Founder Exit Strategy: Xavier Gury on M&A Deal Terms vs Valuation

25:31But then there are some points of friction you got to push back. Yeah, definitely. I think what publicists managed to do well is a lot of M &A firms, they make the deal and what's happened next is not too much. Exactly. They don't think about that. And when it's managed like the way they did it internally, I'm pretty sure they were incentivized on what the company will be in the next three years. The success will not be only based on the signing of the deal, but what this merge will bring to the group three years later. It helps a lot to make it successful. So in terms of the factors that made the integration successful, obviously there's compromises.

26:09So human factor, there's compromises. I want to talk about the deal structure because that's interesting because you even mentioned that you had a higher offer, but you took this one, it's looked at the earn out being a bit more aligned or in post close. And that's just opportunity to lock more value. I always think about these like dials of the deal, right? In this case, you have the valuation dial, where are we getting valued at? And you got the terms of the deal, which in case built in earn out was one of the terms that was pretty favorable. I feel like there's like the people factor. You kind of saw like, Hey, these could be good people to work with.

26:41Sometimes not. You overlook that. And then it just turns into a total disaster because people talk about culture clash and all this stuff. But how did you think through that? Does that sound fair to look at those sort of dials? Because I want to reference this back on how you look at deals today when you're on the investor side and you're kind of coaching an entrepreneur about thinking through exit. Is that the right dials that you should be thinking about or missing anything? One thing we've done pretty well at that time is to identify the 10 key people in the company from 20 years old coders but we believed was key to build around him in the next years to the business development guys that was like 45.

27:25And we incentivized 10 key people in the company. This helped us to have a core team fully aligned on the goals. And the goal was to maximize the earn out three years later. And it saves you a lot of challenge and a lot of problems. the first one being you have no more management issue managing these people so they're all annual review are very easy because they are in the same boat than you they are aligned they have shares of the company and they will benefit from the earn out at the end so they're all tied to their everybody is working a head down to make sure that the earn out will be to maximize a good example is what the point of getting a very high salary if you believe in the exit and if you know that But the exit will be 10 to 12x the EBITDA.

28:13For$1, you get a salary. It's$9 you lose at the exit. So no more fights on salary for the next three years. Everybody's aligned. We are not very well paid during the three years, but not amazingly well paid because we prefer to bait a month of the EBITDA three years later. It makes the management of the company very easy to do. Was it easy for you to communicate with the... Because you found like 10 key people. They were part of the team already. They're part of the team, but I find that sometimes even we have options for all employees in our company. And I can tell like some people value it and understand it.

28:47Some don't. Did you find yourself having to... So it was before the stock option even exists. So it was like shares as a company. So same class of shares than us. You know, stock options, sometimes they are not, they are vested, etc, etc. In this case, they were like fully aligned with us. Same class of shares than us. They understood. Hey, maybe we're going to optimize the business. we hit this earn out, which is going to be a bigger win than just collecting a salary. Yeah, it was for us. But what we decided is that us and also our business engineers, you remember the crazy business engineers from the beginning that bet on the first startup that didn't work, they were still on board.

29:25And we kept them. The only thing we did is we acquired back our shares from Bernard Arnault when we did the pivot. I didn't mention that, but this was like a pretty smart move. We had almost all the shares of the company. The 35, I don't know how Bernard Arnault, LVMH at the time. But we acquired back our shares before to do the pivot, telling them that our business was completely new, that they will probably not make any money with this new business because it was like not a very disruptive business, which it was. But it was not the business he bet on originally. So we acquired back our shares.

29:56What we did when we decided to give incentive to our key employees, we gave part of our shares and we talked also to our business angels to share part of their shares also with these 10 key people. And we explained to them that, yeah, maybe it will be less loaded in shares, but at the end, your shares will work three times, four times better because you will have this team super motivated and aligned with you and with us. And this worked pretty well. Did you find any points of friction on this earn out? Because I hear stories about earn outs going sideways and they're turning into lawsuits and people pissed off.

30:30No. It was just really clear. And what was it based on? Was it based on revenue, EBITDA? What was the earn out? It was a multiple of EBITDA augmented by the growth of the revenue. Okay. More or less two more points if the growth of the revenue was above certain threshold. But basically a multiple of EBITDA. So it's pretty clear, pretty healthy. You don't pay as a startup based on the revenue that it's making, but based on the performance the company is making, like the financial performance. it helped us it pushed us to be lean yeah we had a very good gross margin like 35 % gross margin which was like less in class at the time in the market and once again everybody in the company was paying attention to the spend but the spend is not like a restaurant or trips the spend is how you optimize your resources on a project how you watch that this client is too much demanding at some point you have to say no because it's very easy to satisfy your customers and to to degrade your profitability.

