EXITING @ $300 M, INTERVIEW WITH ONDREJ FRYC, A SERIAL ENTREPRENEUR
You are currently a VC at Reflex Capital in Prague and previously sold the company your started Mall.cz. How do you sell a tech company based in the Czech Republic for a significant amount of money?
Yes, for $300 million to be exact. Well you sell a tech company as you sell any other asset … you prepare yourself and then you run a most efficient process. With a company this big, you are much better off engaging a capable investment banker to run the process for you.
How to negotiate price? What should a founder focus on?
Well it should not be you who negotiates for the price. It should be your advisor, the investment bank. They would assess the dynamics and choose the right strategy to talk about the price. You, as the founder, should not be seen as the greedy bastard, that is their job and that’s why they get their commission for.
Where to start?
Start with a good selection of the investment banker. They should not be just some random dudes but guys with a proven track record in your industry. And of course you should balance your selection based on their views on the process, their fees, and a gut feeling as well. You’ll be working together for at least 6 months, so a good relationship is important.
Should you do an aquihirer or just bury the company if the company is struggling and things don’t look great for the company?
Hard to generalize. But as a general rule, if the company struggles, you should not wrap it too soon. Perseverance is the way to go. There are struggles in any successful story, so you should not “fail fast” too fast.
What do you do with zombie companies aka not fully growing and not ready for liquidation?
Well again, hard to generalize. If they require constant life line of funding, you perhaps try to cut costs to bare minimum and see if it can go breakeven to gain some time. If they are breakeven but they do not grow as expected, you perhaps leave them walking zombies for some time. They still produce value for the society even if there is no value for the shareholders. They employ some people, deliver some products, so no need to shut them down.
How do you approach acquirers?
Acquirers generally approach us or the portfolio companies. And if the decision is taken to take a company to the market, then we generally engage an adviser to run a process.
How not to sound desperate as a seller?
Perhaps not to be a desperate seller in the first place?I don’t think you can pretend not to be desperate if you would be, a trade sale is not a one day encounter.
What was helpful to you in the sale of Mall.cz?
That’s a hard question. You need to have a good asset meaning numbers, growth, people, process driven company, good market etc, but you also need to be sort of unique. If the acquirer basically could choose to build or to buy one of many competing companies, the reverse bidding situation would occur and you don’t want to be there.
As a former founder turned VC are investors helpful? When do you engage them?
Yes, they can be helpful, of course. They provide the cash for growth, but they also implement structure and contacts. A company with investors engaged is generally more valuable as they are a guarantee that some basic principles are met and the company perhaps does not have too many buried skeletons in the closets. And when to engage them is highly individual. Apart of “when you need extra cash” it can be a moment when you feel you need to take the company on a next level.
Can you give your opinion as a VC and a former founder how to achieve hyper growth prior to sale?
I would not try to artificially boost the numbers prior to sale as investors are not that stupid not to see how that the hyper growth was actually made through steroids. You also should understand the process usually drags for much longer than expected and it would not be good to suddenly report slower months in the later stages of the process. In fact, it should be vice versa. In the later stages investors are looking for assurances that numbers are not deteriorating.
Do you think there are different rules for European founders selling their companies to Silicon Valley companies?
No, I don’t see many differences. The rules are generally the same.
What do you with the money afterwards? Invest or retire?
It depends on each individual I guess. But important thing to consider is that you hardly exit at once, there will be some vesting time for you as the founder most probably. So you will help the acquirer to run the company for several years, i.e. your life probably won’t change much, even having lots of money in the bank.
Some founders calculate that a software engineer/developer equals to $1 M in value for Silicon Valley purchasers? Is this correct thinking?
Cannot say. I would generally think this very much varies on the seniority level and many other things.
How does LTV; ARR; MRR and valuation translate into purchase price in an M&A?
Well you have some rule of thumbs in calculating valuations but overall, talking about acquirers, they always calculate what does that mean for them. For them the economics will look very differently, they may have competing or complementing product.
Is tax planning important for founders?
Only to a certain extent, I mean, you should not think too much about exit proceeds too early. All your energy and mind should be focused on your products, your customers, your company.