ScaleView founder, Gabe Wilcox, talks with Aaron Perman from S3 Ventures about raising funds, key terms in a term sheet, and post-investment strategies. Make sure to watch until the end to get all your questions answered.
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Gabe Wilcox: This is Gabe Wilcox from ScaleView Partners, the investment bank for founders by founders speaking today with Aaron Perman from S3 Ventures. Aaron, how are you?
Aaron Perman: I’m doing well.
Gabe Wilcox: Awesome. Thanks for coming on today. To kick off, why don’t you tell us a little bit about S3, what you guys do, and what you focus on at the firm?
Aaron Perman: Yeah, happy to. So, S3 Ventures, we are the largest venture firm in Texas focused on Texas based companies, and so we’re primarily investing in Texas based founders, and then opportunistically in middle of the country based companies as well. And typically investing at the seed, series A, and series B stages. So, generally, investing in companies that are doing anywhere from a few hundred thousand a year of revenue up to three to five million a year of revenue depending on the stage. We have $900 million under management. Firm’s, been around 17 years. We’re investing out of our seventh fund. It’s a $250 million fund that we raised in ’22. And a little bit unique about us, we only have a single limited partner, and so that’s a unique aspect of our firm relative to a lot of other venture firms, and that’s beneficial for founders, because we can have a lot more patience.
We don’t have the difficulties around having to sell companies early, or have these weird pressures around fundraising. And it allows us to spend all of our time with our founders so we don’t disappear every 18 months to go fundraise either. Really focused on business to business (B2B) technology, that’s a vast majority, whether it’s software, marketplaces, or infrastructure. Then we do some consumer digital experiences, and medical device investments as well. I’m a partner of the firm, I’ve been with S3 for the last decade, and then prior to this was at a long-short equity fund investing in public companies, some operational experiences before that, and then spent about a year as CEO of a SaaS business leading it through to an exit. So, that’s a little bit about me, and the firm.
Gabe Wilcox: Awesome, thanks.
Do you think the market of Texas-based founders is still overlooked and underserved?
Gabe Wilcox: So, you’re, likewise, in Austin where we’re located. What’s it like being a large venture firm outside the coasts? You mentioned that you focus a lot on Texas-based founders, and other founders across the middle of the country. Do you feel like that’s still an overlooked, and underserved market?
Aaron Perman: It’s interesting. Yeah, I wouldn’t say overlooked, and underserved anymore. I think it’s just a great market to build a business. I think some of our focus is, I think to your point that the ratio of engineers, or GDP to venture capital dollars just has historically been out of whack in Texas, in the middle of the country, and relative to California, and other places, and I think still is. But I think that the bigger reason is that you have lots of talent flocking to Texas, and to Austin. Your cost to build a business here are still lower than the coast so that the capital you raise goes further. And then somewhat selfishly, we can be more helpful to local companies. We have a full-time director of talent to help our companies hire executives, and her network is here. Our networks are here for hiring, and we like to roll up our sleeves, and spend time with our companies, and it’s just a higher return on time to be able to do a southwest day trip, or drive down the street, and whiteboard stuff out than try to do that thousands of miles away.
Gabe Wilcox: Awesome. No, it makes a lot of sense. The value prop of an investor who’s able to be pretty hands-on, and be pretty involved is really high. So, I think that’s pretty compelling for your companies, too.
When is the right time to raise money for a business?
Gabe Wilcox: Let’s back up a step, and think about the founder’s perspective. It’s a question that we hear a lot, that we thought about ourselves when we were running a software company, too, is when is the right time to raise money for a business? Let’s start there.
