Prepare to navigate the high-stakes world of mergers and acquisitions with insider expertise as Dimitri Steinberg and Brian Flynn from Founder Partners join me, Àlex from MarsBased, for a riveting discussion. In the ever-turbulent market of dwindling venture capital and faltering tech stocks, our guests share invaluable wisdom from their impressive careers on how to steer a company towards a lucrative sale or merger. We'll be revealing the art of reading between the lines during negotiations, the strategic finesse behind successful M&A, and why having seasoned pros at your side is a game-changer.
As we peel back the layers of M&A strategy, you'll discover why timing, organization, and information management are critical for startups looking to sell. Dimitri and Brian illuminate the intricate dance of revealing just enough to pique interest without oversharing early in potential partnerships. We also tackle the nuances of inbound acquisition offers, dissecting how to filter out the noise and recognize serious contenders. And if you're considering an advisor for your next business sale, you won't want to miss our insights on aligning incentives for a mutually beneficial outcome.
Finally, and after all the verbose AI-generated stuff, I've got to say that this is one of the most fun and insightful episodes I've recorded. The 60+ years of combined experience of these two gentlemen cannot be summarised in just one hour, so we will have to invite them again!
🎬 You can watch the video of this episode on the Life on Mars podcast website: https://podcast.marsbased.com/
Prepare to navigate the high-stakes world of mergers and acquisitions with insider expertise as Dimitri Steinberg and Brian Flynn from Founder Partners join me, Àlex from MarsBased, for a riveting discussion. In the ever-turbulent market of dwindling venture capital and faltering tech stocks, our guests share invaluable wisdom from their impressive careers on how to steer a company towards a lucrative sale or merger. We'll be revealing the art of reading between the lines during negotiations, the strategic finesse behind successful M&A, and why having seasoned pros at your side is a game-changer.
As we peel back the layers of M&A strategy, you'll discover why timing, organization, and information management are critical for startups looking to sell. Dimitri and Brian illuminate the intricate dance of revealing just enough to pique interest without oversharing early in potential partnerships. We also tackle the nuances of inbound acquisition offers, dissecting how to filter out the noise and recognize serious contenders. And if you're considering an advisor for your next business sale, you won't want to miss our insights on aligning incentives for a mutually beneficial outcome.
Finally, and after all the verbose AI-generated stuff, I've got to say that this is one of the most fun and insightful episodes I've recorded. The 60+ years of combined experience of these two gentlemen cannot be summarised in just one hour, so we will have to invite them again!
🎬 You can watch the video of this episode on the Life on Mars podcast website: https://podcast.marsbased.com/
Hello everybody. I'm Alex. You are founder of Mart Space. I'll be your host today. In this episode we talk to Dimitri Steinberg and Brian Flynn from Founder Partners. Founder Partners is a platform for entrepreneurs that want to IPO or sell their business. They are very, very experienced in the art of M&A, but also in creating and growing high growth companies. They are a group of very experienced and seasoned entrepreneurs, former bankers and investors that help companies that just want to go global with a global mindset, global ambition, with very, very little, if any at all, investment, that want to conquer other markets, and they just want to make it big. But, above all, they want healthy, healthy companies.
Speaker 1:We discuss M&A because there's a lot of consolidation in the market. The market has dried up, especially the investment side, in the last 12 months. 2022 was rough, 2023 was even rougher for companies and after this decline in the technological stock, in the amount of venture capital being deployed in the market, there's time to sell the company and maybe for some of these companies in distress, maybe they can save something out of a company that just maybe didn't reach their peak. But now we're facing tailwinds not we, not Mars based, because we are not VC backed, but most VC backed companies. If they didn't reach profitability before 2022, chances are they're in for down rounds, extension rounds, rich rounds, whatever you want to call them rounds, or even down rounds, and some of them might even be in for selling the company. So if you're here to listen to Dmitrys and Brian and learn from them because these two experienced gentlemen have got over 60 combined years of M&A entrepreneurship experience, they have got a lot to share. We discussed the incentives of M&A boutiques. We discussed being in both sides of the table. We discussed financial tricks. We discussed when's the right time to approach all of these parties, how to signal or how not to signal certain things, what's the protocol, when to move forward with an LOI, how to drum up interest from other competitors or potential acquirers, and much more.
Speaker 1:This I'll let you know right now. This is an episode with a high percentage of wisdom nuggets permitted. This has been one of the most interesting and insightful episodes we have recorded and I look forward to recording a second part with them because I left out so many questions. Also, if you like this podcast, just make sure to leave a like and subscribe to the favorite podcasting platform that you use. And also, here's the. You know we're doing the question of the day. We'd like to know what is your favorite M&A story you've ever heard. It can be a funny one, it can be a fuck up, it can be something insightful, it can be something of a big corporate. It doesn't have to apply to you, you don't have to have experience it first hand. But if you're the great stories, just share them in the comment section down below on YouTube and, without further ado, let's enjoy this episode with Brian and Dimitri. Brian, dimitri, welcome to Live on Mars. Welcome to the show. How do you think?
Speaker 2:Doing. Great Thanks for having us.
Speaker 3:Ditto, good to be here.
Speaker 1:Well, it's been a while since we last recorded one episode about M&A and we were talking in the warm up about how there's going to be a lot of consolidation in the market. Right, there was some in 2021, you know, following a crisis, 12 to 18 months after a crisis, there's a lot of consolidation. Maybe companies that are not able to raise more funds, maybe some companies run out of cash, maybe they just hired too much of the lost clients and you know they run out of business, and one good way to kind of like salvage something out of your business is maybe sell it. Maybe not always for a lot of millions, but you can save something out of the business in distress, right? My first question of course, we can introduce a little bit founder partners and whoever wants to start, but I want you to explain what are the main reasons for having people with gray hair in the M&A, and you don't want a company that's starting out helping you in this process.
Speaker 2:Dimitri, why don't you answer that question, since you got more gray hair than I did, but I'm hiding it.
