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

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Hello and welcome to the M and A Science Podcast. This podcast is part of a mission to rethink how M and A is done. The old school seller led approach? It's dead Fire led. M and A is all about strategy, alignment and efficiency, putting value creation at.

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At M and A Science. Today I'm joined by Xavier Guri, Founding.

Partner at Wind, a venture capital firm.

Backed by both top tier institutions and exited entrepreneurs across Europe and Asia. Before becoming an investor, Xavier was a three time founder who exited companies to publicist And l', Oreal, including one deal where he stayed through a performance based earnout and helped grow the business from 100 to 250 people.

In this episode, we're going to unpack.

What actually makes an exit successful from deal structure to post close execution. Xavier now applies those lessons when backing the next generation of founders. Xavier, how are you doing?

I'm great.

Did I pronounce it right? I didn't get it quite right.

Xavier Gourie is the French. Thanks for having me here. Super happy to be there with you.

Hey, we're here live in Paris. Yeah, in the Sweden Center. Thanks for making the time. I really appreciate it.

My pleasure.

Can we kick things off a little bit about your background?

So my background, I'm a computer science engineer. Chose to follow that path because I was a geek, the kind of geek that you call all the time to fix your computer. And also because I'm not coming from a rich family. And it was for me one of the easiest way to make money being a student. They are these biggest, this better, best student organization where they propose work to students. It was a good way for me to enter in the real life, working life. I did all kind of different jobs from being in company. Training Excel. My first training I think was teaching people in company how to use AltaVista. So I'm talking only to the boomer like me, the old guy. AltaVista is this search engine on Internet before even Google exists. I'm sure you remember Kaizen. So I was doing that kind of teaching. I even teach how to use a computer word Excel to prisoner in jail for six months. So yeah, good experience. I learned a lot about myself talking to people about technology. Very quickly I found myself being an entrepreneur. It was in the years 1999, if you remember. It was like this crazy time before the Internet bubble where a young guy, 19 years old could just come up with an idea, a business plan, an Excel spreadsheet and a PowerPoint convince business angels that was not so numbered at that time to invest in his company. So this is what I did. I jumped in when I was 19, funded my first startup, founded a few crazy business angels to follow me and this first id. And then I launched my first company. I raised my first run with Bernard Arnault, the CEO of lvmh, pretty well known, which at that time had a VC fund to invest in startups. As I say, it was this moment. If you were not part of this movement, if you were not an investor in a startup, you were a loser. So it was a time where it was easy to raise money. Actually too many money have been raised and a lot of startups failed. My first startup actually didn't work, so we raised something like 3,4 million euros. It was still the franc. The franc at this time, before the euros currency didn't work. Pivot started from scratch with Thierry, my partner, who is still my partner today. Ultimately we turned the company, which was like a marketplace for knowledge management, into something more practical, which was how to make website, digital communications, working with luxury companies like Dior, Dior, Chanel, but also institution public institutions that had money at that time. And we end up being 100 people by the end of 2007. It was a good journey. We went through all steps of entrepreneurships. As I said, we raise, we Pivot, we acquired a competitor that was filling bankruptcy and ultimately we sold to Publicis and we went through a three years earn out. A good way to learn about being entrepreneur, going through all the steps.

Yeah, you had a startup that didn't work out and then you bounced back, did another one and ended up having a successful exit. You had some other exits too. Yeah.

And then after that I moved to San Francisco and Singapore. So first Singapore, I spent few years there and then we met other founders based in the US and based in France. At the time, my co founder Thierry was in Shanghai and we founded a perfume company that has been acquired by l'. Oreal. Later, another good adventure in a completely different business where the challenge was more like international deployment. We're also investors in that project, so also a good exit for us. And the funny thing, we did a third exit recently. If you remember, the first business that didn't work actually there was one side of this business which was like a translation company, basically having onboard thousands of translators in their native language, being able to connect them through a workflow to other people who need their service. And this part of this business worked pretty well. We sold it a few years ago to a German company. It was like our third exit together. So we had like three babies and the three babies worked pretty well.

