From selling his company to Booking.com to building a fintech unicorn! - Arthur Waller [Pennylane]

0:00In the last two rounds, we probably allowed our employees to cash out around 30 million. 60-70 % of our deal was on the earn out. We took 10 million each. They bought it for, I think, 500 million. And today, I think Booking.com is worth like 150 billion. Yeah, that's huge. Today on Billions, I'm sitting down with Arthur Waller, one of the sharpest French founder of his generation. He sold his first company to Booking.com in his 20s. And instead of retiring, he came back to build PennyLate, a fintech that turned accountants from enemies into gross partners and became one of Europe's fastest growing unicorn.

0:37In this episode, we will discuss how six co-founders actually share power, what founder gets wrong about fundraising, terms and dilution, and what Arthur thinks about secondaries, freedom and building a company that lasts 20 plus years. If you want to understand what it really takes to scale, cash out without selling out and keep your ambition alive after success, then this episode is for you. Arthur, thanks a lot for being here. Thanks for having me, Guillaume. I'm super excited to have you on because I think your story is pretty amazing. The first thing I want to talk about, because I know we have a bit less than an hour, is the story of how you essentially sold to Booking.com.

1:18You were like six co-founders, I think, at the time. Can you share the process of how you came up with the idea up to the moment you decided to sell? So the idea of PriceMatch, the first company, which was a revenue management software for hotels, I would say we basically were in college and we wanted to launch a company. We thought we had nothing to lose launching something at that age. And what I always say is I think we were not really right on the ideation process. We were more thinking about what we had learned at school and we felt like this was our edge. And so we tried to think of a space or an idea where we would apply what we had learned.

1:55And so I studied econometrics, which is kind of maybe like machine learning before machine learning. And so we came up with that idea trying to forecast demand for hotels and recommend prices. But a bit randomly, like having talked to one hotel inspired by a company in the US that used to do this for pricing for baseball tickets. But I would say we really first started with us. And then we kind of went still to customers to confirm that our idea was good. But we didn't start with the customer's pain point. And so we launched that company. We built a product. we thought it would sell alone and it doesn't.

2:35And so, you know, then we had to scale our go-to-market. It was a very, you know, not easy go-to-market where we had to call-call, sell a free trial, convert a free trial, etc. We also realized pretty quickly our market ICP was like big cities because there's more variance in demand in big cities. So it was easier for us to sign our next customer in New York or Berlin than to sign it up in, I don't know, like Dijon. Okay. Even if the product was built for France. So we very quickly went abroad. And so for that company, we didn't know anything about fundraising, but a bit randomly after a year and a half or so of having bootstrapped the company, we raised the seed round.

3:17Half of it was a customer, a guy owning hotels. Nice. And the other half was a French VC called Partec. And then the company started getting traction. and the moment we were about to raise our series a uh we actually got a acquisition offer from booking.com which we ended up accepting so yeah that's that's really awesome and uh i think the total amount from uh basically like the the deal itself and the earn out was around 80 million is it correct or okay yeah yeah can you share like kind of the split between uh the cash up front and the earn-out that you had? Yes. And the structure of the deal was a bit special.

3:59So basically how it worked is that Booking agreed to buy the company at the same valuation we were about to raise funds for our Series A, which was around$20 or$25 million. And then they gave us the founders stock options, which was basically employee ease-up from Booking.com, like regular ease-up that they give to the management of the company. And we were lucky enough because the price of the share of booking doubled, kind of doubled during our three years there. And so we ended up getting a lot of our probably like 60, 70 percent of our deal was on the earn out. What was also a bit special is we didn't have any.

4:41So it was pure ease up, right? We didn't have any. No milestone to reach or. OK. And essentially, because I think Booking.com got acquired eventually down the line, or they are part of an American company? Yeah, so Booking.com got acquired in 2005. Okay, so way before. Yeah, yeah. Okay, and you were working with a founder, right? The founder of Booking.com was an employee when you were there? He's an employee, like a random developer. and was he still there when you when you when you sold your company yeah yeah okay but he he sold this company actually he sold booking.com to some other dutch entrepreneurs okay those other dutch entrepreneurs um kind of grew the business they then sold it to this american company called priceline who made booking like their european toy if you want but they were smart enough to keep it very independent and booking.com outperformed by far the american company priceline and so now it's a group that until recently was called Priceline Group and now they've renamed it to Booking.com Holdings because Booking is probably like 90 or 95 % of the value of the group and the group has Booking, Kayak, Agoda, Open Table, Rental Cars but Booking is worth 95 % of all this.