31:35What were the synergies that you found? That, hey, it was a publicist brand, made it a lot easier to do business. What were the big value-add resources that you got? Yeah, the publicist brand definitely helped us a lot. It gave us access to some... People answer the phone more often. You remember me? Definitely, it helped. I don't think there was any downside. Yeah, what we did is at some point, we became too expensive for some of our old customers. and this is just like the natural way of life. So you increase your price. What about like strategy? Did you get extra help with strategy and just thinking through go-to-market?

32:10No, I guess this is like being an entrepreneur. Yeah, so it's more of giving you a platform but just incentivizing you to keep growing. So no, there was no downside. The synergy was like definitely the brand. One thing also, you don't have to focus and paying your employees at the end of every month or these paperwork admin things is one less thing you have to think about because there is a staff dedicated for that. So you can focus more on the business, which is good. That's a key thing. Let's keep it letting you have that autonomy. So I think there's an interesting balance that they ultimately created.

32:43You got the autonomy to grow the business independently, but also got support from the larger organization. Let's break that down. Thinking from the buyer-led perspective, what point of view or advice you could give to buyers to help them create a better experience for founders on their exit. Yeah. As I said, one of the reasons the deal worked pretty well with publicists is that the deal was really balanced. I really believe in the yin-yang M &A. And the deal has to be fair for everybody. Very often, the buyer feels that the power dynamic is in his favor. So he's going to try to push the cursor to the maximum in his favor.

33:23and maybe at the closing time, he's going to feel like he won. He's going to flatter his ego. But what I've seen, and especially in that kind of deal, is that it's not a sprint, it's a marathon. It means you're going to have to work for a very long period of time to realize the benefits and the profits of this merge and this acquisition. If the deal is unbalanced, at some point, the seller will feel like will lose motivation. We kind of lose sight of why he did the deal. And there will be this not involvement in the business. And at the end, it will make a bad deal for everybody. The good model is when one plus one makes three.

34:07This is what happened with Publicis. I created a lot of value for them, a lot of value for us. And when the deal is unbalanced, when you try too much to make it favorable for yourself, then one plus one equals zero. Everybody lose the value creation that you have done. And this power dynamic works when you're a buyer and when you're a seller. It's the same thing. So having a good balance of what's in it for each person, a lot of that carried over with this earn-out structure because it gave you potential for a significant amount of upside. What did that look like? Is it sort of a percentage? We can make up some numbers just to give a rough idea.

34:45But was it like, hey, here's yield value, whatever, 50 million, then earn out comes out to like 20 million. Like what was the ratio? So the company, the publicist is obviously listed, so I cannot disclose everything. Yeah, just rough idea. The structure of the deal. How much percentage? Yeah, but it's interesting. You're right. The structure of the deal was we get one check up front, which is a small check. But still, you know, you've been working for seven years, very hard, since 19 years old. You're happy to materialize this work in some way to be able to buy a house, whatever. So this was the first check.

35:18and then there was an intermediary payment over the three years based on the same formula. So you were playing the formula and obviously you're in the middle of the journey. The full value is realized, but they play the formula and they give you a second check based on the exact same formula of earn out. And ultimately at the end, in our case, it was three years, they play against the same formula. Normally, if you do good, the total is much bigger than the first and the second check. And they were just like offsetting the two first checks they paid. In our case, what is interesting is I'm pretty sure that what it costed to publicists was over what they budgeted.

36:01Because when you close a deal, you say, okay, I want to acquire this company. And based on the forecast, it should cost us$50 to$80 million. And if you do very good, because it's a formula with no cap, then it cost them more than what they were expecting. But it's just like a proof that the merge worked and that the acquisition was a good acquisition. So at the end, it's a good signal. It means that PBC is able to acquire small companies, is able to merge, to create value. And yes, it costs them more than they budgeted, but it means it was a success. So not a bad signal for... This deal, there's actually a lot of the value is actually on there now.