Wow, okay. It's interesting how you expanded and got diversified in these different industries. Do you find that there's some fundamentals. I will talk more about this, but that just generally apply from those early experiences. Even though you're going different industries or is it just you thrive off of learning new things? The reason I bring it up because I feel like when I see a lot of founders exit, they tend to do the exact same thing again, they'll wait till the non compete runs out and then they do the exact same business again.

Is any turn to be boring? I mean I was happy to change of industry and today if I'm an investor it's also another challenge. It's for me it's a very entrepreneurial journey. Also I find myself like fundraising a fund is very, very similar to fundraising a startup except maybe it takes a little bit more time. Normally a startup you fundraise like in six months a fund it takes more like one to two years depending on the market and how great and lucky you are. But it's the same exercise. You come up with an id, you pitch, you adapt your pitch depending on how people react to the idea you propose, reframe your deck, you go back pitching and you try to convince people and ultimately at the end you get the money and you have to execute your strategy. So very similar. One common denominator is pitching. You have to like pitching. You have to like.

That's true.

I find it like you have to have this sell vibes inside you. The first steps at least raising money and convincing people. And then you have convinced startups. You have to enjoy pitching story and pitching business.

What's your secret sauce to pitching? Is it all about confidence in the story?

Where I'm good at is listening and adapting. I mean understanding what my audience wants and adapting my speech to the audience. I don't think I have a very high iq. I think I'm pretty good on eq. Emotional patient. I'm pretty balanced on the EQ than the iq.

But a lot of these big investment decisions are based off of emotions. Most of the time there's an element where the numbers got to line up but then you got a lot of things that look alike.

Both as you said, both are mandatory. And if you let your emotions too much speak, you can just jump on a project on a deal that sounds amazing because it's going to cure cancer. But for many reasons there is no economical rationale behind. So you end up losing your money.

You have to balance the two out. Can we take apart the publicist experience? I like how you went through the whole journey. You went through a process, you ended up actually sticking around, which is what most buyers want and you continue to go and build success post close. Can we walk through and you mentioned too you did an acquisition before you sold the business. Can we take that apart a little bit?

Yeah, the acquisition and the business was like.

Is more of like a digital agency.

Yeah, it was a digital marketing and communication agency and we were not the most shiny one or project.

What year was this when you started this?

So we started the business with the pivot was 2001.

That's what I mean. So you're early like digital agencies. That's a new concept. Back in 2001.

Yeah. I mean if you. It was at a time where making website was disruptive, it was complicated. There was no word phrase, wix whatever to help you to build your website. So you need technical competencies and this is what we were bringing. And then you need to make a beautiful website. So you need artistic directors, creative people. Then came the flash. So what was interesting in that business is that you had to gather in your team competencies that were very versatile, coming from very good coder to amazing stick director. We were not the most shiny. Our project was very public institutions because at that time they need their website. Like all the cities, all the governmental agencies, they needed a website very technical and we were good at that. The other agency we bought, they were just better from all side all angers. They were just better than us. Their name was better. It was W Cube. Super name, like 3 www. They were super competent, they were older than us. They had been part of a Swedish group that was big, big. More than 1,000 people in that company. But they didn't manage well their cash, which we did well. We started from zero, but we grew it organically and we were good at managing your cash. Not picking up the most shiny project. You're going to work for Dior, you're super happy, you can claim. But they don't pay you and they're super demanding. And at the end you spend half a year for 50k project. So we focused on more like a rational and economically viable project. This worked pretty well and it put us in a position to acquire competitors better than us. When the market changed and where everybody was feeling bankruptcy, they were still the good student like us to acquire them. It was an interesting journey because I was like maybe 20, 21 and I was acquiring a team. It was like 30, 40. I was like the CTO at the time and the guy we acquired from the team, he was a CTO with 10 years more experience than me, obviously better than me. So there was all this challenge of merging people together with all these human relation that you have to handle, all this ego that you have to handle. And I think we're pretty well at doing it. Everybody needs to find this place. This was one of the first milestone that we achieved, which was how to integrate people coming from another company. With your company, with your DNA.

