How To Create a Value Chain Ecosystem

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1:12And you can do a free trial right there on the spot and do a side-by-side comparison so you can see why it's a better product for a better price. Dealroom is a leading M &A lifecycle management platform. It manages your pipeline and combines diligence and integration into one process so that the integration is faster and easier. Even if an investment bank is driving the sale process, Dealroom helps you take over once the LOI is signed and drive better integration results. Learn more about Dealroom at dealroom.net. See why the best in M &A are using Dealroom. Now on to our interview. I'm Kisan Patel and you're listening to M &A Science, where we talk with deal professionals and learn valuable lessons from their experience.

2:01This podcast focuses on stories, strategies, and what actually happened during M &A deals.

2:14Hello, M &A scientists. Here at M &A Science, our goal is to continuously expand our understanding of M &A and use that knowledge to create top-notch training programs and resources by visiting mascience.com. You'll find all the information you need to take your M &A skills to the next level. Get started by signing up for our free newsletter to stay up to date on our latest courses, upcoming events, and expert interviews. Again, that's mascience.com. I'm your host, Kisan Patel, CEO and founder of M &A Science. Joining me today is Brian Matthews, CEO at ITEL. ITEL is a leader in the insured tech industry backed by GTCR, leading private equity firm out of my home city, Chicago.

3:02Today we're going to talk about how to design and create a value chain ecosystem that can lead to M &A opportunities. Brian, can we kick things off a little bit about your background? Good afternoon, Kisan. Great to be here. I spent the first decade in banking in New York City, as you had a lot of the consolidation on the commercial side, working for Chase Manhattan, coming together with Manny Hanny, Chemical. Ultimately, Bank One and J.P. Morgan came together. So it was an interesting time to be in banking. I then pivoted to the technology side, quickly was acquired by a company, VeriSign. And inside of VeriSign is really where I grew up from a technology perspective, initially involved in M &A and product, general management roles, marketing, etc.

3:45And then it really has spent the last 20 years in leadership roles, the last 10 years really in more president, CEO roles of growth phase, data and analytic companies, where part of our growth play not only was organic development, but by rolling up other companies in the space. And ultimately, all of those have had a successful exit, either on the strategic or the financial side. So looking forward to the conversation. Pretty well-rounded experience from the banking, the operational experience, the M &A. Can you tell me what is your value chain ecosystem approach? To me, it actually goes all the way back to VeriSign days.

4:19With VeriSign, they originally were a security company, but the internet was going through a lot of rapid evolution at the time. And they wanted to have a broader value chain. So two of the acquisitions they did, one was actually getting into the domain name business. That's the first step of the internet. Get a domain name, then get it secured, and then you want to accept payments. And so the company that I was leading at the time, Sales and Business Development, was the leading online payment gateway company. So get your domain name, secure it, and then be able to take payments. By bringing those together, you have a broader value proposition for a community or customers.

4:53Fast forward 20 years and the last few opportunities I've had are really in different industries, whether it be people-based risk or more recently in sure tech. These industries are going through dramatic digital transformation. Oftentimes, there's point solutions along that value chain. As industries go through digital transformation, the ability to interconnect those different value streams or point solutions into an optimized, frictionless solution for businesses or consumers is really a key part of the value proposition, number one. And number two, if you're really looking at how do you increase value, increase wallet share, looking at that value chain, looking at adjacencies where you could expand either backwards or forwards to deliver more value, again, reduce friction and increase what you're doing with your customers is a great way to increase value and ultimately make you more valuable and may support an exit.

5:50Okay, so we're looking at our business. Here's a cohort of customers that we're providing value to through an offering. And as we look at the broader ecosystem, we can look in different directions around it to identify other products and services that would add value to that customer. Could be, what are the other services that the buyer that you're selling to today? Because you already have relationships. You may have an MSA or a master service agreement. So what are the other products? What are the other SKUs that you can now take the market from a go-to-market perspective through that same relationship?

6:23Many times these value chains, they're very fractured. So you have these organizations that have vendor or procurement groups, and they might be buying data or technology from 5, 10, 20, 30 different companies. And as these industries go through consolidation, as it goes through a digital transformation, those same customers are actually often looking to simplify their supply chain. And there is an opportunity to become more of a strategic partner, to work with those companies to define value, define roadmaps and deliver. And they're actually open to having strategic relationships, moving the sales process away from or together with the traditional vendor procurement office and really moves you from being a supplier, more of a commodity to being a valued partner.

7:11And one way to do that is to kind of move up the stack with an increased value solution with multiple components woven together organically through partnerships or ideally through acquisitions. Okay. I like that because it expands further that it goes beyond just looking at purely acquisitions, but looking at your customer, what is the ecosystem of products and solutions are using? And if you could provide more of it, it reduces the amount of overhead they have to have with managing all these relationships with different vendors and looking at you as a bigger partner and consolidating that relationship with your organization?