6:02It's probably, I mean people say it's one of the most successful M &A transactions because they bought it for I think 500 million in 2005 and today I think Booking.com is worth like 150, something like this, billion. Yeah, that's huge. And Booking is worth like 90, 95 % of it. So I hope that the recent M &A you've done will be as successful. I hope so too. I hope so too. And usually, you know, when a company gets acquired, the earn out phase is always like a bit tough for founders because they have to stay, you know, like in another company and you basically spent three and a half years like being, you know, the captain of your ship.

6:46And eventually you had to stay at Booking. I saw that you stayed there for about like three and a half years. Did you enjoy like staying there for that long or did you feel it was like, you know, like shorter? What was your take on this? So we loved our time there. The thing is, Booking was not very experienced in M &A, surprisingly for a company that size. So Priceline, which is the, you know, the holding company, they had bought like i don't know maybe six seven businesses that they had kept very independent each but booking itself we were i think the third company they were acquiring and the two first companies were very tiny small software companies one building a property management software for hotels and the other one building a website builder for hotels like a weeks.com for hotels one out of barcelona the other one out of seattle and those m &a transaction had happened couple of months or years before us.

7:39And I would say they had not been super successful. And so booking had some very clear things they didn't want to happen again when buying us. So one of them was like, you don't let the company, you know, keep going too much standalone. You want to integrate them as quickly as possible. And so that's why like we signed the acquisition and I think like 15 days later, the founders, we had to move to Amsterdam, be there in Amsterdam, work. Our employees, they had to move to the Booking.com office very quickly in Paris. So I think this we've done really well. I think what we haven't done well, and I put myself in, right, because I was part of the team, is we haven't taken the time to do proper strategic planning.

8:25So their main concern was like, we want you to keep running. We don't want to lose the momentum you have, but we didn't take the proper time to think strategically, you know, what does this change? Also, what does Booking want to get out of this acquisition? And then also the other bad thing that happened to us is the, I think the one driving the acquisition was the CEO of the group. And he left the company like six months later. And so then when he, after he left, I think nobody really knew what was expected, not only from us, but so they had created. So the thing is like booking is great at bringing reservations, bring business to hotels in a very efficient way.

9:05Hotels complain, right? Because they say it costs too much. But they also don't want to invest on their own IT. But still booking always said, you know, if someone comes and brings reservation at a lower cost, as efficiently, hotels will not be super loyal, right? And so the former CEO, he said, like, I want to give more than just reservations. And so he started building a B2B SaaS department with those companies I just mentioned. But nobody really knew what was expected from this B2B SaaS department. Was it extra revenue? Was it more stickiness? Was it more like share of wallet from those hotels that would buy our product?

9:46And I think this is what's super important to define. And it's probably tough, right? Yeah. And you need to make choices. So I think that's what is the toughest and that we didn't do super well. Yeah, makes sense. And I feel like whenever there's an acquisition and the person in charge of the acquisition just go away, you know, it's never easy. I've been talking with another person who was like leading M &A at, I can't really mention the company, but basically like management changed a few times. And for him, it was like a nightmare because when management changed, like strategy must change and it becomes quite a mess.

10:23At that time, essentially, like after getting acquired at Booking and doing the earn out, you're basically like still super young, multimillionaire. But still, you decide that you want to continue and also continue with the same co-founders. So I have several questions because the first question I want to ask is once you have like a successful company and a successful exit like this one, how exactly like what's your thought process for the next company? And also, why do you decide to raise when you actually have potentially enough money to get started and keep more ownership? So maybe the first question is like, why did we go back at it?

11:04So we actually invested a lot of the money we made with PriceMatch. We invested it back in startups. Okay. And we loved getting the adrenaline out of it. So we loved our time at booking, but you still feel a bit like a water drop in the ocean. And so we loved the energy. We felt also the French tech ecosystem was thriving and growing. And so we never regretted having sold to Ali or and we loved having booking as a partner and they've done everything they had promised. So I would recommend them to every company that would get an offer from them. But we wanted to go back to building and having more like feeling more the impact maybe first and also just having more adrenaline of like the early days and stuff like this.

11:49And so we were way more kind of rigorous and scientific about the ideation phase. And one of the criteria was we want a huge market. You know, we were a bit frustrated in the first company. And, you know, when I see now my competitors from that time, I feel they are still all doing, you know, between 20 and 60 million AR. And even the best ones, like the market is not that huge, right? So that was the first thing. And we said, okay, we want to do a second business. we probably won't do a cert. It's like the last one, but this one we want to keep going for as long as we can and as long as we are still excited, not bored and find it interesting.