Aaron Perman: I like to say before you need it, but sometime between before you need it, and when you need it. And so I would think about it as when is the right time to raise money from certain people? And so what I mean by that is I think there are different stages, and I think if you’re barking up the right tree at the right stage, you’re most likely to be successful, and have the most efficient fundraising process as possible, which is usually a good thing because you want to spend as little time as possible fundraising, as much time as possible, building your business. Fundraising’s more of a necessary evil. And so what I would think about is that early stage, so if you are pre-product, or early MVP, don’t have material revenue yet at that stage really the trees to bark up are, for some of us there are friends, and family that can write $25,000 checks, and to go raise a half million through that grind.
Some of us don’t have friends, and family that can write those checks. But there are maybe other people in your network like mentors, or former colleagues, or people that could be advisors, and actually open doors to you, and to customers. And another thing about large enterprises, if you’re a B2B software company, and those can be great other places to raise money alongside accelerators, incubators, pre-seed funds. And so usually at that stage those are the capital sources. And so when you start to see firms, or see companies that are raising that first kind of two to three million institutional VC check, a lot of times that’s when you have a product, and a handful of initial customers, maybe $20, $30, $40,000 a month in revenue for B2B. If you’re B2C it might be more user based. And that’s really when you start to see there are some firms that aren’t defined themselves as pre-seed firms, but the firms that are really post revenue seed enough, that’s when they start to be more common to make investments.
And so I always think it’s worth starting relationships 12 months ahead of when the firm’s necessarily the right fit. But just being cognitive of how much time you spend building a relationship focusing on your business. So, when you think you’re 12 months ahead of that, definitely worth getting warm interest to firms, and maybe doing 30-minute intro calls. But I wouldn’t necessarily try to raise from certain types of firms, until you’re the right fit for them, because you can just burn a lot of cycles, and they’ll take meetings, and you won’t necessarily end up closing on money.
Gabe Wilcox: Yep. Got it. That’s helpful. Yeah, it’s always, you got to remember, it’s the job of somebody over on the investor side to take a meetings, and your main job is to run the company, and grow the company, though. So, you always have to keep your eye on that.
What are the key terms in a term sheet?
Gabe Wilcox: Okay, let’s maybe fast forward a little bit into the deal process. Let’s say you’ve got a company where they’re at the right stage, and they’re having conversations with the right firms to raise some capital. The next step there eventually would be maybe you get a term sheet, you see an offer from one, or more firms. That’s a moment where, I think, again, a lot of founders, it might be their first time seeing that they don’t necessarily have experience there. What are some of the key terms that… How does the term sheet work, I guess, to back it up, what are some of the key terms that are worth focusing on there? And maybe a little bit on the market today, what are some of the kinds of things that founders are likely to see in a term sheet?
Aaron Perman: Yeah, that’s a great question, because markets are changing a little bit than they were a year, or two ago. I would back up, and say, so there’s a group called the National Venture Capital Association, their website’s nvca.org, and they have a model term sheet document, and model financing docs. And most down the fairway venture investors, they make their money on the company being successful, and everyone having a piece of a really, really big pie. They’re generally not making their money on coming in, and being heavy handed, and structuring things, and things like that, right? And so if you look at our term sheet for example, it’s very close to the model NVCA term sheet on their website. And so I think 90 plus percent of term sheets out there are within a half a standard deviation. Every venture firm have their little tweak here, or there of that term sheet.
And so in my mind, that’s a good place to start. I think having an experienced attorney where all they do is venture backed tech companies, and they live, and breathe this stuff, they can very quickly tell you what’s in market, what’s out of market, what should be negotiated, what shouldn’t be negotiated. Because I think the most brain damaging thing for someone on my end of the table, and for everybody is when you’re trying to invest in a company, they’re great, and they have a friend of a friend that does leverage buyouts, or family law that they’re trying to use. And what ends up happening is they negotiate the things that are boilerplate that they shouldn’t even pay attention to, and the stuff they should be paying attention to gets ignored. And it just makes it really painful, and difficult.
