
Backblaze online backup almost acquired - epi0Bauqu
http://blog.backblaze.com/2010/08/27/backblaze-online-backup-almost-acquired-breaking-down-the-breakup/
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pg
Odd as this will sound to the inexperienced, this story is not an outlier.
This is what happens in the median acquisition. Investors now treat startups
much better than they used to, but acquirers are the final frontier of
assholedom. When you get interest from an acquirer, assume by default that it
will play out exactly as described in this post: initial eagerness, followed
by long and distracting delays, followed by an attempt to renegotiate the
terms at the last moment. Then you can be pleasantly surprised if things turn
out otherwise.

~~~
jedan
How should acquirers behave?

I've thought for a while that one thing that could change the dynamic is
price. It doesn't make too much sense to me that a 5 month old company with
$50K in it should go for more than $1M. That is the other side to the
assholedom - the exuberant prices paid for young companies.

The price can and should change as the product and team grow, so this is
mainly a comment about very young companies.

~~~
gojomo
Why should inputs ("5 months old, $50K in") cap valuation when something
unique has been created?

That'd be like setting prices by costs rather than value!

~~~
kbob
Because the buyer could build the technology themselves for $50K in 5 months.
(Okay, $100K in 10 months, given the efficiency of large corporations.)

~~~
arohner
Assuming the buyer has the programming talent and vision to create it, and the
managers to allow something "crazy" to be built. That's rare in large
corporations.

~~~
gojomo
And assuming that a 5-month delay wouldn't cost 10s-of-millions.

~~~
houseabsolute
And assuming the startup in question has not acquired a few key patents. And
assuming the startup made no unique-but-necessary technical decisions that
can't be replicated without relying on information obtained under NDA.

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bl4k
Every experienced entrepreneur has this happen to them at least once in their
lives, usually many times. You think you are so close to being acquired, only
for it to fall apart. A startup CEO tends to spend all his/her time either
raising money, or talking to a firm about being acquired.

The lesson would be not to sign exclusitivity agreements with a potential
acquirer. It is not that uncommon to do this, in fact, I would say it is more
common to not have an exclusivity agreement as part of an LOI than it would be
to have one.

With multiple parties at the due diligence stage, it gives the startup CEO
leverage to close a deal quickly, and to negotiate the price up. Acquirers are
also reassured by the validation that other interested potential acquirers
provide. If you are set on being acquired, speak to multiple companies and
have them press while the iron (ie. their motivation) is hot. Always be
prepared for due diligence.

~~~
illumin8
It seems like the exclusivity agreement is the main issue here. Imagine if
3PAR had an exclusivity agreement with either HP or Dell, they would not be in
such a good negotiating position that they can add hundreds of millions onto
the price.

~~~
boucher
My understanding of what usually occurs in deals like this is that most of the
price negotiations happen before LOIs are signed in the first place.

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dotBen
Their post is really _really_ f'king clever...

It's a massive "hey, we're prime for being acquired - come and get us!"
solicitation.

The information contained in the post is fascinating, but its a by-product.
What they are really doing in a subtle and suitable way is telling the world
they want to receive new offers to be acquired.

~~~
robk
Were I an acquirer, I'd look down on such a shady posting. It seems rather
manipulative and without knowing much context, I'd read it as a very
inexperienced team. If you're trying to sell, there are plenty of backchannel
methods to pass information to potential acquirers.

~~~
gaustin
Shady and manipulative? I don't think so.

If I were a potential acquirer, I would be happy to have a window in to their
decision making process.

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vlad
Great article about requiring a break-up fee in case a buyer walks away after
the company has spent lots of time and money on lawyers for nothing.

The title made me think of a funny situation where every service sends an
e-mail to their users whenever an acquisition fails:

Dear customer,

We regret to inform you that our company has almost been acquired. Your
accounts will continue to work throughout this period of non-transition. Upon
such a time we find a buyer, you will then have 30 days from the date of
announcement to find an alternative.

