had this naive view that sales would just take care of itself--people would just pull out their company credit card and buy. But companies, especially large enterprises, like to talk to somebody. They've got concerns about security, privacy, and compliance. So you really need salespeople to engage with them. We didn't have any salespeople when we started. Now we have 30.
Sacks even regularly went on sales calls. Nothing like directly hearing what the potential customer likes and doesn't like about what you do.
Financial growth and investment is hardly a black hole for tech these days. But if you're going to make a go of it, do it right so you can have some success, and maybe interest from someone with deep pockets.
If you want to learn more about Sacks' smart moves, check out how he works.