So, don’t try to reinvent the wheel here, but I think in terms of specific terms, assuming you have a venture firm that is using the standard docs, the things you typically see, and pay attention to are things like valuation, the share price that they’re investing at, and how much ownership the firm’s going to end up getting. The board. And so board structure, how many board seats, who has the right to appoint which board seats. The type of security. So, there’s generally venture firms investments called a preferred security, which gives them ownership as if they had comment on the upside, but gives them protection for the dollars, almost like debt protection on the downside where if the company doesn’t sell for much money, they get their money back off the top. And there is something called plaim preferred and participating preferred that a lawyer can walk you through, and that that’s important.
I think where sometimes we’ll see founders stumble here is when they’re looking for a really, really high valuation, so the highest share price. But then the term she has other things that are out of market in it around maybe the investor gets two, or three times their money back before the rest of the investors get anything. And so I always advise companies that a clean deal is the best deal. And so especially in the current market, again, that’s not something we generally do, but just those are things that I would pay attention to. And then the other thing is there will be things like exclusivity time, so how long you’ve agreed to exclusively negotiate with that firm to go close the deal. And really anything over 45 days in my mind is a red flag.
As a firm just from an ethos standpoint, in my decade at S3, I think we funded every term sheet we’ve signed, and we do all of the work upfront, and we think it’s irresponsible, and not the right thing to do by founders to lock them into exclusivity while they’re generally still burning money, and they’re raising money, because they don’t have tons of it, and then do our work. And so we do almost all of our work upfront, and everything else is legal docs, and confirmatory. And if you see a venture firm that has more than 45 days to close a deal has 60, 90, 120, that should be a red flag, and they’re just trying to lock you down, and then they’re going to do their work. And so that’s something that I would really pay attention to. So, those are a few things to look at.
Gabe Wilcox: Okay. Yeah, those are really good points.
Which metrics gives a company a higher valuation?
Gabe Wilcox: I want to come back to the due diligence piece of it when you do your work to figure out what’s the company, and whether it’s the right fit for you, you did mention valuation, and really important point that valuations aren’t apples to apples unless structure is consistent between the two. So, that’s a really important thing to look at. But you’ve invested in a lot of SaaS companies. Let’s talk about SaaS valuation in particular. What are some of the… All companies aren’t created equal… I won’t ask you to just say what’s its SaaS company worth, but I think what would be helpful for founders is how do you think about what’s my company worth? In other words, what are some of the metrics that you as an investor are going to look at to say, “This revenue is of high quality, we want to pay a higher multiple for this.” What are some of the things beneath just the revenue number that you want to see to put that value on the company?
Aaron Perman: So, I would say real simply, and this is, again, a misnomer, but a lot of times people look at your revenue, and put a multiple on it. Maybe it’s eight, 10, 12, 15, order of magnitude, something like that. And that really starts to happen when you’re a million, or two of revenue annually, and up, just on annual recurring revenue. Under that it’s a little more market driven. And I think the rough, rough rule of thumbs is for every round of venture capital you raise, usually you’re selling somewhere between 10% and 25% of the company. And so, in a lot of ways it’s almost like the round size is this, to get to this far, it all back solves in a weird way. So, to be remarkably consistent, but I think in terms of what drives higher valuations, and hire multiples, there’s a few things.
I think at the earlier stages, one really important thing is do all your customers look the same? Are you truly a scalable product company that has a big market? And within that big market you’ve sold the five, 10, 15, 20 companies that all are repeatable, similar use case, and you’ve found a nail, and a hammer you can just keep hammering away at. You have to retain them. So, do your customers remain, and hopefully not just remain, but do they hopefully grow over time as you give them more value, build more product functionality. And that leads to what’s called net revenue retention (NRR), which is a metric. And I think top tier companies are 120, or 130% a year, and up where existing customers are growing 20 to 30% every year on top of new customers. And then just growth rate in general. And really, VCs are typically looking for companies that are growing 70 to 100%, or more every year. So, almost, or more than doubling every year.
