STARTUPS DON’T GET SOLD. THEY GET BOUGHT.

This was originally posted on Swedish Startup Space.

In 2008 I was the Head of Fraud Analytics for FraudSciences, an Israeli startup developing fraud prevention solutions for eCommerce. One evening in January of that year, we convened to talk about our annual plans. Our COO, a quiet guy in his 50s, said: “First thing’s first: the PayPal test results are in. They want to work with us. But they want us to bear their logo”. Then he let out a small smile, and went silent.

The room was completely silent, too. We’ve never contemplated an acquisition. Everything was going great. Last summer, we ran our system on PayPal’s data as part of due diligence for our impending C round. We were geared for war, and we felt like we were going to win. Nothing was going to stop us.

Other than a $169,000,000 acquisition offer from PayPal, that is.

ALWAYS HAVE A NUMBER.

Fast forward to 2011. I was the VP of Analytics for Analyzd, a predictive analytics shop I started with my brother, Yuval, after leaving PayPal in 2010. Our staff of four flew in to Stockholm from Israel, San Francisco and Berlin and we were running full speed with Klarna’s Risk team, trying to rethink strategy for Klarna’s European expansion as part of a consulting project. It’s been a few good months since we started working and spirits were high – the home team was open to our suggestions, and making a lot of progress. At the same time, Yuval was pitching VCs on an innovative merchant risk product Analyzd was working on. When Sebastian, Klarna’s CEO, asked me to join him in a meeting room, I was preparing for a status report.

If you ever saw Sebastian, you know what his selling technique is. More than 190 cm tall, bright blue eyes, he stares directly at you as he makes his proposition. Now he was staring at me. And he was basically asking, “how much for the whole team?”

Were we planning to get acquired? Not really. We had a lot of incoming opportunities, and a brewing funding round. We knew that high growth startups are almost never valued the same way by founders and potential acquirers. We also knew that this wasn’t our last venture, and Klarna was a rocket ship destined for greatness. So we gave an audacious number; Klarna had to want us bad enough to agree, but wouldn’t feel ripped off if we delivered.

For better or worse, Sebastian accepted.

HOW DO I SELL MY STARTUP?

I get asked this question every few months, interestingly, never by people in the Bay area. The large number of talent acquisitions by Facebook, Google and Yahoo, driven by an incredible competition for talent, is misleading. A group of engineers getting acquired before releasing anything isn’t the norm, but rather the exception, and if you’re looking to flip a company before creating value, I can’t help you. This post discusses getting the offer and deciding whether to sell or not.

ARE YOU TIRED?

Tired founders are one of the most common reasons for selling. At FraudSciences, our team of 3 years was interested in fighting, but the founders had a 4 years’ lead on us, having started working on the technology as early as 2001. They were tired, and they wanted to cash in, and it was their right to do so.

If you’re tired and want to rest and vest, take the offer. Enjoy the short-lived fame of an acquired founder. Recharge, rethink, and then move on to your next thing. Leaving to start something new becomes much easier after some liquidity.

Before you sell, though, consider why you’re tired. Is the company doing well, but you’re tired of your role as CEO or CPO? Maybe getting a strong operator to help you can take some load off. Are you financially strained? VCs have become much more sophisticated in providing liquidity to founders and executives. Neither are reasons to sell if you don’t really want to.

IS THE ACQUISITION ROCKET FUEL FOR YOUR PRODUCT?

Why did you start this company? For many of us, the answer is that there’s a problem we’re passionate about and want to solve. When the acquirer is the right one, joining forces with them can supercharge your business. PayPal with eBay, Android with Google, there are many incredible examples.

In Analyzd, though a much smaller team, we wanted to build a think tank for risk management that will change the way the industry thinks about itself, its goals, and the way it operates. Driven by Klarna’s tremendous growth, we reached amazing achievements in two years, while Yuval built the company’s Product organization from scratch. Would we have reached the same goal going at it alone? I want to believe so. But we made it so much faster with Klarna, and were also able to participate in its amazing success. That’s an all-around win.

MONEY COMPETES WITH MONEY.

