Negotiation Lessons from the Venture Capital World (Part Two)

Negotiation Lessons from the Venture Capital World (Part Two)

Notes on Negotiation Written by Marty Latz, Latz Negotiation Institute

Read Part 1 Here

Masayoshi Son had “earned a reputation as the Bill Gates of Japan” by making it big with the software distributor SoftBank. According to Sebastian Mallaby in The Power Law: Venture Capital and the Making of the New Future, while Son’s “childhood home was a squatter’s shack near a railroad that he shared with six siblings,” he invested “like a desperado with nothing to lose, even when his fortune was worth billions.” This style served him well when he negotiated with Yahoo’s founders David Filo and Jerry Yang.

In my last column, I wrote about how the early venture capital (VC) industry hugely valued negotiation skills and strategies like 1) likeability, rapport-building, reputation and relationships, and 2) the power of information, questions, empathy and reading your counterpart.

While these traits obviously continued to be valuable as the VC industry matured, more aggressive tactics took on a more dominant role later. Son’s approach to internet pioneer Yahoo reflected this. How?

Mallaby noted that:

“Son arrived [in 1995] at Yahoo’s office looking as slight and uncommanding as ever. But he brought a bazooka. In a bid without precedent in the history of [Silicon] Valley, he proposed to invest fully $100 million in Yahoo. In return he wanted an additional 30 percent of the company.

Son’s bid implied that Yahoo’s value had shot up eight times since his [initial $2 million] investment four months earlier. . . . After Son dropped his bombshell, Yang, Filo and [venture capitalist Michael] Moritz sat in silence. Disconcerted, Yang said he was flattered but didn’t need the capital. ‘Jerry, everyone needs $100 million,’ Son retorted."

And Yahoo did. But it had planned to get it in a more traditional way later with an Initial Public Offering (IPO). In fact, its banker Goldman Sachs had suggested a listing price that would value Yahoo at twice what Son was suggesting. A successful IPO would make them a lot richer than Son’s proposal.

But Son expected this. So, he “made a move that defied all convention” and asked Yahoo – before it decided – to “name Yahoo’s main competitors.”

“‘Excite and Lycos,’ they answered. Son [then] turned to one of his lieutenants. ‘Write those names down,’ he commanded. Then he turned back to Moritz and the founders. ‘If I don’t invest in Yahoo, I’ll invest in Excite and I’ll kill you,’ he informed them. . . . 

[Since they knew there could only be one winner as the go-to internet guide], Son’s threat was a revelation. . . . Like a digital Don Corleone, Son had made Moritz an offer he could not refuse. Moritz later resolved never to be in this position again.”

What are the negotiation lessons?

One, a familiar refrain from me, leverage is the most powerful negotiation element. Son didn’t have a great Plan B – Excite – but it was a really bad Plan B for Yahoo. And leverage is relative. It’s your Plan B relative to your counterpart’s Plan B.

Two, Son was willing to go with Excite – meaning that effective threats must be realistic and believable. Son’s “nothing to lose” approach made a difference.

Three, timing matters. Yahoo could have refused Son and gone public later, possibly making its founders much richer. But that was a risky Plan B, and Son made it much riskier by threatening to invest in Excite.

Finally, auctions and reverse auctions are very effective leverage-related moves, especially if the relationship is not your primary goal. Son effectively created a reverse auction by adding two potential sellers as his alternatives.

Similarly, 20-year-old Facebook founder Mark Zuckerberg and its initial president Sean Parker largely ran an auction between the venture capitalist Accel and The Washington Post Company with a bidding war for its first major funding round.

Both really wanted to invest, giving Facebook strong leverage and an excellent deal.

Latz’s Lesson: Leverage can and often does dominate in the VC negotiation world. This is true in many other environments, too.

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Marty Latz is the founder of Latz Negotiation Institute, a national negotiation training and consulting company, and ExpertNegotiator, a Web-based software company that helps managers and negotiators more effectively negotiate and implement best practices based on the experts' proven research.  He is also the author of Gain the Edge! Negotiating to Get What You Want (St. Martin’s Press 2004). He can be reached at 480-951-3222 or Latz@ExpertNegotiator.com

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