But you guys are direct competitors.

They were like direct competitor.

Wasn't there like a negative sentiment that comes with it, like when you're bringing these people over?

At that time the market was like super fragmented. They were competitor, but there was like thousands of competitors. And at the end of this market consolidations, only few of them remained. Yeah, there was this kind of ego also for them because they were like the small duck wearing the giant dragon. But it worked pretty well.

What's the headcount difference at the time of the acquisition?

So we were like 10 and they were like 100.

Wow.

So what we did when you save this company at the. I don't say that in France, it's like we decide whether the company fill completely bureaucracy or you can keep some assets if you keep some people of the team. So in France we have this very favorable unemployment program, which means if you decide to just being part of the bankruptcy, you take the money for two years, you are paid by the government. And that's one option. The other option, say you jump in this new venture with us, you're going to have to work, but you're part of a new adventure. And the good thing is the CEO of the Estonians that we acquired was a super Iranian, super good commercial sales guy, very good business developer, not super good financial guy. He joined us and he helped us to select the best profile for the team he had. So we kept the 10% best of the team. And that's why in the team there is always a range of quality of people and competencies. We get the best. So we started with the best element of the former team.

Was that a big break, like a pretty pivotal change in terms of direction and growth after you did that acquisition, or was it?

No, the beauty of the deal was that we were also very complementary. We are very technical and these guys, they were super creative. He matched pretty well. And we were able to address the market with all what this market needed at the time. Competencies that were super technical and competencies that were super creative.

We got to continue growth after this.

Yeah, so we grew from basically 20 to 100 when publicists acquired us. Crazy time. We have always been like a perfect time to market. We raised capital from our first company in February 2000, just before the Internet bubble burst. We sold to Publicis two months before Lehman Brother. So very good time to market. Very lucky. At that time there was this consolidation of the market. All these big groups like Euro, rscg, Publicis, Omnicom, vbdo, All these big advertising groups, they were super good at doing advertising in the metro television, radio, but they were pretty bad at digital. And we were what at this time was called a pure player. Pure player because we are purely digital and they needed to acquire people like us. And for us, the question was whether we stay alone and we try to thrive, but then we're going to compete against these giants who are going to acquire competitors to be also a digital group, or they're going to develop internally their digital competencies. So for us it was the right time, seeing this consolidation of the market, to say, okay, we need to join a bigger group than us or we'll be a small player in the big world. The customer we had, they were working with us because this big group didn't have the competencies. But once this big group will have the competencies, they will not work with us anymore because they will take what we call a 360 approach. These publicists will propose a TV campaign and on top of that a digital campaign. And because they will have the competencies internally, they will not work with a small agency like us. So it was the right time to market, to join Publicis for another one. And we selected Publicis because they were the worst in digital. And we knew that the value added and earn out will depend on how much we'll be able to drive innovation and to drive digitalization in a big group. And actually this is how our earnout was shaped at the end. So Publicis was not the biggest check up front, but it was based on a formula. And I always tell to the startups we're working with that the value doesn't come only from the valuation value of a deal, it comes from the terms. In that case, the terms were pretty risky, but pretty favorable in case of good execution. The deal with the most potential, believing in us and believing we'll be able to drive digitalization in a big group.

Did you run a whole process like hire a banker and then have all these bids come in?

Publicis they are doing, I don't know today, but at that time they were doing 10 to 20 acquisition every year. So we had a big M and a service on our side. We had nobody.

How'd you get multiple offers?