7:46Absolutely. And as a part of that, we're all constrained for resources. Regardless of who your customer is, at some point there's always a resource constraint. And as a strategic partner, you have the opportunity, once you've delivered that value, to potentially take on more of that innovation, potentially start to, again, do some of the development on your side to solve problems they have, which as a point solution or as a commodity, you'd never be welcome at the table for those conversations. It really moves you up in the stack, delivers value and makes you a trusted partner. Can you give me an example of that?

8:20So if I go back to the last company that I was at, a company, Aprys, that we sold to Equifax, it had one core data asset and we saw an opportunity in the background screening market, right? The background screening market, it's about a$5 billion domestic market. Who knew? About 600 different companies who were in that. So there's this whole ecosystem of end customers and all of them were buying data to deliver a background check from 30, 40 different companies out in the industry, a very fractured supply chain. We had a differentiated data asset, but we saw the opportunity in talking to the customers to really consolidate part of that supply chain.

8:57Instead of them coming to us and seven or eight other companies to buy, we could actually aggregate that together. They could come to us as a single supplier, number one. And number two, and importantly, as we brought those data assets in-house, we could actually start to weave them together, gain insights, and actually solve problems to deliver to the customer. And so instead of selling them the raw material, we could actually start to go higher up and do the production work on behalf of those partners and sell them an insight or a solution as opposed to the raw material. So moving part of the work from their side of the balance sheet over to ours, increasing our wallet, how much of the wallet we get, because we're now actually taking on some of that work.

9:41And because we had all the data assets in house, we can do it faster, we can do it automated, less manual labor, and actually deliver a better product than they could do on their own and get rewarded for that. We went down a path, we acquired five companies over 24 months, we grew the business from say 50 million to a couple hundred million. And we sold that business to Equifax for 1.825 billion as a part of that process. And the Equifax was the customer that you worked with and being able to create some of those solutions? It was a channel. So going back to the ecosystem approach, if we think about it, there is data itself.

10:17In this case, the raw material that you're putting together into a product, there is then also selling it to your customers. In our case, it was background screening organizations. It was governmental agency and other customers. We had both a direct, but really more of a channel model. And as we pivoted to a channel model, we worked with other larger data organizations that already had feet on the street, that had contracts, that had trust. People like Equifax, Thompson Reuters, LexisNexis is an example of others as a part of that distribution strategy. We always thought that actually might be a nice strategic exit for us.

10:56It provided us a time to get to know those organizations, understand the cultural fit, accelerate our sales and revenue, and in turn, increase value for us and increase stickiness for our channels, Equifax, Thomson Reuters, and others. In the end of the day, that strategy actually ultimately played itself out, accelerated the timeline in our exit. And Equifax, again, was the acquirer in the fall of 21. I like how that came together. Now that was one of the themes we wanted to touch on in our interview is around the exit process. When you went through that, how much emphasis did you have on exit planning in the organization?

11:39Because obviously you're making some strategic moves with acquisitions, you're building around your vision with the ecosystem that you're building. Is it, hey, we have this timeline in X amount of years, we're going to start planning this exit, we're going to get this banker lined up? Or was it something that happened more naturally where you identified a likely acquirer is going to be one of these channel partners and happen more naturally? Every different asset or business has its own life cycle. In our case, we're private equity back, right? So generally, private equity has its own cycle of kind of four to five years was the timeline for them to be able to return capital to their shareholders, their partners.

12:16And so that was generally the timeline we're working towards. And it can be faster or slower, obviously, depending on execution and macroeconomic environment. In our case, we had always assumed or likely assumed that the buyer would be a financial buyer and another kind of private equity sponsor. We did believe there was an opportunity to be a strategic buyer. And rather than have one or the other, we wanted to increase our exit optionality. We saw by establishing some of those channel relationships that would not only accelerate the value proposition, increased revenue, reduce customer acquisition costs, and a lot of those key KPIs that you look for, but also would increase our optionality from an exit standpoint.

12:59To your question, in the end, it ended up happening faster, right? Because in the end, that exit is not only driven by time, but overall kind of value that the shareholders are looking for return. We were able to actually get a meaningful return through the sale to Equifax in a time that was a little sooner than I think the owners had expected. based on the dimensions of time and shareholder return that allowed all those boxes to be checked. It happened, again, fluidly, organically. And frankly, it happened fairly quickly over the course of a few months. Part of it was accelerated by the relationship and the cultural understanding and the alignment between the acquirer and us that we had built over many quarters.

