5 Lessons from growing a startup to a 9-figure exit in 2 years

August 14, 2020 |  

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About this episode

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David Yaffe was working at Google when he spotted an opportunity to connect advertisers with smaller publishers competing for online advertising dollars.

He and two friends started Arbor, raised more than $2 million in seed capital and built a prototype. Two years later, Arbor had grown to 25 employees when LiveRamp acquired them for more than $100 million.

That’s not a typo.

Yaffe sold a two-year-old company with a couple dozen employees for nine figures. Not surprisingly, there are lots of lessons to learn from Yaffe in this episode.

One of the best insights comes in analyzing how Yaffe dealt with LiveRamp’s original offer, which was around one-tenth of their find acquisition price. Rather than dismiss their initial offer or counter, Yaffe knew they were too far apart on valuation, so suggested to LiveRamp that instead of merging, they partner.

The partnership was a success and only served to heighten LiveRamp’s desire to acquire Arbor. Months into the partnership, they upped their offer. Then a few months after that, they jacked it up again. Finally, having been partnered for a year, they made Yaffe an offer which was so good, he and his partners couldn’t refuse.

In addition to the “let’s just be friends” counter, Yaffe will also teach you:

  • Why you should avoid splitting equity with the founding team equally
  • The secret to building a two-sided market
  • When it’s okay to fib about your progress
  • How to retain key employees who are susceptible to being poached by competitors
  • An alternative to a performance-based earn-out

LiveRamp was keen to get their hands on Arbor because they had built a proprietary platform that would have been difficult for LiveRamp to replicate, no matter how many engineers they hired. How well differentiated is your product or service? Having a unique position in the market — we call it Monopoly Control — is our focus during module 6 of The Value Builder System™. Complete module 1 for free by getting your Value Builder Score.

Our guest

David Yaffe is a co-founder of Estuary which builds technology to help companies work seamlessly with data using both real-time and batch paradigms. He previously was the COO of LiveRamp and the co-founder / CEO of Arbor which was sold to LiveRamp in 2016. Prior to that, he led product and services for Invite Media (acquired by Google) and product for Doubleclick Bid Manager after the acquisition. You can reach Dave at dave@estuary.dev or Linkedin.

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Transcript

John Warrillow:

Next up, you’re going to hear from David Yaffe, who built his company up from scratch in two short years, sold it at a nine figure exit. I mean at times I was just beside myself with laughter, realizing how quickly, and the speed with which he was able to build the value of his company into a nine figure exit. It’s just unbelievable, I don’t think I’ve ever seen that in any of the exits we’ve chronicled here on Built to Sell Radio. It’s just an amazing story.

John Warrillow:

Yaffe talks in particular about his strategy for getting the acquirer to increase their offer over time. I’m not going to spoil the punchline, but rest assured the first offer was one tenth the offer they finally agreed to about a year later. In other words, over a 12 month period, Yaffe was able to get them to increase their offer 10 X. It’s a very interesting strategy that he’ll describe how he used it and what you could take away from that. Lots of other key takeaways from David’s story, particularly why splitting equity equally among co-founders may actually not be the right idea, the secret to building a two-sided market where speed is often the prerequisite, when it’s okay to fib about your progress to key stakeholders, how to retain key employees, in particular those that are really highly desirable, easily poached by potential competitors. And then, an alternative to tying your earn-out to performance.

John Warrillow:

Here to tell you how David Yaffe did it, is Yaffe himself. Enjoy.

John Warrillow:

David Yaffe, welcome to Built to Sell Radio.

David Yaffe:

Hey, thanks for having me.

John Warrillow:

So tell me about the genesis for this company. You were a Google employee, and first of all, how could you ever leave Google? Isn’t it like the juggernaut everyone wants to work at?

David Yaffe:

Absolutely, that was one of the hardest decisions that I’ve ever made. So I landed at Google through an acquisition through a company called Invite Media, and that was a sale that happened in 2010. And because of that, I kind of had that startup blood in me and a thirst to be on the founding team. I was one of the very early employees on Invite Media, but I really wanted to be on a founding team and start my own company and sell it to a bigger company eventually. So that pushed me to do what I think is really considered to be an illogical move, leaving Google has to be considered an illogical move. And I realized that when I shopped around and I was thinking about getting another job and leaving the company. There was just nothing that made any sense, the only way to leave Google is to do it via starting a company.

David Yaffe:

Really for me, the reason that I ended up leaving was because I had a great co-founder that I wanted to start a company with. And as soon as I was able to convince them, actually two co-founders, them to leave, that made it a lot easier because taking the plunge by myself would’ve been pretty difficult. That combined with having an idea that I was pretty confident in at the time …

John Warrillow:

And what was the idea? What were you setting out to do?

