Rumors first surfaced last month that Google was going after cloud security startup Wiz and a $23 billion offer was on the table, the most lucrative offer ever made for a startup. Before the deal eventually died, there would have been a lot of moving parts, and it’s fair to ask: What are the mechanics when a big deal like this is set in motion, and how does a startup decide to sell or not?
We spoke to Jyoti Bansal, who is founder and CEO at Harness, a developer tools startup that has raised approximately $575 million and has made a bunch of small acquisitions along the way. While Bansal doesn’t have direct knowledge of the Google-Wiz negotiation process, he experienced being courted by a large company when Cisco came after his previous startup AppDynamics. Cisco ended up buying the company just a few days before it was set to go public in 2017 for $3.7 billion.
He says there are three factors in play when it comes to deals like this. The first is how serious the offer is and whether it’s concrete or just exploratory. For a private company like Wiz, chances are it’s going to be exploratory at first because there is not a lot of public information available on its financials as there would be with a public company.
Bansal says when he went through the AppDynamics negotiations with Cisco, he had recently filed an S-1 with the SEC and all his financial cards were already on the table. “So for an acquirer, acquiring a private company that’s on the IPO path and a few days from an IPO is essentially no different than acquiring a public company,” he said. “All the information they need is out there, and they don’t have to worry about if they’re missing some information, or the information is not clean, audited or scrutinized.”
Once you determine how serious the company is, you have to explore whether this would be a good match. “The second factor in any kind of courtship that happens is what’s the reason for the combined company? Is that interesting? Is that exciting?” You also have to take into consideration what happens to your employees and your products: Will some employees lose their jobs? Will products be deprecated or canceled?
Finally, and perhaps most importantly, you have to scrutinize the economics of the deal to see whether they make sense and whether they are a good value for shareholders. From Wiz’s perspective, it was a huge offer (assuming the rumored amount was accurate) that was 46 times its current ARR and 23 times its projected 2025 ARR. Yet Wiz thought it would be better off remaining a private company.
In Bansal’s case, when Cisco came a courtin’, he was in the middle of his company’s IPO road show. It was days before the company was going public, but even with the information out there for Cisco to analyze, there were discussions, and it wasn’t easy for Bansal to give up his baby, even if the price eventually was right.
The two companies knew that there was a strict deadline in front of them. Once the IPO happened, that would be that. The negotiations ended up involving three offers, and when it was over, Cisco got its company. “Ultimately, it comes down to what’s best for all the shareholders in terms of risk and reward. It’s all about what’s the risk of being independent versus the reward of selling,” Bansal said.
The first offer was in line with IPO value and was an easy no. The second one was better, but after discussing it with the board, Bansal said no again. “Then they came back with a third offer, and in the third offer, it made sense from a risk versus reward for our shareholders to sell the company.” And sell they did in the range 2.5 to 3 times the IPO valuation.
It’s easy to think that with billions of dollars at stake, it would be an easy decision to sell, but it really wasn’t. “It was not an easy decision from our side. It sounds like [$3.7 billion] is a very easy decision.” But he says you have to poll your investors, your fellow executives, your board members — and they all have different interests, and you are trying to come to the right decision for everyone involved.
Wiz thought it was better staying independent. For AppDynamics, with the pressure of the IPO deadline looming and a good offer on the table, the company finally went for it. “So for us to independently grow into that valuation of two and a half, three times more than our IPO valuation would have taken us at least three years of good execution to grow into it,” he said. “And there were a lot of unknowns, a lot of risk for the company like what happens in the next three years.”
But that doesn’t mean he doesn’t have some regrets in spite of making more than 300 of his employees millionaires with the transaction and personal wealth for himself. When he looks back at the timing of the announcement, he realizes that it’s entirely possible he could have made that much money and more.
“I always wonder what AppDynamics could have become if we had gone through with the IPO. There are a lot of unknowns, and hindsight is 20/20, but if you look back, we sold the company in 2017, the few years after that sale, after 2017, were some of the best boom years in the tech industry, especially for B2B SaaS,” he said. In the end, he might have made more, but instead he started Harness, and he’s happy building a second company.
It’s important to note that Wiz’s offer remains mired in rumor, so it may or may not be that much money. But if it was, the founders could also have regrets if Wiz doesn’t grow into the value it could have had if it had taken the big money money and run.