36:42Yeah. Yeah. I mean, a lot of... Like more than half the value was... Much more than that. Upfront check was 10%. This is crazy. Of the value, total value. There was other options where we were getting like 50 % upfront. Typical deal, you get 50 % upfront, 50 % will be based on the performance. But then it was, it would have been for sure now, looking back, it would have been a much more earn out in total at the end. I'm trying to absorb this mindset, right? Because it's... You have nothing much to lose. But you're just taking... You're taking a huge risk. No family, no kids. So if you bet for the best and you believe in yourself, you believe in your team, you believe in the market, you do the kind of same bets that I'm doing today with my startups.

37:21The idea of an exit is to realize value. But in this case, you're taking on a bigger risk. Yes, we like that. That's an interesting example. I didn't realize that it was actually a huge chunk on this. Yeah, 15%, but not much. Yeah, I still don't get it. As I said, in our case, we believed more in the terms than just in the upfront valuation. You ultimately look back and say, hey, we actually made the best out of that exit. Yeah, definitely. Which was the best path. For sure, we could have been executed even more and make the numbers bigger at the end. But in terms of path, there's also luck in that path that we followed.

37:59Teach me as a buyer, how do I do this? If I'm looking at a company, how do I convince them to put 15 % up front and really base a lot more of this on earn out? As a buyer? For you, as a seller, you had a level of certainty. I'm just wondering as a buyer, How did they get to that point to create that earn-out structure? Pretty sure it cost them more than what they budgeted. But honestly, it's a win-win deal for them. Yeah, because they didn't have to put in much money. If the merge doesn't work, it doesn't cost us much. And if the deal works pretty well, it cost them a lot. But it means you have created a lot of value for the group.

38:31And that was the goal of the deal. Because the deal was to transform the group. So the more you transform the group, the more you pay at the end, which is pretty fair. How did they come to terms with this? Because I don't think this is their standard playbook. So this isn't what they offer everybody. 2007, market conditions, not many players to be acquired. So this is this culture of acquire. I mean, I think they are good. They are good enough. Being able to draft deal, being flexible. I mean, we negotiated that deal. Obviously, it was not the first version of the deal they drafted, but they were pretty flexible and ready also to take some risk and try something that beat out of the market practice.

39:08That's fascinating. I'd love to talk a little bit about your current role. You've had this experience. You've gone through the whole cycle. Now you run a venture fund. Now you're working directly with founders through their journey. And this is a big value add. There's just capital, but then there's capital with the people experience. How do you help and guide them even to start thinking about this? I feel like it's always an interesting conundrum when you talk to founders of, hey, is it really focused on a mission? And you just stay focused on a mission. and you don't really think about exit, it just comes up?

39:40Or are you really thinking about exit early, early on? Are you sort of building for the exit? And what's your philosophy when you start working with these founders? Yeah, we try to explain to the founders that the exit is not the result of the final battle. We try to explain to them that you don't shape your exit at the final battle, but you shape it, you design it at every round where you have to fight every battle to get the best terms. And we try to explain to them that terms matter more than valuation. Our job is a bit schizophrenic in a way that is like the magnet in an EV engine. It keeps changing polarity all the time.

40:25And us is the same. You start being on the buy side. You want to enter the deal. So you want to convince the startup that you are the best investor to work with them. This is the first first approach. And then you are in the cap table, part of the deal, more or less aligned with the other investors and the funders, and you're going to reach the next round. And in the next round, you're a seller. You're going to have to pitch the company to other investors to tempt them, to tease them that they should be part of this journey. They should be part of this startup and they should invest in this startup.

41:03So you turn from a buyer to a seller. Ultimately, if you go to the end, you reach this exit moment where you look at the waterfall and very rarely everybody is aligned. There will be people on convertible knots with a discount. There will be people with liquid press. There will be people with participating. And not everybody is aligned. It's super exciting. It's a lot of strategies like a chess game. how you're going to handle and navigate this waterfall and this cap table to defend your interests and the interests of your LPs that trusted you in the fund. What we try to explain to the entrepreneurs is that the value of the exit is not only in the number of shares they will get, the percentage of the cap table they will get.

41:48Because very often you see an entrepreneur fighting a lot to have 1 % more in the cap table. But at the end, it will not make a big difference. What makes a difference is the terms. This is like the first things we try to communicate and to teach the entrepreneurs. And the second thing is, if you look at what is the success of an exit, is it only the money you're going to make? Or is it just like the fact that you're going to create value and you're going to be successful? And being successful, you're going to be able to raise money for our next journey, next adventures. and actually very few people know exactly how much each funder is going to cash out.

