Next, let’s hear fromwho started gravitytank in 1999. His company focused on innovation well before it was common language in design and business, and established a strong reputation for mature, thoughtful and respected design. gravitytank sold in 2016 to Salesforce; Chris left the company upon acquisition.
In the almost 20 years of running gravitytank, did you ever entertain a sale prior to your exit to Salesforce?
Yes. Our first go-around with an acquisition was with an advertising firm that we had worked with. They approached us to see if we were interested. Advertising wouldn’t be our first selection, but we had done some projects with them and their clients. We thought we could add a lot of value by combining the problem solving that an innovation firm does with the campaign creation of the advertising firm—the power was in doing those things together.
We had experienced this way of working in the past. When we worked with OfficeMax, their Head of Marketing was very integrated with our work. Our product development and design teams seamlessly worked with their marketing and advertising teams. We built a multibillion-dollar private label together.
We saw this potential acquisition from the advertising company as a possibility of doing that same type of work with different brands, where we could create new products and services and integrate that with marketing.
But the thing that blew the deal was compensation for the staff.
At gravitytank, we made sure that everybody had good, but not extraordinary, salaries. They were above-average for the industry, but not egregious. And then, in every year that was working very well, we had a pot of money left at the end that we could split up between investments, staff bonuses, special activities, and the partners. That’s how we ran it for our whole existence. And it worked very well because during the year, we didn’t put the firm at risk. We saw other companies that paid more money, but any time they had lumpy revenue, they would start to make bad decisions about projects to take or things to do at the end of the year to try to make the revenue happen. So we said, “We’ll feast at the end.” We just held off for a reward at the end.
Toward the end of the negotiations, the advertising firm said, “Here’s how we’re going to handle compensation.” We said, “Well, we’d like to handle it this other way, because that’s how we’ve been doing it for the whole duration of the company. If we’re responsible for our own P&L, we’re not going to move to your compensation structure.”
They responded, “Oh, well, let’s see… We’ll figure it out. We’ll figure it out.”
Meanwhile, the deadline was getting closer, and it wasn’t getting figured out. So we finally called them on it and said, “Hey, let’s work this out.”
They responded, “Well, it’s not going to happen. Global headquarters says they can’t do it.” And so we said, “Okay, it’s not going to work then.” We made a pretty fast decision that it just didn’t feel right. We thought, “If we can’t work this out when we have leverage, then never mind.” And that was the end of that.
Several years later, we were acquired by Salesforce.
We had done some work with Salesforce in the past. They were interested and convinced they wanted to acquire us, and it was a fairly easy process to work through because we were a strategic acquisition for them, not revenue accretive. They weren’t interested in buying us to increase their EPS. They were acquiring us to more than double the size of their internal design and strategy group and give themselves far more capacity. It was an acquisition of a methodology and approach, and of people.
Your first go-around didn’t feel right, but the Salesforce acquisition did. How did you know it would be a good fit?
For owners who are thinking about being acquired, it’s important to do diligence about your own firm, where the value is, what you have figured out and how you think you should be valued. And equally as important is working with the other firm and collaborating a little bit on how it will work with the other management team—doing some projects together before the acquisition.
Because during the negotiations, you’re still dancing. Once you’re acquired, you become employees of the other firm, and all your negotiating power is gone. Especially if it’s a big company; things change.
So we treated the acquisition process like one of our regular projects. We tried to put everything through a reflective research, collaboration, synthesis lens to try to frame up what it would be and what it would look like. How is this going to work? Where will we be in the organization?
We tried to grab enough time with the other management team to really meet with each other: to run through some scenarios, reflect back on the projects we had done together, and identify what they were hoping for in the type of work we were going to do together. These meetings were pretty tangible—getting stuff up on the walls, focusing on the categories of things we need to talk about; diagraming some things, visualizing structures, flows, workflows; showing how we can talk about the market and types of projects we could run.
As somebody who’s a target of an acquisition, deploying your actual skills and mindsets and ways of working is a two-part advantage. First, you’re working the problem like you know how to work problems, which is great. You don’t feel like you’re playing the lawyer’s or investment banker’s game, or the M&A game. You’re saying, “No, here’s how we’re going to do it.” Or, “Here’s what we’d like to do because we think it’s important to the success of the integration.”
Second, you’re giving the potential acquirer an authentic exposure to how you’ll be working together and how you think about things. If you’re working authentically, you’re not constantly questioning, and so you start to say authentic things out loud. You say these things early—things like, “Well, we wouldn’t be doing this like this if the acquisition happens… “—and if they’re like, “Oh, nevermind,” you want it to end as fast as possible if it’s not going to work out.
Those meetings were the business side of it, the practice side of it, and of course, we were exploring how we liked each other. We had a unique culture in that we all liked each other, for the most part. Going cold turkey into a non-warm culture would be really troublesome. We saw a positive culture in Salesforce. Marc Benioff was very social-impact-forward. He focused on the softer side of things for employees, like maternity leave, social impact work, paid volunteer days. Those were the cultural things that came out during these meetings that reinforced that, “Maybe this is a really good acquisition.”
How long did you spend exploring ways of working to see if there was a good match?