We had multiple offers, as I said, but Publicis was the best one in terms of potential. And the funny thing, actually at first we are not supposed to be acquired by this entity of Publicis. So Publicis is a conglomerate. They have more than 100,000 employees today with many, many, many agencies all over the World. They had this internal agency dedicated only to production of digital assets. And at first it was supposed to be this entity of Publicis that was supposed to acquire us. We were okay, it was a good offer, everything was fine, until one day we opened the TV and we see that our direct competitor, bigger than us has been acquired by this entity of Publicist. So we were like, okay, we are screwed. A few hours later, we've been called by Maurice Levy, the CEO of Publicis, who told us, no, no, don't worry, I'm still acquiring you, but I will locate you, I will put you in the French entity of Publicis, which was actually much better for us because otherwise first option would have been a small French digital player in a big digital group. And in the second case, the one that happened, we became the king of digital in a group that didn't do nothing in digital. So we were able to brought much more value. And this is the reason why also the earnout was so good at the end. Many, many reasons for that.

But one of them is that you're no investment banker.

No, actually I don't consider myself a finance guy. I'm more like an entrepreneur.

Okay, so no investment banker, but did you proactively go to other agencies to seek out offers or interests?

Everybody was looking for acquiring a pure player like us.

So you got a lot of inbound.

So we got a lot of inbound, yeah. We didn't have to do too much work for finding the potential buyer. Yeah, As I said, good time to market. And once the market knows that you are for sale. And we had a lot of inbound from people, different profile of companies. Some companies that were like pure technical companies, consulting firms, whereas a multiple of EBIT was like 5x because it didn't bring a lot of value. And other groups like Publicis, Euro SJ, Windowman, that were bringing more like 10-12x people of EBIT because you were bringing to them more value, it was like mandatory with more competition.

That's an interesting point, is looking from the buyer's point of view and how they value your business because of the synergies and what value add opportunities you would bring. Definitely timing felt right. You're already seeing consolidation happening in the market and to really compete on an ongoing basis, it would make sense to join a bigger platform. Got a lot of inbound interest and with that you sort of understand this perspective of different buyers putting value on it, seeing a range. But then you mentioned publicist wasn't necessarily the highest offer, but you did see that hey, even though they bought another competitor, they wanted to put you in this different group where it's an opportunity to actually create more value because they didn't have capabilities and things that you were doing.

Yeah, this is, in a way, some luck because I'm pretty sure if we had been picked up to be part of this operational part of Publicis dedicated to deliver digital assets, Earnout would have been much, much lower. In that case, being in charge of transforming a group that was purely focused on TV ads, traditional ads, to something that was digital. And ultimately at the end, it would be the digital that will drive all the other assets. At first, all these groups, they were coming with one creative idea that was made for tv and then you were producing other assets for the subway, for the street, the radio. But everything first come from the TV perspective. And when we left Publicis, everything was like a different paradigm. You first think on how we're going to promote that brand, promote that product on Internet with all the power of what you can do in the digital world. And after that you're going to think how this can be advertised on tv, how this can be advertised in the subway. But it was a completely different creative process, integrating the digital in the way you will promote a brand of a product. And this was our job for three years. It was to train the team in Publicis to make them our best ally, to evangelize the customers and the whole group about how digital was powerful and how they should rely on us at Publicis to make their business. And obviously the more digital business they were doing, the more business we were doing in the group. And the biggest was the earn out at the end.

Pretty transformative for them to acquire you as a startup and saying, hey, we're going to challenge our own business model. Instead of being TV first, we're now moving to more of a digital first approach.

