Justin is one of my closest friends. He’s co-chair of Perkins Coie’s Technology Transactions & Privacy practice, and has worked pro bono for the Northwest Immigrant Rights Project since 2008. He’s a remarkably empathetic, pragmatic, and skilled attorney - a rare triple threat with an impressive deal-making track record. I’m honored to have him as an LP in Ascend, and stoked he took the time to share his wisdom here.
We met in law school - you clearly had a better head (and heart) for it than I did! 20 years later, you've worked on dozens of big M&A transactions in the technology space for a top Seattle firm. What would you tell founders they should keep in mind while growing their startup, that will best set them up for a successful exit?
With respect to law school, perhaps you just executed on your exit strategy a few decades before me. You’re always ahead of the curve, Kirby. From a business perspective, our deal lawyers would say build a fast-growing, independent company that solves a significant customer problem in a large market, and you will have your choice of when/how to exit. As my partner Lee Schindler says, “the exit is an output, not an input.”
It also sounds a little trite, but in the tech M&A space, a target’s most valuable assets are its IP (and I would include data in IP) and its people. Founders are working with limited resources and need to be super strategic around how to allocate those assets. From a legal perspective, you should allocate those assets to ensuring that your company’s processes and policies (including its use of open source software) around its IP development and protection are tight. The upfront costs pale in comparison to what it might cost you down the line to clean up any gaps. From a people perspective, we’re in seller’s market, especially post-pandemic, so the ability to attract, develop and retain top talent is and will continue to be a key differentiator. Nice exits are driven by a buyer’s interest in the target’s IP or its people. Great exits are driven by a buyer’s interest in the targets IP and its people. Do both and do them well.
From the buy-side perspective, what are the top three drivers of valuation and motivation to close a deal? What does a startup need to do to help the deal sponsor get over the finish line?
In terms of motivation, the key driver is the target’s ability to solve a problem, either for the buyer or end users. Are the target’s products and services solving a problem for the user and doing it a way that aligns with the buyer’s view of how to solve the same problem? The buyer is typically looking to expand an existing line of business (where it is more efficient to do so through acquisition) or looking to expand into a new line of business that’s complimentary to an existing line of business.
In terms of valuation, my comment above re IP and talent apply here as well, and Lee also weighed in with the following three key valuation drivers:
1. Value – Do something for customers that no other company can do as well.
2. Opportunity – Demonstrate growth and future opportunity to avoid valuations based on current metrics.
3. Feasibility – Help the buyer understand how the startup’s business, technology and team can integrate with buyer and make the whole greater than the parts.
What's the most common deal killer in an acquisition scenario?
From a business perspective, lack of scalability. The solution a target offers to customers needs to be able to scale (from a legal and technical perspective) in the hands of an acquirer. Shortcuts that work for startups often don’t work for acquirers.
From a legal perspective, and this goes back to my first response above, IP issues are quick killers. This can show up as issues with ownership or use rights, privacy and security vulnerabilities, or a lack of elegance or sophistication in the target’s tech.
From a talent perspective, there needs to be some substance behind the style. Buyers want to add talent, not just tech.
Switching it up, you toured with Alice in Chains before you made the move to lawyering. What's your best grunge era road story?
Ha. “Toured” with Alice in Chains might be generous, but road stories stay on the road (or something like that). I’ll give you an AiC story, though, since you asked. In 1990, I was a seventeen-year-old senior in high school. AiC had just released Facelift. One of my best friends at the time got kicked out of school and with his newfound freedom, he basically became a male groupie and somehow managed to ingratiate himself into the local rock scene.
Through all of that, we met a woman named Demri Parrott. If you’ve seen Almost Famous, she was our own Miss Penny Lane, and she also happened to be the girlfriend of Layne Staley, the lead singer for AiC. Demri epitomized everything that was cool in the Seattle rock scene; her taste in music was impeccable, she was a great artist and she had this infectious smile and personality that attracted people to her. She was a firefly. She was also older and cooler than us, but for whatever reason, she seemed to have a soft spot in her heart for our little crew of rock boys. As a result, we ended up spending a bit of time at the apartment she shared with Layne; so much time that her couch quickly turned into a crash bed for one of my friends who decided that it was more to stay with Demri and Layne than it was to go home to Mom and Dad.
So, after another late night at their garden apartment near the old Lobo Inn, I headed home in my Volkswagen Van (nicknamed the “Shame Train” by Cole from Sweet Water) and just before I leave, my couch crashing buddy asks me to come back in the morning to pick him for school. A few short hours later, I’m back at Demri’s apartment to pick him up. I push the buzzer button next to her name. Nothing. I push it again. Nothing. Hmm. Figuring they all must be passed out and without giving it much thought, I reach into my wallet for my bank card and just like you’ve seen in the movies and on TV a hundred times, I pull out my card and begin to slide it into the door slot. To my utter shock and disbelief, the door opens. A short flight of stairs later, I’m at her apartment door. I knock. Nothing. Another knock. Nothing. Without thinking twice, I pull out my card again and of course, it works again. Now I’m inside and the glamour of the night before has faded. Shades half drawn, my buddy is face down on the couch, fully clothed and snoring. Half empty beers and cigarette butts stubbed into ashtrays clutter the coffee table beside him. We’re running late now, so I shake him and tell him we need to go. Now. As we shuffle out, I steal a quick glance past the open bedroom door and see Demri and Layne sleeping peacefully. 15 minutes later, me and my buddy are sitting in English class, daydreaming of the night before and the adventures that lie ahead.
What song is currently getting the most run on your Apple/Sonos/Spotify?
Maybe I’m showing my age here a bit, I still think of music in terms of albums, rather than songs. My musical tastes are also a little all over the map, but what I’m listening to ant any point in time tends to track my mood. So, during the pandemic, which for me (like a lot of people) was a bit of a more reflective time, I was digging stuff that feeds my mind in a more thoughtful and introspective way. For me, that’s Stevie Wonder’s Songs in the Key of Life, Curtis Mayfield’s Curtis and Marvin Gaye’s What’s Going On. At this point I think we almost take it for granted, but What’s Going On is just a masterpiece, especially when considered in light of era in which it was created and the push back that Marvin got for making that record from Berry Gordy.
As we emerge from the pandemic and head into an open summer, what I’m playing is shifting to stuff that wants to be blared from an outdoor speaker or car stereo. For me, that’s New York hip hop from artists like A Tribe Called Quest, De La Soul and Biggie. And it’s 70s rock from Led Zeppelin and the Who, early 90s-era stuff from Soundgarden and Spoon, and early Strokes.
Favorite shoes?
Current: Adidas Stan Smith Prime Blue. All time: Nike Air Max and Jordan 3s.
Favorite cooking ingredient?
Meat: grass-fed beef from Crowd Cow. Vegetables: riced cauliflower.
Anything else?
You mentioned law school as our first date, but before we met, we were also both attended small, liberal arts schools back east where we studied writing and literature. Finding time to write is hard, but I always find time to read. My two favorite reads from last year were Jonathan Lethem’s Fortress of Solitude, (thanks again for the recommendation!) and Adam Grant’s Think Again. I would highly recommend Fortress as a beach summer read - great coming of age story. Think Again should be a must read for your founders. It’s full of insightful information and guidance that has broad application across industries and disciplines.
