Navigating Investor Relations and Capital Raising for Sustainable Growth

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Scientists, welcome to the M and A Science Podcast where we learn from the best in M and A to uncover proven techniques for enterprise value creation. If you're interested in learning more about how to optimize your M and A practice, or want to get involved with our community of forward thinking M and a practitioners, visit mascience.com subscribe to our free weekly newsletter. If you want to keep up with us on the go, head over to LinkedIn and follow M and A Science. I'm your host and Chief M and A Scientist, Hisam Patel. Today I'm joined by TJ Chang, CEO at AvePoint. AvePoint is a company that provides data management solutions for the Microsoft Cloud, offering products and services for data protection, migration and governance to help organizations manage their digital collaboration platforms efficiently and securely. Traded on NASDAQ under avpt. Today we're going to talk about navigating investor relations and capital raising for sustainable growth. TJ how you doing today? Great.

Thank you for having me on your show. Isam.

Thank you for taking the time of running a public company and doing deals to have a conversation with me.

It's always a pleasure to talk to popular podcast hosts.

Can we kick off with a little bit of background?

I'm a computer scientist by training, electrical computer engineering. First at Cornell and then later doctorates in data mining and machine learning at New York University while I was starting up appcoin. Prior to that, my first job is Lucent Bell Labs. From there went to Wall street, worked at Deutsche bank and then Lehman Brothers writing trading systems. When September 11th hit in 2001, my office, 40th floor of World Trade Center 1. So that changed perspective for everyone went through that experience. Luckily everyone on my floor survived that experience. For me it was a life changing experience. I decided to go back to grad school. First the Sloan program in doing business at NYU and then switch over to the PhD program. That's when I caught the entrepreneur bug and started App Point with my co founder and partner Hai Gong.

You're a hardcore tech nerd.

Yeah, most people don't believe anymore that I used to be a coder or statistian or a math guy, but that I am. As entrepreneur you have to do everything.

That's like the dangerous combo. You sort of develop the engineering mindset and then you learn the soft skills because it doesn't work the other way around. And I'm proof of that. Like I know the soft skills but I can't learn the engineering skills. I was actually curious if you correlate any of that fundamental thinking pattern you develop on the engineering side that applies to M and A today, before even.

The M and A side. To run a tech company today, I feel as entrepreneur, as the founder, as the CEO, you really have to have a technical background. Just because technology is changing so fast, you have to really stay ahead of it. Otherwise you're just going to get cannibalized and disrupted by the market. Or they have to have partners. A very, very important part of their founding team to have very strong technical background to really understand the nuances of what's happening from a M and A perspective. Yes, I think that engineering discipline, that research background does help in thinking about and articulating what exactly what we want and how do we drive a deal dynamic and how do we maintain focus and achieve objective and take the emotion out of it. A lot of times when you do deals, there's emotion. You have to be mindful of that.

Do you like execute you know, I think of tech you do sprints to like execute projects. Like is it sort of a similar philosophy and how you're doing M and A deals?

Oh, absolutely. So we done five acquisitions already since we gone public and prior to that we have not done any. And the company's been around for 20 plus years. There's a deal cadence to do things and we have a very active tracking of 200 plus companies we're actively talking to and evaluating. Obviously market matters. Sometimes the market is too frothy. We're very much focused on fundamentals. We built this company with just $60 million primary capital, no debt when we went public. So we are very focused on discipline and the fundamentals. So when we look at companies, we're very focused on company that's not crazy leveraged, that doesn't carry such a big liability with massive interest rates paying to debt. That playbook no longer works. I never believe in that type of architecture, put things together sounds good in marketing, but doesn't really truly integrate type of acquisition in tech anyways. Tech debt is a real thing that we all have to consider. It has to be. Whatever a company acquires, especially in technology space need to be recoded, refactored and truly integrated into a seamless platform and offering to the collective customer and partners. That's super important to take into consideration as well.

Can we back into the five deals you mentioned and you mentioned you went IPO and then you have done five acquisitions to date. What prompted you to do those acquisitions?

