Michael Levit knows a thing or two about China. As an executive vice president at the e-commerce services company Vendio, he stayed with the company for six months after Alibaba agreed to acquire it in 2010. (It marked the Chinese conglomerate’s first U.S. acquisition.)
Levit says it was long enough to develop a consumer shopping project called Dealio that Alibaba had no interest in owning. So, he helped spin it off, renamed it Spigot, and eventually turned it into an application advertising company. (Users installing one app would receive a suggestion for another.) Roughly a year ago, Spigot also sold to a China-based company, publicly traded Genimous, for a reported $252 million.
Now Levit is taking the lessons learned from those experiences, and turning it into his next startup. Specifically, he has teamed up with longtime friend and advisor Rick Marini — cofounder of Tickle (sold to Monster) and Branch (picked up by Hearst) — to form Dragonfly Partners, a new advisory firm that’s matching U.S. companies looking to get sold with China-based companies that are hungry for revenue.
They’ve also brought in a third partner, Gary Hsueh, who was most recently Yahoo’s global head of search partnerships and an investment banker with Goldman Sachs before that.
I sat down with Levit yesterday to learn more about the business, and how it might help Silicon Valley founders who might be ready to hand over the keys.
TC: This business sounds perfectly timed. What inspired it?
ML: Selling Spigot was wonderful, but the sales process was very challenging and tedious, and partially that’s because there aren’t many people who understand cross-border transactions and specifically how you take a U.S. company and sell it to China. Thankfully, I still have a number of friends from my Alibaba days, including David Wei (who was Alibaba’s CEO when Vendio was bought). He remains one of my mentors and helped us through that process.
TC: How many companies have you been working with, and have you sold anything yet?
ML: The first two companies that we advised informally are [the ad tech company] Media.net, sold to a Beijing-based company called Miteno for $900 million in August, and [mobile ad tech company] AppLovin, which sold last month to the private equity firm Orient Hontai Capital for $1.4 billion.
TC: You’re not an investment bank, but it sounds like you’re not far afield from one.
We’re akin to being an investment bank, though frankly there are a lot of people on the ground in China who are formal investment bankers [working with us]. What [we’re more focused on is talking with entrepreneurs about] whether China is real, what do the numbers look like, what do [China-based companies] want, how do you create your financial forecast, how do you create the right PowerPoint presentation, and help put those materials together before you even meet with a bank. Then we make the introduction to the bank.
TC: Which banks are you working with?
ML: There are a couple that we work with, including CV Capital. We’re also starting to work with [the private equity firm] CSC Venture Capital [the private equity firm that has committed to invest $400 million on the AngelList platform].
You have massive pools of capital in China that want to be deployed in the U.S.; you have entrepreneurs in the U.S. who want do business in China. What’s missing is a level of trust and understanding of how the two sides do business with each other. CSC solved that problem in part by partnering with AngelList. We’re doing something similar for much bigger deals and for M&A.
Frankly, some companies in China will promise you the sun, moon, and stars, and won’t give you any of it. Conversely, there are other companies that are soft-stated and that you’d never find and that have $90 billion [in market cap]. There are multiple entities like that because of the scale of China. We want to be the trusted layer that helps founders find those entities.
TC: Do you need someone on the ground in China?
ML: Between the three of us, including Gary, who’s a native Mandarin speaker; and CV Capital; and my mentor, David Wei, we feel like it’s enough. Of course, we have to have a partner in every deal on the ground in China, but [the outfits we’re working with] have 40, 60, 80 people managing relationships. We’re never going to match that level on the ground there; we think it’s more important that we’re here, working with the entrepreneurs.
TC: How many clients can you take on?
ML: We’re aiming for one a month. Right now, I think we’re capable of one a quarter, so we have a lot of work to do to systemize and prioritize these things. Things break when you start doing more — everything from the buyers not being ready to handle that much inflow, to people like CV Capital who aren’t ready to handle that many new relationships.
We also want to be sure that nothing breaks with [the Chinese] government, which is right now allowing money to flow out of the country. You don’t want to move so fast that you break that ability.
TC: Where is your deal flow coming from? At this point, I assume a lot of what you’re doing is outbound?
ML: We’re reaching out to every entrepreneur we know in our networks and going over the characteristics of what Chinese companies really want to buy.
TC: And what are those characteristics?
ML: Chinese are most concerned about profit — true net income. It’s a very non-Silicon Valley mentality. Here, you reinvest your profit to make your company bigger. That doesn’t work so well in China.
We’re looking for companies that are massive in scale and throwing off earnings and look a lot more like a private equity target, though Chinese outfits are often willing to pay more than private equity.
TC: You hear a lot of stories about last-minute negotiations when it comes to investors from China. Has that been your experience? What are some of the cultural differences that you discuss with the U.S. entrepreneurs you’re approaching?
ML: Chinese are fierce negotiators. They enjoy negotiating and it’s part of their culture. So after agreeing to something, some will say, “That’s my word and I’ll stick to it for life.” Others will say, “That’s a starting point and now every moment I have, I’m going to look for an excuse to change my mind.” By the way, they won’t say, “Oh, that no longer applies.” They’ll say, “Well, XYZ happened.” And you’ll say, “Well, XYZ almost always happens; you should have expected that.” They’ll say, “Well, I didn’t expect that.”
So that’s something you see a lot more in China. Standard things that are happening in a deal [that] some folks use to re-trade, which leads to a whole bunch of fear. It’s like, “Hey, I got a great offer, but the deal isn’t 100 percent closed; I don’t have the money in the bank. Is this really what’s going to happen?” So you have this constant nervousness. The good news is there’s enough margin being made by the Chinese on these deals that they’re able to keep the deals going.
Part of our job is setting expectations. “You go with this party, you’re going to lose 20 percent down the road. You go with this other party, you’re going to get pretty much what you think. You go with this third party and the deal will die six times before you maybe make it to the finish.”
TC: How big a firm do you think this could become, and what verticals are you targeting specifically?
ML: So far, we’ve done almost $3 billion in transactions think we can do over $10 billion next year, though we’ll have to grow well beyond the three of us.
We’re still figuring out [verticals], but if you take SaaS for example, it’s by its nature a very sticky business. Since it’s so stable, these companies tend to be highly valued in the U.S., so they’re less interesting to China. On the other hand, you take ad tech, which bumps around and is right now way down; China is willing to pay up for it. The same is true of gaming, which bounces around a lot.
If we find five to 10 categories, this becomes a really big business with hundreds of people. If it’s gaming and ad tech, that’s still a sizable business but how sizable remains to be seen.
TC: Do closing periods differ much from what you see in the U.S.?
ML: The closing periods started off much longer. So selling [Spigot] took 14 months, the deal died four times, and my wife will tell you the little bit of hair I had at the time, I lost. The Media.net deal also had challenges, but it took about six months. AppLovin was even shorter. Now we’re seeing deals that are on a par with or even shorter than U.S. timeframes.
TC: Why is that timeframe shrinking?
ML: Because these companies are really hungry. You have companies that are trading for 40 years’ worth of profits. They are buying things for 10 years’ worth of profits. It’s dramatically accretive, so their stocks shoot up the minute a deal closes. Because of that, they’re willing to strike really fast and get things going.
TC: Are you charging investment bank-type fees?
ML: They’re along those lines, though the majority of our fees we end up paying to people in China. We want to make sure we have the best people on the ground working on this.