Yeah, exactly. If you ask me why it worked, because ultimately, zero. Now it worked pretty well. We know that when a company is taking over, like a small company is taken over by a big group, it's not easy. The size, the scale of the company completely changed. Your employees that were part of family became part of big groups. They became more like a number, whereas before they were really part of the family. It's really challenging. And in our case, it worked pretty well for many factors. One of them is clearly the human factors. The team within Publicis that took over a company had deep inside an entrepreneurial mindset. They could have been amazing entrepreneurs. They decided to follow that path and they had a Great career, but they could have been an entrepreneur. I think they lived a bit this entrepreneurial journey through us, through our ventures and our interests were completely aligned. And this is because the deal was shaped in a good way, where if we win, the group win and the people who manage us on the day to day win. And there was this alignment of planet and interest for everybody where they had to make us thrive. Being successful for them, being successful. It goes down to the way the deal was shaped, the formula of the earnout, et cetera. Another factor is when you are a small startup, you are very lean, you try to save money on everything and then you join this group and they tell you to absorb, to embrace their process, which are not compatible with our way we manage the company. Before I gave you an example, we were using all our it. Stack was open source, so cost zero. And you join this group and the first thing they tell you, hey, every employee is going to have to migrate on Lotus Note. I don't know if you remember Lotus, I'm not sure it does still exist. Maybe, but it was like Windows 365 before Windows 365 but the worst possible option and the cost per headcount was like €1,000 per month per headcount. So it would have damaged our EBITDA too much. But we had to fight to explain that, no, we don't want. We have to do a lot of politics and convince and you have to have in front of you people that are ready to listen to you and understand. We won a few battles. That makes a difference at the end.

I think that's interesting. So it wasn't the smoothest, but it sounded like there were some elements that allowed you to continue growing, which is for them just being more entrepreneurial minded, that hey, we're acquiring the startup and we're going to learn from them. But then there are some points of friction. You got to push back.

Yeah, definitely. I think what Publicis managed to do well is a lot of M and A firm, they make the deal and what happened next is not too much.

Exactly. I don't think about that.

And when it's managed 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 those factors that made the integration successful, obviously there's compromises. So human Factor there's compromises. I want to talk about the deal structure because that's interesting because you even mentioned that he had a higher offer, but you took this one. You looked at the earnout being a bit more aligned post close and that just opportunity to lock more value. I always think about these dials of the deal. 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 earnout was one of the terms that was pretty favorable. I feel like there's the people factor. You kind of saw, hey, these could be good people to work with. Sometimes 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 dials? Because I want to reference us back on how you look at deals today. When you're on the investor side and you're coaching an entrepreneur about thinking through exit, is that the right dials that you should be thinking about or am I 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 coder that we believed was key to build around him in the next years to the business development guys that was like 45. And we incentivized 10 key people in the company. This helped us to have a core team fully aligned. And the goal was to maximize the earnout 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 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 earnout at the end.

So they're all tied to their earn out.

So everybody is working head down to make sure that the earn out will be maximized. A good example is what the point of getting a very high salary. If you believe in the exit and if you know that the exit will be 10 to 12x the EBITDA for $1 you get a salary is $9 you lose at the exit. So no more fight on salary for the next three years. Everybody's aligned. We are not very well paid during this three years, but not amazingly well paid because we prefer to bait amount 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, some don't. Did you find yourself having to.

So it was before the stock option even exist. 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, et cetera, et cetera, et cetera. In this case, they were like fully aligned with us. Same class of shares than us.

They understood, hey, 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 angels, you remember the crazy business angels from the beginning that bet on the first startup that didn't work. They were still on board and 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 or I don't know how Bernard Arnault LVMH had at the time, but we acquired back our shares before to do the pivot, telling them that our business was completely new, that he will probably not make any money with this new business because it was not a very disruptive business, which it was, but it was not the business he bet on originally. So we acquire bag of shares. What 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 NGOs to share part of their shares also with these 10 key people. And we explained them that, yeah, maybe it will be less loaded in shares, but at the end your shares will worth three times, four times better. Because you would have this team super motivated and align with you and with us. And this worked pretty well.

Did you find any points of friction on this earnout? Because I hear stories about earnouts going sideways and they're turning into lawsuits and people pissed off. No, it was just really clear. And what was it based on? Was it based on revenue? Ebitda. What was the earnout?

It was a multiple of EBITDA augmented by the growth of the revenue, 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 he's making, but based on the performance the company is making, like the financial performance. It pushed us to be lean. We had a very good gross margin, like 35% gross margin which was best in class at the time in the market. And once again everybody in the company was paying attention to the spend. The spend is not like 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 degrade your profitability.

