On the quest to learn more about how great tech companies, achieve extraordinary exits Notion interviewed more than 20 European enterprise technology founders who have achieved significant liquidity events. Their businesses span marketing, security, and mobile, including Business Objects, MessageLabs, Moonfruit, MySQL, Neolane, ScanSafe, Thunderhead, Unruly and Zeus Technology.
While each of the companies in this report is unique, there is much to be learned from the challenges they faced – in particular from the recurrent themes shared across more than one business. In this report, we examine those themes in several broad categories.
All of our contributors have stories to tell about the process of founding, growing and scaling their businesses; the obstacles they overcame, their successes and some inevitable failures along the way.
They also offer insight into the complexities of the liquidity event itself, whether IPO or M&A: how they prepared, how they managed the process, and the essential sources of professional assistance which helped get their deals over the line.
As well as our founders, we have also included commentaries from some of those professional advisers; including members of the team at Notion Capital. They are able to give a perspective on the wider European investment ecosystem, and we examine why the European market is softer than the US, where longer-term capital markets can be found, and how entrepreneurs and the investment community can work together to foster greater ambition and a standard bearing grade of exit for what is shaping up to be a ‘golden age’ of SaaS opportunities.
The collective advice of our experts is remarkably consistent.
The strongest message of all is that great founders surround themselves with great people.
Rome wasn’t built in a day, and it wasn’t built single-handed. Our leaders all pay tribute to the talented co-founders, boards, and managers who shared their skills and commitment during challenging growth phases or in the face of adversity.
Several were also at pains to note that growing businesses often fail to get the basics right. Focus on the most valuable markets. Solve the most important problems first. This sounds like Business 101, but growth is by definition transformational, and it’s easy to lose sight of fundamental disciplines in the process.
This is also why many founders spoke of the importance of maintaining a strong company culture so that the shared values and objectives of the business remain clear (for a superb example of corporate culture in action, see Måns Hultman’s story).
Some of our founders have experienced more than one rocky period. Their businesses have pivoted several times before discovering the right model or simply finding that their perfect time had come. That’s not a point just about resilience and perseverance. It’s also a key differentiator between a startup – fighting for business and changing strategy on a sixpence – and a business developing scale. Our founders were at pains to point out that scale comes with predictability repeatable and predictable demand and clear sales and buying models which the business can build on. With scale and predictability also come a broader set of metrics for effective management and governance. All our founders said that steering a business at scale requires particular focus on the underlying economics of the business. In particular, CAC, GM, and true payback, combined with growth stats, should be daily bread-and-butter reporting for management teams. This contrasts with top-line EBIT, which becomes important much later, once the inevitable pain and expense of growth have settled down.
The scale phase is also where our founders and industry experts are united in highlighting the importance of expanding to the US. They agree that it is an essential market, a large market under (broadly) one regulatory environment, and above all a source of potential partners and acquirers. Ideally, enter the US market fast and early; but doing so requires commitment and ingenuity. Commitment, because one of the founding team must lead the charge, so expect some family upheaval. And ingenuity, because any goodwill which can be leveraged to generate a client base in the US is worth its weight in gold. Our contributors mention using reputation with European clients to buy credence with their US counterparts, or even credibility built up with US suppliers (very much a core element of many SaaS technology businesses) to open doors.
Practically all of our professional contributors have offered the same cautionary advice on exiting: plan early to build the relationships and strategic alliances that yield long-term value. Many exits come from organizations in the ecosystem (competitors, partners, customers etc.) with whom the business has worked for many years. Planning early is also the only way to deal with a raft of other priorities:
In short, an exit is not a process to be taken lightly, and our founders all have the scars to prove it.
We describe the exit as being like playing poker for the first time… against a world champion. Several of our contributors find it extraordinary that there is a peculiarly European antipathy towards bringing in professional advisers at this crucial stage. Insight from bankers and lawyers, particularly those with experience in your sector as well as the exit process, is invaluable.
This is where the long term relationships built up between the management team and their counterparts at strategic partner organizations come into play. Several of the founders we spoke to had experienced multiple approaches at different stages of their company’s development, often from the same potential buyer. Going down the road of due diligence all the way to a dead end is, of course, expensive and time-consuming, but the experience of a few dry runs is invaluable in building knowledge and refining processes for when the time is right.
Those processes and the governance that supports them is essential. Our founders and professional advisers both admit that the overhead in preparing for exit is enormous – and certainly more challenging than our founders had ever expected. But it is also the sort of management discipline that will be required ongoing in a public company, so ensure your house is in order and be transparent. You will not get acquired without strong underlying financial metrics and the evidence to support them. Be prepared for an avalanche of due diligence, and ensure controls are in place to keep execution going whilst your sale team – which will include many senior managers – are diverted.
Finally, remember that not every business shares your culture. M&As don’t always work out, and lack of cultural fit is a surprisingly frequent reason for this. Sell to a company you admire, and would really love to work with. Make it a company you would also be proud for your team to work with. For an object lesson in this, read Monty Widenius’ experiences of the sale of MySQL to Sun Microsystems or Hampus Jakobsson at The Astonishing Tribe.
Our contributors are hardly disparaging about the European investment environment, but some (particularly as SaaS ventures in a globalized tech market) took finance from the deeper pockets of the US. There is no shortage of financing in Europe, particularly in centers like London, Stockholm, and Berlin. However, Europe has few large-scale enterprise software companies big enough to act as consolidators; firm foundations around which new sources of innovation and scale can be nurtured; and from which talent and money are recycled.
And many of our founders suggest that a key challenge seems to be a lack of ambition, leading to earlier exits than might otherwise be achieved. If a SaaS venture is solving a major problem or bridging a useful gap, then why not keep going and growing?
The space between $100m and $1bn in revenues is not significantly more challenging than the one between $10m and $100m.
Often, that growth comes from global deployment. If European enterprise tech companies are to learn to add serious scale which cannot be achieved in their domestic market, then financiers and governments must provide better support for internationalization.
Many of our professionals (see the excellent commentary from WSGR) have high hopes for the European market over the coming five years, but we think there are several strategies which might further help to create an ecosystem that fosters ambition and creates the next generation of independent, European acquirers and tech companies to feed them:
These would all help European tech ventures in the coming years. And the next generation of technologies which take SaaS scale out from behind the laptop screen and infrastructure data centre into our daily lives (artificial intelligence, smart cities, robotics, machine learning, biotech, and genetics etc.) suggest that the opportunity will only grow.
Posted by Stephen Millard, Chief Platform Officer, Notion Capital
Join our network of 1000+ subscribers to keep updated with our new investments, partner insights and portfolio news.