13:42Have you been on part of an exit that was a traditional bank auction process? So not a pure exit. The APRES, the company I was at, we went through a process owned by one private equity company, Insight Partners out of New York. And we ended up doing a transaction brought Clear Lake into the relationship. And that was a fairly structured process in 2019. You know, 19 different bankers and strategic organizations and ultimately brought Clear Lake to the table. But I wouldn't characterize that as more of a traditional exit. And then on the flip side, if I look at on the acquisition side, I've probably been involved with many more acquisitions that were traditional sales process, where there was a banker on the buy side.

14:24Over the last seven or eight years, when I've been the CEO and taking this ecosystem approach, by and large, we try to do deals outside of a process. I was trying to get into the difference between the bank process versus this partnership approach. And a lot of the things sound like really good things in terms of understanding the culture, how these organizations are going to come together. And that's where I wanted to get a sense of how much value do you actually weigh on that? Because again, a lot of times you get so objective about running a competitive process to get the highest price versus do you end up with the best possible outcomes when it's dealing with the partner and friends and family that you know?

15:01Now going back on how you framed the question, it was exactly right. How much influence did I have in those processes of friends and family versus more of a structured process? And fortunately, it just happened again organically and that the numbers were there to come together. But I think there's huge value. You look at the number of M &A deals that you're aware of and your listeners will be aware of that fail, and it's a high number. And the number one reason, at least from my experience, is really about that cultural fit. How do they come together? How do you have an aligned go-to-market approach?

15:30Is there a tech transformation needed? Do you kind of break relationship with customers? All those things are critical. The benefit of having this ecosystem model, the benefit of kind of embedding what you do from a go-to-market standpoint and enabling that expansive, potentially strategic exit option, and ultimately either buying or selling, buying a product or a solution that you've embedded in your go-to-market and or inversely selling the company to somebody that you had that relationship with. The culture is a common. So you've reduced, if not eliminated, the cultural risk. The go-to-market motion is very clear.

16:05You've already been kind of working together on a go-to-market and messaging and customer relationships. So you've eliminated that risk. Oftentimes, you've already integrated from a technology perspective. So really, you start to check off the boxes or eliminate or reduce the risk. And really, what you're left with is execution. And so there's still risk, but you've dramatically reduced the risk from an outcome perspective if you can influence it that way. I like that. These are the big risk items that define why deals fail. Being able to validate the go-to-market, basically validating the culture compatibility and the technical integration compatibility.

16:42Let's go back to the ecosystem approach. What are the benefits of an ecosystem approach? One is it opens up kind of the overall LTM. Oftentimes, a lot of companies I've joined or companies I partner with, they offer a specific product. And when you look at their competition, they very, very narrowly define their competition or their wallet through the specific service or product they deliver. If you expand the aperture, either from a value chain perspective of, hey, what are the spaces upstream or downstream? What are the other markets I can potentially move into? What are the channels I can deliver it in maybe to get to new markets that I wouldn't otherwise, you dramatically increase your potential TAM, you dramatically increase your potential wallet opportunity.

17:23And obviously, a key part of the exit process is not only what is your existing white space, like how much of the market and the products I'm selling do I have today? And what is my growth path for the new buyer, financial buyer, strategic buyer to continue or accelerate growth? And if you don't have enough TAM or growth optionality, that's either going to remove your exit or dramatically dampen the multiple you're going to get because you don't have the growth profile. It increases the TAM, it gives you that growth optionality, and ultimately, it probably leads to a better exit for you. I like that.

17:56Bigger TAM, but also looking beyond that, that you create a bigger growth path for the potential acquirer means they'll pay more money. That's on the sell side. And also, as a company and as a leader, it actually starts to map out what your acquisition strategy is, Because when you take that value chain or ecosystem approach, you're going to not only identify your growth path, you probably start to identify some tuck-in acquisitions that can accelerate your growth, whether it be through increased distribution or increased products, which is a faster growth path than just doing everything organically.

18:28So you have both the acquiring side as well as the sales side, I think, benefits to that approach. Very good. One of the other comments you made in our prior conversation was around bringing fresh perspectives. Can you tell me more about how that comes in play with the ecosystem? In just my own experience, the last three companies I'm in, including the one right now, I had zero industry experience, whether it be people-based risk, whether it be an insured tech, whether it be in the whole securitization process, which was a company before that, had never been there. And one of the reasons that I was hired, and frankly, one of the things that found very early on, as you have these founders or these leadership teams, had done a phenomenal job building a brand, building kind of a deep moat around a specific product.

19:10And maybe one of the challenges is they actually were running out of TAM. It was unclear kind of how to grow it, but they oftentimes were so close to the market and the product, they had a hard time really stepping back and really thinking of it from an ecosystem perspective or thinking about the digital transformation that either was coming or starting to happen and the implications on that for the business. And oftentimes as a CEO, as I step into these organizations, some of the resistance I see initially is actually from the really smart, successful employees who were there because maybe they tried something five years ago, or maybe they've been so close to it.