Speaker 3:So, look, I think that one of the most important things to think about, you know, if you are considering hiring an advisor, is you know, what should you be looking for? And there are all kinds of different things that I think are important in that regard. You know, one of those things might be the degree to which your advisor is focused on what you need help with. So some investment banks do all kinds of different things. Other investment banks are exclusively focused on M&A. Other investment banks are even more focused and they not only focus exclusively on M&A, but they may focus exclusively on sell sides or exclusively working with founder led companies or technology businesses. We're focused in all of those ways, but that's number one. But the other thing that I think really important is the degree to which your advisor actually has germane relevant deep experience. How long have they been an M&A advisor? How many companies have they sold? How many deals have they done in all kinds of different market conditions?
Speaker 3:And that matters, because there's just a tremendous amount of pattern recognition that comes from M&A, and a lot of the times, you sort of have to realize that in an M&A process, a tremendous amount of value will either be created or destroyed, and a handful of points, what I described it, what Brian and I described, the sort of critical inflection points, and you sort of don't know ahead of time when they're coming up and you have to have like a sixth sense about how to deal with them. And that, frankly, just comes from reps, from having seen it and done it over and over again. And I think that's one of the critical reasons why experience is important. You know it when you see it and you sort of know how to react in the right way in real time. And that's very, very important in an M&A process because ultimately you can't take anything back. It's a little bit like the toothpaste and the toothpaste container you can't put it back in. And so you've got to make sure, when you hit those critical inflection points, you make the right moves.
Speaker 2:Yeah, I think that's a really good point, dmitri, or points you've made, dmitri. One other thing I'd add to it part of the gray hair and I'll take for example myself and another one of our is that when you've been on all sides of the table in M&A, you're actually really well positioned. So Dmitri and I have known each other for 30-some odd years. We started our careers together at Morgan Stanley in the M&A department and then, after business school, dmitri's had this incredible career on Wall Street.
Speaker 2:I took a different path afterwards, as an entrepreneur. So I've learned how to sell my own businesses, not just be an advisor to other entrepreneurs. But the other thing that I did, and another person on our team has done, is joining on the buy side. Basically, I ran corporate development for a public company and bought a bunch of businesses, and I know from having a lot of friends that were also running corporate development in companies out here in Silicon Valley from Facebook, google to lesser-known name companies what's done in on the other side, in other words, how a business plan is put together, what are the internal politics of an organization and how do you navigate that. With all that gray-haired experience on all sides of the table, I think that that can really help entrepreneurs when they're trying to navigate their own exits and or react to inbound, for example, so they understand how a process works, and then that, coupled with what Dmitri just recently said, which is the patterns of different things it's the patterns of all sides really helps.
Speaker 1:In one minute. How would you describe for you guys to have founder partners to give some context to the audience before we segue into the next questions and the whole process? Oh, bro, is this Sure?
Speaker 2:Founder partners is a platform comprised of two types of entrepreneurs or two types of professionals. We call them builders and deal makers. The builders are folks that have started and sold at least two companies two to six companies and they have shifted from becoming an entrepreneur themselves to being a coach, so from player to coach. And the other group of professionals which is what Dmitri does full-time are the deal makers. These are folks that have been Wall Street, they've gone into corporate development, private equity and or CFOs and they're consummate deal makers. And by stitching these two skill sets together we have founder partners are able to cover the full arc of the company, build through the exit.
Speaker 1:Because one of the things I really wanted you to talk about is this part of about the experience. Right, we're talking about the gray hair, but it's mostly accumulated wisdom and experience and track record. Right, obviously, you need to have some credentials, some authority, which you bring to the table, because obviously you have created companies. That's something I really respect. That's something I would look for in a partner in an M&A boutique or an advisor in the M&A process if I were to sell my company. But the other thing is like I see some parallelisms with me being an investor when I have been a founder of a company other investors might not read between the lines in the reports that we receive or in the one-to-one meetings we have with the companies like I'm seeing something. I'm able to read the signals this company is selling sending to me without actually telling it to me. Right, what are the things that you are able to see because you've been a founder yourself, like Brian?
Speaker 2:A lot of things. It's exactly what you said. Just actually reading in between the lines, sometimes seeing things that people aren't saying, it's like how people react or what they're not saying actually in selling a business. But oftentimes it's also just asking, I think, the right questions. I think that that's really one of the most important things. If you're a buyer or you're a seller. On the buyer side, you've got to ask a lot of data points. You start seeing when founders aren't giving you the right information, how they are responding In a negotiation. For example, if you're dealing with a seller of their equity and they're not responding, they may actually have other alternatives. So, trying to build a relationship of true transparency so you can actually get the data, but don't give up on asking the really important questions. Dmitri, you've got a lot of experience in this, a lot more than me on the M&A front.
Speaker 3:Yeah, I mean, look, at the end of the day, it's a little bit like Sherlock Holmes, the dog that didn't bark. It's not only what people say, it's what they don't say and, as Brian noted, reading between the lines. In an M&A process and when you're dealing with potential buyers, you have to understand what they're looking for and you have to understand how to position the business well.
Speaker 2:This goes back to seeing all sides of the table Entrepreneurs that are out there and their first or second time entrepreneurs and they're selling their businesses and they don't hear back, for example, from a buyer. That could be another example where the entrepreneur's like, oh my God, they don't like me or they told me you're going to do this, you're going to do that, but the reality is that there's a whole bunch of other things that go on behind the scenes. When I ran corporate development at Macro Media, I had like 25 different companies that we were looking at buying and those priorities would change a lot. We didn't necessarily have champions there and when the priorities would change, we weren't necessarily always able to communicate effectively with the sellers. The seller is like, oh my goodness, the deal's not going to happen.
Speaker 2:There's all sorts of different examples like that things that aren't said. Don't blame it necessarily on yourself, but there may be other existential threats or other things that are going on in the background. That's why you want to have somebody who has the gray hair, who's seen those movies over and over again over 30 plus years.