42:32But everybody on the market will be able to recognize the creation of value made by the funders with this startup, with this product, with this service. And they will be able to see that this player, big player, acquired your company because it was bringing value to this big player. Ultimately, what matters is not how many millions you're going to make. is more jumping in this journey with the right partner, the right investor that's going to be here when everything is bright, but also during the storm. And will it help you to make a success at the end? And whether you cash out with 20 million, 18 million, 15 million, or even less, what you want as a people, as a human being, is to be successful.

43:17And just like the beginning of your career, the beginning of your journey, usually you are a young entrepreneur. It's not going to be your only venture. So I try to teach them that focusing on the success is more important than focusing on just the total amount of money. And the success doesn't come from maximum percentage of the cap table. But it comes from having the best partner to help you to thrive your startups. Yeah, and you had a good point. You have a cap table with different investors that are going to have different perspectives, different expectations, maybe different terms. How do you benefit the greater whole of the cap table?

43:50It's not easy, I have to admit. This is our day-to-day job. I'm learning it firsthand. The messier the cap table, the harder it is to do the deal. But it's not easy for an entrepreneur, which his job is to develop his business and not to focus on the strategy of the waterfall at the end to understand all that. And that is good when you have funder-friendly work with you. As I said, I don't define myself as a financial guy. I'm more like an entrepreneur who likes to be part of other entrepreneur journey, where we can also make the difference compared to other VCs. is going to be better also, but maybe more like focus on the return only.

44:24You know, if I was a company looking to raise money, be it VC or growth equity, what are like the terms specifically? Because valuation we always look at, but now we're realizing terms are more important. What are the terms I should really pay attention to? There's always like liquidity preferences. There's so many different terms, but definitely pref or no pref, participating or no participating makes a big, big change. Participating is kind of game changing. So that's super important. And then the typical good liver, bad liver, always messy. There is a lot of fight about that. What do you mean?

44:58So let's explain this. If you have a participant, now this is a funny one, right? Participating, that means you basically get your preference. So participating, I'm going to try to explain that in English. Be tolerant. Don't worry, I'm going to try the best because I know this like in the same way. Even I know English, I still can. So it all comes to the waterfall and the final payment. So participating, it means you're going to first get a percentage of your shares. So let's say you have 10 % of the cap table. You're going to take your 10 % of the total amount that's going to be paid to the investors and to the funders.

45:38You offset this 10 % from the top line. And after that, you're going to get once again your percentage with all the other funders. But the first 10 % are secured. Right off the top. Secured for you, right off the top. You're playing for another round after with everybody. But in a scenario where the company is not performing as good as it should, if you run all the simulation, securing your liquid press participating can be game-changing. Yeah, big time. You're going to be the first serve, and you're going to be served twice. Is it ideal to have 1x non-participating? Is that the ideal term to go for?

46:16You know, I've seen everything. I've seen like 4x press. when the deal is super defensive. And this is the moment where you need to have dry powder. Typical example is you invest in a startup, seed round. Not everything goes accordingly. Company is not doing well. Not easy to find anybody else to join the next round. But the company still has some potential, but needs to be reshaped. You, if you are an insider of the deal, It means if you have been closed to the funder all the time, not the business angel that put his money and lost sight of his deal, then you know what this deal is about. Is it defensive or offensive deal?

46:58And you know if you have to play a game, put another coin in the machine, or if you just have to drop. This works only if you are an insider of the deal, if you have been closed to the funders. At that moment, what might happen is that you're going to cut your arm, which means like the first dollars you have invested in the deal are over, but you have a chance to play for another round. Sometimes I could pay to play. It can be even worse. You know, it can be even worse. It can be like you got 4X press, the new round coming. And if you don't participate, your old shares became common. So it's like the double penalty.

47:37And if you're an insider of the deal, you know what you have to do. and if you have enough dry powder, which happens that some people, they played all their, they did all in, they did all in at the last run. They have no more cash for this next run and all the value is going to come from the next run because you have 4x fresh and the company is going to start a new adventure. So you have to believe in this new adventure. Typically, you have a kind of identify potential buyer that is pretty secure. You know that if the company reaches like this kind of few milestones, then you have likelihood that the deal will happen.