David Yaffe:

So at Google I led an advertising platform called Double Click Bid Manager from a product point of view. And Double Click Bid Manager is their demand side platform which in the industry means you work with a whole bunch of marketers and you try to help them bring their ads to websites. We were the connective tissue that effectively connected those marketers to find basically every website in the world. And we saw was that Google and Facebook combined were eating everyone’s lunch at the time. They represented about 80% of every new ad dollar that was coming online. So our thesis was that that was happening because Google and Facebook had interesting data assets that no one else had in the world, and frankly still kind of do.

David Yaffe:

They have this identity graph that represents most of the world, and they have this first party data that enables them to just put much more representative and relevant advertisements in front of anyone. So we decided that if we could figure out a way for publishers who had small pieces of that pie. Maybe they didn’t have as big of a network as Google and Facebook, but small pieces of the pie and they could come together and federate and identity graph between them, we’d be able to build an asset that was kind of similar to that. So that was the idea behind Arbor.

John Warrillow:

Okay, so you’ve now exceeded my intellectual or technical knowledge, so that’s very easy to do. So okay, let’s imagine I’m a dog lover, right?

David Yaffe:

Yep.

John Warrillow:

And so I go on lots of websites, I mean, lots of, I’m always posting pictures of my dog on Facebook, Facebook figures this out and puts an ad that says, “Buy dog food from Purina,” whatever, because they figure I’m a dog lover. Fair enough?

David Yaffe:

That’s right.

John Warrillow:

Okay. So that’s great for Facebook, because everybody uses Facebook or Instagram. But you’re saying there are other guys out there that are maybe smaller publishers, like Outside Magazine, or …

David Yaffe:

Good, that’s a great example. Yeah.

John Warrillow:

Okay, Outside Magazine. I might go onto the Outside Magazine website and they don’t have the resource of a Facebook to know that I’m a dog lover.

David Yaffe:

Yeah. That’s a good example, so they might not know that you’re a dog lover, but they have a piece of the pie, they understand that you like outdoors. So if we created the infrastructure that connected people who like Outside Magazine with other magazines that might be relevant, dogs in this case, and allowed for basically, them to combine their views and be able to share that information in a privacy safe way.

John Warrillow:

So how did you separate, because Outside Magazine is not going to want to share data with some other publisher, New York Times. So how did you draw a Chinese wall or some sort of structure that didn’t allow each other to see each other’s data.

David Yaffe:

That’s a great question. One of the things that we allowed for was rigid controls around who you could share with and who you wouldn’t share with. And those rigid controls essentially meant that Outside Magazine could not share their data with another outdoor magazine if they didn’t want to. For the most part those weren’t used as much but just having the ability to say that you could control it was very powerful, it was enough to get people over the edge. And we ended up implementing those all from a back end point of view. So yeah, that was the platform, and we ended up working with around 200 publishers within short order.

John Warrillow:

So let me get this straight, again I don’t know if Outside Magazine or New York Times is one of those publishers that doesn’t really matter but for my example here. So let’s say I read a story on New York Times about how to care for your dog during a pandemic, I don’t know. Why dogs are getting separation anxiety as people go back to work, I think that was actually a recent article. So your system would say, “Ha, Warrillow likes dogs.” So then you feed that information back to Outside Magazine saying if you’ve got Purina as an advertiser, this guy Warrillow likes dogs, you should serve it up to this guy, not this guy.

David Yaffe:

Yeah we could help connect that dataset pretty easily between those different publishers.

John Warrillow:

So cool, man it’s kind of spooky but it’s cool. How did you make money? What was the business model, who paid who for what?

David Yaffe:

So generally speaking, we worked with the publishers, the publishers were incentivized via money and we revenue shared with them. And then on the buy side there were big technology companies, not as big as the Googles and Facebook’s of the world, but marketing companies that were interested in that type of information and we connected those all together. And then eventually even marketers and direct marketers themselves. So we would create a platform where they could all come together and put their data there, and then the marketers could end up using.

John Warrillow:

Sounds incredibly expensive to setup, once you’ve got it going I can see it being lucrative.

David Yaffe:

Yeah.

John Warrillow:

But how much money did you have to raise to get the thing off the ground?

David Yaffe:

So we ended up raising about two and a quarter million dollars in the first round. So it wasn’t that expensive to setup, we’d had a lot of experience building these types of systems before. One of the interesting things that we did was we built an entire open source project that’s live and actually the basis of my next company. That open source project is called [inaudible 00:10:33], it’s a real time data processing infrastructure. And that was probably the most expensive thing to start. And in hindsight it was great but it took us a while, we’ve been working on that thing for the last five or six years, actually.

John Warrillow:

I always find this fascinating, how did you guys figure out the equity slices? Because in the beginning, you could throw evaluation numbers out there, the total address of a market is this, and you could with the hockey stick. But it’s all just vaporware in the beginning. How did you figure out who was going to own what percentage of the company and then how did you figure out what a slice of it was worth when you raised that first round?

David Yaffe:

Right.