And then I’d say the last thing that people are really paying attention to burn multiples. And so how fast do you burn in relative to your growth? There’s burn multiples, rule of 40, it all yields to the same result where if you’re growing really, really, really fast, you can burn more, but you don’t want to burn unlimited amounts. And there’s a relationship between the two, candidly, got a little bit untethered I think when firms were looking at companies a couple of years ago, that now they’re really looking at. And so it’s the efficiency your growth is real important. And I’d say the last thing is sometimes deep technical moats.
And so companies that workflow softwares can be very valuable, but they may be valued differently than something that’s a system of record where customs are stored on lots of data, or things that have deep, hard, technical innovations that maybe took years of PhDs, and a lot more capital to build out the product than a lot of other companies. And so those sometimes might get valuations that are a little less tethered to revenue, but when they get product market fit they can grow really fast without a lot of competition.
Gabe Wilcox: Interesting. Yeah. Okay.
Aaron Perman: And that’s a lot of the AI stuff right now.
Gabe Wilcox: Yeah, sure, sure. Makes sense. The use case one is pretty interesting to me. So, for a relatively early stage company, it actually can be a little bit of a red flag if you see across their customer base that they’re using it in different ways, or the customers don’t look all that much like one another. Was a little bit counterintuitive, because oh we have all different kinds of companies who our product, that feels like a good thing. But what you really like to see is a set of companies that look similar, and then you want to look out into the world, and say, “Oh, there are a lot more companies like that that we can go knock off.”
Aaron Perman: I think that’s at a high level. And I think if you’re a horizontal platform, like a database, or a piece of DevOps infrastructure, I’m not saying they need to all be the same type of company, but ideally they’re using it for a similar use case like to store certain type of information, or otherwise, right? And so it’s really like is there repeatability to the sales cycle? And I think to your point on the flag, if they’re customers that are all using things in different ways, a lot of times that might mean there’s really 10 different products that evolve, and customize then it’s more of a services businesses versus a product business which can still be a great company but it doesn’t typically fit in the venture model of build a product that can be sold scalably to a whole bunch of customers.
Gabe Wilcox: Yeah, that’s a really good insight.
What is the process of closing a deal?
Gabe Wilcox: Let’s talk now about, come back to the comment you made before about doing your work. In other words, due diligence. So, between first stages of meeting the company, and some interest, and a term sheet to actually getting a closed deal. At your stage of the market, what does that look like? And you mentioned you guys try to do your work upfront so that when you issue a term sheet you do intend to close on it. But what are some of the things that founders should expect to have to produce, to have go through for a process like that to get a closed deal?
Aaron Perman: That’s a great question. And I would say, again, our stage is companies that have anywhere from a few hundred thousand of revenue annually up to a million, or two up to three to five million. That’s where we’re doing our initial investments. And then typically we’ll do multiple following rounds after that. But at those stages I would say a few things. First off, we try to use founders’ time as efficiently as possible, because we realize that’s their most valuable asset. And so we always try to move through with purpose in a plan. We may meet with a company for 30 minute catch-ups, or whatever for a year, or two years before really engaged. And we’ll try to be helpful in them to customers, or talent over that time so they can get to know us a little bit. But you fast-forward to when it’s your point, “Hey, we’re engaged, this is a good fit. The right stage, fundraising has started.”
Usually we can get from that to at least, “Hey, we’re interested, here’s a summary of terms. Let us know we’re in the ballpark, we’ll put in the full term sheet in anywhere from three to six weeks.” And through that process, and maybe an initial meeting with, you’re one of the partners that’s leading the deal, and an associate that’s going to work on it. And then maybe a follow up. And then pretty quickly in that time, we’ll start doing some of our own market research, and diligence. And usually, though, for that first meeting, it’s good to have a 12 to 14 slide deck that walks through who you are, what you do, what problem you’re solving, how big the market is, early customers, how they’re using it, and then your financial plan.