If you’re not tired, don’t view an acquisition as supporting your long-term goals and generally tend towards not selling, make sure you make the most out of it. A good acquisition offer effectively gives you a price. It may be a good opportunity to raise your next round and end up with a bigger war chest, with lower dilution than you would have otherwise. Money competes with money. Use the offer to jack up your price, stuff your coffers, and grow your business.

BOTTOM LINE

If you received an acquisition offer, congratulations! You already created value that someone is interested in. Startups don’t get sold, they get bought, and someone wants to buy you. Price negotiations aside, are you ready to sell? Should you sell? What are good reasons to sell? Don’t discuss an acquisition for the wrong reasons; negotiating the sale is much more than just the price, and it will wear you out and kill your business if it falls through at a too late stage. Consider your options, understand what you set out to achieve with your company, and go do it.

Dealing with Account Take Over? Here are my top tips (O’Reilly post)

Online payments and eCommerce have been targets for fraud ever since their inception. The availability of real monetary value coupled with the ability to scale an attack online attracted many users to fraud in order to make a quick buck. At first, fraudsters used stolen credit card details to make purchases online. As services became more widely used, a newer, sometimes easier alternative emerged: account takeover.

Account takeover (ATO) occurs when one user guesses, or has been given, the credentials to another’s value storing account. This can be your online wallet, but also your social networking profile or gaming account. The perpetrator is often someone you don’t know, but it can just as easily be your kid using an account you didn’t log out of. All fall under various flavors of ATO, and are easier than stealing one’s identity; all that’s needed is guessing or phishing a user’s credentials and you’re rewarded with all the value they’ve been able to create through their activity.

Read more on O’Reilly’s programming blog here.

Working on risk and fraud prevention? Don’t dig your career into a hole

I give this talk about Risk Management called The Top 8 Reasons You Have a Fraud Problem. I learn a lot from the way audiences respond to it, mostly from objections. Most commonly, objections tell me how risk managers paint themselves into a corner in day-to-day work, effectively limiting their ability to drive change or participate in key business decisions.

How do they do that?

First, they make losses their one and only benchmark. It’s easy to focus on reducing losses when the business is taking hits, it’s your job and it’s what’s expected of you. But overcompensating and focusing on aggressive loss reduction whenever possible, while rejecting troves of good customers, will not only limits your business’s growth prospects – it turns the risk manager into a single-issue player. Revenue enablement must be a core KPI for the risk team or it will lose relevance.

Second, risk managers focus on maintaining status quo. When one lacks tools and methods to control their environment, their first response is to try to make sure that nothing ever changes. It’s not the risk team’s job to say no to everything new; it’s their job to find a way to say yes. That’s where the technological and organizational edge is. Find ways to enable new business by shifting risk across your portfolio and finding detection and prevention solutions that support even the craziest marketing ideas. You may flail at first but long-term, you’re building an important muscle.

Last, they tend to distrust the customer. It makes sense – when faced mainly (and often solely) with the malfunctions of the operation, often caused by customers themselves, one tends to stop believing in people’s good intention. That starts becoming a problem when every product design process turns into a theoretical cat-and-mouse game where every possible abuse opportunity must be curbed in advance. You should let users be users, and that means that there will be breakage and there will be losses. Zero losses can easily be achieved by stopping all activity in your system; you should accept that some customers will be bad and find a way to detect these as they act in your system, rather than limit every customer’s ability to use your product.

As I often write, risk teams are multidisciplinary and must think about operations, data science, product design and more. Whenever one focuses on limiting risk instead of trusting users, challenging the status quo and enabling new business, they are contributing to turning risk into a control function, a technocratic add-on that doesn’t deserve a seat at the decision makers’ table. Make sure that’s not you.

(If you want to read some concrete advice on how to do that, take a look at my free eBook here)

Why did PayPal buy Braintree?