John Warrillow:

It all seems so arbitrary to me, I’m not a tech guy so it’s kind of …

David Yaffe:

I think if it is kind of a weird concept. So we had three co founders and the initial task is obviously divvying up the company between the three co founders. And I think of the principles we started with was we didn’t want to start with equal ownership.

John Warrillow:

Oh you didn’t? Okay.

David Yaffe:

And the reason for that is because different roles effectively, there are online equity calculators that you can use to figure out what a role is theoretically worth at a stage of a company. And we ended up plugging it into that, talking with a whole bunch of people, one of our founders started a little app to the other, too. So all of that combined led to the final breakdown, but it isn’t an easy thing to figure out and it’s certainly not an easy conversation to have at the beginning.

John Warrillow:

What tips would you give a new founding group that was trying to figure it out?

David Yaffe:

My first tip is just pay attention to the numbers and the roles of founders that you have. Because I see a lot of companies getting started with three people with the exact same job title, effectively, or two people with the same job title. It’s really nice when you have a team that does different things, and our team was like that. We had myself, I was the founder and CEO, my co founder, one of them, was our CTO, so he built the product itself. And the final one was he led sales and operations for us. So that is a nice looking team because it ends up you can naturally divvy tasks up, and you get a lot more done that way. So I think making sure that you’re really mindful of selecting a founding team that is complimentary to each is super important.

John Warrillow:

And so all three of you guys were at Google at the time?

David Yaffe:

We were, we all came over via Invite Media acquisition.

John Warrillow:

What impact did it have for three guys from Google to walk up to an investment firm and say, “Okay, here’s the idea.” I’ve got to imagine that carries a lot of weight.

David Yaffe:

Yeah, especially that we had done previously successful ventures in the marketing space and the advertising space before. The fundraising process for Arbor was pretty straightforward, the whole process took about a week and we ended up raising and getting, I think we had seven meetings in that week and got four offers. And ended up just picking the firm that we liked the most which was First Round Capital.

John Warrillow:

And when you do those, are you saying, “Look, this is what we want the valuation to be.” Or, so you’re kind of putting a price if you will, or a valuation on your business, or are you letting the market basically determine what they think the market is and having them make offers? Do you know what I’m getting at?

David Yaffe:

I do know what you’re getting at. I think it’s, something that I didn’t know back then which I wish I did was that you really need to be telling the market what the business is raising and why it’s raising that amount of capital. The valuation is kind of a strange thing, it comes from both the market of course but it also comes from what you want to do, right? If in the first 18 months of building a company, you have goals that are going to cost you two million dollars, you should figure that out. And the valuation sometimes backs in at least at a seed round to what you’re raising and what the needs of the company are. So I think that’s a key thing to think about, for a founder to figure out what they need, why they need it, and then try to make their own valuation based on that. And in the end the valuation that you pick and you put down on your slide deck probably isn’t going to be the one that you end up raising at but, it’s important to be authoritative and thoughtful around what you think you want to do at least.

John Warrillow:

How much of the company did you have to give up through all of these successive rounds of raising money?

David Yaffe:

We ended up doing two fundraising rounds, which isn’t so bad for the sale that we had. And we gave around 45% of the company up over two fundraising rounds, which is very painful when you look at the numbers at the end but it’s actually pretty reasonable for this type of thing.

John Warrillow:

So let’s get into the story itself, so you get the money, you build the, I’m not sure what you called it but it was the infrastructure, the database I guess, is that what you refer to it as?

David Yaffe:

No, it’s a platform, it was a data platform, effectively.

John Warrillow:

Data platform? Got it, okay. When was this that you raised your first round? What year?

David Yaffe:

  1. It was October of 2014 that we closed.

John Warrillow:

Got it, and you sold in?

David Yaffe:

  1. November of 2016, so about two years and one month. Yeah it was pretty quick.

John Warrillow:

That’s ridiculous. How do you in 24, so okay, what do you do in two years to create nine figures worth of value?

David Yaffe:

That’s a good question. I think most …

John Warrillow:

Hey, can I sign up for your next deal? Is there some sort of investment round? No, I’m kidding.

David Yaffe:

Not yet but I’ll let you know. So that’s a really good question. So I think we had a really interesting place with Arbor, we hit the right market, the right team, the right time, we hit a space where people wanted something new. We hit the right financial model, the right business model, and we did that all really quickly.

John Warrillow:

What was the first milestone though? What was the first critical decision or first milestone you reached where you were like, “We’re on to something here.”?

David Yaffe:

I think the hardest thing for us was, to get people to care about the asset that we had, we had to get to critical mass, we had to get to a point where we had enough publishers signed up for the thing that …

John Warrillow:

What was critical mass for you?

David Yaffe:

I wanted to cover about 40% of the US.

John Warrillow:

In terms of eyeballs, of EDPs?

David Yaffe:

In terms of eyeballs, exactly.

John Warrillow:

Okay.

