Navigating Investor Relations and Capital Raising for Sustainable Growth

24:08You sort of always see that. And most founders end up getting diluted. That's the typical story. They do subsequent rounds. And then next thing you know, they own like half a percentage of the company. They exit and they got preferred. They got a payout. And then they end up with a really small check. Walk me through that. How do you actually get investors to agree on it? Because it doesn't seem like that's the common thread of what I typically hear. That's a very good question. Like I mentioned, at a certain point, your investor won out and you need to provide them out. And of course, they would want out at maximum valuation possible.

24:39And there's that dynamic. So sometimes the maximum valuation may require you to do a majority sell. So this is where it's important in the first place that you have majority control so that you can say, I'm the core of the business. If you force me to do a majority sell, a business that's worth less to all of us is worth less. so they cannot force you to do a majority sale. It's very important to keep that control. And this is why I also started by suggesting when you raise capital, keep it to a third because between one third, which let's just say 33%, all the way to 49%, there's some room that you can continue to slice and raise additional primary capital in future rounds all the way till whatever your ultimate exit is.

25:25I would suggest that when you do that, Ideally, you have 51 % control. You maximize your leverage and negotiation. I've seen too many cases where founders give up too much shares early. I ran into this in acquisition conversation. So I would be talking to a founder and we negotiate this deal. And then I find out, actually, this founder has not 51 % of the company. On the contrary, this person has 49 % or 40 % of the company. Then who am I negotiating with? I need to be negotiating with an investor group. just makes things a lot more complicated. But what you said is also true. What we hear in the news is all these companies are keep on raising.

26:03It seems like the CEO and founder job is just capital raising. It's like a politician is always raising capital. Every six months, there's a capital. I think those businesses have no choice. It's a different type of business model. Or if you're an AI company, you need to buy a capital-intensive AI company. You need to buy GPUs like nobody's business. You have to have a billion dollars. That's a different business model. Not everyone's in that boat. Most people are not in that boat. I would say to maximize your chance of success is you need to really figure out how to run your business. Again, going back to discipline, going back to focus on the fundamentals of your business.

26:37Do you really need to burn cash to grow? Do you really need this cash? Do you really need this capital? Because the more you give out in terms of equity, the less control you have. Eventually, all your sweat equity, this enterprise you've been working better part of your two decades for is no longer yours. It's a very sad thing. I hear CEOs, even public companies, that founder, CEO, public company getting fired the day before Christmas because that person has less than 1 % of the company. By activists who came in and bought 3 % of the company. It's very sad. You don't want to be in that situation if you can't help it.

27:10That's where I'm coming from. Life is a marathon. You can really pace yourself. Of course, in the news, we always hear outliers. Oh, this company being around for six months is now worth$700 million. We all love to have companies like that. But for the majority of us, 99.999 % of us, we focus on the fundamentals, grow our business, and be sensible and control and be disciplined. Keep control, control your destiny. Control what you can control because there are a lot of things we cannot control. The market, we cannot control. Let's continue that same role play. We had the$25 million, we turned$250 value, and then we did the recap deal.

27:44So we gave up 30 % of it. And there's$50 million. We invested the$50 million and let's say, whatever, another three years. And we have$75 million revenue. keeping the math simple here. And then we 10X it again, say it's worth$750 million. And now I want to go through that same role play of like, okay, somehow I'm going to convince these investors, look, I want to maximize your IRR. This is a pretty good return. This is going to make your shareholders happy. We want to go bring a new investor in. Now I've got the big institutional name brand firm that you're very familiar with. They're coming in.

28:15Is it the same where I'm bringing in the primary and secondary, except the secondary is used to pay off the prior investors? That's right. The second time around, it's going to be majority secondary, minority primary, because you want to keep majority control. So the second time around, in this scenario, you want the Series B investor to buy out the Series A investor as much as possible. And they're just going to take that money and go. That's right. The Series A investor, they're happy with their returns, they're gone. Or they keep a little bit piece left because they think, hey, there's still upside.

28:47I can ride upside. I get my principal back or plus some return, the cash return, and then the second investor become the primary. They may negotiate for a preferred class of share just because they come in at a much higher valuation. But you will essentially do a bigger secondary than the primary. The primary is only for the capital you need to use. You need additional capital to grow the business to the next phase. If you think you can take this$750 million value company now to a billion five, 1.5 billion, for example, We can double it in the next, whatever, three years, four years, and you need some capital to grow.

29:23That's where that piece of primary come in. Wouldn't I still end up with less than 30 %? I'm going to use the secondary basically to replace. So you will raise a little bit more than 30 % this time. Let's say the first time you raise 30%. Second time, you probably raise 35%. And then the 30 % goes pay out the first one. That 5%, it's a primary capital come in to grow your business. So$750 million is your valuation. 10 % is$72 million. So 5%. $37.5. $36 to run their business. Okay. So I see it. So we're still keeping that control. A little bit of an increase in the minority. But now we got pretty significant, like a good amount of cash in there to deploy the next strategy.