(Pasting my Quora answer here)

PayPal wants to be anywhere payments happen and it seems to be willing to pay a good price for that. Beyond the standard dynamic where the leader buys one of its most affordable up and coming competitors, PayPal acquired a few nice assets:

- The Braintree team is strong, with multiple highly talented folks that are both well known in the industry (= strong advocates) and generally capable.
- The product is superior to anything PayPal has in gateway tech. PayPal acquired Verisign’s gateway a long time back but that integration was not synergistic. With new PayPal management and Braintree’s product, they can get better access to a large and growing volume of gateway payments. This is a good and needed complement to PayPal’s portfolio.
- Last but not least, PayPal bought a foothold in the upmarket – medium and large merchants that usually do not use standard PayPal products due to lack of UX flexibility and integration, as well as strong presence in mobile payments.

So, bottom line, PayPal acquired a team, a product and a market. A smart move.

TrueAccord is looking for a community manager

TrueAccord is reinventing the debt collection process through data and behavioral analytics. Instead of the grim and negative experience it is today, we’re turning the collections process into one that allows debtors to grow, and improve their financial standing.  Since we’re dealing with such a contentious situation, customers often reach us angry, disappointed, and negative. This is where we can help them the most.

As a community manager, you will be in charge of communicating with our customers and the general public through the use of our internal tools as well as all standard social media outlet. You will help define, promote and support the company’s brand as well as the impeccable service it aims to provide its customers.

You will:

  • Manage day to day interaction with customers and solve issues that our system cannot address
  • Manage the company’s outgoing social media participation through Facebook, Twitter, blog and so on
  • Monitor the company’s social presence and participate in online conversations wherever needed
  • Participate in PR and marketing activities

The ideal candidate:

  • Is passionate about helping people through rough times and can exude empathy and positivity even under pressure
  • Has superb writing and speaking skills; English is a must, Spanish is a big plus
  • Is highly proficient and has tangible experience in using social media: Twitter, Facebook, blog and other social media outlets
  • Is motivated to work for a startup at its early stages and eager to participate in setting a direction for the company’s brand and voice
  • May have consumer marketing experience – this is a plus

Note: this is not a debt collector’s position. Debt collection experience isn’t required and is in fact discouraged for this position.

For more details, please send resumes to osamet67@gmail.com

BitCoin mass-adoption challenges

Crypto currencies, specifically BitCoin, are touted as the next big thing in financial
services. A secured, encrypted, technologically advanced platform that can support
monetary transactions across the globe is a dream come true for a lot of financial
services innovators hoping for a borderless financial world. This wave of innovation,
while still nascent, bears a lot of advantages.

It’s important to note, though, that not everything is green in the realm of BitCoin. While
some disadvantages are obvious – exchange rate volatility and lack of sufficient market
making are two obvious ones – some are less obvious, and are sometimes mistakenly
presented as advantages by newbies to the industry. Specifically, I am referring to fraud
using or on the BitCoin platform, and misconceptions about its feasibility – while some
may think it is much safer than other means of payment, that is absolutely not the case.
With BitCoin’s no-recourse movement of funds, transactions are subject to two types of
fraud: supply side fraud, and social engineering. Their prevalence might hinder mass
adoption of crypto currencies and must be addresses by the ecosystem before those
can be used the proverbial “normals”, the majority of consumers.

When a consumer purchases online using a credit card, the merchant charging the card
isn’t protected from fraud the same way they would be if charging the card in the offline
world. No issuer, acquirer or card network provides any fraud protection and merchants
can easily be victims of stolen cards or “friendly fraud”, a term describing customers
making actual purchases then charging back alleging fraud, while keeping the goods.

Defending oneself from chargebacks is difficult for merchants and fraud constitutes a major line item in retailers’ financial statements. However chargebacks serve a purpose: they
protect consumers from fraudulent merchants, failure to provide service and other
issues. With no ability to reverse transactions, no consumer protection is possible,
hence more and more fraud is perpetrated by those who pretend to be merchants. As
merchants, they can sell a service or product while charging in advance, and never ship
the product (or never own it in the first place). Consumers who pay find themselves out
of their money and the product they were offered, with no ability to reverse a payment.
Thus, demand side fraud becomes much more appealing to fraudsters.

This lack of protection hurts consumer trust. It also amplifies the damage from each
fraud case. A single fraudster using a stolen credit card may shop for $1000 in stolen
goods; a single fraudulent shop can easily scam dozens and hundreds of consumers.