Speaker 1:Now, how about what you were seeing in the last weeks or months? Because I've been seeing a lot of M&A in the consulting already consultancies sector, because we've been asked. Obviously, when there is every two or three years, we get some requests by big players. There's been a lot of action in the Spanish ecosystem. Some big private equity firms have acquired a bunch of big consulting firms. They're lumping them together to create a macro consulting firm and then try to sell it to the next one. Obviously, what they want is let's just buy a bunch of them. How many developers you got? I give you X or H developer you got and let's just lump them all together.
Speaker 1:It's a recipe for failure for their products and their service, but it's probably a good investment for them because private equities don't buy if they don't think they can. They can sell it at a multiplayer. This is I'm just in this sector. I've seen consolidation in other markets in PropTech, perhaps in Spain, a little bit in Fintech, but I don't know what you guys are seeing in Silicon Valley and the US in general. Dmitry, do you want to take off?
Speaker 3:Well, look, I think that what you're describing the roll-up strategy of private equity firms has been a strategy that's been employed for well. I know exactly how long it's been employed because when I was in a private equity firm 30 years ago, we were one of the first firms out there executing on it. It's been in existence since the early 1990s. The thesis behind that is that there are markets, there are industries that are number one, highly fragmented, with a lot of so-called mom and pop operators out there with a highly fragmented group of customers. There exists the opportunity to buy up these very small businesses at relatively modest prices, ie low multiples of earnings, put them together, extract some level of combination, synergies, cost savings, presumably some measure of pricing power, and ultimately exit at a much higher multiple than you came in at, because now you've built a business that might be of interest to institutional investors, the public market, what have you? The challenge, of course, is identifying the right industry in which to do this. There are some industries that this makes a ton of sense. There are other industries where you run real risks.
Speaker 3:Alex, you maybe have just described one. I mean the consulting industry. These are body shops, these are people. You've got to be very, very careful about how you manage them. When your most important assets walk in and out the door every day, it's a very, very different dynamic than if it's a business with hard assets that you have a lot greater degree of control over. The strategy itself can make sense, but it's very fact in circumstance specific. I can't comment exactly on how likely a consulting firm roll up, how likely that is to be successful, but you're absolutely right to be cautious about it because of the nature of the assets and the nature of the dynamic that comes with that.
Speaker 2:I think that sometimes you look at markets that got overloaded, meaning there's too much money that would chase into those markets greedy investors, especially in the zero interest rate environment. This has happened from economic cycle to economic cycle. Let's take AdTech, for example. Here in the United States it was a really big deal to have an ad network. There are over 300 of them. Then there are all different permutations within advertising technology. So much money chased that thing. Then there are these companies called Google and Facebook that basically dominate and sucked out the oxygen out of that area. Everybody was left to offer the little morsels. They were forced, these little companies to actually consolidate before the music stop.
Speaker 2:We're seeing that in marketing tech lots of types of different companies the music will stop. I think that that plays into don't miss those windows. If you actually are an entrepreneur in some of these markets, know who those partners are that you'd want to essentially marry up with and do it when you get the timing right. I think in the United States right now it's clearly a buyer's market, and I believe that's the case in Europe. It may not necessarily be the best time to be selling, but I'd say, no matter what, if you're on the sell side. You're an entrepreneur. Have your company always looking good. Have profitable unit economics. More buyers that do come around and sniff around are going to be interested in well-run organizations.
Speaker 1:All right, yeah, that was going to be my next question. Let's talk about timing. You know Brian is a founder that when you build startups maybe it's not the case with agencies kind of like, because we're bootstrap or bootstrap companies we tend to be a little bit more organized and clean. We have our houses cleaners, just because we don't run out of money, right, and we don't have to rush things, we don't have to take shortcuts, we don't have to cut corners and whatnot.
Speaker 1:But startups you run out of money, right, you raise around that you know, in the 12 months you got to be fundraising again, so on and so forth, and your house isn't exactly very tidy, right. And so if there comes a time around when you have to sell your company, you will never have your data room and the right place you will never have. You know, obviously you need to compile all of this data. All this reports, all these KPIs are not exactly up to date and it takes a while to prepare that. So if there should be a potential buyer for your company, if you don't have all of this information, you're signaling that is your first time, right? So when is the right timing to start compiling this data, to have all of these data prepared, which is so you don't signal that that they are contacting you for the first time.
Speaker 3:Yeah. So I think that that's a great question. It's easier, you know it's sort of easier to go along than to sort of do it all at once. So start off being organized and continue to be organized is a great way, right? So you know, to have a place, a virtual place where you are, where you're keeping the critical documents and critical information about your business, and keeping that in an organized, accessible kind of format will make your life easier if and when you sort of need to pivot to a sell side.
Speaker 3:And you know, back in the day, you know data rooms were physical. You know there was a reason that was called a data room. It was a room in which all the data was located, and Brian and I both as analysts 30 years ago had the experience of being the data room analyst, sitting in a data room, monitoring it and making sure people didn't come in and steal stuff. Now we have virtual data rooms and it's a very different world. And now we have all different kinds of alternatives or ways in which you can create virtual data rooms from you know pricey dedicated service providers to sort of homebrewed things, like you know, using Google, or you know Dropbox or Box or whatever, to get what you need.
Speaker 3:But at the end of the day, you know, having a sense of what should be in a data room sort of the key tabs, if you will right, sort of how it breaks down to the basic corporate documents, financial matters, information about IP, material agreements, information about customers, suppliers, what have you you know it's good to sort of create a taxonomy of that and start to populate it. And some of the companies that we work with or get engaged with have done a very good job of sort of keeping themselves organized and it's an easy lift. And in other cases, you know they need to sort of go back and backfill and create it. But the truth of the matter is, you know, we live in a world today where virtually everything exists in a virtual form somewhere and, you know, with reasonably diligent efforts you know, can be assembled. I think it's actually not as problematic as it, you know, once was when we, you know, everything was physical.