30:04That's right. What's it like going public? I think this is the dream. We aspire for it. Then nine times out of 10, you end up selling the company to a strategic acquirer or private equity. I heard a recent stats. I think there was 500 delistings on NYSE and NASDAQ in the last year, at least two or three times the usual churn. Take privates are going popular these days. People don't realize going public, at least for me, it's just a financing event. I don't want people to think, especially entrepreneurs, aspiring entrepreneurs, to think going public is in on be all. What is the point of going public?

30:38It's really not that different than a fundraising exercise, except it's a lot more work. It raises your brand. It makes your equity liquid, which makes everyone happy, your investors, your employees. But it's a lot of work in that every three months, you get a report card. And the report card is basically what market thinks of your earnings. And market is brutal. Mark is brutally honest. And it could just be following the market. It may have nothing to do with what you did. But that report card is seen by everyone in the world, include all your employees. So for me, because I'm a bit of a masochist, I like it.

31:13because I think it keeps us focused. I quote the founder of Tipco had this really good saying that the best companies are made in the crucible of being a public company. Because when you're public, you really focus on the metrics that matters. That ultimately makes you a healthy, disciplined and focused company. So I think that's good. But a lot of people don't like that because it could, if you take it to one extreme, it could make you incredibly short-term focused. And that's not good either because if you want your company to be somewhere in five years and you want to justify your investment to your investors all the time and give them an update every three months, it could become, in some perspective, a pain in the neck.

31:54And also, the public market is brutal. They will judge you every step of the way. For example, a lot of companies, like Splunk, for example, for a while, they were a high-flying company. And then they decided to do the subscription conversion. They go from perpetual license maintenance model to subscription conversion for their business model, go to cloud, et cetera. the SaaS conversion, right? And that process, even as everybody knows that process is hard, when you actually execute and being judged on your progress every three months, it's extra hard. And that's why now they're private. They're acquired.

32:26So that's not for the faint of heart. Adobe did it successfully, by the way. And it was not easy in the beginning. You have to message and have to manage. And being a public company CEO, all of a sudden you have a new job as well. In addition to everything you already do, that is to manage the investors, both the institutional investors, as well as the overall retail, more so the institution investors. And they're very sophisticated. And one thing I also realized, these guys, these institution fidelity of the world, they hire very smart people. These guys are very good at Excel. So they all model everything.

32:58And also every quarter you talk to coverage analysts, the bank research analysts, and these guys are all super smart. They all have models, very detailed business model on your business. So you have to be brutally disciplined and transparent even with yourself because these market do not forget. What you promised last year, what you promised last quarter, what you forecast, what you foreshadowed, they keep you to your word. And if you miss that word, if you don't do the beat and raise, market will penalize you for it. That's why it makes a company, if provided you execute, it makes a company better and more disciplined.

33:33You're not making your job sound very fun, by the way, DJ. But when you're doing well, it's good. When you're not doing well, yeah. Of course, you have long days. I can tell you, it's funny. In the early days, when we were in public, I had one call with the investor. I said, thank you for your support. And he said, don't thank me. Just make me money. Like, what? I'm still a very large, significant inside holders, shareholders. And you just came in like three months ago. Sure. My job is to make you money. Okay. Yes, sir. Once you're public, is it easy to get capital? What does your vehicles look like?

34:08I know we didn't talk a lot about equity and there's obviously debt. You mentioned you're not a big debt person. I'm kind of curious, like between private, what are your sort of levers you have to pull on your capital balance sheet? And then also when you're public, like how does that differentiate? So I just talk about all the headaches of being public or additional work that need to be done. But there's obviously tremendous benefit to being a public company. There's brand benefit. Because of that, you can attract really good talent as if I continue, provided that you're executing. Options are actually worth something.

34:39Yeah, your stock price is doing well. For example, we are one of the largest public Microsoft ecosystem player, and our stock has been increasing in a much faster rate than Microsoft stock that gets people's attention. So that's actually very good in attracting talent. Also, to your point, cost of capital, it's cheaper. It's much cheaper because you're liquid, because your equity people can trade at any time. So it's considered liquid versus a private company. Private company is e-liquid. There's dark pools. if your private company is large enough that people trade. But relative to a public company, its cost of capital, cost of borrowing, it's much higher.

35:13As a public company, you can borrow at a much lower rate. You can also give RSU stock options. This is why we talk about stock-based comp. It's actually real cost. But you can use stock-based comp to incentivize talent, to incentivize your existing employees, to use it to essentially acquire new talent, and also to use it to acquire a company. So it's not just a cash conversation anymore. So there's many ways you're leveraging the capital markets to grow even faster. That's the benefit of being a public company. Okay, so talent, lower rate for cost of capital. In stock comp, you have to expense it.