Exactly. What were like the synergies that you found that hey, it was a publicist brand made 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.

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, things like that?

No. I guess this is like being entrepreneur.

Yeah. So it's more of giving you a platform but just incentivizing you to keep growing.

Exactly. So no, there was not on side. The synergy was like definitely the brand. One thing also you don't have to focus on paying your employees at the end of every month. All these paperworks, admin things you one less things 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 the key thing that's keeping letting you have that autonomy. So I think it was an interesting balance that they ultimately created. You got 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.

As I said, one of the reasons the deal worked pretty well with Publicis is that the deal was really balanced. I really believe in the yin yang in M and A. 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 cursors the maximum in his favor. And 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 merger and this acquisition. If the deal is unbalanced, at some point the seller will feel like we 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. This is what happened with Publicis. It created a lot of value for them, a lot of value for us. And when the deal is unbalanced, when you try to too much to make it favorable for yourself, then one plus one equals zero. Everybody lose the value creation that could have happened. And this power dynamic works when you're a buyer and when you are a seller, the same thing.

So having a good balance of what's in it for each person, a lot of that carried over with this earnout structure because it gave you potential for significant amount of upside. What did that look like? Is it a sort of a percentage? We can make up some numbers just to give a rough idea, but was it like, hey, here's deal value, whatever, 50 million, then earn out comes out to 20 million. What was the ratio?

The company publicity is obviously listed, so I cannot disclose everything.

There's a rough idea of the deal, how much percentage.

But it's interesting, you're right. The structure of the deal was we get one check upfront, which is a small check, but still 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 and 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 earnout. 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 offsetting the two first check they paid. In our case, what is interesting is I'm pretty sure that what it costed to publicists was over what they budgeted. Because 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 costs them more than what they were expecting. But it's just 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 Ubisys is able to acquire small companies, is able to merge to create value and yes, cost them more than they budgeted, but it means it was a success. So not a bad signal for this deal.

There was actually a lot of the value was actually on the earn out.

Yeah, yeah, I mean like more like.

More than half the value was much more than that.

Upfront check was 10% of the value, total value. There was other options where we were getting like a 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 earnout in total at the end.

I'm, I'm trying to absorb this mindset, right, because it's.

You have nothing much to lose, but you're just huge risks. 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's my startups.

The idea of an exit is to realize value, but in this case you're taking on a bigger risk.

Yes, we like that.

It was an interesting example. I didn't realize that it was actually huge chunk on this earn out.

Yeah, 15%, but not much.

Yeah, I still like that.

As I said in our case, we believed more in the terms than just in the upfront valuation.

You ultimately look back and said, hey, we actually made the best out of that exit.

Definitely we choose the best path. For sure, we could have been executed even more and make the numbers being bigger at the end. But in terms of path, there's also luck in that path that we followed.

Teach me as a buyer, how do I do this? If I'm looking at a company, how do I convince them to put 15% upfront 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 earnout structure?

Pretty sure it cost them more than what they budgeted but honestly it's a win win deal.

Yeah. Because they don't have to put much money.

Is a merch doesn't work, it doesn't cost us much and is the deal works pretty well. They win because them a lot. But it means you have created a lot of value for the group. And that was the goal of the deal because the deal was to transform the group. The more you transform the group, the more you pay at the end. Which is like pretty fair.

How did they come to terms with this? Because I don't think this is their standard playbook. Like this isn't what they offer everybody.

2007 market conditions. Not many players to be acquired. Obviously there's this culture of acquiring. I think they are good. They are good enough being able to draft deal being flexible. 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 out of the market practice.

That'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.

