1Mby1M Virtual Accelerator Investor Forum: With Seong Kim, Corporate Strategy & Development at Chegg Inc. (Part 5)

Sramana Mitra: In smaller acquisitions, what role does valuation play?

Seong Kim: It really depends on why you’re acquiring the business and what you’re ascribing the value of the business to. The role of valuation is always prevalent and important. The needle gets moved by the conviction that an acquirer is able to build around what it’s acquiring and the future state of that team as well. When you’re talking about smaller check sizes, the acquirer tends to focus on the simplest forms of consideration. It can be just cash along with some equity incentive.

But you’re right. You don’t have acquirers wondering about its currency. In a large acquisition, there’s a whole consideration around what is the value of my currency and stock. When it comes to smaller businesses, it’s about what is a successful outcome for that team. How much conviction do we have in the attitude and capability, and its ability to integrate into the longer-term roadmap? What is that worth to us?

Sramana Mitra: Can you do an example?

Seong Kim: We acquired a company a couple of years ago. It offers an equation solver. Students have the luxury of being to type in a formula or point their cameras at a math problem and get step by step coaching and solutions. What rules to apply? What concepts? These two founders bootstrapped the business for 20 years. There are some unique bootstrapped businesses.

One is likely that the company exists because the founders are intrinsically motivated. They are vested in long-term success. There is a lot of confidence to be gained by knowing that it wasn’t just an outsider who made the economic decision. One thing that I seek to understand is are they trying to take the business to the next level or are they just tired.

Sramana Mitra: How much revenue did they have? 20 years of bootstrapping to what level of traction?

Seong Kim: Unfortunately I can’t disclose the exact number but it was a meaningful amount that led to a valuation in excess of $100 million. That’s the other difference of a bootstrapped business. It’s typically been run with capital efficiency and operating discipline. I mention that because it’s a double-edged sword. What you see is what you get. On the bright side, it’s a high-quality stable business. On the other hand, it could have been a business that could grow 10x faster.

Sramana Mitra: By putting in more of that marketing throttle and leveraging your existing cusotmer base, you can grow much faster. That is the rationale.

Seong Kim: Absolutely. Doing that is a clear opportunity but also important to have the conviction to be able to do that with this team and with this company. We take a deep assessment of the founders – their growth mindset and the way they think about investing.

One of the many questions I might ask is, “If I triple your operating budget, how would you spend it?” That answer is important to me because it gives me a sense for how the founders think about investing in growth.

Sramana Mitra: Did the founders stay with the company?

Seong Kim: Yes. Of all the deals we’ve done, there’s only been one acquisition where the founder didn’t stay for multiple years. It was a sub-million deal to be honest. One of the reasons we acquire businesses instead of build or partner with them is that we believe they will be a core part of the fabric of who we are going forward, and number two, we don’t believe that we can do it better without them. That needs to come out through the dialogue that occurs early on.

Sramana Mitra: It was very enlightening. Thank you for your time.

This segment is part 5 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Seong Kim, Corporate Strategy & Development at Chegg Inc.
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