Speaker 2:Nowadays, pulling together a data room shouldn't be too difficult and shouldn't be too time consuming a process, I think the most important thing for entrepreneurs to do is to have, not necessarily a clean data room, but have a clean business. What I mean by that is getting to making sure that you've got a great business engine, a profitable business engine, starting at profitable unit economics and I use the baseball analogy which is get to first base. First base is to getting to sustainable cash flow positive, because if you're sustainable cash flow positive, you've got an infinite amount of time to do anything. Even if you're getting into the markets that are starting to consolidate. You know you also look better right. You're in a position of leverage, so that doesn't mean necessarily you know you don't have to go fill out the data room in advance of. You know getting to a sustainable cash flow positive, I get to that first base right away. That's the most important thing. The second thing I'd say is you know create a situation which I think is even more important than just the data room per se which is the right partnerships for the company, so that you have optionality. You know through those partnerships so you know they make the income statement or business development partnerships that you can actually flip to one. So if you get an offer from somebody from outside. You don't have a partnership put in place. You can call one of the partners if you really want to conduct an M&A process, and then the other thing I'd say around a data room is just what kind of data you want to share in an initial conversation. It depends on what kind of conversation you're having. I like to say always have a simple deck about the business. You know 10 slides or so, right. So there's an overview of the company, maybe a couple of the key metrics, but don't share everything right away. There's it's kind of a progressive set of discovery.
Speaker 2:One of the things I see happen a lot and it's terrible where entrepreneurs don't know the green, yellow and red lights of information disclosure at different points in time. So, for example, lots of times entrepreneurs will go down to or go up to Redmond, for example, go to Microsoft, and they'll be so excited because there'll be a conference room filled with like 15 Microsoft folks, mostly product managers and chief software architects and they'll probe and they'll try and learn as much as they can about an area they want to be in, because they actually are thinking about a build versus buy. The entrepreneur leaves the meeting, feels like it was a great meeting, they don't hear back. And they didn't hear back, but they shared too much information. So I think it's really important that entrepreneurs, you know, don't go down that rabbit hole too many times when they should be focusing on building their business.
Speaker 2:So, kind of understand, don't give the keys to the kingdom of the other side. Just be progressive in what you share. Know the red lights of like hey, this is too much information, I'd be giving it this stage of dating versus the green light. Hey, I've got kind of that 10 page deck. I'm okay with people knowing roughly. You know what we're doing in general, right?
Speaker 1:I agree with the, you know, with the point of having a sustainable business, profitable one, because it gives you the position of power and negotiation, but then again, then you eliminate 99% of the startup to eliminate quick commerce, e-scooters, mobility, pretty much every all of these sectors that only make sense if you have astronomical units of unit economics, right. But on the other hand and I don't want to give myself to the confirmation or survivorship bias, I think it's confirmation bias when I look to my portfolio and I see that the best entrepreneurs are the ones who are worst, reporters are the messiest, are the, you know they're not tidy, they don't communicate well, and I don't know. Then maybe it's because I'm an angel investor and I invest in very early stages of the company and, granted, I'm not involved in the company's pastures B, for instance, right. So maybe there's a correlation between that and when's the right time to bring in a CFO. Is that a key moment for a startup that potentially might want to sell and, if so, what's the right time to incorporate a CFO into the company?
Speaker 2:Okay, we'll come back to the CFO. Let's start with like communications and what I've seen over you know, 30 plus years of investing, advising businesses you know I'd say the best entrepreneurs are oftentimes the best communicators. Frankly, I've seen the companies where I've personally invested in that have actually done not so well, or the ones that weren't communicating so like, when you're like the entrepreneurs that are communicating, like, even if it's a monthly one pager to their angel investors. Here's the metrics that we you know that we focused on and here's what we did versus plan. Here's what's working, here's what's not working and here's where I need the help. And they do this on a regular basis. They're communicating. They're gonna be in a good spot.
Speaker 2:When you have irregular communication, to me that's highly correlated with something's not going so well within the business. Frankly, and back to like CFO stuff, I think it's really start out with a bookkeeper. I think founder CEO should probably, you know, have a bookkeeper if they're not doing the numbers themselves, and that could be part time and inexpensive. Usually. Wait until company gets to a certain size where it makes more sense to have a full-time CFO. And what's that size I don't know. In our portfolio and companies we look at, it could be, you know, 5 million, 10 million or so, and it still may not necessarily be a full-time person.
Speaker 3:It's almost like a red flag for us. If a company has a CFO too early on, it shows a sense of misplaced priorities and perhaps a lack of sort of understanding where resources should be dedicated. And you know, given the powers of automation about what a CFO needs to do, you really don't as Brian has pointed out you really don't need like an actual high-powered, fully dedicated CFO till the business is quite far along and the money that you'd pay a CFO and having been the CFO of a startup company, I sort of say this for a degree of experience you know to a certain extent I was probably superfluous when I was the CFO of that company, or certainly I could have imagined the company operating without a CFO. And you know, really those resources are probably better allocated towards a you know, more engineering talent, investing in sales and marketing, whatever it is, or simply just banks. So the company's got more runway.
Speaker 1:So I'm flipping the question and sending it back to you, Dimitri. Then what is too early to bring in a CFO?
Speaker 3:Well, I think you have to think about what roles that the CFO, what roles does a CFO or would that particular CFO play in the organization you know, sort of a CFO and a big company and then sort of you know, think how it maps to like a small company, right. There's sort of a controlling function, the controller function, and then there's sort of the treasury function, right, which is sort of financing and raising capital and things like that. The control function is basically something that can be done, you know, by an accountant for somebody of that you know. With that sort of that level and on the sort of the treasury function, the truth of the matter is that people who are investing in startups, venture capitalists, angel investors they don't want to hear from you CFO, they want to hear from the founder and the man and the team that's actually running the business, developing the products, selling the products. The CFO just does not have a lot to add, even in the fundraising of early stage companies.
Speaker 3:So the CFO you know the role a CFO could play in an earlier stage company might be if they're, you know, very strategic and the business sort of would benefit from that sort of seasoned advice. Maybe the founder is, you know, technically brilliant but lacks other sort of skills or experiences that the CFO can sort of plug. Organizationally, maybe, the CFO is also effectively the chief operating officer, the chief administrative officer, and is keeping you know all of the trains running on time, while the founder is really the product visionary. So you know, your title can be X, but your actual responsibilities, you know, can be far more diverse than that. And that's where I think a CFO can make sense at an earlier stage company where you know their roles and responsibilities are much broader than their title might otherwise imply.