We’ll typically look for things like a financial plan as well. And it’s not that it has to be super complicated, but we just want to get a sense of how’s revenue grown historically? How much money have you been burning? And then try to want to be able to work on together, how much money do you need to get to that next stage? And usually that’s a 24 month time period to then raise the next financing round once you’ve hit an inflection point. We’ll look at things like your sales pipeline, we’ll want to look at product demo, roadmap, dig into the technology with your technical leaders, those sorts of things. And so think a few hours of meetings, and things like that. We’ll be doing research on our end. Late in our process we might do a three to six hour session with our whole partnership, digging into all aspects of the business. And then at some point we will try to introduce you to a few customer prospects, typically if you’re a B2B software company. And be able to listen in on all the conversations, get feedback from people that know a lot more about your end customer persona than we do.
And so hopefully worst case if you spend time with us, you get a customer, or two out of it even if we don’t invest. And in best case, you get an investment, and a customer, or two out of it. And that allows us to get industry feedback without us pre-term sheet having to talk to your customers. Because we realize those relationships are super valuable. And so, I think that can be a process done over three to most six weeks. And at that point usually what we’ll do is we’ll say, “Look, we do standard NVCA deals, to our point earlier, here’s like the five key terms is this in the ballpark before we spend money on lawyers, and we make you spend money on lawyers.”
And when we get a thumbs up within a few days we’ll look up a full term sheet, hopefully get that signed. And then once that term sheet’s signed, we’re basically in, unless confirmatory work shows something wasn’t true, which has fortunately never really happened to us. And so usually once we’ve signed that term sheet, we’ll have to do a close within 30 days of possible, 45 at the latest, and it’s lawyers taking the term sheet, and draft them the formal docs, and then we’ll usually on a confirmatory basis want to talk to a few of the biggest customers just to have them trust, but verify what we have heard from the company. And those have pretty much always gone well. And then we’re investing.
So, I think for founders, when you’re going to be doing this dance with us, you’re probably doing it with five of the firms, or more at the same time. And so to the extent that you prepare before this, it makes it way easier, because it’s hard enough to run the business, and manage these conversations, and produce things for ad hoc diligence requests.
And so prior to even starting fundraising, get your 14 slides down, get your story down, that’s a lot easier if you already have good marketing, and product marketing, and messaging. And if you don’t, that’s an area that companies frequently under invest in. So, I would look at investing in that ahead of time. Get your financial plan down. Again, it doesn’t have to be complicated investors just want to see a monthly plan of who you’re going to hire, and how much that will cost to know how much money you actually need in this financing round, and get things like your sales pipeline exports, your product roadmap slide, things like that. Just get it all tidy before you start the heat of the conversations so that you can phase the workload out a little bit, and not be building the plane while you’re flying it, while you’re building the other plane, which is your company, the more important one, while you’re flying that one.
Gabe Wilcox: Yep. That’s really helpful. I think a lot of founders have… There’s a mystery around if I did go down this path, what would it mean even? How would it work, and what would be required to get it done? And so I think that really helps demystify it at your stage. I think, in our experience that basic roadmap you laid out remains true of investments even up to a later stage. A growth equity type deal doesn’t look all that different from what you described either. We will come back to selling the company. I know that you’ve been a part of some successful exits as an investor, too, so we’ll come back around to that, what it looks like in a bigger M&A type context as well, but that’s really helpful.
Aaron Perman: …actually one of the real important thing I’d say as you go through that process, is they treat it as a collaborative process. Because ultimately a large chunk of what we’re doing during that is figuring out what it’s going to be like to work together, and are we going to work well together? And so I’d say don’t overly sell it. Treat those sessions as an opportunity for you to try working with an investor, and your board member potentially for the next decade, and make sure that y’all will have a good relationship, because picking an investor is getting a married with no divorce. So, make sure that you use that as an opportunity to try out working with that.