David Yaffe:

Which is a lot.

John Warrillow:

So the New York Times drives a lot of unique eyeballs, Outside Magazine less.

David Yaffe:

For example, yeah.

John Warrillow:

You wanted to get to 40%?

David Yaffe:

40% coverage of the US, of unique users. And that was kind of like a arbitrary metric that I setup but it was something that was really important because just to get a reasonable scale where marketers could actually reach their audience, you need to get a certain amount of data.

John Warrillow:

It’s like the classic chicken or egg of the marketplace, right? You had to have enough people.

David Yaffe:

Yeah, and it’s a two sided marketplace. So setting up a two sided marketplace is always tough, and it was just a hustle at the first few months when we built the technology and we were ready to go live, I was basically on the phone all day everyday with different people in different spaces just saying on one side, “Hey, we already have 40%, you should join on.” And on the other side, “Hey, we already have 20 buyers, you should join on.” And you know what, we didn’t have any of that, but by the time we ended up going live we actually did, so it actually worked out somehow, and that was the milestone.

John Warrillow:

You seem to me to be a hugely transparent, very authentic guy, we don’t know each other very well but just in our brief interactions. What did that feel like, to basically, lying is probably too strong a word but fudging it, right? What did that feel like for you?

David Yaffe:

Yeah, I wouldn’t say, I think I was confident enough with all of the conversations that we had that each one was at a 70% chance of going through, that we had enough going on that we were going to get them through. And for that reason I felt pretty confident and comfortable with those conversations. But I think it’s just a principle, right? It’s a principle of having a two sided marketplace, there is a startup problem and you need to get people excited, and you need to have, there’s a day one, and that day one needs to be successful. And I don’t think that there was ever a time where people were misinformed on the situation or the company or anything like that, they knew exactly where we were and they knew that we had a lot of conversations going and we were scaling really quickly, and we were. So I felt pretty comfortable with those conversations.

David Yaffe:

But I think the more important thing about that piece is that when you do have that type of two sided problem, it’s really important to just be on top of every possible route that you can go, to understand every player in the market and to have every conversation that you can have.

John Warrillow:

As you reflect back, who was the biggest win? What media organization did you win that really put you over the top?

David Yaffe:

That’s a hard question because we needed a lot, we needed to have a significant amount of critical mass to get there. So I don’t think there was any one specific company that we won, it was more the fact that everything came together within a few months time period. And if you talk to any customer that we had, they were all very happy with the outcome and the product and everything. So I think when you’re talking about this type of scale that we needed to go live, you can’t refer to a single player that ends up pushing you over the edge.

John Warrillow:

And it your case it was, with the media companies at least it was a revenue sharing agreement. So you weren’t, as I understand, asking for cash up front.

David Yaffe:

That’s right.

John Warrillow:

It was simply, sign up and we will share. We will share on stuff that …

David Yaffe:

Yeah.

John Warrillow:

Got it.

David Yaffe:

Which made it really easy for them to go live, there was no risk there.

John Warrillow:

Yeah.

David Yaffe:

And I think classically companies, they give money up front for this type of thing so it was also easy for us, we didn’t have to pay our publishers anything to go live either, we just needed to make sure that they checks that they were getting were sizable enough to keep them excited.

John Warrillow:

Got it, so you’re a kind of classic intermediary if you will, in a two sided market. Did you ever, I know in some cases Care.com for example, has experimented with getting one side of the two sided market to pay. Did you guys ever talk about user fees or getting one of the two sides to pay to join the market?

David Yaffe:

Yeah, the buy side did pay to join the marketplace.

John Warrillow:

Oh, they did? Okay.

David Yaffe:

Yeah, they had to. That was basically how we ended up making money, through fees that happened on the buy side. And yeah, that was a good model. I think we were pretty liberal too, with the amounts of money that we paid out and everything, so that model worked and scaled well.

John Warrillow:

How big did you get the company in terms of number of employees before you decided to sell?

David Yaffe:

It was pretty small. We were able to handle this whole network and this technology play that we built with a relatively small number of employees, it was 25 I think the day that we sold. And we were scaling quickly, we’d actually just raised our series A two months before our final sale which is kind of timing, but yeah, so we were definitely hiring quickly but a small business at that point.

John Warrillow:

Yeah. Bad timing in what respect, why would you say it was bad timing?

David Yaffe:

Well as soon as you raise a series A, you give away 20% of your company, right?

John Warrillow:

Right.

David Yaffe:

If you could not do that two months before you sell that would be pretty favorable, but …

John Warrillow:

So what happened? Why did you sell just two months after raising money?