The Management

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pvg
A lot of interesting offhand tidbits in it -

 _Our team has been through a few acquisitions_

So we know they were not babes wandering the woods.

But then -

They went to shop the offer which seems logical enough but seemed to believe
this process can really be all that 'discreet'.

Then

 _we heard rumors that Cogswell had previous acquisition processes that
started and didn’t complete, which made us a bit nervous._

and

 _At the last minute, around midnight on Tuesday, Cogswell said yes [...]_

These seem like overt red flags, although, of course, they are made much more
obvious with the hindsight provided by the author.

 _We called Spacely. Our contacts there were really unhappy. They wanted to do
the deal, but in the months since we went silent [...]_

Ouch, months.

Long story short, if you have just two bidders of which one did not choose to
bid unsolicited and maybe has a history of less than good-faith bidding,
you're navigating treacherous waters. And you might end up navigating them
even if you do (or think that you do) know what you're doing.

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thaumaturgy
On a completely different note, I'm disappointed to hear that they've been
courting an acquisition. I really don't understand this -- you have a great
product, happy customers, lots of growth, a solid business model, and tons of
continued growth potential; why would you want to get out of that?

I've been promoting their service and gradually signing up my clients (even
though, last I checked, their reseller program still wasn't active). I was
hesitant at first because I wanted to be sure that my clients were getting a
service which would be around for the long term. Bummer.

~~~
dotBen
Why are you disappointed?

I'm not clear how 'being acquired' is some how negative?

~~~
fragmede
Being acquired isn't _necessarily_ a negative, but all too often the next step
after being acquired is "Hi, we've been acquired and this service is shutting
down." (With a nod that they'll be back, and better than ever. Which generally
doesn't turn out to be true.)

~~~
thaumaturgy
I'm generalizing here, but when someone decides to build a startup, it's
usually because there is a problem that they want to solve so desperately that
they're willing to forgo the comforts of a regular paycheck and having to only
concentrate on one or two things a day. They're willing to endure sleepless
nights, stress, uncertainty, and pour a huge amount of effort into creating
something.

So, they tend to take care of their customers really well. They tend to
produce the best product or service they can, and if they succeed at that,
they become really popular.

Established large businesses have completely different priorities. Oracle's
licensing schemes for one example are not designed for their customers'
benefit; they're designed to maximize Oracle's profit, calculated in part by
how many customers they can afford to lose.

In Backblaze's case, let's look at their business model: $5/month for
unlimited storage per computer. This is _great_ for their customers. It solves
an important problem. They even mentioned in this post that they set out to
create this service after one of their friends suffered an agonizing data
loss.

But, that's not the most profitable way to run the business. Oracle for
example would make a _lot_ more money on it by offering it to their enterprise
customers at some absurd monthly fee (plus fees for an annual support
contract), and ignore the consumer market altogether, along with all of the
headaches that comes from the additional data storage and support costs for
supporting the consumer market.

So yeah, I'm not usually too excited by the news that some really great
startup is looking to get acquired.

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tlrobinson
Don't pop the champagne until the money is in the bank.

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dmillar
Great article about the whole acquisition process. I can't recall a more
detailed account.

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arnorhs
I have never heard of this service before but it looks pretty sweet. $5 for
unlimited backup storage? How on earth?

This is what they say about it on their website:

"How Can You Backup Everything Online For Just $5 per Month? We have developed
a highly efficient storage system that enables us to optimize how we store
data. And we’re counting on some people having a lot of data and others not
very much, but that it will work out on average. "

..but still. Almost sounds scary.

~~~
DanLar75
Without technical details on how they actually manage this (Anyone can figure
out that storage is an accumulative cost) I am pretty skeptic.