Speaker 1:How about the? Let's say you engage in M&A boutique because you want to sell your company? Let's get into the real meat and potatoes now. Let's start a process. So you say you want to sell your business. You bring in somebody like you guys, for instance, and you start to get a lot of inbound requests, right, maybe you got some of them before you engaged M&A boutique, and it's hard to separate the grain from the chaff, like we've never wanted to sell the company.
Speaker 1:But every now and then, at more space, we receive requests right, and out of the 10 years we've existed, only two of them made sense and they were our biggest clients, you know. And so in that case, for me it was easy I should listen to these ones, but I shouldn't listen to the other ones. Right? For me, it was a matter of why are these people wanting to buy me if we don't know each other? I don't know who's on the other side, how they work with their company culture. Who am I gonna be talking to? What do they value in our team? Are they just buying pounds of developers and it could be March base, as in any other company or they really want us versus our biggest clients? Maybe perhaps it was not the biggest offer, but we know each other. We know how they would react, how they treat us. We've got a great relationship. So how do you separate the grain from the chaff when we got too many inbound requests Like what would be your advice here?
Speaker 3:Do you have to be clear whether or not you're just trudging along and you have no intention to sell your business and you get over the transom, unsolicited inbound, versus you hire an advisor or you don't hire an advisor but you are intentionally running a process and you are now trying to make selections and grade and prioritize the inbound interest and which ones you think are more or less interesting. If it's the former, it goes back to what Brian was saying you built a great business or you're building a great business and you're really not focused on exiting and then you're getting these over the transom inbounds. I think, alex, you asked exactly the right questions. Why would the parties be interested? Do they make any sense? How does that fit into my own thinking and aspirations for the business?
Speaker 3:I'll say the following when we start from scratch and we think about identifying buyers and maybe we can use this framework to answer the question you just put forward the way we think about it is almost as if you're a detective trying to solve a crime. It means motive, opportunity. I think you can use the same kind of framework when thinking about buyer. Motive is the strategic rationale and that's the most important criteria. Means does the buyer have the financial wherewithal to actually do the deal An opportunity. Is this the right time? Is the buyer actually motivated to transact? Does the buyer have their own management team in place or are they suffering from their own executive turnover? Is the buyer been an active acquirer or are they someone that's never done a deal before and they have a non-invented here syndrome? Is the buyer themselves being subject to being taken over?
Speaker 3:You can apply these criteria to assessing the inbounds and which one of these parties checks as many of these boxes as strongly as possible.
Speaker 3:That's one thing to think about. The second thing to think about and I think you were going there, alex, right, when you were talking about these were long-time customers or clients of yours is the importance of building real dialogues, if not relationships, with potential buyers in advance of the potential transaction. That's very, very important. I like to joke most people don't get engaged on the first date. They need to get to know each other really well. That's important. That's very important to figuring out whether or not this deal has strategic merit, whether there's a good fit from a culture perspective, whether you, as the founder, would enjoy potentially working at this company, because undoubtedly they're going to want you to be part of the deal. Developing these relationships with potential buyers and figuring out a way to make these relationships develop organically or what Brian and I have often characterized as let's build an income statement relationship before we consider a balance sheet relationship is a great way to prioritize and assess potential buyers.
Speaker 2:Have in mind what your objectives are and objectives for different constituents. Let's say you're a bootstrapped founder. You have nobody else on the cap table. The buck stops with you there. Well, maybe it should buck stop somebody any founder, frankly but you should always know are you trying to build a $5 million business and exit for $25 million and then you're done, or do you have bigger aspirations? Do you want to build something much bigger or do you want to have a lifestyle business? There's a lot of it. It starts with the objectives of that founder, but then, if the founder also has investors or co-founders or other employees, understand people's incentives and where their motivations are, where they're coming from, so that then you can hit the ground running. You're not reacting the things all the time. You're reacting in a proactive way because you actually already understand those goals and objectives.
Speaker 2:The other thing I just wanted to bring up is and Dmitri and I advise founders let's say there's three or four different offers and they're all coming in at the same time because a process is being managed. Some of the offers may be with companies that an income statement relationship partnership has been put in place or there's been a previous inbound. Some of them have been drummed up because you thought about oh my goodness, we're selling to the same buyer the same kind of ICP and we're strategically adjacent. We have a product line strategically adjacent to this other party that's got much bigger means, and so you bring, let's say you've got four parties that are at the table in all time. So what's the framework to making the decision?
Speaker 2:It's not always just pure economics I mean you can also hopefully get the economics roughly around the same, but it's actually a strategy. That's why Dmitri said it's the most important thing for the buyer, but it's also very important for the seller because you want to make sure that you're aligned in the same vision. Otherwise you're not going to probably want to last at that buyer for very long. And last, but not actually probably almost as important great acquisitions are also when there's great chemistry. So you're not going to go from, you're not going to get engaged if you think that the person of the party is not that pretty and they're not treating you very well. So it has to have a good chemistry. I mean those are the three things that we like to have founders think through very carefully when they're going through this M&A dating process.
Speaker 1:Now about the incentives, because one of the things that I think they are the most complex parts of an M&A process and, having been part of, known at all this striking number of zero in my career. But from the outside it strikes me as really complicated to understand the motivations and the incentives of the M&A boutique and how to control them. So on the one hand, you hired them on a retainer so they are incentivized to be with you long enough because they want to maximize a little bit of profit. On the other hand, they don't want you to run out of money but, understanding that the company is either profitable or in a good position, they can milk you in a sense. But they also might want to go for the biggest offer because they get a percentage of that. So how do you control these kind of incentives and tell them sometimes you want another acquisitor that is perhaps not the biggest offer as a founder. How do you negotiate this? How do you retain control?
Speaker 3:If you're talking about the relationships with your advisor and how to sort of optimize and manage them. I think that's where you're going. And, alex, first principles your advisor doesn't decide ultimately whether or not to transact. You, as the principal, decide whether or not to transact, and you should certainly never sign up an engagement where you're sort of obliged to pay a fee if you don't do a deal. At the end of the day, you want your interests and that of your advisor to be as closely aligned as possible.