David Yaffe:

So it was a whole bunch of different factors but basically we had a persistent acquirer that came to us kind of at the beginning of 2016. And they gave a few different offers for the business. And those kept coming back but eventually we kind of said, “We’re not ready to sell, we’re too early, we want to create a big company.” And we kind of shut the door on those conversations. So at that time what I realized was that we had built a platform with a kind of a V1 product, and to get to the next phase we would have to do about six months to a year of product building with the current team that we had. Or I could probably accelerate that by raising some money and getting to this kind of B2 product. And we decided to go that route, the founding team wanted to make a big company. We didn’t leave Google and found this thing to make something that was just a year and a half, two year flip.

David Yaffe:

So we ended up deciding to go the route of fundraising, it was an inside round, one of the investors in our previous round had just decided to take it on. And it was …

John Warrillow:

Is that what you mean by inside round, when an existing investor re-ups and does more?

David Yaffe:

Yeah, they led the next round as well.

John Warrillow:

I’ve never heard that term before, inside round, I’m going to write it out.

David Yaffe:

Okay.

John Warrillow:

Okay.

David Yaffe:

So we ended up decided to go with an investor, it made it a lot faster, we ended up closing the rounds in just a couple weeks. And that was the reason, we were fully expecting to buckle down for the next 18 months, build the product, add a whole bunch of new customers on the new product, and grow. It just so happened that the same acquirer came back and they offered us a valuation that we couldn’t refuse based on our current revenue. And honestly, there’s risks whenever you start a business, right? There’s execution risks, there’s regulatory risks, there’s just everything that goes along with starting a business. And combined with the risks of execution and everything, we decided it was a sizable offer enough to take it off the table.

John Warrillow:

Who was the acquirer?

David Yaffe:

It was LiveRamp.

John Warrillow:

And they had been pursuing you throughout this process?

David Yaffe:

Yeah, they’re a public company. So yeah, we had been talking for a while, they were pretty close, we liked their team as well.

John Warrillow:

What do they do? I’ve never heard of them, what do they do?

David Yaffe:

They’re a marketing space company, they are Identity For Marketing is the tagline. So they help any marketer that has information, that has customer lists of their users, and say they work with someone like for instance, Macy’s or someone like that. Those types of companies have catalogs offline where they’ve been classically working with offline customers that buy stuff and get it shipped to their homes. LiveRamp helps them connect that data online. So they help them take that data and bring it online. And that’s the primary business model, but the space was blowing up at that point. So it was a natural place for LiveRamp to come to us.

John Warrillow:

And what was it that they saw in you that was so strategic for them?

David Yaffe:

We had built out a data asset that was pretty strategic for them and their core business.

John Warrillow:

What do you mean by that? I don’t know what you mean by data asset.

David Yaffe:

So I mentioned how we connected publishers and marketers, publishers had a whole bunch of data, we built out a data asset of a whole bunch of publishers and we were able to take that and introduce them to new publishers that they didn’t have, they didn’t work with. They used that data to connect users online. So we gave them new relationships in that space. We gave them technology as well, the the technology is extremely important. That was the open source thing that I spoke about, and even though it’s open source it was a valuable technology. Because we focused on real time data, so literally when something happens you can start doing analytics on it and using it that moment. So that was something that was very nascent, and still is nascent in the space, being able to act in real time and use data in real time.

John Warrillow:

Interesting. And so did they ever allude to, threaten, doing it themselves? Clearly you guys had built something very quickly, in less than two years. Presumably they have pretty smart engineers too and wouldn’t they be able to do something similar?

David Yaffe:

It’s a good question, I mean this is, especially if you’re talking about that real time data component, it’s a very hard problem. It’s a problem so much so that my next company is focused on it, right? Estuary tries to fill that gap and make it so that any company that wants to use data in real time can get analytics in real time. Classically there’s been this chasm between doing things in what’s called batch, you do it all at once at one time, and doing things in real time continuously. We try to fill that gap by making it so that you can look at everything in both ways if you want to. That piece of technology is really unique, so that’s something that I think would have been very difficult to build for any company. So I wasn’t too worried, to be honest, about a company coming and trying to replicate our technology. The data asset is something that we knew that we would be probably locked in a war against.

John Warrillow:

How did you protect your people from livestream poaching them? I guess your CTO had shares, so he had some skin in the game or she had some skin in the game. But the tier below them, I’m presuming that livestream would have been trying to poach them all of the time leading up to increasing their offer, etc.

David Yaffe:

Yeah. So LiveRamp, but no worries.

John Warrillow:

Oh, sorry. I’ll get the name of the company right. Sorry, LiveRamp.

David Yaffe:

No worries.

John Warrillow:

There is this company called Livestream, isn’t there?

David Yaffe:

There is a company called Livestream.

John Warrillow:

Anyways, I’ll get it right. So LiveRamp would have been, I’m sure, desperate to try to poach those guys and gals underneath your CTO.

David Yaffe:

Yeah, I think being at a startup, one of the things that we had was we had a mission and a vision and we were this really exciting high growth company. And everyone saw it, you could feel it in the company. We would talk about goals and then we would exceed them by two, three X. It was an exciting place to be.

John Warrillow:

Wow.