At $5/month the break-even on even a VERY cheap solution is around
$40GB/person.

~~~
alexqgb
This would be true if Backblaze were simply offering 'unlimited storage for
$5/mo.' Needless to say, they're not. Rather, they offer _backup_ unlimited by
size for individual computers at $5/mo. The difference is what allows them to
create a profitable business.

Unlike a system that stores your cumulative history, Backblaze simply keeps
copies of every file you have on you computer right now. If you delete
something from your local drive, Blackblaze notices, and flags their copy for
deletion in 30 days. In other words, they're in the data mirroring and
recovery business, not the general archive trade (a point they make very clear
in their promotional materials).

They also protect themselves from overload by limiting the drives they backup
to local ones (internal or external), and explicitly excluding network drives.
In other words, while the amount of data per machine is unlimited, the number
of machines per account is limited very strictly. This distinction is what
keeps them viable.

There is an additional limit on what they handle imposed by network speeds.
Realistically, most people can't send more than 4-5 GB per day. For some, it's
as low as 2-3, and if you can deliver 9-10, you're doing well. Blackblaze
notes this clearly, pointing out that an initial backup can take weeks, if not
months to complete.

What makes them especially awesome is that they don't expect you to wait this
long to recover your data. You can download files via their website at no
charge. Alternately, you can flag larger collections, have them copied to DVD,
and FedEx'd for next-day delivery. And if you've got a _lot_ of stuff you need
immediately, they can put up to 400 GB on a single USB drive and overnight
that to you for $250.

Obviously, their proposition doesn't serve everyone. But for a certain class
of customers, it's absolutely perfect.

~~~
cperciva
_If you delete something from your local drive, Blackblaze notices, and flags
their copy for deletion in 30 days_

So much for the "damn, I must have deleted that file; I guess I'll have to
recover it from my backups" scenario.

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sadiq
It's a shame Backblaze don't have a Linux version, it looks like a pretty neat
offering.

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iansltx
Have used Backblaze for about a year now. It's a solid system, though I use it
IN ADDITION TO a local backup on my primary machine, not INSTEAD OF one. If I
had to pull files over my 'net connection to my new HDD, rather than just
grabbing them from my Time Machine drive sitting on my desk...well, I would be
typing this on my laptop rather than my hard-drive-failed-but-replaced
desktop.

Hopefully Backblaze stays chill about being acquired, and waits for a really
good offer that will allow them to keep on doing what they're doing now,
except better. I'd back up with Backblaze any day over Mozy or Carbonite, the
only two "big dog" competitors in the area...

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danbmil99
The key was when Cogswell upped their offer, pushing the OP away from his gut
instinct to go with Spacely. Cogswell callously (and perhaps not even in its
own interest) refused to let the deal drop (probably someone had intuition
that a Spacely was involved). Aside from the backout and legal costs (which
might be insignificant for a big company), Cogswell got to keep the option
alive, at Backblaze's expense (through losing the Spacely opportunity).

This kind of shit happens constantly with big companies.

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frou_dh
On their product:

I was all set to pay up for Backblaze last week, but the GUI you use to define
what's backed up has a hard-coded list of excluded directories and file
extensions (!!!).

Why can't I back up /Applications/ or a .iso file?

If those files push my total backup size larger than they tolerate then that's
a separate issue. Too user hostile; uninstalled the sucker.

~~~
andybak
When they do their sums they are gambling that the average amount of space per
user will leave them profitable. They advertise unlimited storage rather than
capped storage so they have to hedge their bets somehow.

I like their model. Your milage may vary.

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smoody
great that they shared the story. no way to know going into one if these deals
if it'll happen to you or not. yes, there were red flags, but there are almost
always red flags. and when there aren't red flags, it can still go south. you
see it happen with the big boys, too.

i love their user growth curve graph but wonder why it's over a year old...?

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ericflo
I thought this was a fantastic article. Not too often do you see such a candid
account of a failed acquisition.

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jgrall
Great article. Thanks for sharing.

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DanLar75
This is almost 'trollworthy'. Hey we 'almost' got bought out, so hey try our
service (Profit)

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rbranson
Thank FSM! I LOVE my Backblaze! It's the perfect backup solution, no-foolin'.