48:15And then, because you are aware of everything being an insider, you decide to play again. Yes. Terms matter. Terms matter. Are there any other big like gotcha terms that are things to think about besides this sort of preference stack? Most favored nation, MFN, Ratchet is good also. It's a good protection. It means like if the next run is below the previous run, they will... give you more shares to compensate the loss, to make it simple. So it's a good prediction. As an investor, you have about over 30 exits now? Yeah. What advice would you focus on when it comes to the pure exit event? I have a funny story about that.

48:55One of the first deals we did with Wind One, the Wind One was our first fund, self-funded by Thierry and myself, roughly$40 million. 4-0. I mean, we did this bet on the team that was developing a log management product. So a SaaS business. 2015, this is the moment where everybody is doing SaaS and this is the beginning of this new trend, working very well. And so we bet on this team, we bet on that space and the company is doing pretty well. They are selling their log analytics system to many companies. But unfortunately, it happens sometimes, the funders disagree. The dynamic of the funders doesn't work.

49:36So they decided to sell quickly. They have a buyer. They haven't realized a lot of value creation from a sales perspective, but from an IT, from a product, they have a good product. And I'm a young investor, repeat entrepreneur, but young investor at the time. And the deal is pretty good, a good IRR. We get maybe 3x or 4x in two years of time. So we're pretty happy. So we kind of signed the deal quickly. what's happened is that this startup being acquired by a u.s company the valuation was not so high because the funder were loaded in shares of the company the mother company that was acquiring the startup we didn't see too much we didn't pay too much attention to that and also at that time this u.s company was not what it is today ultimately long story short this u.s company that acquired the startup became listed on the Nasdaq.

50:32Today, it's worth$50 billion on the market. And the product they sold is probably one third of the revenue. Lesson taken is that try to be as much as possible aligned with the founder terms when there's an exit. If they would have got the same percentage of share, ratio of shares that the founders get, I think I would be very happy today. So there was like asymmetry, disalignment in a way. At that time, we found it fair. But my lesson from this deal is that next time, I will try to be more aligned with the same term than the founder. How did you end up with different terms? Because it was like everybody got the same.

51:14The valuation of the company was obviously the same for everybody, but they got incentivized with shares of the mother company. With their company. You didn't. You just got exited out with cash. Exactly. So if you would have converted to shares, that would have been the whole... We could have been converted or we could have noticed that, hey, maybe we should value the shares you're giving in the total value of the deal. Or we could have asked to, as you said, to get half equity, half cash, for instance. Yeah, because they would have probably been open to doing that, rolling over the equity. I'm not bitter about that.

51:47It's a good story and I'm super happy for... That's a good lesson to learn. That's a good lesson to learn, like being Paris Passu with the Funder deal. Paris Passu. What does that mean? Paris-passu is not something, it's a Latin word, but Paris-passu means like same terms. Same terms, yep. Paris-passu, same terms. We use it a lot in France. Paris-passu. Yeah, yeah. Looks fancy. We got to bring this in. It's part of M &A science. We got to bring in, you got any more M &A French terms? Déjà vu. Déjà vu. That happens too. This deal is déjà vu. What is your philosophy when it comes to exiting versus double down?

52:20And I gave that example of you got this other opportunity where you can get exited out, or do you play into the next journey or next round? How do you think through that? How do you work with your entrepreneurs on that as well? I don't have one philosophy, but what I think made us kind of successful in Fund One is to enter early because we are doing like pre-seed and seed, basically. We were able to do multiple secondary rounds. Sometimes it could be like counterintuitive because you're going to basically sell your shares to people like Sequoia, Tiger, NGP, that are bigger, smarter than you, and you sell when they enter.

53:01So you're a seller when they are a buyer. So it looks like counterintuitive because why sell when the company is doing good and when everybody wants to enter the deal and buy your share? And typically, they usually buy it with a discount. But when you enter very early in the deal, at Series B, you can do 15x. sometime next round 30x so this is what we've done with the startup in the mobility space we did like first secondary 15x together with my founder like 15x is not bad i mean never know what the future will look like so maybe we should check your bit so let's say like 10 to 15 percent of our shares sell it company keep growing secondary next round 30x yeah 30x we have to secure a bit of that you have to secure a bit of that so we sell again maybe 10 to 15 percent again and ultimately at the end, the company will do a SPAC, not a good SPAC.