How do you kind of help and guide them to even just 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. You don't really think about exit, it just comes up. Or 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 the founders that the exit is not the result of a final battle. We try to explain 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 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. And 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 investors to work with them. This is the first approach. And then you are in the cap Table part of the deal, more or less aligned with the other investors and the founders, 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. So 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 and convertible notes 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 are you 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. Because very often you see entrepreneurs fighting a lot to have 1% more in the cap table. But at the end, it will not make big difference. What makes difference is the terms. This is like the first things we try to communicate and to teach other 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, but everybody in 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, it's 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, 20 million, 18 million, 15 million, or even less, what you want are the people as a human being is to be successful. And just like the beginning of your career, the beginning of your journey, usually you are Young entrepreneurs, 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 of 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. Like you have a cap table with different investors that are going to have different perspectives, different expectations, maybe different terms. How do you even benefit the greater whole of the cap table?

It'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 a deal. It's just.

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 are funder friendly to work with you. As I said, I don't define myself as a financial guy. I'm more like a entrepreneur who likes to be part of other entrepreneur journey where we can also make the difference compared to other VCs are going to be better also but maybe more like focus on the return only.

You 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 the terms are more important. What are the terms I should really attention to? There's obviously 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? So 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.

Don't worry, I'm going to try the best because I know this like the same way even I know English, I still can't.

So it all comes to the waterfall and the final payment. So participating, it means you're going to first get as 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 founders. You 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. 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 LiquidPress participating can be game changing.

Yeah, exactly.

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?

You know I've seen everything I've seen like for express when the deal is super defensive and this is at 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 have some potential but need 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? And you know if you have to play again, 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 close to the founders at that moment, what might happen is that you're going to cut your arm which means the first dollars you have invested in the deal are over. But you have a chance to play for another round. Sometimes like a pay to play it can be even worse. It can be even worse. It can be like you got 4x pref the new round coming and if you don't participate, your old shares become common. So it's like the double penalty. And 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 fair poker, they did all in at the last round. They have no more cash for this next round and all the value is going to come from the next round 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 identified potential buyer that is pretty secure. You know that if the company reaches this kind of few milestone then you have likelihood that the deal will happen. And 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 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 round 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 over 30 exits now. What advice would you focus on when it comes to the pure exit event?

I have a funny story about that. One of the first deal we did with Windone. The Windone was our first fund self funded by Tier and myself. Roughly $40 million four zero. I mean we did this bet on the team that was developing a log management product. So a SaaS 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 happens sometimes the funders disagree. The dynamic of the founders doesn't work so they decide 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 and 4x in two years of time. So we are pretty happy. So we kind of signed the deal quickly and what's happened is that this startup being acquired by a US company, the valuation was not so high because the founder 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 US company was not what it is today. Ultimately. Long story short, this US company that acquired the startup became listed on the NASDAQ today it's worth 50 billion on the market and the product they sold is probably 1/3 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 we 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 asymmetry, disalignment in a way and 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'd you end up with different terms?

Because it was like everybody got the same. The 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.

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. It'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 founder's deal.

Paris passu, what does it mean?

Paris Passu is not something, it's a Latin word. But Paris passu means like same terms.

Same terms. Yep, same terms.

We use it a lot in France.

Passu.

Yeah, yeah, Looks fancy.

We got to bring this in. It's part of M and A science we got to bring in. You got any more M and A French terms?

Deja vu.

Deja vu. That happens too.

This deal is deja vu.

What is your philosophy when it comes to exiting versus double down? 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 successful in Found one is to enter early. Because we are doing pre seed and seed, basically we were able to do multiple secondary rounds. Sometimes it could be 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. So you're a seller when they are buyer. So it looks like counter nvt 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 a 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 looks like. So maybe we should secure a bit. So let's say like 10 to 15% of our shares, sell it, company keep growing secondary. Next front 30x. Yeah, 30x. We have to secure the bill of that. You have to secure a bit of that. So we sell again, maybe 10 to 15% again and ultimately at the end the company will do a spac. Not a good spac. But in the cap table we were probably the best in term of IRR because we have done secondary where people enter the last round and then there was this SPAC and this spac.

Secondaries actually helped you out.

Always had this philosophy of securing a bit and keeping the rest for the potential. 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 counterexample.

