M&A, competition, pricing, and investing | Julia Schottenstein (dbt Labs)
Julia Schottenstein, Product Leader at DBT Labs, discusses M&A strategies, including how to get noticed by potential buyers and the importance of creating Plan Bs. She also shares insights into DBT's success, competition philosophy, product development, and pricing strategies.
Deep Dive Analysis
19 Topic Outline
Transitioning from Venture Capital to Product Management
Evaluating Early-Stage Companies: Four Key Dimensions
Identifying Product-Market Fit and Distribution Strategies
M&A Strategy for Founders: Creating Plan Bs
Lessons from dbt Labs' Acquisition of Transform
dbt Labs' Philosophy on Competition
Keys to dbt Labs' Success: Simplicity and Openness
Offsite Exercise for Internalizing Algorithm Changes
Deciding What Features are Open Source vs. Proprietary
Insights on Pricing and Willingness to Pay
Lessons from dbt Labs' First Pricing Change
Transparency in Selling Your Startup
Utilizing Connections During Acquisitions
Communicating a Company Sale
M&A Market Forecast
Core Values at dbt Labs
Working with Strongly Opinionated Users
Importance of Shipping, Learning, and Iterating
Translating VC Skills into Product Management
6 Key Concepts
Inflicting Pain (M&A Strategy)
This M&A strategy involves identifying potential strategic buyers and creating a competitive advantage that makes it impossible for them to ignore your company. The goal is to force them to notice you and consider acquisition, while still maintaining friendly and open communication to preserve optionality.
Grow the Pie Philosophy
A competitive approach where a company focuses on expanding the overall market opportunity rather than solely competing for existing market share. This involves collaborating with partners and identifying new use cases to enlarge the total addressable market for everyone.
Open Core Model
A business model where the fundamental or core functionality of a software product is made available as open source, while advanced, enterprise-grade, or specialized features are offered as proprietary software. This allows for broad adoption and community engagement while enabling monetization.
Worse is Better
A product development philosophy that prioritizes shipping a 'good enough' product quickly to gather real-world user feedback and learn rapidly. It encourages avoiding perfectionism, as the most valuable learning often occurs only after the product is in users' hands.
Tech Debt is a Champagne Problem
This mindset views the accumulation of technical debt as a positive indicator of product success and user adoption. It suggests that if a product has significant tech debt, it means users are actively engaging with it at scale, necessitating future improvements.
T-shaped Generalist
A professional profile characterized by broad knowledge across many different areas (the horizontal bar of the 'T') combined with deep expertise in one or a few specific domains (the vertical bar). This allows for effective cross-functional collaboration and specialized problem-solving.
11 Questions Answered
Founders should aim to build a strong, enduring company that doesn't *need* to sell, giving them the upper hand in any M&A conversation. They should also identify 2-3 strategic buyers and 'inflict pain' on them by demonstrating a competitive advantage, while remaining friendly and open to maintain optionality.
High potential is indicated by strong leadership (a compelling founder with vision and detail), a growing market with space for new entrants, a product that generates genuine user enthusiasm and 'spark,' and a clear, defensible distribution advantage.
A product has a spark when users cannot stop talking about it, want to share it with their teammates and other companies, and make it part of their identity. This top-of-mind love and desire to evangelize is a strong indicator.
dbt Labs' philosophy on competition involves holding true to their vision without distraction, focusing on growing the overall market ('grow the pie') with partners, and leaning into their strengths while fostering an ecosystem of solutions.
dbt Labs' success stems from the power and simplicity of its product, which made complex data transformation accessible, and a strong commitment to being open source, which fostered organic adoption, network effects, and a diverse user base at the right time in the market.
dbt Labs open sources the core data transformation logic (the 'guts') where business logic is described. Proprietary software is reserved for features that supercharge the development lifecycle, deal with stateful interactions, or enable cross-team and structural collaboration at scale.
It is crucial to have pricing and willingness-to-pay conversations early in the company journey, ideally before building the product. This proactive approach helps ensure that the product being developed aligns with what customers are willing to pay for.
If a company is in a 'Hail Mary' situation and needs an exit, being transparent and publicly announcing that you are seeking a sale can be an effective strategy to cast a wider net and attract more potential buyers in the current market climate.
Founders should use corporate development teams of potential acquirers to get introductions to product leaders or GMs who could sponsor a deal. They should also leverage their venture capitalist network, as investors often prioritize a good outcome for the founder's next steps.
The M&A market is currently slow due to integration challenges, headcount constraints, and general uncertainty. However, as founders adjust to new valuations and more attractive assets become available, opportunities will eventually incentivize buyers to re-engage, likely in the near future.
PMs can learn from investors by actively building and investing in their network of operators at other companies, cultivating a 'T-shaped generalist' skillset, and applying an investor's mindset to product by constantly thinking about risk and uncapped upside opportunities when making strategic bets.
21 Actionable Insights
1. M&A: Inflict Friendly Pain
Identify your competitive advantage and use it to inflict pain on potential buyers, making it impossible for them to ignore you. Do this in a friendly, open way to maintain optionality and avoid prematurely shutting down conversations.
2. M&A: Create Plan Bs
Always cultivate alternative paths for your company, aiming to build an enduring, independent business. This strong offense gives you the upper hand in M&A discussions, as you have the viable option to not sell.
3. Evaluate Early Stage Companies
When joining or investing, assess four pillars: People (trust in founder), Market (growth opportunity), Product (unique, user-loved), and Distribution (market access advantage). Your contribution can de-risk weaker dimensions.