When we went public in 2001 we had a healthy balance sheet, $230 million balance sheet and no debt. And we're growing and today we're cash generating pretty much almost GAAP profitable. We're non GAAP profitable. The difference is stock based comp. As a public company, when you issue stock options and equity to employees that's also a real cost. But by next year we will be GAAP profitable as well. But the consideration for us in term of growth because we're very focused on profitable growth. So that means we need to make sure we're cash positive. But also growing revenue double digits and now EBIT margin double digits. As folks that are following the company's trajectory, we just closed our sixth straight beat and raised quarter. So that's all good. But we were very clear when we indicated to the market that there are multiple ways to grow. There's organic growth. So we organically grow our portfolio by investing to sales and marketing engine while at the same time try to make it more Efficient by investing to channel. So the cost of sales and marketing continue to go down while the revenue continue to go up. And of course there's product investment. So we continue to invest into our R and D to make sure that we can continue to expand our portfolio so that we have this whole platform play and land and expand motion as we win more customers and become more sticky as a value added partner to our customers and our MSP partners. And lastly we talk about, hey, we are also looking at inorganic expansion, especially in the space of multi cloud because we have built quite a reputation and brand in the Microsoft cloud ecosystem. But you know what, the whole world is multi cloud. So even you look at the recent CrowdStrike incident that makes enterprise customer even more keenly aware that you do need to have multi cloud deployment scenarios so that you have that business resiliency built in so your business doesn't stop running just because your endpoints are down. All those type of things are what we looking at as say hey, we also need way to grow faster because our customers are multi cloud, our partners are multi cloud. How do we then provide additional value to them beyond just Microsoft cloud? So today we already have solution for Google for AWS as well as Salesforce. So those are the bigger cloud platforms, not as large as Microsoft, but equally sizable that we are continuing to invest in. We do that via inorganic as well as organic investment.

Okay, so you have this organic approach which there's a big sales and marketing focus to grow current revenues and then product which is also organic. But it sounds like product can also be inorganic as well. And it sounds like most of the driver of acquisitions is really product related so you can expand your offerings.

We don't believe in acquiring for revenue purposes. As a technology at heart, we take tech debt seriously. We want to make sure that we acquire very interesting IP. And because we have such a global footprint. So today 45% of our revenue is North America and then that 55% is evenly split revenue wise between Western Europe and developed Asia markets, that's Japan, anz, Singapore, South Korea. So we have a global footprint. Literally last 20 years we've built a very solid foundation. We think that we have value to add when we bring interesting ip, we can then distribute that across our global channel and global markets so we can accelerate our platform growth.

So the strength is your existing distribution model and for you to look at targets, it's basically some capabilities or products that you'd want to add to your distribution that would fit nicely with it.

That's right. Both the Distribution model as well as our existing customer footprint because we have a platform, what we call confidence platform. So when we do acquire new ip, for example, the great products that we bought, Canadian company called Tigraph which is really into capturing signals in hybrid workspaces to see who is talking to whom and what are the sentiments. And now in the age of AI, what are the central cluster of density of where you should actually deploy AI to have a better change management effect. That's actually a product we integrated very quickly onto our confidence platform. And then for our existing customers it's a matter of just a checkbox to turn it on. So both our channel play of our existing distribution channels to sell the net new IP as well as existing customers.

How did you build that distribution network? Even somebody building a company organically and you just look at where you're at now and these larger companies and it seems like such a long path. I'm curious, was there anything there that you just had the magic touch to to get that figured out? Because it seems like that's what gave you that base to then do acquisitions.

We started off as a direct sales organization because I would say we were a bunch of engineers. So we actually started in the hard space which is regulated industry, government, banks and that's very much direct high touch enterprise sales experience. But then since we got to cloud, we realized hey, by becoming software as a service provider, the customers don't have to install run, we have to run our own cloud operation. Cloud securities become first class citizen in that globally and then it removes a lot of the headaches for different SMB customers as well. So they can get access to enterprise grade data management data security software from us without having to worry about maintaining it, installing it, running it and operating it. So that's where we actually see the power channel, the channel allow us to invest into because they have a much bigger outreach. The world is very big in the B2B space. We have a limited population of sales folks around the world. So we can only scale being more conversations through investment channel. That's when we learn to say hey, to truly reach the SMB space, we have to really scale to channel. And you know What? Microsoft is 100% channel organization. Their cost of sales is amazing. It's 15%, it's super low. When the SaaS industry average is about 30% they are able to do through channel and what 50% of their revenue come from small to medium businesses. So that's where we see this massive opportunity, greenfield opportunity for us to invest in. That's when we started this exercise, less than four years ago, we started this exercise and now it's 60% of our revenue revenue and it's growing fast. That's something that we learned along the way. It's a way to reduce cost but continue to increase growth and market coverage.

You really figured that out, starting with the direct sales, then evolved into adding the channels, which really gave you a big lift, and then bought companies. And that's a big part of the playbook. Can we talk about the capital structure? When you look at how the business started from the first round of funding and what did that journey look like.