Sure.

The context really depends on the performance of the company. So in that case, first situation I just described, the company was not yet profitable but an amazing growth and being acquired by a big US player. It was one context. Second example is a US company. I've been board member of this startup for three, four years in the mobility space, also based in San Francisco. 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 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 million actually the line worth a few million. I decided to stick to the company and to stay in the venture because I say okay, I get these few millions. Is there a better way to invest these 2 million than staying in the adventure? I know the startup, I know the founder, I've been board member, I know the market, I know 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 fund is not as early stage. 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 markets I know and I trust. So in this case we decided to stick and it's been like two to three rounds that we could have cashed out but we decided to stick to.

That venture 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 and operator and he's playing long term versus you. You have your different angles of diversifying your risks, whether partial versus holy and.

Looking at that and the luxury is when you can decide. When we did secondary before it was because we had obvious opportunities to cash out and reinvest this money in new opportunities. But right now this is fund one, Fund two is already a big fund. There's a need to be more financed. We have plenty of LPs now and this new fund so you got to.

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 and ideally you want to be over 40. That's your rule of 40.

Either your growth is like 30% but you are breakeven 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. We're pushing to get the 40% year over year growth. So it's intentionally operating right at break even. Is there a spot from your perspective as an investor that maybe there's a sweet spot between it? Right. Because you got to kind of align. You could push.

I like when the EBIT is below zero. But very well controlled, very well controlled. It means you don't need to be above. If everything is under control, it's better you be a little bit below and it will help you to grow faster. You can feel as an investor and you can talk to the founders, you can feel how he's in control of the global trajectory of the company. You're going to be like -5, -10 on the EBITDA. 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 if it has to be acquired or financed.

If I ask that question, a later stage investor they might give you a different response.

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've 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, teeter or run negative 5, 10%. It's 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.

And 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 an 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, it means like it's pretty safe. And you can take more risk because you know that you're not going to accumulate a downside of the market. And at the same time customers are going to drop. They 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. The founders don't get along and they want to sell.

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 couple working, managing a couple men and women managing 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 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.

It's an additional risk.

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 the fake information. It happened once on 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 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 bet on. You're relying too much on Apple, for instance. Another example is I did once a startup back when I was in the US 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. So this is when it can be sideways and it's very hard to predict. Can be a completely bigger change of trend. You were in the translation business, you did amazing translation apps and ChatGPT is coming and you're dead. And this going to happen with many, many because of 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 a calculating bet. 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. But there's always someone in the team that is going to take a spreadsheet and run all the simulations, all the scenario and at the end I understand Xavier, you really like this deal. But look, it doesn't work. The market is too small. 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 on the numbers.

But maybe we are not following enough our intuition sometimes. Jason Huang, the CEO of Nvidia, was telling that Americans, they focus on the 1% reason why to make the deal. When European focus on the 99% reasons why not to make the deal. So we try not to follow that rule, but recognize some pattern in that.

That's funny, I love that. I gotta ask Xavier, what's the craziest thing you've seen in M and A?

Definitely easy answer. The spac. It's dead now. It's good thing that it's dead because for me it was an aberration. It was a 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 would 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 a really weird way to put it.

It was crazy for me, this was gambling. Hey, look, this company did a spac and did amazing. Let's do a SPAC. Because one did good. I think 99 did bad. So it was like what the worst could be done in finance. And the only winners in that transactions were the bankers and the lawyers. 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 doing this back and just public. And it wasn't capital efficient. I mean, when you look at it, that's a big chunk of expense to. To run through a spac.

I follow some deal. I was part of the deal. The fees, the lower fees and the bunker fees were something like 10 to 15% of the total value of the deal. I'm talking about big numbers, like in the billion.

I'm very careful, efficient.

So yeah, Spike, 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 and A scientist. Those of you still tuned in, fellow M and 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's always welcome. And the criticism, I'll take it. That's how I get better at doing this. With that, till next time, here's to the deal.

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