What I Learned Selling Associated Content to Yahoo

Six Lessons From the VC at the Center of the Deal

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Warren Lee
Warren Lee
Last month, Yahoo announced that it was acquiring Associated Content, a start-up in which I (via Canaan Partners) invested in July 2007 and on whose board I served. While Associated Content is the fourth of my investments to be successfully acquired in the past few years (after Arroyo/Cisco, Broadbus/Motorola, Counterpane/British Telecom), I consider it to be by far the most personally rewarding and also at times the most challenging as well. Since our initial investment less than three years ago, the team has done a superb job of executing and grown every key metric substantially.

The following are some lessons learned and random opinions from my time with Associated Content.

1) Hire a great start-up lawyer from the start. A great start-up lawyer is hard to find but is worth her weight in gold, so don't even think of skimping on this. Hiring the right lawyer at the beginning is like putting money away for a rainy day ... you won't appreciate it until it really matters. Ideally find someone who has worked extensively with technology start-ups and who has also worked for both buyers and sellers. There are countless ways in which shareholders in a start-up can be taken advantage of, so be sure to have an experienced lawyer watching out for your interests. In today's environment, strategic acquirers and their M&A teams have substantial leverage and many will use this leverage when dealing with start-ups. Make sure that you have lawyers who can help negotiate the tough terms and keep you out of trouble. A big thanks to Lucy Stark (Holland & Hart), Craig Abruzzo (Associated Content), and Adam Dinow (Wilson Sonsini) for keeping us out of trouble and getting the deal done.

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2) Make necessary personnel changes -- fast. And use a search firm when needed. Exactly two years ago, another board member (Mike Perlis, SoftBank Capital) and I sat in an office as we prepared to meet with Associated Content's CEO at that time to let him go. It's never easy to fire someone, and the temptation is always there to delay, and to hope that things will turn around. Yet waiting in these situations is almost always a mistake. And procrastinating once it becomes clear that a change is needed is the worst mistake you can make (a mistake that every VC, including myself, has made at least once). In this case, we made the change very quickly and waited a few months before launching a formal CEO search. We waited patiently until we were ready to undertake a formal search and made sure that the founder (Luke Beatty) was intimately involved in the process. After an intense five-month search, we were fortunate to land Patrick Keane as CEO. It has been gratifying to see how well Patrick adjusted to the company's quirky culture and how he and Luke quickly developed a close, very productive working relationship with one another.

It's fashionable among VCs to complain about how ineffective search firms can be and how expensive they are, but I disagree with this sentiment. Hiring a good search firm forces a board to be disciplined and to take the process seriously. It forces everyone to think critically about what kind of CEO is needed for a company, what skill sets and experience are required, and how a new CEO might fit within the company. Start-up boards can be quite disorganized, so having an external party to help organize and drive the search process can prove invaluable. Well worth the cost of an executive search fee.

3) Appreciate passionate founders and teams -- they make the company. Founders who are passionate, driven, and a little bit crazy are big pluses in my book. Luke and I butted heads (figuratively, not literally) on a number of occasions, yet I give him enormous credit for conceiving the idea behind Associated Content and being the heart and soul of the company. Each start-up has its fair share of ups and downs, so having a founder who is both passionate and determined to build something special can make a critical difference.

4) Be wary of acquirers proclaiming honorable intentions. From the moment that we invested in Associated Content in mid-2007, companies came knocking on the door expressing interest in acquiring the company. Some were sincere in their intentions; others, however, were disingenuous and just fishing for information on our technology and plans. The end result is that those discussions wasted a lot of time and energy, and we ended up "educating" the competition.

In contrast, Yahoo impressed us with their disciplined due diligence and the fact that they took the time to thoroughly understand the business, get to know the team, and discuss how Associated Content's technology platform and diverse community of contributors might benefit Yahoo and vice versa.

5) Why sell now? In addition to being a great outcome for employees, investors, and shareholders (everyone can buy all seasons of '24' without using a credit card), we were also excited by the possibilities of what Associated Content could achieve as a part of Yahoo with its audience, resources, and market intelligence. As a cold-hearted, mean-spirited VC, a major priority is, of course, to make money. Another, however, is to see the companies that I work with be successful in the long-term and the people there do well.

6) Ignore the pundits. It's amazing the amount of public commentary that Associated Content has engendered, much of which is mistaken. In a New York Times column this past Sunday, David Carr, whose articles I always enjoy reading, describes the company as "a business of link-bait stories churned out by people you've never heard of." Well, that's part of the point of Associated Content. The company's aim is to give anybody a voice and the opportunity to publish content on topics that interest them, to make some money, and to show off their skills and creativity to others. What's wrong with that? That's why the company was founded as the "People's Media Company."

In addition to his work at Canaan Partners, Warren Lee blogs about the New York start-up scene at www.eastwestvc.com.
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