When we went public, we literally, if you're not counting the going public capital raise, which is about 490 million at that time, just a Series A, B and C, collectively we only raised about $60 million of primary capital. So series A was Summit partners back in 2006 with just less than $6 million. And then series B was Goldman Merchant Banking, a hundred million dollars in 2014. And then Series C was Sixth Street Partners, what used to be called TPG Sixth street then, now SSP 63 Partners. It's $125 million. And then we went out to raise another about $150 million from friends and family. That was our Series C. So every step of the way we kept the investors to be about a third of the business. And every new round, we had the new investor buying out effectively the previous investor. So we didn't lose essentially that much shares. We took a little bit for primary to inject some more additional capital. In the business. We are always focused on cash flows as the foundations fundamental of the business. So we never really needed so much cash. Therefore, we avoided dilution, we avoided losing control. I think that's very, very important. As tech entrepreneurs, you want to retain the vision and continue to drive the growth of the business because we think we really know and understand our customers and we always, like me, I'm on the road all the time meeting customers, meeting CIOs, CEOs, figure out their pain points. For entrepreneurs to think about listening to your show is that don't give up control too early. In fact, I would say raise your first round of capital as late as possible. You can bootstrap as long as possible and get revenue, get to revenue. That's the best time to do it because you don't want to lose control too early. I have seen too many entrepreneurs sell their business too early where they haven't really truly reached the steep climb in valuation. So they missed out the upside, if you will, it's very important from our perspective, is to make sure that you only raise the amount of capital you need. You don't need to go crazy and raise so much capital that you lose control. Because ultimately what it comes to is that investors at some point at the end of their investment cycle, whether it's three years, five years, seven years, every investor have different length of investment horizon. At the end of that, they need to exit, they need their return, their LPs, demand return. So that's where the highest potential for difference of objectives and opinion between the founders and the investors. The investor want out. Founders want to continue to build a business. Investor want out at the highest possible exit value at that moment in time. Founders want to continue to run the company to get to much higher perspective because we're in it for the long game, whereas investors are in it for much shorter horizon. So you have to really manage that dynamic as a founder and CEO of.

A startup, keeping your investors in a minority position. TJ this is something that really piqued my interest when we first had a conversation. I really want to click into this, teach me this stuff, be my CEO advisor mentor here and I've given you a little scenario. Even our business is unique in the fact that we've bootstrapped the business. We're about a 10 million run rate with 50 employees. I get about five, six calls every month from you. Name the PE firm, VC firm aspiring to follow your footsteps here. I don't know if the IPO is the right track because they're not serving the hugest market. But as we continue this path, I could see us getting to 25 million ARR in the three years. In the coming three years, pretty clearly we have a pretty consistent 60% year over year growth. Then I could look past it a little bit and say, hey, if we only serve the current market, our business will taper around 30 to 40 million ARR. But at that point, this is where I like to recap the business, to introduce some capital. And I think we get past that point of being an acquisition target into more of an investment platform can be the acquirers. Walk me through it. What do I need to do to make sure that works out well and what do I need to avoid to not screw up?

First of all, Kishan, congratulations. That sounds like a fantastic business profile. I'm sure there's a lot of investors that would want to invest into that. Especially you bootstrapped the whole thing and now just with 10 people, you're growing revenue at this clip, that's really good story. I think you should be able to get some really good valuation. It's really the outcome you want. I think you're absolutely right in hitting the exit plan there. Whether you want to be a platform or wanting. You want to be an acquisition target. You know what, as you grow your business, your vision for your business may change as well. You may become part of a much bigger platform. I think it's really the philosophy of the entrepreneur, him or herself. Because I have seen many entrepreneurs who are what I call serial entrepreneurs. They will take a business from 0 to 10 million and then exit and then build the next one 0 to 10 million with the same crew.

That's not me. I don't want to do that shit.

No, that's not me either. Because you're the one the hardest.

Yeah, that's it. I don't want to relay that at all.

So I think for you specifically, if you don't need capital, you don't need to raise capital, continue to grow your business. If you get growing 60% year over year, that's fantastic. So keep going. There needs to be a purpose for the capital. So what is the proceeds used for us, our initial bucket of capital we use for international expansion. So today we're in 18 countries. So there was a specific purpose for it. So there's a B2C world, these companies raising insane amount of capital and just burning cash to grow revenue. That business model is not sustainable and obviously market no longer rewards for that type of behavior. I think what you do is very smart to be prudent, disciplined and continue to execute. You raise capital when there's a need for it or when you philosophically thinks there's a time to bring an investor in to take some cash off the table to de risk part of your sweat capital. At the same time potentially bring a good partner that can then elevate your platform. That's also very important in selecting that partner is because there's plenty of funds with cash. Dumb money is very easy to find. What's hard to find, It's a very, very good partner that at least in the first three to five years are fully aligned with you to maximize your growth potential. So you're in this together. I think that's a very important part of your decision tree in the future to select the right partner to really grow your vision. But hey, you don't need capital. Keep doing what you're doing. Growing 60% year over year. It's a very admirable state.

