20 Jun Big Idea CONNECTpreneur: Rockstar Dealmaker Panel
According to Mark Holloway, Associate at Wilson Sonsini Goodrich & Rosati, if you’re a startup looking to exit, there’s an 85-90% chance you’re looking at M&A. At the CONNECTpreneur Summer Forum held last week in Tysons Corner, VA, attendees got to hear from Holloway and a panel of some of the regions best dealmakers to learn the ins and outs when it comes to successfully completing (or not completing) that merger or acquisition. Collectively, panelists had participated in the building, buying and selling of more than 50 companies.
The discussion addressed the panelists experience, biggest wins, biggest losses and tips for making your company appealing to potential buyers. Panelists included:
- Paul Singh, CEO, Rezon8 Capital; Co-Founder Chairman and CEO,
- Steve Roth, Partner CM Equity Partners, ex COO Preferred Systems solutions, President, Vista Technologies Solutions
- Carolyn Parent, CEO & President LiveSafe, Founder; Gravity Analytics; Advisory Board, comScore
- Jonathon Perrelli, CEO & Co-Founder LifeFuels; Managing Director/Founder, Fortify Ventures, Founder, Chairman and CEO, SecureForce
For those of you who didn’t manage to score tickets to the sold out event, here are the highlights of the conversation from some of the areas most successful veterans.
Holloway: Can you talk a little bit about your deal making experience?
Singh: We have about eleven companies in our portfolio. Our unique proposition is that we don’t just invest capital, but we serve as advisors for those companies (we invest in). My M&A experience comes from my last company, which was in the telecom space.
Roth: CM Equity Partners started out as a private equity firm about six years ago and invested in anything you can imagine from Greek food to lumber and flooring. Then we came across an IT government services company and ended up exiting very quickly. So, last year, we focused on IT companies with government services.
Parent: While I served as the Executive Vice President and General Manager of Deltek, we acquired 7 companies to scale immensely. I have founded and exited two companies and I’m currently the President and CEO at LiveSafe.
Perrelli: I am currently the CEO and Co-Founder at LifeFuels. I’ve co-founded six companies and sold five companies, and have experience on both the buying and selling sides.
Holloway: What was your biggest win?
Singh: When I wanted to start Primus Telecommunications, most countries’ telecom industries were monopolies. Then, everyone wanted to deregulate. I have founded and exited three companies, and all three of those started because of deregulation. To be global in the telecom industry, you need to be a billion dollar company. For me, an opportunity came up in Australia for a company that was a reseller of Telstra, $110 million in revenue, gross margins of 2%. All I knew is that they basically owned the customers. I flew to Australia, found them, and offered to buy the company. And they said, “Well you are a startup yourself. We should be buying you.” But I had the capital. They thought I was lying. They said sorry we just don’t believe anyone from America who comes here. So I told them I would give them a $1 million dollar check, and if I don’t come with the rest, you can keep my million dollars. So, we did end up buying the company for $110 million dollars. We bought them, which meant we bought the customers. Margins went from two to 50 percent. Then, I talked to some friends form Harvard business school and they said to go public because the idea was so big, deregulation was happening. In the first 18 months we went public and in five years we were at $1.2 billion in revenue. That was the biggest win.
Roth: As a financial buyer, going public isn’t something we want to do. Except, we bought this little company out of bankruptcy for $90 million. Went for two, three, four years. They said OK now its time to go public, and we said no. The company’s name is ICF International. We convinced them not to – so the rest is kind of history. The public exit isn’t something that happens often. It’s really hard. And dealing with what you have to deal with is not fun. So, ICF has been very successful. A very good deal and still an active company that continues to grow and flourish.
Parent: From the sales side, something you should look at is if there are technology holes – if you can find someone who can exit a company and build that solution. My biggest win was a small tech spin out from a government contracting company: CA and Deltek. We found a little tech niche where we could go and solve a problem and sell it back to that bigger company.
Perrelli: My biggest win, both emotionally and financially was a company called SecureForce. We were trying to start a cyber security services firm back when it wasn’t the hay day of cyber security. We tried to raise money and failed. We finally got over that and was able to start the company in 2004. The journey – it’s so exciting. But it’s also painful. But, when the freedom tokens hit the bank accounts, it’s success. I was able to start a company that was just an idea — It started in my kitchen — and hire a bunch of people. It was a closely held company never raised outside capital. This was the biggest win I was a part of.
Holloway: What was the deal that got away?
Parent: Primavera. When we were at Deltek, we brought on a whole new management team. Three months on the scene and we were looking at Primavera, which was focused on project management. We made an attempt and then four to five months later they sold to Oracle. We could have done way more with that product, just because of Oracle’s size. In retrospect, they could have been worth a billion at some point. I should have done more analysis and justification to outside bankers. But at the time it just seemed like too much of a stretch/distraction with the new team.
Singh: After the Internet bubble in 2001 –- before that, because of deregulation, everyone went global – then, after the Internet bubble everyone wanted to go back to their roots. We got the AT&T Canada base. Then, Sprint Canada was for sale. And I, not having experience in buying public companies, way underestimated the valuation and then could never get it. Someone paid twice as much. I just got greedy and lost it. Lose some and then you learn some.