We spent about 80 hours in those meetings, but you can ask for only so much of their time. You get into the negotiations and once they have committed to it, they’re like, “Come on. This is great. Let’s get it done.” And then you’re worrying, “Are we screwing this up? What are they thinking? How serious are they about this?” So you’re doing all those things just as you would in, I don’t know, selling your house or a real estate transaction. It’s the same things that are going on in your head.
I don’t like a lot of legalese about “if this, then that.” I prefer it to be very clean. And I believe that a good acquisition, one that’s not nitpicking, has enough room on both sides that you’re feeling good about it. You say to yourself and your team, “Okay, all in all, we figured this out and we’ll accept the consequences. We can’t predict the future, but we’ve worked in a way that we feel good about and we understand enough.” If you’re trying to minimize all your risk and let them take on all the risk, you have to understand that it’s a risk for both parties in the transaction. You have to be clear as an owner of why you’re doing it, and then inform yourself about M&A practices.
How did you know how much to sell the company for?
I drew on this firm called Equiteq who publishes annual reports of mergers and acquisitions for consulting-type firms. They discuss the going multiples of EBITDA and revenue, and financial things like that. Our overall package was two to three times revenue, probably. It’s not rocket science. But as a consulting firm or as a design firm or an innovation firm, I think you have to get knowledgeable about this type of information.
Valuation depends on what your revenues are and what your ownership structure is. We had a very wide ownership. We had over eight partners with equity; it’s rare for a firm our size to have such a flat or such a spread leadership structure, which I think is why we got the multiple we did—there were so many consulting leaders in the firm, and it wasn’t like this pyramid where one person’s going to make out really big and everybody else is going to get maybe a nice bump in salary and some restricted stock units. It’s actually quite broad with the number of people who were a significant part of the acquisition.
Three of the partners were already pulling back from the day-to-day—myself, my spouse, who was a partner in the firm, and our other partner Michael Winnick, who was running our spin out, dScout. The new generation of leadership was running the firm for the most part. There was an assumption that the three of us wouldn’t go along with the acquisition. If they would’ve put that as a negotiating thing, I would’ve been like, “Sure, no problem. You want me for a year or two or whatever, sure.” But I didn’t have to. And I guess as an entrepreneur, one of the things I value most is flexibility. And so if they weren’t going to require it, I wasn’t going to necessarily go along.
Before the acquisition, we had started to develop the next generation of leadership and management in our company. The COO and I were starting to pull back and just play a role on the broad strategic parts of the business. We were building the management structure for the next generation to grow. This next group of leaders were great at their craft, and good at growing accounts if they already existed, but they didn’t want to have to go get new business. We had discussions about partnering, and they said, “We’d rather work on the work and not have to worry about the business development.” That made it clear that we would be open to the right acquisition.
During the negotiations, my younger partners weren’t asking for us to stick around post-sale. They said, “We got this,” and, “We’re excited about this.”
It sounds like the partners were excited about the transaction, and the next level of leadership was, too. What did the rest of the employees think when the acquisition was announced?
During the process, probably 10% of the company knew about it—8 to 10 people. People knew that we were speaking with companies, that we were getting interest; we were upfront about that. And we described that we would have to keep it confidential even amongst us. But at some point, when it looked like it was going to happen, we had a meeting with the team. And at that point, even, because I think maybe people knew about the advertising firm that fell through, some people were like, “I don’t believe it’s going to happen.”
But it’s a little hard to know how the team felt after the acquisition. I wouldn’t use the term happy, because there’s so much uncertainty about the future at that point. I think designers and innovators can be just as risk averse as anybody else. So in their minds it’s like, “Well, what’s it really going to be like?” I think it’s probably a bell curve: there were some people who didn’t go along and they left, beforehand. And then you have the big middle who are like, “Yeah, let’s see what happens.” Everybody got a raise. Everybody got some stock and everybody got more benefits. So the professional compensation part was great, very fair.
And then there’s probably some people who are very excited for the opportunities that we’re going to open up. Basically, we went from “hoping” to work with the CEOs of companies, to walking in the front door in the biggest, most interesting companies in the world and doing work for them. A lot of people got amazing experiences very quickly with great audiences, strategic design, and digital transformation. A year in, some people found another group in Salesforce and moved overseas.
Like I mentioned, I wasn’t intimately involved in all the workshop meetings with Salesforce and stuff like that, when they were figuring out how it would work. When we talked about it with the whole staff, I gave it my blessing and said, “I’m really cool with it.” But I didn’t help people process it in an authentic way as I should have done. I was trying to be careful not stepping on the other leaders’ toes and portraying it how I saw it. And I think that’s an important realization when you’re building a multi-partner leadership team. Everybody has a different leadership style; for those who have a more charismatic nature, you have to be really careful that you’re not always front and center driving the narrative when other people need to be doing it because then they’ll never grow.
I probably was too timid during those times, and I could have said more things along the way to describe what I was thinking and why I thought this was interesting and a good idea. Normally, when I’m trying to understand what other people are thinking, I’ll facilitate a conversation with everybody; they can say what they’re really thinking, which might be, “I think this is a load of crap,” or, “My world’s going to blow up and I’m really scared.” Let’s get that out and process it as a team. I probably didn’t do enough of that.
It’s just so uncertain. And that’s a lesson learned: to realize that it’s uncertain throughout the whole process. Work authentically, communicate authentically, share your own vulnerability during the thing. Discuss with people that “I don’t know if we should be doing this, but I’m going to continue the conversations, whatever they are.”