4. Product: Solve Pain Manually
Work closely and hands-on with early users or clients to understand their pain points and manually solve challenges. This direct experience helps mature the product by addressing real-world friction before scaling.
5. Product: Look for User Enthusiasm
A strong sign of product-market fit is when users can’t stop talking about your product, sharing it with teammates and other companies. This “top of mind love” indicates genuine enthusiasm and helps drive organic growth.
6. Pricing: Discuss Early & Test
Engage in pricing and willingness-to-pay conversations early, ideally before building the product, to test price elasticity. This allows you to understand customer appetite while stakes are lower, as pricing is always evolving.
7. Pricing: Gauge Relative Value
When discussing pricing, focus on understanding the relative value customers perceive your product offers compared to alternatives. Ask what they consider inexpensive, fair, or too expensive to inform your strategy.
8. Competition: Strategic Philosophy
Adopt a competition philosophy that includes holding true to your vision, growing the overall market “pie” with partners, and leaning into your strengths while fostering an ecosystem. This long-term view prioritizes your journey over competitor distractions.
9. Product: Embrace “Worse is Better”
Combat perfectionism by embracing the mindset that “worse is better” and “tech debt is a champagne problem.” Ship good enough solutions quickly to learn from users, as you can’t anticipate all edge cases until the product is in their hands.
10. Product: Internalize Algorithm Changes
For complex new projects, create memorable, physical exercises (e.g., using rope and sticky notes to represent a graph) to ensure the entire team deeply understands and owns algorithm changes. This prevents a few people from running ahead and ensures collective understanding.
11. Open Source: Define Proprietary
Clearly distinguish between what remains open source (core business logic, ecosystem standards) and what becomes proprietary software. Reserve proprietary offerings for stateful interactions and cross-team/structural collaboration to supercharge the open-source experience.
12. M&A: Be Transparent in Dire Straits
If your company is in a “Hail Mary” situation and needs an exit, be transparent about seeking an acquisition. Cast a wider net by openly communicating your situation and interest in finding a home for your team and product.
13. M&A: Leverage Corp Dev Teams
Proactively engage with corporate development teams of active acquirers, even if not immediately interested in selling. Use them to get introductions to product leaders or GMs who could sponsor a deal or partnership.
14. M&A: Leverage Investor Network
Utilize your venture capitalist network to find connections at potential acquiring companies, especially if you’re in a challenging position. Don’t worry about disappointing investors, as they understand the risks and prioritize your long-term success.
15. M&A: Don’t Be Clever
Avoid overly clever or obfuscating language like “exploring strategic alternatives” when you’re looking to sell, as everyone understands these code words. If you have runway, focus on partnerships; if not, be direct.
16. M&A: Create Targeted Buyer Set
Develop a focused list of about a dozen potential acquirers who would find your company strategically relevant. Prioritize this list by criteria that might count companies out, then initiate conversations.
17. Product Leadership: Build Operator Network
Invest time in building a network of operators at successful companies similar to yours, especially those slightly ahead. Ask them about their experiences with challenges like open source, pricing, and M&A, then apply the best ideas to your own business.
18. Product Leadership: Be T-Shaped Generalist
Cultivate a “T-shaped generalist” skillset, possessing broad knowledge across various domains (finance, business, tech) and deep expertise in specific product areas. This diverse background enhances effectiveness and credibility within the organization.
19. Product Leadership: Think Uncapped Upside
Adopt an investor’s mindset by constantly considering risk and “power laws” in product development. Make strategic bets that have the potential for uncapped upside, aiming to bend the trajectory of your business.
20. Product Management: Do Fewer Things
Improve team focus and impact by doing fewer things and single-threading the team as much as possible. Align everyone towards one main priority or mission to ensure cohesive effort.
21. Company Values: Core Principles
Adopt core company values such as prioritizing value creation over capture, ensuring transparency, maintaining humility, and appreciating work done well as its own end. These principles drive culture and decision-making.
5 Key Quotes
M&A is always about creating plan Bs.
Julia Schottenstein
Inflict pain on that potential buyer. Make it impossible for them to not notice you because that's when they're going to have their ears perk up and say, well, what's going on with this company?
Julia Schottenstein
You don't get to decide if you're going to have a pricing or willingness to pay conversation. You only get to decide what.
Julia Schottenstein
We're more concerned with value creation than value capture.
Julia Schottenstein
Worse is better and tech debt is a champagne problem.
Julia Schottenstein
3 Protocols
Exercise for Internalizing Algorithm Changes
Julia Schottenstein- Show up to a team off-site with a spool of rope and sticky notes.
- Tie people up to create a graph, with each engineer representing a node and the rope representing the edges connecting them.
- Work through the new algorithm extremely slowly, step by step, ensuring everyone has a role to play and understands exactly what is going on.
M&A Strategy for Founders (When You Have Runway)
Julia Schottenstein- Figure out the area where your company brings a competitive advantage.
- Inflict pain on potential buyers by making it impossible for them to not notice you.
- Do this in a way that is still friendly and open, maintaining optionality and not prematurely shutting down conversations.
M&A Strategy for Founders (When in Dire Straits)
Julia Schottenstein- Be transparent about needing an exit for your business.
- Cast a wider net by openly communicating your situation to potential acquirers.
- Prepare a data room, emphasizing the team members who would join the acquiring company as a key motivator for buyers.
- Leverage your investor network to help find connections at different companies that could be potential buyers.