David Yaffe:

So honestly, I wasn’t worried about that. Everyone was incentivized via equity, all of my employees had reasonable equity stakes in the company. And I think the people that we hired were our mission and vision oriented. They were really great people that I would love to work with again at any point in the future. And I think that’s key, right? When you hire people and you don’t just set, it doesn’t feel like you’re just going to work everyday, it feels like you’re going and you’re working with people that you want to spend your time with. And we worked out of this office that was the absolute worst place I’ve ever worked in my entire life. They were constantly doing construction, I remember there were days when there was dust everywhere and everyone would come in and they would be excited to work there. So it was a special place, I don’t think that that was something I was worried about.

John Warrillow:

What was their reaction when you told them you had sold?

David Yaffe:

They were pretty happy, no one was expecting it except that all of a sudden I was in California three days a week, every week. So some people were a little bit nervous that their jobs were going away because we were folding or something like that. But as soon as we sold, we had a very positive story. One of the things that we did was we set aside a pool of the acquisitions value that was actually more than the employees equity pool and we gave that to the employees. So they all had a pretty positive outcome and they were excited to go into the next phase and build this into a bigger company and take on bigger roles. So yeah, I think everyone was pretty happy after the acquisition, there is always some reluctance that you’re going to a bigger company. And this is the third acquisition that I’ve been through now. Going to a bigger company changes things. So you have to go in with open eyes and understand that it is not going to be the same that it was and that you’re going to have to figure out how to work and do your job within a much bigger organization.

David Yaffe:

So I think that process takes some time and getting used to, but everyone ended up fitting pretty well into LiveRamp and taking leadership roles within the company, taking on meaty tasks, and they were all excited.

John Warrillow:

What was the difference between, on a percentage terms, the original approach and the actual one that you were like, “This is too good to turn down.”

David Yaffe:

On the original offer? It was about ten times different.

John Warrillow:

Ten times? Oh my god.

David Yaffe:

Yeah. About ten times between the first offer and the last offer. And yeah, we were not thinking about selling, and revenue and our place in the market was a point where we just didn’t think that our market positioning could have justified what we wanted out of an acquisition. So we weren’t pursuing anything.

John Warrillow:

What did you say when the first offer, which was one tenth the actual one you agreed to, what was your reaction to them? What were the words, did you react at all? Did you say thanks but no thanks? Or just take us through, I’d be curious to know what you said because whatever you said didn’t piss them off enough to turn them away.

David Yaffe:

Yeah. So I think the best way to approach those situations, is by saying, “I’m not interested in acquisition right now, but we would love to figure out a way to partner together so why don’t we have those types of conversations?” And that actually did lead to a partnership route, and the partnership route in which we could kind of work with each other and see if each other’s businesses would be complimentary, which they were. And I think that also allowed our teams to get to know each them, them to know that we were the real deal, that our technology was the real deal. So the pivoting into the partnership really does help with those types of conversations. And we had that a couple of times, where we were small and companies were like, “We would love to buy you.” And, “No let’s partner.” So it gets to be second nature after a while to be able to say those words.

John Warrillow:

And how many times did they come back and say, “This partnership is great but we really want to acquire you.”? Like the first time? How many more times until you said, “Okay, I give.”

David Yaffe:

I think it was about three or four. It was hard, honestly.

John Warrillow:

And were those actual letters on intent David, were those formal, “We want to buy you, here’s the offer.” Or were they just kind of conversations over dinner, sort of thing?

David Yaffe:

We got to one letter of intent before the actual one that we ended up accepting.

John Warrillow:

Yeah.

David Yaffe:

And it was a hard thing to say no to, so it took us a while to kind of band together and say we want to do something bigger, we want to make a bigger company, on that last offer that led to a letter of intent. I think I wasn’t prepared for how difficult it would be to turn down some bigger offers that came our way.

John Warrillow:

What made it difficult?

David Yaffe:

It’s just life changing, you’re turning down a life changing event where you’re de-risking your operation, you’re accomplishing a lot of goals that you had set out for yourself. So, saying no to something that you previously probably would never have said no to, but you just happen to be in the right place at the right time and have built a nice company that you know can be worth a lot more. It’s a very difficult situation to put yourself in. So I think there’s no way to prepare you for that situation, right? And also I was at the role of CEO, so in the end it was my decision to say yes or no to these things. And we got to points where I remember my co founders were like, “No you just make the decision.” And that made it even harder.

John Warrillow:

“No, no, I want your input.”

David Yaffe:

Please tell me no so I can just say no.

John Warrillow:

Yeah yeah yeah. What was the structure of the investors, did they have preferred shares, were they guaranteed some sort of preferred return?

David Yaffe:

No. We had one class of shares. So we had preferred and common shares like the way that any normal startup does, we didn’t have preferences though, on our preferred shares.

John Warrillow:

So they got paid out at the same rate you did?