Speaker 3:So I'll tell you, from our perspective, the way we think about it and the way we think makes the most sense, given that sort of underlying first principle, is that we assume that our client ultimately wants a successful transaction done, number one and number two, they want to sell the business for as much as possible, and so the vast, vast majority of our compensation should be tied to that actually happening.
Speaker 3:That's point one. You also brought up the concept of a retainer, and I think that's actually very, very important and, to give you the perspective of an advisor, the reason we look to get paid a retainer, even if it's a relatively modest one certainly relatively modest in the context of what the total compensation might look like if we get a successful transaction completed is it's a little bit of a signaling mechanism From our perspective? We have limited bandwidth, we can only work on a relative handful of transactions at any given time and we want to make sure that everybody we're working with is pretty seriously committed to trying to pursue a transaction. And, as Warren Buffett has famously said, a check is a commitment and everything else is just a conversation.
Speaker 3:But I think you also raised sort of another point, which is how to make sure your advisor isn't milking you, right, that they just don't drag things on and on. I can assure you that, in the vast majority, of advisors don't want deals to take forever, right, they want to try to get a deal done and move on. But that's a fair question. Which is what does that mean for me as the principal? Well, first of all, with respect to the retainer itself, our perspective on a retainer is that it shouldn't be. You're better off paying one retainer, independent of how long the deal takes to get done, so that as an advisor, as a client, you don't hear the meter running and you're not motivated to terminate the relationship because you don't want to pay the next month's retainer. You just pay one retainer and that's for the rest of time we're committed to you, for as long as it ultimately takes. The final thing you were bringing up, alex, which I think is a subtle point, which is what do I do if I feel like my advisor is somehow trying to get me to do the first deal possible and maybe not hold out for better terms? Look, that's a fair question to ask.
Speaker 3:I think what that really speaks to is the importance of openness and transparency between the advisor and the client, setting expectations, for the client to convey their expectations and for the advisor to understand what the client's expectations are in terms of valuation. We've been managed by clients and it feels like they're trying to not be fully transparent with us and it feels somewhat analogous to somebody cheating at Solitaire. What's the point, the goal here? You're paying us to give you good advice and help you manage a process. We should know exactly what your objectives are. If your objective is I don't want to sell this business for anything less than 100, we'll obviously not entertain buyers and we won't go down a path where we know the bid's going to come in at 50. If we don't have that openness and transparency, we can waste a lot of cycles with a buyer that's not serious or is not going to meet your valuation expectations, and that doesn't do anybody any good.
Speaker 2:I think that's right, Dimitri. I also say one of the things that at least I've learned from my days as a banker. I ran a big practice software and internet M&A practice at one of the four horsemen's back in the mid to late 90s, and how founder partners are very different than those kinds of firms. Two things in particular bankers often will bait and switch their clients and that's really important. If you're an entrepreneur, when you're talking to the person who sounds he's got the silver tongue, sounds like his awesome banker, and then quickly you sign the engagement letter and then you get the B team or the C team. You get the person who's right out of the MBA program. There's never really sold anything before. What the heck? That's terrible. So bait and switch. You got to hold the feet to the fire of the person you are going to hire Founder partners, which is really cool, is it's whizzy wig. What you see is what you get. You want the gray haired person who's been there and done that, Not the 25-year-old ex-McKenzie person who's really never done that or somebody who's trying to become a banker. The second thing I'd say is, in learning about banking, it's very transactional. Bankers typically would think to themselves that oftentimes. That's why they're terrible investors. Any deals are good deals as long as it gets done, Whereas a founder partners, we really care about doing the right deal because we care about karma.
Speaker 2:We are building a platform, not just an advisory business. Let me give you an example One of the companies that we sold to Amazon. The founder there was delighted with the process, Also learned about the builder side of founder partners when his golden handcuffs were finishing up as a product manager at Amazon. He wanted to start another business. He asked about the builder side of our platform. Now he's a portfolio company. This is what we want to have happen. It's not get something done as fast as possible, collect the fee and next move on. That's not a great way to build something that's really scalable. I think the founder partner is very deliberate about trying to be very different than what's out there.
Speaker 1:I totally hear you. I think there's another parallelism in what you guys do and what we do at Mars. Of course I know that M&A advice or boutiques they don't want to milk you. Of course, in theory, you want to get the best offer, you want to get the best acquire and whatnot, but in practice, 95% of the people out there in this business they're not doing the right thing. The same with development agencies. You always hear horror stories about development agencies outsourced to this company and they screwed me over, they never released the code, they locked me with these stupid technology and whatnot. That's precisely why companies like MarsBase exist. We leave off of these bad practices of other people. I assume it's the same for you. The proof of that is most M&A boutiques or advisors I know and I respect they're terrible at marketing. Why? Because they don't need it. The best companies, advisors and trustworthy people. They've got these word of mouth recommendations.
Speaker 1:Marsbase for almost 10 years we've never had salespeople. We almost exclusively worked through recommendation. Why? Because we do a great job. Salespeople are people external to the company. That really resonated with me. The other thing is, I really like your concept of what you see is what you get.
Speaker 1:I'm going to pay you the royalties every time I use it from now on, because I think that's something that I suffered at Deloitte and the other company I used to work for. They were using my CV for potential leads and lending new clients. Then I would never work in these projects. They were sending somebody else Every two weeks. Alex, can you update your resume? Can you update your CV? We need it, for we're going to work for this bank.
Speaker 1:Okay, then why I'm never assigned to these projects? I know that they were doing that One thing because we're running out of time and I think we'll have to record. I got so many other questions the process, but it's been really interesting For me. One of the other difficult parts from the founder perspective and I always hear that at the people I interview at StartupRenor on these podcasts is it was really hard for me to conceal this from the team how to keep the focus on the one hand and keep the business running. Delegate it to somebody else while the CEO on the C level gets the deal done. The second is when's the right time to communicate and to whom? How do you calibrate?