Perrelli: I studied the science of beverages at Virginia Tech. I also started a company that was basically the other side of Napster. We had the platform built. Had a relationship with Napster. But, we were in our 20’s and really stupid. So we thought if they went legit we’d be the engine for them. When they died we died shortly after. But, the deal got away because we had a buyer -it was a subsidiary of CMGI, basically an Internet radio platform. They agreed to buy the company and less than a week away from the deal closing – we were going to take a big celebratory trip to Nepal – and they called and the attorney was crying. And we had become really close with this lady. And she said, “The company is literally broke. There’s no more money, no more cash, it’s my last week, its over.” We still took a trip to Nepal. Went to Tibet. Really thought. Now I was broke and still happy – but it was still the deal that got away. It was very painful. Advice: Don’t hitch your ride to things that are illegal.
Roth: It was a company called 3Comm. We didn’t have many employees, but a lot of good technology. Ethernet was coming around. Engineers said there’s this thing called a router and we want to invent it. The CEO said, “no that will never work.” Because, at the time it was still a new technology. That company went on to become Cisco. And our company went away. So, if I was to think back on what could have been, that could have been.
Holloway: How do I make myself attractive to potential buyers?
Roth: When we look at companies there are a few things we look for. I’m a financial buyer, not a strategic buyer – I look at financials, I care about profit. But the few things we do look at are: management team (how strong do we feel they are, what is their ability to grow this company), we don’t really want a product company. We like tools, something that makes you unique something the government says, wow, we could really use that. But the key is really the management team. We’re not interested in bringing in a new team when we buy you.
Perrelli: The deal is about people. The psychology of the deal is you have to provide value. Show the company they need you and that you don’t need them. You don’t sell to one buyer. There’s a reason auction platforms are successful. Multiple people can bid. The moment you only have one buyer is the moment you’re dead. All about how you present value – the value to them is perceived differently to others. It’s a long process.
Parent: On the sales side, it is simple math: Revenue, pipeline, and numbers on a spreadsheet. The easier you can make it for the buyer to understand the potential market value is, the better. What is this product or opportunity worth in its lifetime?
Singh: I agree with Carolyn. You have to make the value prop for the buyer. Work out the cases – just like you’re selling to the customer. Figure out what value you would create for them. Find strategic buyers. If you can show a 5-10 percent increase in their revenue, you provide them value. You have a right to go and say you want to buy me. Do as much homework as you can. Then, find one guy who can be your champion within the company.
Holloway: What is the most number of hours you’ve spent negotiating in one sitting?
Perrelli: 32. We went all night. Deal totally busted so it was a waste.
Parent: 18 hours.
Roth: 1.5 hours.
Singh: 6 hours.
Holloway: What is the shortest amount of time you’ve closed a deal from start to finish?
Roth: 6 weeks, it was an add-on.
Singh: 90 days.
Perrelli: Under 5 months. It was a body shop. Part cash, part earn out. There were two people involved in the negotiation.
Parent: 30 days.
Holloway: If money were no object, what would you go after?
Perrelli: SpaceX or Tesla — anything Elon is doing. SolarCity might be fun (the sun, it’s kind of a no brainer). Running a big company would be fun, but I’m afraid I’d screw it up. So, riding shotgun with Bezos or Musk.
Parent: I’d love to be Bezos at Amazon. Or Uber – wounds are self-inflicted.
Singh: No desire to run a public company. I’d target a non-profit…to make a difference.
Holloway: What is your advice for founders who stay with a company – how do you make the most of that experience?
Singh: When you sell the company, remember you don’t run it anymore. Try to separate yourself out so everyone else can be integrated into the new company. Now you’re an employee of a new company – and you want them to be successful. That’s the attitude you should take.
Roth: Most owners are so used to running a company they can’t get out of their own way. They want to make decisions, and that’s a good thing, except for when it’s not your company. Remember that if you’re strong minded and strong willed, and you probably are as an entrepreneur, that someone else is going to be telling you what to do everyday. They’ve paid you.
Parent: Commit to two years, and one year mentally. We never have had founders stay – for the sake of the team be aware of your strengths. It’s a new environment after someone pays.
Perrelli: I’ve sold five companies and didn’t join any of them after the sale. Post merger integration can be a total cluster – the people working together – it’s a total cluster. It’s a challenge, there’s a lot of chaos. So I’ve engineered my out before the company is sold. I’ve not moved into a role. I just know it’s not for me. Know thyself. So I walk away at the closing of the deal.
Holloway: Can you provide some advice for folks selling in the future? Is there anything we haven’t got to you wan tot add?
- The Deal Room — If you have to sign something, file it and keep it organized. It will go into your deal room. When you set up a deal room, you need one so you can see who is accessing it how often and if they are downloading something. There are now platforms to help with this. It tells a lot about a company — be organized and share everything.
- The Deal Team – Don’t tell your entire company that you’re for sale. There are very few people who should be involved. The key thing is to have a financial rep and a legal rep and then bring in the right people internally. And, understand that team and keep it tight.
- Having Multiple Buyers — This is critical. You can’t get the best offer if you sell to one company. Multiple buyers drive deadlines, decisions, and, in the end, you know who wants it the most.
Parent: Find your Eeyore. Most of us are Tiggers, we’re positive. Find someone who can sit with you before the deal and ask you all the questions and play the pessimist. Because the worst time to come across with a response that isn’t prepared is when you’re sitting across the table from your potential buyers. Eeyore isn’t fun, but they are necessary for objectivity. Think about the other side, the buyers’ viewpoint — which is very different from your own.
Roth: Get organized. Understand your assets; know your strengths, your people, your product, and your capabilities. You have to know it.
Singh: Know your numbers – your value. Always get a banker/broker. Don’t negotiate yourself. You want to get more than one party interested because that’s what drives the valuation up.