The other thing to consider is social engineering. Fraud wasn’t invented in the 20th
century nor is it dependent on credit cards. There is a reason why Western Union or
MoneyGram was and still is a favorite for 419-type (“Nigerian”) scams; it, too, has no
option to reverse a payment. Every complex system is as strong as its weakest link, and
BitCoin is no different; the human element is its biggest failure point. As the SEC brings
to trial a man accused of running a BitCoin ponzi scheme, it becomes obvious that no
encryption beats greed and no sophisticated technology beats lack of good judgement.
In that sense, BitCoin isn’t different than any other means of payment, for better or for
worse. It is just not any safer.

Crypto-currencies hold a big promise for a more sophisticated financial infrastructure,
but the discussion about them is still limited to a small group of techies. As the world of
those currencies expands to meet the average user, questions regarding consumer
protection and social engineering must be dealt with, otherwise BitCoin will fail to be
adopted. We cannot just trust the users to be sophisticated, as we have all consistently
demonstrated that as a crowd, we are not sophisticated at all. In a sense, the same lack
of a governing 3rd party guaranteeing at least some protection or recourse, justifiably
hailed as the platform’s greatest advantage, is also one of its biggest disadvantages.
That, too, needs to be a part of an informed discussion.

How to get the most out of your acquired entrepreneur

I have a friend, let’s call him Joe, who’s an entrepreneur. Joe’s company was acquired a couple of years ago by a larger company, and Joe was left in charge of a suite of products only he could run for this company. He was doing very well but had the usual corporate complaints: it was too rigid, it was too slow, he didn’t enjoy it. We shared some of our war stories.

Then, one day, Joe was walking by a conference room where his CEO was hosting a group of b-school students, talking about acquisitions. The CEO calls Joe in, introduces him to the class, and says: “do you know what is the first rule when acquiring a company? Fire the entrepreneur. They never fit in, and they give you bigger headaches than anyone else could”.

As Joe was telling me this, I think he agreed with his CEO. I did too. Entrepreneurs are often celebrated and applauded in the Bay area, hailed as business leaders and innovators. That’s often true. However, there’s another thing that’s true, that acquirers find out quite often: most of us are individualistic, unmanageable hotheads who can’t, or at least won’t, play well within the corporate culture. It makes sense, too: had most entrepreneurs been able to or interested in participating in the corporate power structure or dynamics, most of them wouldn’t have become entrepreneurs.

Since I first heard Joe’s story, it resonated in many stories I’ve subsequently come across. Entrepreneur meets CEO. They become business BFFs. CEO acquires entrepreneur, hoping for higher returns and synergies. The entrepreneur is exhilarated: finally, he’s able to super charge his strategy in a much bigger organization. Acquisition goals? We’ll get them in no time. I’ll just do what I always do. The time bomb starts ticking.

Fast forward 12 months and the situation is almost beyond repair. The CEO has an energy ball running around the building calling his middle managers lazy and their process folks idiots. Every second person in his company is irritated by this person sitting in meetings making everyone else feel stupid. Plus, the guy’s team has set up a barricade and is unwilling to integrate with corporate systems, come hell or high water, because theirs are better. In the meantime, the entrepreneur is plucking out hairs due to the slow pace. Everyone’s so slow! Everything requires permission! He’s being asked to provide status updates and someone can override his operational decisions! All hell is about to break loose.

Not an ideal scenario, is it? That’s the worst case, of course. The usual case is a much more tame version of the same problem, with the entrepreneur still being unhappy and looking to eject as soon as his vesting has crossed some major milestone. How do you prevent this from happening? Here’s some advice.