Speaker 2:that. So it depends on a lot of things. But let's just take company size. I remember at MacMedia, when I was running corporate development strategy for the company and we were selling to Adobe, it was a big deal public to public deal, $4 billion transaction. We created a very small team CFO, CEO, of course, and myself, nobody else, nobody else until we got to assigned to LOI. And then we had because I had information in a publicly traded marketplace that this would be terrible, be so distracting to all different kinds of constituents. And as we got closer and closer to assigned definitive purchase agreement, it was only on a need to know basis, right, so tightly controlled.
Speaker 2:I think even in small companies I've seen entrepreneurs do it two different ways. Just be open about it. So if the team is really small, yeah, might as well just be transparent about it. I mean, because why is the CEO kind of leaving with somebody else every kind of odd times when they're supposed to be showing up at meetings? It's just, it creates all sorts of like gossip and questions. So then I think if it's a really small team, the CEO should probably say, hey, look, we've had some inbound, we've had inbound in the past and we're bringing pretty good, you know we just go explore it. It makes sense. But you know we're not trying to actively sell the business. You guys got your jobs to do and the best thing you could do in helping us is outperform your deliverables, Because then we got an even better business and we'll keep you in the know as to what's happening. But don't get anxious, Don't worry about what your stock options are worth, right, Just do your job.
Speaker 3:I think everything Brian said is spot on. I think also, honestly, it really is a facts and circumstance, case by case, kind of situation. You've got to read the room right. You've got to know. You know what is the reality of the situation on the ground Brian put out you know some pretty good. You know, guide rails. Like you know, smaller company may make sense to just be open.
Speaker 3:Conversely, at a much larger company and he gave an example of a huge company you know the importance of keeping the information confidential, particularly given the fact that it was publicly traded. You know, I think that you know, the kinds of companies we're working with that have anywhere from, let's say, 15 to 30 or 40 employees. You know that might be sort of the sweet spot of the size of the companies we're working with. More often than not it's not being shared universally, it's being kept within a relatively small group, whether that's sort of two to three people, maybe up to four, and it's for the reasons that Brian described right.
Speaker 3:We don't want people distracted from, you know, doing their jobs and focusing on, you know, what's right in front of them.
Speaker 3:And the other thing that I think is important to recognize is that this M&A process is immensely time consuming, and so you just don't want people sucked into it and then all of a sudden spending, you know, tons of time or you know otherwise not. You know doing their day jobs and in fact you know that's why it's often helpful if you've got a situation where there may be, let's say, a company has two founders and one can be, you know, mr Inside, keeps the trains running on time and running the business, while somebody else can be Mrs Outside and actually dealing with the M&A process. You know we don't always get that luxury of, but if you do, you know that can often be a great way to make sure that the business continues to operate as it needs to while you're executing and pursuing an M&A transaction. But I'll just, you know, I'll finish by sort of going back to what I said at the beginning. You really need to look at the specific facts and circumstances to decide how broadly to share this information.
Speaker 1:Because in the M&A sector there's a lot of survivorship bias. Right, we only hear about the companies that are sold for millions, hundred millions, billions, even. Right, but more often than not most M&A processes they fail and they can be a big hit to the morale of the CEOs and sea levels and founders of the companies. How do you bounce back from that? That's a genuine question I've always had. It's like you're working so hard and a process that can last for 12 months, lots of millions on the table, and then you walk away without anything because somebody fucked up or because the market changed, you know, big technological drop in the stock exchange, and it went on and on and on. What happens and how do you bounce back from that?
Speaker 2:It's brutal. I sometimes think that just having being recognizing that this is the risk of M&A, that it may not actually happen is the very first step. Because if you have, if you're reasonable about it and you know you have like lower expectations, then you're probably gonna be fine. If you have a really high expectations and God forbid you take your whole team thinking that something's gonna happen, then it's extreme. It's like being an entrepreneur. Entrepreneurs, usually young entrepreneurs, have big extremes like that's like anxiety and depression. It could be such big swings. Same thing in the M&A.
Speaker 2:But if you actually are a little bit more calculated, more reasonable that comes with reading a lot, having an advisor, you know, I think I can temper some of those expectations. I actually like to even start out with a client and just say, hey, look, even if we get to a term sheet, for goodness sakes, we got a long ways to go. Dimitri and I we wrote, I think, a foundational article about the 10 things that we've learned in 30 years of doing M&A or 60, some years combined over 100 transactions. But one of them is yeah, I mean, even if you get to assign term sheet, you're probably only 50% of the way there, right? Because there's all these existential threats, things can blow up, kind of what you were saying. So having reasonable expectations actually lower expectations probably helps a lot to manage the anxiety, so you don't get super depressed, so that when the real one comes along you're actually still gonna do this song and dance and do the right thing.
Speaker 1:Dimitri, you wanna add up something to that, or?
Speaker 3:I think everything Brian said was spot on. I mean, fortunately, you know, the very fact that you are a founder means you are likely to be a resilient person who has already gone through hell and back, and so you know you talked about survivorship bias Fortunately, the types of people we're dealing with, you know, have already demonstrated a lot of ability to survive, and I think that's very important. I mean, I've got, you know, two situations you know that are very apropos here. In one case, the company was sort of a bit of a melting ice cube and was being trampled by one of the 600 pound gorillas and we couldn't get an M&A deal done in time before the business really started to fall away. And the founder, I mean, he just dug deep, he pivoted. There was a kernel of an opportunity and he's pivoted to sort of a different product and service, raised some more capital. He's already sort of, you know, got the business back up to, you know, half a million dollar run rate. This guy's a survivor and I am convinced, truly I am convinced, that I'm gonna have an opportunity. We're gonna have an opportunity to help them sell this reinvented business in the next 24 months. I believe that In another situation, you know, we had a term sheet in hand, speaking to what Brian just said, and the buyer said hey, I need to take a break, we need to sort of finish out the year.