12:30The second criteria was software. That's what we know how to build. And I would say booking was like an MBA in managing large tech product design data teams. And the third criteria, which was maybe a bit more unusual, was we wanted a market where we come and replace something. and so that goes back to my point that the first company we were rather trying to think about what our edge is this time we were looking for a market where there's a real pain point and so i would say when people already have or paying for software and they're not happy you know you know there's a budget and if they are not happy you know there's a pain and so we felt it's in some way it's tougher because you know people don't like changing right so there's this problem but i still feel you own your destiny more if you don't have to replace excel yeah replacing excel is super risky uncertain and so we are really looking for a market where we would come and replace something we were also very inspired by the wave of french company that had kind of popped up at that point going after super large legacy markets so you know payfit for payroll alan for healthcare conto for banking and so we were looking kind of our sweet spot this way and accounting was the most obvious one where every company needs to do accounting.

13:49You have legacy software. It's a big market and it's kind of broken. And so we said, okay, this is what we need to fix. Yeah, and I think like to be honest, you did it like brilliantly, obviously. Otherwise, we wouldn't be like talking today. Like we are actually like super happy with Penny Lane. and we've been a customer for quite some time. And I'll mention it a little bit later because I'm curious about where you're heading. But because we started talking about, you know, like the inception of the project, I'm quite curious because, you know, like there are this kind of like dogma whenever you start a company.

14:25And one of them is you shouldn't have like too many co-founders. Being a solo founder is something that's a red flag for most VCs. But if there are like more than, let's say like three or four people, it's usually like many, many red flags. Right now, your company is worth many billions and you are still like, I think, six co-founders, seven, seven co-founders. How exactly did you decide to split the equity? And was it like a starting point where, you know, like people were kind of feeling that they should own a little bit more of the company or not? So in the first company, everyone had exactly the same amount of equity, each the six of us.

15:06It's not the case in the second company. The main rationale we had when we started the second company, we felt, to the point you just brought before, we raised money from day one. So maybe I didn't answer that question. The main reason why we raised money from day one is we felt anyway, we want to build a large company. And so it doesn't matter if we give up in terms of equity. It doesn't matter to us if we give up a bit equity. What we want to maximize is that we are aiming for a huge cake. and we don't mind having a smaller share. Anyway, we are seven co-founders. So already every co-founder has way less of the cake than if you are a solo founder.

15:44And so having a bit less of a small pie doesn't really matter. And so we wanted to be as aggressive as possible in terms of being able to go fast, hire good people from the start, stuff like this. And to do this, you need to raise a lot of capital. And to raise capital day one with good conditions, you need to like basically people invest on your track record. And so we felt like we needed to value a bit more the fact, you know, a couple of us, because not all the seven were in price match. Yeah. So we felt we needed to value the fact some of us we had done the price match exit. We also invested a bit of our own money on top of what the VCs invested.

16:23Yeah. And then, you know, a couple of like out of the seven, we were probably four of us at the ideation phase and the three others, they came in like a few months later. And so, yeah, now at Penny Lane, not everyone has the same. So basically the price match founders that are at Penny Lane, we have the biggest amount of equity. And then the others, they have a bit less. Okay. Yeah, that makes sense. And has it ever like created some frustration along the way? Because, you know, like often what you can see when a company is growing like super fast. And now we're talking about like billions in valuation.

16:58you know like the the small percentage uh even small is actually worth quite a lot and have you ever found that you know between co-founders sometimes you know like uh the equity story was was a problem for for certain people i would say the toughest moment is the beginning okay because at the beginning right it's it's pretty intangible right and so at the beginning like you know having to tell someone you are worth x times less or you have less than no and you can always find arguments but it's tough to know to explain why it's that kind of a gap or stuff like this so those were not easy discussions but i think since everyone was comfortable with them since then we haven't had any any any problems super interesting and i'm also like really curious because when you are like six co-founders um seven co-founders sorry you you all have initially like uh more or less the same voting rights so whenever you go to board meetings now because you've raised like from i mean let's say the the most famous uh funds in the in the world now like how does the board work and how does you know like the the voting right works like uh do you still own a vote each or no no okay no so from the beginning because we've raised on day one yeah from the beginning i think uh it was only felix and i on the board okay so only two of the seven representing the the co-founders on the board uh and so now nowadays um as co-founders we have absolute majority okay so we can decide anything because we always had good conditions to to raise money but that being said we actually invite all the others yeah i would say uh you know the tech guys they don't come up.