  • Fire the entrepreneur. Joe’s CEO’s advice still holds. Hiring entrepreneurs to do what they did with their companies, only internally, seldom works. If you need a team, get the team. If you need the product, get #2 in the company to run it. Move the entrepreneur aside and let him work on something interesting and open ended, usually solving a really hard problem.
  • Keep them self sustained. The best use for an acquired entrepreneur is as head of a business or functional unit, separated from others and hopefully with its own infrastructure. Let them run free. If you put an entrepreneur in a role that requires them to touch all parts of the organization – well, they will. Big time. That can prove successful in one use case only: when you put them at the top, like eBay did with David Marcus. Otherwise, be ready for some turmoil. Entrepreneurs didn’t get to where they did by setting up committees and inclusive communication, and there’s no reason to believe that they’ll start when you acquire them.
  • Manage by KPIs/challenges. Once you have them overseeing a well defined area, give them concrete targets to hit. An unchallenged entrepreneur will get bored and either eject or try to redefine his mission, which often means stepping on other people’s toes. Set goals. If they’re met quickly, set more aggressive goals. Aggressive targets and the free hand to pursue them is what drives entrepreneurs. Give it to them and you’ll get an effective force. Let it slip and you’ll get mayhem.

Entrepreneurial people can be a positive force, if I may say so myself. Acquisitions happen because they, we, create value. However mismanaging an entrepreneur often results in both sides being less happy and successful than they could have been. Taking a few precautions can help your acquisition dollars do so much more for you.

 

Babylon’s bait and switch (updated)

(UPDATE: Babylon responded and this matter is sorted out. See the bottom of the post)

This is off topic for this blog, but I wanted to tell you about a product experience I found preposterous, on the verge of misleading, by a company I thought was serious.

I’m working on a project and found out that I needed some text translated to Spanish. Since this is a proof of concept I didn’t go to a regular translator but was looking for a cheaper alternative. Yes, I know, you pay peanuts etc – I get it. I needed a quick translation to check something.

A trusted connection suggested Babylon’s translation services. I went ahead and found the website. The form counted my words, suggested a price for the word count, and sold me up on “proofreading”. Not sure what that is, but I went with it. Altogether $12 that I happily spent to get one small translation. Roughly 50 words.

Then, a day later, I get this email from someone named Orly:

Dear Ohad,

My mane is Orly [redacted] , I’m Babylons professional translations project manager.

I noticed that your last request is for translation of 56 word and proofreading. According to that it comes to the total of 84 words.

Currently your account shows the balance of 75 words, so there are 9 words missing.

Please purchase a suitable package that covers your needs so we can proceed with the translation and send you the results as soon as possible.

Thank you and awaiting your reply.

Wait, what? The website gave me a price. I said ok. I paid. Suddenly there’s a higher price to pay? What’s this about? I asked:

I paid $8 for translation and $4 for proofreading as your website asked me to. I don’t understand why I’m being asked to pay more. That doesn’t make sense to me. Do you have a different price than your website?

Because hey, maybe I’m dealing with the militant faction of the human translation network. Like an unplanned road block by the militia. Diligent Orly promptly responded:

Thank you for your reply.

The payment of 12 $ (8$ translation + 4$ proofreading) is related to 50 words translation and 25 words proofreading.

You exceeded this amount -56 words translation + 28 words proofreading.

Due to that you need to add more words to your account in order to get it done.

Something is clearly not coming through. So far I’m far beyond the “One page in one hour” promised on their front page, but hey, there’s an asterisk and maybe my text is that kind of text (it’s not). I try again:

But that’s what your website asked me to pay. How does it make sense that I ask for something, your website asks me for a certain payment, and suddenly I need to pay more?

Trying logic. She replies:

The website offer you to purchase the word quantity according to your decision.

The website doesn’t know how many words you intend to translate. In that case you should choose a bigger words package that will cover all the words.

But, wait, the website has a word counter. It gave me an offer based on my word count. In fact, the price changes according to word count. Check it out.

At this point I decided it wasn’t worth my time. I will move to another service and leave Babylon and their bait and switch techniques to themselves. I asked for a refund and I fully intend to cancel the charge if I don’t get it within three days, as my concern about this company grows. I just want to put the word out there: be careful with Babylon.

UPDATE: I got a response from Babylon. David from the team asked for the following response to be posted:

“We would like to apologize to Ohad. There was a problem with the Babylon Human Translation website, of which our translation account managers were unaware, that caused it to report a faulty word count. It was this glitch that led to the misunderstanding. We are sorry for any frustration or inconvenience this may have caused.”

I appreciate Babylon taking this seriously!