Speaker 3:We have another deal, we're closing. We need to take a three month break. You know that's not a pleasant message to hear. It's not a pleasant message to share with your client. But in this case, you know, what made it palatable was our business is healthy, you know, growing nicely, it's profitable and you know when these buyers come back in a couple of months time, our business is gonna be more valuable than it was a couple of months ago and we're not gonna cut the price. They're gonna be lucky if they get the same price they were talking about A few months ago. So we gotta have that reality and that attitude as well.
Speaker 1:I like that. I like that Time for the last question. This is a signature question of the podcast. You guys have to share each one of you your biggest fuck up and how expensive it was. And don't give me like, don't give me the usual things, like everybody tries to give me the I hired the wrong person. No, I will not accept that one. Just try to think of a big fuck up that you've had in your career. If related to M&A, of course, all the better. But if you can quantify in money how much was lost, don't worry, we've had people setting fire to this oh, oh, oh, oh, god, yeah, okay, this is great Okay.
Speaker 2:You want to go most expensive fuck up. We'll go first. I will talk about things other than M&A and, demetri, you focus on the M&A thing because we cover. I'm gonna talk about me as an my biggest fuck up as an entrepreneur and as an investor. Demetri, you talk about awesome.
Speaker 2:I like it, like your attitude, so I've started sold quite a few businesses and I think I am my I. I became a little bit too confident, little maybe to cocky, and I thought that because I was a software guy, I've always been a software and a digital media guy, and so I thought, hey, and I've been brought Demetri. I thought I could build a business in the consumer package good space, and it was called New York tapped, which was basically bottling New York City tap water and and I was pumped. I thought it was a brilliant idea. We are on the David Letterman show, we're all this free PR. That came around and I was like, yeah, this is gonna be a cool business. And it went bankrupt. I lost Demetri's 25 grand as the angel investment and it was just like God. But that was a.
Speaker 2:That was a screw up and and, by the way, I've had others. I mean, I've been a serial entrepreneur. I've had some other failures besides all the things that look Clammers and good on the outside. But what I learned it's actually the screw ups are about learning, frankly, right. And so I learned I better stick to my native, my native software. Just don't go outside of that. Don't look for me to do anything in biotech or semiconductors, just state the software.
Speaker 3:Yeah, Alex, have you ever seen a $25,000 bottle of water?
Speaker 2:Thank you for rubbing it in my goddamn face. Demetri, I love you.
Speaker 1:Love it. I knew you were gonna go for that. Yeah, how much money was lost in the it's not so much.
Speaker 2:It was about the money, because I'm gonna get to the money thing.
Speaker 1:Okay, yeah.
Speaker 2:I mean a big number.
Speaker 1:You're not getting out of these without revealing the numbers.
Speaker 2:It was a ego Bruising embarrassment, and time and time is definitely valuable, right, come on when you're like really humping it on a company. Here's an expensive one, I think and I ran the math on it I made a $200 million mistake, jesus Christ.
Speaker 1:All right, I want to do that directly to the top five of these podcasts.
Speaker 3:Brand you only top five only top five.
Speaker 1:Yeah, oh, we've got some really big ones. I mean yeah, yeah, yeah, yeah, yeah yeah.
Speaker 2:Here's a problem is I made another one too is about a hundred million dollar. They kind of fell into two categories. Actually, the one, the same category, missed out investment opportunity. Right, I mean, you've heard this before. There's the biggest mistakes I. I did not invest in roblox, and I should have. When I had the opportunity and my, my Co-founder, founder partners, is on the board of roblox gave me the opportunity. I said what is this? Is the gaming? It's, it's a game. I'm not in a game and realize it was gonna become a platform. And boy oh boy, that was crazy. But you know what, though? Because I'm so positive, I try and see the positives and all the negative stuff. The positive side is, you know, if I had made that, I don't know if we would have built founder partners, and to me, that's my true love I, I'd pay millions of dollars. If then I had 200 million to actually do what we're doing a founder partners, it's really fun.
Speaker 1:I Don't know we would you. I don't know if you guys have got a hard stop in two minutes, but I don't. Just the means for you, so I don't know if you got time constrained or you got only two minutes to share your M&A backup for me.
Speaker 2:You can go on. I need to leave in a couple minutes, but, dmitri, keep, keep.
Speaker 3:Yeah, I. So I, before I joined up with Brian and I was sort of more of a traditional M&A banker we I was working on a deal and you know, set a boutique, so I mean it was, you know, very much like the fees we'd earn. You know much of it would go into our pockets and this was 750 800 million dollar deal. We had a nine million dollar fee and tied up with it and we had fully negotiated everything and on a Saturday we had like five outstanding items. We had top tier law firms and there were five outstanding items still left to resolve.
Speaker 3:And then the the seller just went radio silent on us and you know I went. I remember, I mean I remember going from sort of quizzical to somewhat concerned to very concerned, to getting an email from the advisor To the seller saying can you speak tomorrow morning, on Sunday, at 7 30 in the morning, and having this sort of Pit in the bottom of my stomach form Getting on this call and being told by the sellers oh, we just sold this business to someone else, the deal is Done and dusted. First time I'd heard that term and never forget it, since it was in the context of losing a nine million dollar M&A fee and you know, you know you sort of go back and you, monday morning, quarterback. What did I do wrong? How did we miss out on this? They used us as a stalking horse. They, they basically brought our offer to the other buyer.
Speaker 3:You know, and you know, at the end of the day, we did not insist on a period of exclusivity and we should have done that. We didn't do it because it was a competitive M&A process, but we should have just put our foot down at that point and said if you want to get, you know, you want to talk to us. We need, you know, 48, 72, 96 hour period of exclusivity doesn't have to be very long. And I think we were just so excited and we thought we were in the driver's seat, I think we had a little bit of that hubris that Brian was talking about and we, you know, we let that thing slip away and, you know, disappointed client and, needless to say, you know, seeing a nine million dollar M&A fee go up in smoke in the period of 24 hours was Very, very painful.
Speaker 1:Gentlemen, thank you for opening up. This makes this episode even better. This is the icing on the cake of a really, really, really special episode, so thank you very much for being part of this podcast.
Speaker 2:Thank you for having.