19:45But now by bringing in a set of fresh eyes, you can start to ask different questions and really start to see the art of the possible through that fresh perspective. So it's worked for me. I've seen it work for others. It's something that I continue to invest in as I build out my organizations. How does that work? How do you come to an organization and not be the guy to be disruptive, pain in the butt, to frustrate people versus I'm going to create some bigger view on the possibilities for our organization? There's no perfect playbook, right? They go into it very much as going in, building trust, having a leadership team and working with that leadership team to really set a clear growth strategy to really set what is our mission?

20:27What is our purpose? What are our values? It may seem a little bit kind of hokey to say that, but oftentimes these organizations, they get have been very successful in a product or an area, or even have grown more holistically through an ecosystem, have gotten away from a clear view of a strategy, a vision, a mission, and a purpose. And really going back to its roots and establishing that really provides a North Star, not only for the leadership team to assure they're aligned and marching towards, but really to bring the employees along on that journey, which is so critical. And so part of it is going in and just facilitating those conversations, breaking down sometimes the barriers or the silos between the functional groups, and really oftentimes getting an arty, which is in some of your leader's head.

21:12Think of it as a consulting organization, coming in and really getting the best out of the people around the table and really packaging that up and getting buy-in and then going to execute. Again, not a perfect playbook, but that's the path I've taken. And And it's worked a number of times. What would be the rough outline of a playbook in approaching that? Say I'm CEO of a new company. I'm trying to get them to really open up to potential. You're looking at, hey, introducing a strategy around building out and participating in a broader ecosystem for the company and delivering this greater value to the customers.

21:43What would that look like? I'm just trying to get a sense of, hey, get teams together, get them back to mission and understand their perspective of it. What is that going to look like? As simple as it is, really having a working session, getting on a whiteboard and asking some of the simple questions like, hey, how do we grow? That's our mission as a leadership team. If we're not have a strategy and we're not growing, you don't need us here. When the answer isn't, gee, we can't grow, we're running out of room, or we've sold to all the existing customers, then you start to ask the next level question.

22:13Well, who are our customers today? Hey, it's a CFO, which is a chief sales officer. Who is it? What are the water coolers? What are the problems they have and where are they aggregating together to learn? Is it different conferences? Is it newsletters? Is it LinkedIn groups? And really starting to look at some of those places to learn more about the industry, the emerging players, coaching your team to have more thought-provoking conversations with the customer. Not about what keeps you up at night, but who's the most interesting startup company that's been in here in the last month? Who are the most disruptive kind of organizations that you're seeing?

22:49And you start to piece together those breadcrumbs to understand who are the emerging companies? What are the problems that they have? Where are those water coolers that you and your team and your sales team and product organization can start to go participate in? It really is a participation exercise to get there. And then with that, you can start to flesh out what are your growth vectors? Is it new verticals? Is it these adjacencies? and really from there start to prioritize. We start with a whiteboard kind of engagement and then evolves into a number of different tactics and programs to get the data and set a path forward, Kassan.

23:26And I think you're getting into a question that I had coming up here was, how do you go about creating a value chain ecosystem? It sounds like some of this starts with understanding this core strategy. How's that shaping? I don't know if there's any other details in terms of getting more specific to the value chain ecosystem. The only thing I would add to it, Again, maybe it sounds overly simplistic, but actually writing it down, laying down in an Excel street, ultimately into a PowerPoint on a whiteboard to literally understand each step of the value chain. When there's a data or a participate, who are they handing it off to?

24:00What are the underlying platforms they're using? Is there a platform or a workflow that actually the customer is using that takes all those elements? And who are those leading kind of workflows? Are those companies going through disruption? Are there opportunities to partner with those organizations to drive stickiness and again, reduce friction, which I'm a big fan of, to deliver value, but really mapping it out in addition to then going out and asking your customers, really talking to bankers, right? Talking to bankers that are out there to understand who are the emerging companies that they're seeing, going to different innovation forums.

24:34It really is about mapping it out and putting it down on paper and then continuing to iterate and learn. I keep asking you stuff because here at M &A Science, we like to make basic frameworks so that it's easier to explain and learn and apply. So if I were to turn this into that type of framework, it sounds like step one is understanding the players in your organization. And when you reference water coolers, is that the idea of understanding where the water coolers are? Or are you trying to create these water coolers to have more of those conversations between functions? I think both are important.

25:02When I was talking about water coolers, I was more referring to it as an ecosystem perspective. Where are the respective places that customers and partners are coming together to talk to learn from about what's happening? And those can be LinkedIn sharing groups. There might be conferences. There might be customer advisory councils. There might be thought leaders that have their own kind of blog or newsletter, such as you do around M &A. What we're doing today, hopefully, is a water cooler space for people who are learning about M &A. So where are those water cooler opportunities that either I can go learn from or participate in the conversation to start to get our point of view on?