53:54But in the cap table, we were probably the best in terms of IRR because we have done secondary where people enter the last round and then there was this SPAC and this SPAC was a shitty SPAC. So the secondaries actually helped you out? We always had this philosophy of securing a bit and keeping the rest for the potential. Right. I don't know if it's a philosophy or a theory. I didn't make it a theory, but looking back, it worked pretty well. And I can give you a counter example. Sure. The context really depends on the performance of the company. So in that case, the first situation I just described, the company was not yet profitable, but an amazing growth and being acquired by a big U.S.

54:36player. It was one context. Second example is a U.S. company. I've been board member of the startup for three, four years in the mobility space also, based in San Francisco. So the company is doing very well. We entered the ARR was 30K. And today they are doing 32 million ARR. So huge growth. And this is the second time that a growth equity fund is joining. Basically, a few weeks ago, we had this option of getting all our cash back or stay in the adventure for the next round. It was a few millions, actually. The line was a few millions. I decided to stick to the company and to stay in the venture because I said, okay, I get these few millions.

55:20Is there a better way to invest these two millions than staying in the adventure? I know the startup. I know the funder. I've been board member. I know the market and I have the potential of the market. And I guess the gross equity firm that's joining the adventure did all his due diligence and is pretty sure the gross equity firm is not as early stage. Yeah. The risk is limited. And I'm sure they did all the due diligence to make sure that they will do a 2 to 3x in the next 3 to 4 years. Today, I'm not sure that I could find right away a better investment than to stick to the founder team I know, I trust, and the market I know and I trust.

56:00So in this case, we decided to stick. And it's been like 2 to 3 runs that we could have cashed out, but we decided to stick to the adventure. That's looking good. Because the company is profitable now. Profitable is like self-finance. That's an interesting view on that from the investor perspective of you have your own view on exits. There's a founder view, but he's got like different perspectives in operator and he's playing long term versus you. You have your different angles of diversifying your risk, whether partial versus wholly and looking at that. And the luxury is like when you can decide.

56:31When we did secondary before, it was because we had like obvious opportunities to cash out and reinvest this money in new opportunity. But right now, this is fund one. Fund two is already a big fund. It doesn't need to be more finance. We have plenty of LPs now in this new fund. That's true. Assess it against your alternative bets that you could be making. And I really believe in this rule of 40. This startup is one of the best in class following this rule of 40. Pretty safe business now. That's true. With B2G. So rule of 40, basically, your combination of your EBITDA margin plus your growth percentage equals your...

57:12And ideally, you want to be over 40. That's your rule of 40. Either your growth is like 30 % but you're a break-even on EBITDA or you're positive on EBITDA and your growth is like 30%. I feel like I run a business right now. We're right at 10 million ARR, like 50 people. And we always think of rule of 40 as well. We're always focused on growth. Like we're pushing to get the 40 % year-over-year growth. So it's intentionally operating right at breakeven. Is there a spot from your perspective as an investor that, you know, maybe there's like a sweet spot between it, right? Because you got to kind of align.

57:43You could push. I like the question. I like when the EBIT is below zero, but very well controlled, very well controlled. It means like you don't need to be above. If everything is under control, it's better to be a little bit below. and it will help you to grow faster. You can feel as an investor, you can talk to the funders, you can feel how he's in control of the global trajectory of the company. You know, you're going to be like minus five, minus 10 in the EBIT. But the big growth, and you know that at any time, you can cut some cost in being breakeven, which is game-changing in the perception of the startup.

58:23He has to be acquired of finance. If I ask that question to a later stage investor, they might give you a different response. It depends. Exactly. It depends. You tell me like 5 to 10, this is what I will do. If you tell me I'm doing 100, I will probably give you a different answer. Yeah, no, it makes total sense because we have a couple of years where we're doing 30 plus percent EBITDA margin. So we built cash reserves. Now it's easy to sit there and teeter or run negative 5, 10%. It's like not a big deal. We have cash on hand. I think you're right. When you kind of know your total financial picture is sound, then you prefer that push forward on growth, which totally makes sense.

58:58And another thing I will look at is your churn. Oh, the customer, yeah. The churn and the value of your contract. This other startup I mentioned from San Francisco, it's a B2G business. So it's hard to enter, business to governmental. It's hard to enter, but then it's super resilient. The churn is very low. And the startup, a history of very, very low churn, like actually a positive churn because they are upselling their current customer. When it's been like this for five years, means like it's pretty safe and you can take more risk because you know that you're not going to accumulate the downside of the market and at the same time, customers are going to drop.