David Yaffe:

Yeah exactly, so the investors ended up getting paid out at the same time.

John Warrillow:

And what was the reaction to the investors at these increasing offers, as the offer keeps going up and up, I’m assuming you’re sharing that with your …

David Yaffe:

Yeah, you share that with your board.

John Warrillow:

Yeah.

David Yaffe:

And you get their response.

John Warrillow:

What’s their reaction?

David Yaffe:

They were happy that we were getting offers, it wasn’t a fund changing event for them, at the lower amounts of value we weren’t going to make their fund. So they extremely supportive, I would say first round capital is a great VC to work with, we have had an extremely positive experience working with them. The feedback from them was always talking our side and telling us that we should do what we want, and that they believed in us to build a much bigger company as well. So they would be happy if we continued down the path and that would be obviously, more economical for them if they ended up getting a billion dollar exit or something like that. But they were generally supportive, we never got to a point where we had a contentious conversation with an investor. And think that it was key for us to interview our investors up front and make sure that we knew what we were getting into. We knew that we had done diligence on the people who were putting money into the company so that we knew that how they handled good times and also how they handled bad times.

John Warrillow:

When it comes to the final offer where you finally said, “Okay, I give.” What was the straw that broke the camels back? Why that time? You mentioned it was such a large amount of money that it would take years, lots of operational risk to achieve that same valuation.

David Yaffe:

Yeah. So I think when I looked at our timeline for putting the next product into market, it was probably six months out realistically to start selling the next product. Then we had execution risk after that on being able to sell the product, we had to get into a new type of buyer who would want that new product and that’s a pretty substantial execution risk. I also have always looked at the marketing market and seen that there’s privacy laws that come into play, for instance, GDPR was coming out around then which is a European privacy law. Which we knew that there could easily be the California one which came out eventually, and we just didn’t know from a regulatory risk standpoint, what the market had in it. So de-risking from that point of view as well as from the execution point of view, those two things combined really helped us get over the hump.

David Yaffe:

And I can tell you that once we said yes to that offer, I slept the best I had slept in I think probably six months afterward.

John Warrillow:

What was that period like between the time you said yes to the offer and the check hitting your bank account?

David Yaffe:

It was a sprint, a mad dash to get things in order, we were a two year old company and we were not expecting to sell so our books were not the best in the world. We had to go and redo our accounting books and go through a whole period of diligence. And so that process was very little sleep and it was a whole team effort to try and get everything in order to make the thing happen. But both parties really wanted to complete the acquisition and because of that it made it a lot easier, it made it so that we worked together hand in hand to get the thing done.

John Warrillow:

Was there are re-trading at the end?

David Yaffe:

No, there really wasn’t any re-trading, we signed the LOI and all of the terms. We had done the negotiation previously so we had pretty much agreed on all of the terms. So there really wasn’t any re-trading. The negotiation itself was pretty tough right before was actually said yes to the acquisition.

John Warrillow:

What made it tough?

David Yaffe:

I think any negotiation is tough, there are so many terms that you don’t even think about, there are so many triggering terms. One of the things that we had was we had to hold back since we were such a young company, they held back some of the value of the acquisition which was paid over time. And you could imagine that anyone, any founder in that situation wants to make sure they’re going to receive their value. So you need to make sure that you have the right triggers in place to cover yourself. So I think those types of things are really important for any founder who is thinking about selling their company.

John Warrillow:

When you talk about a holdback, is that the same thing as an earn out, or was it in ESCRO, or what was it specifically?

David Yaffe:

It’s the same thing as an earn out, you could think of it being an earn out where part of the acquisition’s value was held back and paid over a specified period of time.

John Warrillow:

Contingent on you achieving goals, or just staying with the company?

David Yaffe:

No, staying with the company. I think that my primary advice to any founder would be never agree to a performance based earn out. Because that’s too difficult based on changing priorities within a company or just changing market landscape or you getting the support that you need to achieve those goals within the required time.

John Warrillow:

So what was your earn out tied to? Simply tenure, that you showed up for work everyday?

David Yaffe:

Yeah, most of those earn outs are basically structured in the same way.

John Warrillow:

Got it. Yeah. Interesting. Go ahead?

David Yaffe:

What I would say is that I think that it’s important for, just to put realistic earn out timeframes in place for acquisitions because most likely, you’ll have achieved your goals within two years. Your goals with incorporating your company into the larger company and making that a success. So another piece of advice I would probably give to founders would just be to keep that in mind with regards to timelines of earn outs.

John Warrillow:

I’m just trying to parse that advice, are you saying don’t make them too long?

David Yaffe:

Yeah, exactly. I think realistically, most startups you can achieve a full enveloping of your company within the larger company and synergy within two years. So I think that’s a good timeline for most earn outs.

John Warrillow:

Got it. I want to change gears and just talk to this kind of personally for a moment.

David Yaffe:

Sure.