35:49Is that like a public company thing that you issue any stocks? Oh yeah, it's real cost. This is why we talk about gap profitability and non-gap profitability. If you look at SaaS companies, most of them talk about non-gap numbers. And we also talk about gap numbers. So we already at the investor day last March, we say, hey, by next year, we will be gap profitable. So we're already generating cash last year, this year, 30 plus million last year, more this year, even more next year. But we'll be gap profitable next year because we then include the stock-based comp as part of the costs. This part sounds good.

36:21Now I'm more optimistic in terms of this position, you better to do deals. Can we talk a little bit about how you structure acquisitions? What I'm curious about is people want to get paid out. And I feel like when you think about to exit. You're just like, think about this one huge check. I don't think that's the reality. I think there's cash, there's rollover equity, there's earnout we mentioned. What does your typical structure look like, ideal versus what you end up with typically? So firstly, I would say every acquisition is a different scenario. So it really depends on where that business is at, where the CEO, founder, where that person is at in term of his or her career or aspiration.

37:00That dictates how you structure a deal. Also, the ownership. Who owns what part of it? Is it VCs that we have to deal with? Or is it just founders? So that changes the dynamic in a very significant way. But overall, the thesis of acquisition is that we are entrepreneurs. So we understand entrepreneurs. Provided that we want the entrepreneur to... If that person is the soul of the company is the continuing to be the innovation engine of that company. And usually, as I mentioned earlier, we buy a company for their IP. So that means domain knowledge. That means we're acquiring a domain knowledge that we don't ourselves have.

37:39And if that founder is that person, we want to incentivize that person to stay as long as possible with us so that we can see success together. Because we don't just want to incorporate this domain and forget that. We want to have one plus one far greater than three. So we actually want to grow with the founder, leveraging that person's domain knowledge to expand the IP so that we can actually maximize the return. So because of that, I favor earn out model. So that means you pay some upfront and you pay incrementally more every year following, obviously tied to the revenue performance, have a multiple that may ratchet down.

38:20But ultimately to the entrepreneur, That person can make a lot more from the sale in subsequent years as the product performs in revenue than the upfront paper. So that's what makes it worth it. At the same time, for the acquiring company, you have the downside protection. If that product doesn't perform, then as you're going in the outlay years and you ratchet down, you're actually collectively not paying as much. Because we all know when you buy a company, you see a financial forecast. It's always a hockey stick. There's reality and there's projection. So this way, with the earn-out model, you align the party's interest, you have a longer horizon, minimum three years, I would say, and you win together.

39:03And then if you lose, you lose together. It's all about alignment and interest. Wouldn't it be better just to do an all-stock deal? All-stock deal. So the issue with stock is that it's a blended because stock is basically an indication of the performance of the acquiring company's overall performance. unless you're buying a company that's very sizable. So far, we've been buying companies for IP, not revenue. We don't want to buy revenue. So we're buying much smaller companies compared to us in revenue. If you do that, you introduce this free rider problem because that acquired product may not perform well.

39:37While the company is performing fantastically, then why is that entrepreneur getting the benefit of the overall? So you're reintroducing free rider problem. It sounds like it's getting the right mix and then figuring out what the founders' incentives are and aligning with that as well. That's correct. This is like a whole topic of its own. But can we talk a little bit about just holistically capital allocation as a strategy? We talked a lot about different things that we have all these vehicles for accessing capital, equity, debt. But the actual deployment of this capital, we got deals we're doing towards acquisitions.

40:11We've got the sales and marketing we're funding organically. We've got organic product development. TJ, how do you think this through? Because I feel like this doesn't get talked about very much. Capital allocation for a private company versus public company is also different. Public company, there's a thing called stock buyback. There's a thing called dividend. So there's also ways to use capital, but for the benefit of overall shareholder value. So for a private company, the capital is really there to grow the business. Of course, there are certain metrics I encourage folks to look at industry.

40:41The beautiful thing about being public is that all that data is public. So you can compare yourself against your industry peers. That's also another advantage. When you're private, it's hard to compare against your peers. But when you're public, literally, you're basically in the major league. You have to compare to other teams that are equally playing their game very well. So you look at what is the cost of sales, marketing for them, what's their operations cost, what's R &D cost, and you benchmark yourself against that and say, hey, are you performing as efficient as other tech companies? I think that's another interesting benefit.

41:14But when you're private, that's another... If you want to look at how well you're performing from a metrics perspective, look at public companies and how are they doing it. That's a way to help you think about capital allocation. How much should I spend on sales and marketing? How much should I spend on operations? How much should I spend on development to make sense and to drive the outcome that I want to go? That's a good high level. I feel like we can have a whole other conversation and click in a lot of details. We'll save that for the sequel. I think you had a good point too. It gives you a good sense of, as you're public, you have a whole different things, levers to look at, or the comps, basically, because everybody's looking at you and all your information is public.