59:37They are very sticky. They had to integrate the product with their system. So churn will always stay very low and it's like another way to remove the risk from a deal and assess the investment. What are the biggest reasons your investments go sideways? Because you had that reference earlier, like the founders don't get along and they want to sell. Yeah, you name it. You cannot control everything. This is why it's called capital risk. Virtual capital. Macro trends you can't control. You cannot control everything. And we've seen startups where there was a couple working, managing a couple, men and women.

1:00:10Managing the business. Statistically, in Paris, 50 % of the couple split. So you know that on top of all the risk, market, technology, whatever, you add this risk on top. So I had one bad example of the company going sideways because the couple split. And I have another example of working together and did amazing. So I have no philosophy, but I know for me, when there is a family involved in the business, it's an additional risk. That's an additional risk. I take it like that. One case, I did more than 80 investments, probably 100 now, the second one. One example of fraud. Oh, wow. Not disclosing the right information or even disclosing fake information.

1:00:52It happened once in a very small deal. I didn't lose much, but it happened. But it's very, very rare. I mean, this business is all about reputation also. That's so true. You get a reputation for a good investor. I'm talking to investors now and it's like the number one thing I'm looking into. And then other reasons to go sideways are multiple, but it can be the market in a way that you're relying too much on Apple, for instance. Another example is I did once a startup back when I was in the U.S., B2C apps, and Apple is changing its terms, and the apps can no longer be on the Apple Store. This happened to many startups, actually.

1:01:33And so this is when it can be sideways and it's very hard to predict. It can be a completely bigger change of trend. You were in the translation business. You did amazing translation apps and chat GPT is coming and you're dead. And this is going to happen with many, many, because of the AI. This is going to happen to many, many companies. Are you in the business of taking calculated bets or are you gambling? No, no, I'm really calculating bets. IQ and EQ. The EQ is important. We have to believe in the team, to have a fit with the team because we're going to work with the team. We're going to have to love the market.

1:02:09but there's always someone in the team that is going to take a spreadsheet and run all the simulations, all the scenarios. And at the end, I understand Xavier, you really like this deal, but look, it doesn't work. The market is too small. And then we don't do the deal. Fair enough. Maybe I'm too much of Silicon Valley culture. I always imagine them on a roulette table, just putting chips and numbers. No, but maybe we're not following enough our intuition sometimes. Jason Wong, the CEO of NVIDIA, was telling that Americans, they focus on the 1 % reason why to make the deal when Europeans focus on the 99 % reasons why not to make the deal.

1:02:49So we try not to follow that rule, but recognize some part in that. That's funny. I love that. I got to ask Xavier, what's the craziest thing you've seen in M &A? Definitely easy answer. The SPAC is dead now. It's a good thing that it's dead. Because for me, it was an aberration. It was the pinnacle of what can be the worst in finance. Completely misalignment between the sponsor and the investor, signing a blank check, not knowing exactly what will be in the package at the end. It's like you're signing to get married, but you don't know who will be the bride. Yeah, that's actually really great to put it.

1:03:28It was crazy. For me, this was gambling. Hey, look, this company did a SPAC and did amazing. Let's do a SPAC. Because one, it's good. I think 99 did bad. So it was like what the worst could be done in finance. And the only winner is that transactions were the bankers and the lawyers. Yeah. These guys made tons of money with SPACs. Absolutely. The SPAC craze. You're right, because there's a lot of fees to go to do doing a SPAC and just public. It wasn't capital efficient. I mean, when you look at it, that's a big chunk of expense to run through a SPAC. I followed some deal. I was part of the deal.

1:04:04the fees the lower fees and the bunker fees were like something like 10 to 15 % of the total value of the deal and I'm talking about big numbers like in the billion so I'm very capital efficient so yeah it's back definitely Xavier this has been great I appreciate you taking the time to have this conversation thanks for having me you helped me become a better M &A scientist those of you still tuned in fellow M &A scientists I appreciate you listening and staying tuned love to hear what you think This is another different interview, different topics. Reach out to me on LinkedIn. Like any of the feedback, the other topic ideas, just general feedback is always welcome.

1:04:42And the criticism. I'll take it. That's how I get better at doing this. With that, until next time, here's to the deal.

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