Market Exit Positioning: Lessons from Yahoo’s Acquisition of Tumblr
From time to time on this blog, I write about market exit strategies and provide market exit positioning tips based on case studies from the M&A market.
As you probably know by now, yesterday, Yahoo!’s board approved the acquisition of Tumblr for $1.1B. This is the latest (and biggest) in a series of recent purchases that Yahoo! has made under Marissa Mayer over the last few quarters. Since Mayer took the reins at Yahoo!, it has been clear that one of her strategies was to use the M&A market to help reposition the company for future growth.
Tumblr has had its eyes on Yahoo! and has been positioning itself for this market exit opportunity for several months (if not longer). This blog post examines the acquisition to see what other startups and expansion-stage companies can learn from Tumblr’s market exit positioning.
Here are six market exit positioning takeaways that startup and expansion-stage companies can learn from Tumblr’s market exit success story:
1) Focus on Building a Committed User Base
Tumblr has a very committed user base and is home to a younger and cooler crowd that does not typically frequent Yahoo! This made it a very attractive audience for Yahoo! to bring into its aging audience umbrella.
2) Target Key Users Who Are Attractive to Potential Acquirers
Acquirers are looking to populations that will help them grow their business. Younger tech-focused audiences are an appealing crowd as they spend lots of time online and will be the future of the internet for many generations to come.
Tumblr focused on selling to this younger and cooler crowd, and that made the platform very appealing to Yahoo!, which has struggled to expand its reach past a much older audience that is not going to sustain itself in the long-run. Yahoo!’s traffic has been on a precipitous decline for sometime now, and the hope is this acquisition will help reverse that.
3) Build a Culture that Big Companies Aspire to Bring into the Fold
Changing any company’s culture is difficult, but doing so in an established enterprise is even harder. Look at the backlash Mayer took for suspending Yahoo!’s work from home policy a few months back.
Having a cool startup culture that a company can acquire and slowly integrate into the fold is very appealing to more mature companies. Bringing in a cool startup culture with a younger vibe will help Yahoo! in the long-term with dealing with retention, which is an area the company has struggled with for some time.
4) Build a Monetization Model that Will Easily Fit into Your Target Acquirer’s Business
Tumblr has a very committed user base that generates significant traffic, but it has not been able to convert this traffic into revenue very well to date. In fact, this was even a problem for them when they first reached into the private funding markets during their last funding round.
Tumblr set itself up for an acquisition by Yahoo! or another company that is heavily dependent on ad revenue generation since it demonstrated dependable high volumes of traffic that is difficult for companies like Yahoo! to reach.
5) Immediate Revenue May Drive Exit Value, But Sustainable Growth Limits the Risk an Acquirer Perceives
Like many of the social media websites Tumblr, has struggled to monetize the traffic its committed user base brings to its platform. Rather than push too hard trying to convert their audience into revenue, the Tumblr executive team opted to maintain and build its user base commitment and actually leverage this traffic for revenue and leave the monetization move up to its acquirer.
This was a great move on the side of Tumblr’s executive team, as stepping on the gas to try to monetize traffic often leads to a shunned user base. By leaving this up to Yahoo! they removed a huge risk factor in growing their business before they exit the market. Now the company can let Yahoo! figure out how to monetize the traffic and leverage its more than 20 years of doing so to maximize this opportunity.
6) Prepare Your Executive Team to Be There for the Long-Haul
Most acquirers would like the acquired company to operate as a separate division or entity at least for the first couple quarters after acquisition (if not for the long-run). The last thing an acquirer wants to have to do is immediately integrate a company before it is ready to do so, or swap out leadership and disturb its acquired user base.
Tumblr positioned itself well for this exit by assembling a strong executive team that was built for the long-haul — not to just propped up for a dog and pony show until their exit.
If you are interested in learning more about market exit positioning, you should read my blog post on accounting for antitrust risk in your market exit strategy and my blog post series on understanding your exit options. Similarly, if you are interested in learning more about early-stage market exit strategy, I highly recommend reading Early Exits: Exit Strategies for Entrepreneurs and Angel Investors by Basil Peters.