18:41They're invited, but often no shows. Like Plunkred, our CPO, Alex, who is a CPA, they come to the board meet even if they don't have a seat or something like this. And same for investors, by the way. So not all our investors have a seat at the board, but we actually invite almost everyone. And then so far it worked well for us. Okay. And when you negotiate around, what's the most important for you? I'm curious to understand how you see you know like dilution and also like terms like how do you balance both because it's always kind of a trade-off you know so i think we've been always careful about dilution especially because you know to your point we're already many of us and we sometimes felt like we didn't need so the first couple of steps of the company we really sought in terms of steps so it was like okay i want to validate that there's a real need in the market this was like what brought us with from the pre-seed if you want to the to the series a then okay we actually demonstrated that there's some good traction with accountants then actually we are able to start migrating accountants which accelerates the the growth then we actually launch a second product it's you know like smes also start paying they also you start using our bank account product you know now it's going to be about you know are we able to demonstrate our ability to go to germany so there are really like steps like this uh and every time we said okay you know i i don't need more than this amount of money.

20:09And so I'd rather optimize for dilution than amount I want to raise. And so obviously I would say the valuation kind of comes from that thing. So for example, for our seed round, pre-seed round, if you want, I would say probably the average would be at pre-seed the company would give up like 20, 25 % of their capital. And we gave up 10. Wow. So we were able to raise money, but not diluting ourselves too much. And so do you try to always keep that kind of like 10 number in terms of dilution at every round or 10 to 15? So this is for the first round. When you reach like later rounds, like we are now, now I would say it's capped at five.

20:53Like we never give up more than 5 % at every round. Nice, really, really awesome. And when it comes to terms, do you spend a lot of time like negotiating with funds the terms? because obviously like what I've seen and we don't often talk about it and I'm curious you know like your thoughts on it it's like you have so many different things that as a founder are not like super easy to understand like preferred shared waterfall like all these kind of things and in your case where you've been having like different funds entering at different stages do you see that the negotiation are quite hard sometimes also between funds we're gonna have like a different class of shares like yeah i'm just curious like how you structured everything so i think first of all like we've been lucky enough that every time almost every round there was lots of um uh over subscription in a sense nice so we really had the the negotiation power and so i think the the most amount of negotiation has been done at the beginning and since then in our case every time we raise money basically what we do is we send our terms from last round and you know people understand if they don't agree to those terms that we already have last round they won't be in okay nice so we've been able to keep the same terms uh over time uh and there are definitely you know people should negotiate so you know we have like um you know liquid pref we have like one time non-participating um stuff like this i'm and and there i have to confess so i'm not an expert at all those topics.

22:27And I am very happy that I have my co-founder, Felix, who is the guy who is basically leading those discussions together with our head of legal. We obviously have our lawyer who's helping us. It's the same lawyer we've had since Price Match for the acquisition, also for Penny Lane. He's called Charles-Philippe Le Tellier. Nice. I would say we've, I mean, so far so good. Yeah. But I obviously understand it's not like not everyone has this luxury. I've also been trying to understand, talking to other founders, what were the pitfalls you should like try to avoid. Also making sure. So one thing we've been optimizing for definitely is the quality of the investor.

23:11Yeah. So it happened to us several times that we chose one investor over another, even if the second one was offering a higher valuation, definitely, because we prefer like the quality. So I'm not a VC myself. my impression is that VCs is a small word and like especially top tier VCs is probably even more of a small word and their reputation is probably what is, you know, the most valuable thing for them. Yeah. And so if you have a number of those top tier VCs in your cap table and you bring in a new one, I'm convinced, maybe I'm wrong, but I'm convinced the new one, they cannot fuck up, right?

23:44Yeah. Because there will be all those other guys that will ruin their reputation if they do something bad. and so it ends up with a really small word in French, which is a bit strange, but I think it kind of protects you as a founder as well, somehow, that they all know each other and that they cannot screw up too much. Okay, yeah, that's great. And when you say you were focused on the quality of the investor, when you mentioned the quality of the investor, do you mention the quality of the partner you had a chat with or was it really more the fund's reputation? I would say both. I would say both.

24:22One thing I haven't mentioned, and in our case, I would say probably a bit special. So we feel, and maybe you are wrong, maybe every founder feels this way, but we feel we are not a super typical business in the sense like we are not just a SaaS business that acquires direct acquisition and a bit of indirect, et cetera. We have this very special motion with accountants, right? Where you need to build a super complex product. You need to be super patient before your product reach product market fit. And then even once you have product market fit, those accountants, they will actually not pay a huge amount of money for your product.