Gabe Wilcox: That’s a great comment. I’m glad you said that. It’s like a lot of things in life, whether it’s marriage, or finding a job that fits for you. There’s maybe an intuition that you want to sell really hard, and make it work, but in reality you need to think of it as a matchmaking exercise where you want to represent the company pretty accurately so the investor is all in, and you want to make sure that it’s the investor that you want to spend a lot of time with. That’s a really good comment.
How should Founders think about life after investment?
Gabe Wilcox: That brings me to the next one I wanted to ask, which is besides what is it like to get a… How do I get a term sheet? How are they going to value the company? How will they due diligence, and close the investment?
The other big question I think founders often have is like, well what is life like then? If I go, and raise money, and I have Aaron now is on my board, and I have a VC on board, what does that even mean? How is life different? What’s better? What’s worse? Talk a little bit about how you work with companies on an ongoing basis, and some of the good, some of the bad ways that it can get sideways. Not necessarily with your businesses, but things you’ve seen before. How should founders think about life after investment?
Aaron Perman: Yeah, I mean think once we’re invested in a company, our goals with them are aligned to maximize the value of the company. And so, we’re all in on doing whatever we can to help do that. And usually that’s them pinging us, but also us, we’re looking at things like what customers can we introduce them to? We just brought on a full-time director of talent to help them with sourcing execs as they build out their exec team. And all this is free to our companies. We don’t charge for any of it. We have a whole team of associates, and VPs that can work supervised by a partner, like work with the companies to help do work for them, whether it’s building out a financial plan, or looking at potential acquisitions, or helping on a go to market project. And so we see our job as doing whatever we can to help make them successful.
And it is funny, I have Slack on, and I’m seeing Slack, so I’m on Slacks with half the founders I work with, and I’ve had multiple Slack messages from them during this session, pinging me with questions, or things we could potentially do to help them. And so, I would say we don’t look at it as an overly formal relationship, but we talk to them once a quarter, or every other month at a board meeting, and that’s it. We look at it as a partnership where a lot of times they’re pinging us depending on the stage of the company, whether it’s every other week, or once a month saying, like last week at a company say, “Hey, we’re working on a new sales comp plan, you’ve seen a bunch of these, can you help put this together for us.”
I do think that, to your point, where can things go off the rails? And I think it’s important to remember that your investor is in this with you, and the good, the bad, the ugly, they just want to be able to help. And so as long as good news travels as fast as bad news, bad news is okay, it happens. Every startup goes through bumps in the road, and the worst thing you can do is try to hide the bad news, because then that just breaks down trust. The best thing you do is, I mean plenty of our most successful companies, when something bad happens, they lose a big customer, employee issue, something like that, the service goes down. Usually they’re calling, and texting, and saying, “Hey, this happened, how can we figure this out together?” And that’s just part of being invested in early stage companies.
I do think the one area, once you have your first board member investors, there’s a little more tightness around just doing financial closes, and having financials, and board deck. But that investor is there to help you put that together, too. And even though it may not seem like a good use of time, you can’t manage if you can’t measure. And so it may seem like a little bit of overhead, but they’re there to help you minimize the overhead, and I think it will make you better long term. But we really try to be cognizant at being stage appropriate for that type of reporting, because we have LPs we have to be able to report to as well. And so we do try really hard to be stage appropriate, and not take unnecessary amounts of time on reporting at the earlier stages.
Gabe Wilcox: Yep. It makes a lot of sense. I mean my experience I know with my software company is that there’s some stuff that feels like overhead, but it’s actually part of the benefit that you get from getting an investor on board is you get to grow up a little bit as a company, and sometimes that has a little bit of pain temporary that goes with it. But I think having a little bit of formality that you know, probably don’t have as a bootstrap business is a good thing for the company, particularly when it comes time to sell the business, which is what I wanted to go to next.
How do exits happen?