John Warrillow:

It’s just an incredible story, it must feel a little bit like winning the lottery in a way. I don’t mean to say that to discount what you did, what you achieved, the incredible insight, the experience, but from taking a company from zero to a nine figure exit in two years has got to feel like winning the lottery on some level.

David Yaffe:

It’s surreal for sure when that happens. And it’s mostly because I think we were on a great path, the company was doing super well and we would have …

John Warrillow:

You hear about people who win the lottery and they go kind of crazy, they buy a bunch of stuff, everyone that they’ve ever known asked them for money, what happened to you? Did all of that stuff happen, or?

David Yaffe:

I think it took me a little longer to get used to the idea of the exit, afterwards. So personally there was this phase of readjustment where you figure out what your new goals should be in life. So I think that phase took me probably the better part of a year just to figure out what …

John Warrillow:

Because you had a financial number that you wanted to hit and you hit it?

David Yaffe:

Yeah exactly. So you take the better part of a year to figure out what’s next, what do you want to focus your life on, what do you want to change? What’s going to motivate you at that point?

John Warrillow:

What did you come up with?

David Yaffe:

So first I started investing, I did a decent amount of angel investing, and I think it turns out that I’m more of an operation person.

John Warrillow:

Okay.

David Yaffe:

So I started another company back in October of last year.

John Warrillow:

So before we get to that though, why bother? Why not go climb mountains, build a charity?

David Yaffe:

Well I do that.

John Warrillow:

Oh, you do that too, okay.

David Yaffe:

Yeah.

John Warrillow:

But what is it about starting another business that was, because at some point you’ve got enough money, why? Do you know what I mean?

David Yaffe:

Yeah, so I think building things and creating things is something people who do this just can’t stop doing. And there is always going to be your side fix of climbing mountains or doing whatever you do and for me that is a really big thing in my life. But I think you can’t replace the day to day creation. And parts of company building that you don’t get in any other thing for me is working with really great people on a day to day basis. And coming up with a nice environment for us to build and invent things. And for me, that’s really important, it’s been some of the best experiences I’ve had and I hope to continue.

John Warrillow:

Can you describe the first time you shared the final offer number with your spouse? What was their reaction?

David Yaffe:

Yeah, I think actually a funnier one was, even then my spouse was when I shared it, my new apartment with my dad.

John Warrillow:

So wait a minute, the new apartment with your dad. So you bought a new apartment as a result of the exit?

David Yaffe:

Yeah exactly. So my dad has built houses his whole life, and he’s built tons of amazing homes and stuff, and he came over to my place and he was looking around the top floor and he just had a tear in his eye and was like, “I’m so proud of you.” And I don’t think my dad’s ever told me he was proud of me.

John Warrillow:

Wow.

David Yaffe:

So that was a pretty important moment for me.

John Warrillow:

I imagine.

David Yaffe:

Yeah.

John Warrillow:

Yeah I’d imagine that would feel pretty good for him and you.

David Yaffe:

Yeah for sure, for sure. But yeah it’s definitely a life changing type of thing.

John Warrillow:

Speaking of changing lives, so let’s talk about the new company, because you’ve alluded to it, Estuary.dev, am I getting the URL right?

David Yaffe:

That’s it.

John Warrillow:

Okay. So I think of Estuary as a river that empties into an ocean, am I getting that right? But tell me what does the company do, what’s your vision?

David Yaffe:

That’s right. So the name of that is because we work with data infrastructure and we work with streaming infrastructure. And streaming, what it means is that you’re working with things that happen in real time, so an event gets triggered and you actually deal with it then, you can report on it then. So our goal is to make it extremely easy for anyone to implement that type of infrastructure at any scale. Right now the alternative is actually, it takes a big distributed team of engineers. And we want to make it as easy just a sequel, effectively. So we’ve been working on that for about a year now and just building product.

John Warrillow:

Cool, and so people can check that out at Estuary.dev?

David Yaffe:

Estuary.dev, that’s it.

John Warrillow:

Great, and then do you accept LinkedIn connections, is that something you’re into at all? Or is Estuary.dev the best place for people to reach out?

David Yaffe:

For sure, my name is David Yaffe, and you can search for me, I’ll come up on LinkedIn.

John Warrillow:

We’ll put it in the show notes and it’s Yaffe, I believe, right?

David Yaffe:

That right, you’ve got it.

John Warrillow:

David, your story is amazing, it is incredible. I hope I wasn’t in any way discounting what you achieved by suggesting that it was such a short timeframe, I just think it’s incredible. I’m so grateful for you sharing your story.

David Yaffe:

No, we didn’t expect that timeframe either. And I think we were expecting fully to go at this thing for another six years but when the offer comes along it’s always good to take it.

John Warrillow:

What is it? Make hay when the sun shines?

David Yaffe:

Exactly, yeah.

John Warrillow:

David, it was a pleasure to be with you.

David Yaffe:

All right, you too, take care.

 

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