24:59And most of the money is like a second step effect where, you know, if the customers of your customers start paying also for the product, then you make more money, etc. And so we were always very careful having investors that understood our business. because I think the worst thing you can have is people that come in and do not understand your business and then they will have expectations that, you know, will not be met. And then they might, in our case, they might, you know, panic, right? Because we had to be very patient before seeing the return on our investment. If our investors did not understand and did not believe in the flywheel we were talking about, you know, very quickly they could have said, okay, like, please stop burning as much money on R &D.

25:40Like, are you crazy? And so we were very lucky so far with people understanding. And this, you can feel it when you do like investor stocks or even due diligence. There was one round where we had, there were maybe like two rounds where we struggled a bit more than the other rounds. So one was the second round because basically we had demonstrated there was demand, but we were still operating as a tech-enabled accounting firm for the very first few months. and people had to believe us that we were going to successfully switch from tech-enabled service to pure SaaS. And so there were, you know, some people were stressed, some investors.

26:17And the second round was, you know, at some point, I would say 2022 probably. There was some kind of tech winter. Yeah. And like all the fundraising kinds of stops and we wanted to go to market. We didn't have to, but we wanted. and nobody knew how the market was going to react. What we're sure is that we saw that all the VCs, all the analysts had a lot of time because they were not looking at a lot of deals. And so they asked us a lot of questions and you could see a lot of them asking very irrelevant questions because they were applying by the book their SaaS templates and metrics, which didn't make a lot of sense in our case.

26:59And so - What's so different between like a traditional SaaS and the way you operate, you would say? If you look at cohorts, it's very hard to define first what a cohort is, right? Okay. Because accounting firm, they will usually put like five customers and only then they are gonna, at some point, but that could be like two years later, that they could actually say, okay, now I'm putting all my customers, right? And so tracking that cohort is very tough. And if you look at it from a macro level, it doesn't make any sense. So it's hard for you to know the net retention or you can still track it?

27:35Exactly. A net retention, like what is it? Is it accounting firm adding more customers? Yeah, like the expansion. Is it that customers start paying us more money themselves? So depending on your definition, there can be many ways to look at it. Because the accountant pays and also like the client, the end client pays, right? We have a model where the accountant always pays for their own tool. Their own tool includes a freemium product for their customer. Today, you have around 80 % of the customers of the accountants that are on freemium. Okay. And 20 % that also pay something. Okay. Okay, nice.

28:09But you can always tie a customer to an accountant, right? Yeah. But so it's tough because sometimes the customer comes in later. Sometimes they switch accounting firm. It's not easy to measure, really. And then with accountants, again, it's kind of black or white. either they like your product and they will go all in or they don't. You also have very strong seasonality, etc. But I would say what makes it the toughest is this. So, like computing your acquisition cost is very tough. Okay. Because there are a lot of touch points. But in the end, like your retention is actually like huge, no? Like, I mean, you must have an insane retention because, I mean, for me, Typically, I think we switched to Penny Lane and it's obviously a game changer for our accountant, for our CFO.

29:06They love pretty much everything about it. And I know we will not move from it. And it's very, very sticky. So for you, I think in terms of valuation, it must be the one thing that investors look at very positively. Yes. So the nice things about our business, one is once you found product market fit and your product really works, your acquisition cost becomes super low because you onboard a lot of accounting firms and you don't need a nominee of salespeople to do this because it's limited how many accountants there are. And then indeed, your retention is super high because basically what I always say is for a churn to happen, you need to have both the accountant and the SME to want to churn at the same time, et cetera.

29:48So yeah, if you look at the comparables like QuickBooks in the US, Sock zero in Australia and New Zealand, they usually have a churn rate below 1%. That's huge. That's huge. And what really struck me with Penny Lane, you know, it's like I feel when I look at the overall space in fintech, it's usually like these companies, they always try to replace accountants or replace, you know, like a specific department. On your end, you really made them like your allies. So what was kind of like the light bulb moment where you thought, okay, like we need to create all this partnership. We need to make sure that the content like really love our product.

30:30So they become the one, you know, will be the driver of the customer acquisition. That was really like at the initiation. So I interviewed about 100 accountants, SMEs. And they actually all told me I love my accountant. It's my doctor. Okay. Please don't replace him or her. and I just want to work smarter with him or her. And I really took the time to think about the value chain, etc., which I had not done with PriceMatch. And so it's really from the beginning that we got this very strong belief. And I still believe, and by the way, I think it's our main risk and weakness because it's a very fundamental assumption, right?