Gabe Wilcox: Obviously, at ScaleView we work on M&A advisory when companies are ready to sell to a strategic, or private equity group, you’ve been part of that exit with some of your portfolio companies. My first question, really, for founders is how did exits happen? How have you seen it happen in the past with some of your companies who had really great outcomes? And then maybe you can talk a little bit more about how that process goes. Things like having discipline around financial reporting, and things like that really payoff when it comes time to get involved in a bigger deal like an exit, but tell me a little more about some of your experiences, and how they came about, and how they went.
Aaron Perman: Yeah, that’s a great question. I would say there’s a couple of things that lead to exits. There’s one type of thing which is the company’s got into a good point. The founder says, “Hey, I think I want to sell”, and the investors, “Okay, this is a good time, it’s good market.” They hire an investment bank, run a process, and like that, and we’ve had good outcomes from that. I would say a large chunk of those don’t always transact, but we’ve had some that have transacted, and have gotten really, really, really good returns. So, I think one misnomer is sometimes companies they say, “Hey, good companies only get bought. They don’t get sold.” And there there’s a twinge of truth to that where, yeah, it’s great if someone shows up, but look if it’s the right time for you, right time for your investors, you can sometimes hire a bank, run a process, especially if you’ve had people that you’ve had relationships with over the years, and using the bank to formalize, and run that process, and get really, really good outcomes. And we’ve had that happen.
I think the other key way exits will happen is sometimes industries go through consolidation cycles where a competitor bought something so then they feel like they need to fill that hole in their strategic roadmap. Big companies do. And these are for M&A exits, we can talk about IPOs if that makes sense, but this is M&A exits. And ideally as a company, this founder, and CEO is spending time talking with potential strategic partners for years, where they’re just building relationships. Maybe they’re a channel partner where they could be co-sell, or resell some of the founders company’s products, maybe they’re just straight competitors, and it’s still worth talking to them, and one of them maybe gets wind that you’re raising your next financing round, which would set it even higher bar for them to buy it in the future, or otherwise. Or they decide it’s the right time. Or if some market thing happens, and they show up, and make an offer they think you can’t refuse.
And then there’s a decision point of what do you do? And some of the best outcomes I’ve seen have come from saying, “That’s not really interesting.” And then sometimes they come back, and double it. And then sometimes this dance happens over a one month period, sometimes over a six month period, sometimes over a 12 month period. So, this is an 18 month dance, and maybe then you say yes, maybe you say no again if they come back, and double it a third time. And then it’s like, all right. And as that goes, you can then start to get other potential parties interested. And sometimes you’ve done this before, you have a really experienced board, you can successfully run this yourself.
Sometimes you’ll still get a really high value add for bringing on a banker, or an advisor that can be that arms length party that can have the tough conversations with maybe your future boss, to really drive the price up. But I think a lot of times when someone comes in, you get inbound interest that can drive some of your best outcomes. But also realize you can accidentally leave a lot of money on the table on those where a lot of times the first offer is substantially below what they’re willing to go to if you’re able to effectively negotiate it.
Gabe Wilcox: That’s interesting. We pretty strongly believe at ScaleView that no banker is likely to dress up a company that’s not good to get some great outcome. It’s just most buyers are savvy enough to figure that out. But we do believe that good companies get great exits when they run a pretty structured process to get there. And so I think if you’re a good company, you’re pretty likely to have interest all over the place, probably from competitors, and partners, and growth equity investors, and other private equity shops. I mean those are all groups that are looking for great companies to invest in. But we strongly feel that you get the very best outcome if you’re able to, as you said, put some structure around it, create some competition around it, create some urgency even, like you said, to get that offer from okay, maybe double, maybe double again. You’ve got to give them a reason to do that. And if you just go right down the path, then that reason’s not there.
The hard conversations one is also pretty interesting, can be pretty tough to talk about how excited you are about the deal, and the merger of companies, and at the same time negotiate really hard, and push hard on different terms. That’s something that can be pretty tough for founders to manage as well. What role have you played as the investor, and board member there, and helping the founders think through it, and eventually get it done?
