Last month, rumors first surfaced that Google was targeting cloud security startup Wizz, with a $23 billion offer that would be the most lucrative offer ever for a startup. There were probably a lot of moving parts before the deal ultimately fell through, and it’s fair to ask: What are the mechanisms when such a big deal is initiated, and how does a startup decide whether to sell?
We spoke with Jyoti Bansal, founder and CEO of Harness, which has raised about $575 million and made several smaller acquisitions along the way. Bansal doesn’t have direct knowledge of the Google-Wiz negotiations, but she was courted by a larger company when Cisco followed in her footsteps with her previous startup, AppDynamics. Cisco eventually acquired the company for $3.7 billion just days before it went public in 2017.
He says there are three factors that come into play in such deals. The first is how serious and specific the offer is, or is it just exploratory. For a private company like Wiz, it’s likely to be exploratory at first, because there isn’t as much public information about its finances as there is for a public company.
Bansal said when Cisco and AppDynamics were negotiating, he had recently filed an S-1 with the SEC and all the financial cards were already on the table. “So for an acquirer, acquiring a private company that is on the path to an IPO and a few days away from an IPO is essentially no different than acquiring a public company,” he said. “All the information you need is there, and you don’t have to worry about some information being missing, or information not being filed, or not being audited or reviewed.”
After determining how serious the company is, you need to figure out if this is a good fit. “The second factor in any type of courtship is, what is the reason for the merged company? Is it interesting? Is it exciting?” You also need to consider what happens to the employees and the product. Will some employees lose their jobs? Will the product be scrapped or canceled?
Finally, and perhaps most importantly, the economics of the deal need to be closely examined to ensure it makes sense and is a good value for shareholders. From Wiz’s perspective, it was a huge proposition (assuming the rumored price is accurate): 46x current ARR and 23x projected 2025 ARR. However, Wiz felt it would be better to remain private.
In Bansal’s case, he was on the road show for the company’s IPO when Cisco began courting him. It was days before the company went public, but even though Cisco had information to analyze, the discussions were ongoing and it wasn’t easy for Bansal to give up his baby, even if the price was right.
Both companies knew there was a strict deadline ahead. Once the IPO happened, that was it. The negotiations involved three offers, and when they were done, Cisco bought the company. “Ultimately, it comes down to what is best for all shareholders in terms of risk and reward. It all comes down to what the risk of independence is versus the reward of a sale is,” Bansal said.
The first offer was in line with the IPO valuation and was easily rejected. The second offer was better, but after discussion with the board, Bansal again rejected it. “Then they came up with a third offer, and in the third offer, it made sense to sell the company in terms of risk versus reward for shareholders,” he said. And they sold it at a range of 2.5 to 3 times the IPO valuation.
With billions of dollars at stake, it's easy to think selling is an easy decision, but it wasn't. “It wasn't an easy decision for us. ($3.7 billion) seems like a no-brainer.” But he says he has to poll investors, executives, and board members. They all have different interests and are trying to make the right decision for everyone involved.
Wiz thought it was better to remain independent. In the case of AppDynamics, as the IPO deadline approached and good offers came in, the company finally did so. “So for us to grow independently and get to a valuation that was 2.5x, 3x higher than the IPO valuation, it would have taken at least three years of good execution,” he said. “And there were a lot of unknowns and a lot of risks to the company, like what would happen over the next three years.”
But that doesn’t mean he doesn’t regret making over 300 employees millionaires through his deals and his own personal fortune. When he looks back on the time of his announcement, he realizes that he could have made that much money and more.
“I always wonder what would have happened if AppDynamics had gone IPO. There are a lot of unknowns, and hindsight is 20/20, but in hindsight, we sold the company in 2017, and the years after that sale, post-2017, were the best boom times in the tech industry, especially in B2B SaaS,” he said. He probably would have made more money, but instead, he started Harness and is happy building a second company.
It's important to note that Wiz's offer is still shrouded in rumor, so it may or may not be worth that much money. But if it was, the founders may regret it if Wiz doesn't grow to the valuation it could have had if it ran off with the big money.