41:52The stock buyback as a tool is pretty interesting because that's a whole different dynamic that if stock's cheap, why not buy it back? That's right. And then as a private company, I guess it is more specific to how you're operating. Where do you see the growth? If you're really growing strong on organic stuff in specific areas, you're just really betting on those areas. I can tell more specifics on that area that we can click into. Just generally, of everything we talked about, founder to founder, what's some advice you'd give me to make sure I don't screw things up going forward as I grow the business, raise capital, execute our own capital allocation strategy?

42:28Oh, there's one other thing I forgot to mention about the difference between public and private, the unifying impact of being a public company. When you're private, let's say you screwed up a quarter or a year, really you get yelled at in board meetings by your investor. And then you talk to your senior leadership and say, hey, we need to do better. But the rank and file employees don't really feel the pressure, don't really feel the pain that you feel. But when you're public, everybody feels the pain. When the market then judges you in the way that market does, it's an incredibly unifying effect.

43:00Because everybody in that point is a shareholder. That's another major difference that when execute well, it's a very big force multiplier. I had private investors ask me this, hey, how do we wargame this for our private companies? I said, it's very hard. I don't think you can wargame this. The sentiment you feel when you watch your stock after earnings, whether it goes up or go down, you get excited or your heart sinks across the entire company. I don't know how you wargame that. That's another interesting flavor to it. Go back to what we've been discussing in the last 50 minutes. is really, as an entrepreneur, really focus on fundamentals.

43:34I think Warren Buffett is such a great investor. He's not so much of Oracle or Omaha. He's a person who really focuses on fundamentals. And that's what really lasts. Things come and go. You can have meme stock, for example, right? So a topic can be hot today, but not tomorrow. But as a business, you have to focus on making sure that you run a cash-generating, growing business from year to year. So that doesn't matter what happens in the macro, you can be resilient. As an entrepreneur, it's a marathon. Life is a journey. You're going to continue to grow yourself, grow your business, continue to have different type of challenges.

44:12By the end of the day, when you look back, you build a strong and resilient business. And that's a legacy that will last, whether for your partners or your family or your investors. That's the key that has been our North Star to guide how we grew the company. I often say my only regret is that we didn't go public 10 years earlier. We could have gone public 10 years earlier. Between Series A and Series B, we had eight straight years of exponential growth. But that was on-prem days. That was not SaaS. That was not subscription. At the time, honestly, we could have gone public. And today we will be a much bigger company because of that discipline required to be public.

44:46You're never ready until you're ready. But at the same time, I think we may not be as ready because by being public, you cannot miss. You have to continue to execute and execute that consistency, predictability, it's super important. So there are certain maturity level to management team, to your business. Do you have enough senior and mid-level managers that you have fall tolerance if someone leaves your organization and you still continue? Do you have single points of failure in your organization? That maturity needs to be there. That bench step needs to be there for you to become a public company and be in the 10 ,000 watt light bulb that's shining on you every quarter to look at every aspect of your business.

45:25So again, yeah. So go back to fundamentals. That will carry you through. It's all about building a great business. TJ, what's the craziest thing you've seen in M &A? Is it just between you and I? Yeah, just don't mention names and dates and then we'll protect all innocent. Oh boy. There was a funny one. Company A buys Company B and then Company A had to go to Company B employees and say, do you realize that we bought you, right? Not we work for you. We actually bought you. They didn't tell him. So you guys need to switch over to our way and our system and everything because we bought you. Okay.

46:00Realize the dynamic here. That happens a lot because the hardest part of acquisition is post-acquisition integration. Because every company have their own culture, their own way of doing things, and their own norm. When you get acquired, all of a sudden that comes into conflict. And if you actually look at the statistics, most acquisitions don't end up well because of that. Ultimately, it's a people business. We're social beings and most businesses are not static. It's not, I'm not talking about capital intensive businesses. It's not like you bought over a nuclear plant. The nuclear plant will continue to run no matter what.

46:38In tech, it's really the people. It's the talent. If the people leaves, the code is dead. So it's very important to bring people on board that will be aligned with your way of thinking, your vision, and your strategy to continue to grow the platform bigger, make the pie bigger. That integration of managing people, managing culture is super, super important. And it's the hardest thing to get it right. Yes, totally agree. Aligning people, a great example of M &A comms gone wrong. TJ, this has been an awesome conversation. Thank you so much for taking the time to help me become a better M &A scientist.

47:16It's my pleasure. Thank you for having me on your show. Those of you still with us, fellow M &A scientists, love hearing feedback. Reach out to me. Let me know what you think of this interview, how I can get better at doing these interviews. Till next time, here's to the deal.

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