Aaron Perman: Yeah, it totally varies, and sometimes it varies on the experience of the team. Do they have a CFO that’s been through a few of these before, or not? I’ve done everything from being a very active board member serving as the negotiator, especially when there’s not a bank involved sometimes. And then our team can do some of that work around putting together the funds flow, the waterfall, helping on disclosure schedules, working on management presentations, and decks to use in the sales process. If you think fundraising is bad, input of 10X in terms of materials during a sale, helping to fill the data room. And these data rooms have thousands of documents, which by the way, start with the end in mind.
When you sell a company, the buyer will go back from inception, their law firm will pick apart every single board minute, every single employee, make sure there is an agreement assigned in the company IP. And there are certain buyers that will not close if you had one engineer six years ago who you cannot find the employee proprietary information agreement, and you literally have to go track them down, and beg them to resign it if you want the exit. That’s an aside. So-
Gabe Wilcox: Probably more than beg them, probably more like pay them.
Aaron Perman: Yeah. Potentially. So, we’ll do some of that. We’ll sometimes help the team manage process so they can focus on the business, because you have to also close your numbers during an exit, like you got to hit your sales targets to maintain your price a lot of the time. And so a lot of times it’ll help work with the banker, the law firm, as they work through the legal agreements, and negotiations, and working capital negotiations, and other things so that the team can focus on the business as well. So, it really just depends on what they need.
Gabe Wilcox: Got it. No, that’s really helpful, and the ongoing performance of the business is another thing that can be really tough on, particularly on a bootstrap founder who doesn’t have a VC on board. Running the sale process while still making sure that business hits numbers. I mean, that’s the most important thing to getting a closed deal is continued strong performance of the business.
Aaron Perman: Yeah. And like I said, we’re all on the same team here, and so nothing is above, or below us like, hey, I’ve stayed up one night sending out DocuSign packages with signatures, and chasing down the smallest investors to get to the threshold for deals to close. So, we’re all hands on deck however we can help is our typical motto in an exit.
Gabe Wilcox: Yep. Awesome. No, that’s really, really good stuff Aaron. Thanks. It’s informative, and congrats on having, like I said, been a part of some really nice exits so far.
Why start your company in Austin? What does the city offer for founders?
Gabe Wilcox: The last thing, we’ll come back around to Austin here, we’re big Austin fans. What’s your commercial for founders to come, and start their companies in Austin, or open up that next office here? What are some of the things that you think the city brings?
Aaron Perman: Yeah, I look at it building what we have in Austin takes generations, and decades, because you don’t have a talent pool like Austin’s until you’ve had people come here, and start businesses have big multi hundred million dollar M&A exits, or billion dollar type IPO exits, and then those people leave, and now you have 50, or 100 people that know how to scale fast to the early stages, and have the resources to go invest, and they do it again. And so Austin has a history of that from the eighties when the big semiconductors brought people here that left to start enterprise software companies. In the nineties when IBM brought people here that left to go start enterprise software companies, and the 2000’s when Austin Ventures invested in bunch of consumer companies.
And so we have this just great talent pool, and then COVID happened, and all these great founders, and startup people moved here from the Bay Area, moved here from New York, and probably accelerated the growth of that by 50%. And so Austin’s unique in that, I think it’s one of the few cities outside of the Bay Area in the US that not only has a whole bunch of local capital, and is a great place to build a business, better quality of living, things like that, but has the people to build the business. And that’s something that I think you can’t just replicate overnight, and really makes Austin special for building high growth tech companies.
Gabe Wilcox: Awesome. Couldn’t agree more. We’re thrilled to be here. The ecosystem’s incredible, and it’s just going faster all the time. I think it’s only accelerating, so it’s an exciting place to be. Aaron, thank you. Aaron Perman, S3 Ventures, thank you again for the chat today. Really enjoyed it.