TJ we'll keep role playing this out. So let's fast forward two and a half years from now. We're at 25 million ARR. And I'm at this point and I'm like, hey, the business is doing good, but I think it's that time that we accelerate it. And this is where acquisitions may be part of what we want to do. International expansions. Walk me through like negotiating what that term should look like. And for me, I'm ideally would like to keep the same philosophy of a minority position. Maybe I'm comfortable saying, hey, I'm ready to give up 30% of this equity. Teach me like what should that look like? Part of me wants to recap and take some chips off the table. So I can, I don't know what I would buy with it, but buy.

A company, there's much you can do with it. So when you do a recap, the concept, primary and secondary capital. So how much of that recap is going to go to the company, like net new shares, that would dilute all your existing shareholders, including yourself. That would be capital to the company to accelerate the growth. You could do acquisitions, you could do international expansions, what have you. And part of that then is actually secondary sales. That means you're selling your personal shares to the new investor at a higher valuation from today and then you're taking some chips off the table. So at least you have financial safety net. I will say that does make a difference, especially for entrepreneurs like you and I. We start with nothing. Having a couple million bucks in the bank. It's peace of mind. Oftentimes what it does is makes you think and move even more aggressively with your business. That does have a psychological effect to say, hey, I have this. No matter what happens, this little bit of nest egg is here. My family is going to be fine. I can then focus even more, lean into my business even more to take that risk, go swing for the fences. So there's that dynamic there. But yeah, for primary capital really then it's you and your business partners or your senior leadership and think about, hey now, if we're going to raise this bucket of money, provided that we're raising it to maintain control, only give out 1/3 or 40% of the business. What do we want to do with this capital? Are there a really good way to then go out and grow the platform? Of course, if you want to acquire companies, that's another very interesting set of dynamic that will happen. You can do cash acquisition, you can do cash part equity, you can do earnouts the earnouts is very important for entrepreneurs. It takes entrepreneur to understand entrepreneurs. So you want to make sure the interests are aligned.

Taking some notes here. I'm wondering if there is a common ratio between raising the primary versus secondary capital. Let's just use simple math. People are going to message me afterwards. Let's say it's 10x and we got 250 million is the proposed company value and all of a sudden we sort of introduce this, that's pre, then the post structure and let's say whatever a third or 40% on that range we do in a minority. What would that look like in terms of. And like I said, just kind of getting a sense of even for the.

New investor to come in, if it's too much secondary it will raise red flags. A good rule of thumb is 2 to 1 ratio. So 2 third is primary, 1 third is secondary. Obviously you can do plus minus a few basis points from that, but I think that's a good rule where new investors want you to take most of the money, let's say 2/3 of the money coming in to work, put the money to work, grow the business because ultimately you guys are aligned to grow the platform even bigger. So everybody wins, take it to a higher valuation and one third could be then secondary to then provide some sort of safety net for you and your senior leadership. So that again like I mentioned, that psychological effect of leaning it into it more, even more aggressively. And some of you guys, probably you specifically because you bootstrapped this business for the first few years, you probably didn't take a dime of salary. So this is, that compensates for that. Your family is like hey, this is my sweat equity getting some return. That's my rule of thumb is 2 to 1 ratio.

Even at roughly 30% on 250 that would be about 75 million. And I would say hey, 50 million to go to primary, 25 million goes to secondary. Yep, we'd have a balance sheet with 50 million to start going doing deals. So now if I look at 50, let me round up the investment stuff. The other question I had is this is a great, kind of sets us up for the first term. And then what I was curious about was as you add other rounds, you mentioned exiting out the previous investors. Yeah, but a lot of the time I hear them always like adding on capital or rolling over into the next round. You sort of always see that. And most founders end up getting diluted. That's the typical story. They do subsequent rounds and then next, you know, they own like half A percentage of the company. Yeah, until they exit. And then they got preferred, they got a payout, and then they end up with a really small check. Walk me through that. Like, how do you actually get. Investors agree on it? Cause 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 want out and you need to provide them out. And of course, they would want out at maximum valuation possible. And there's that dynamic. So sometimes the maximum valuation may require you to do a majority sale. 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. But 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 1 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. I 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 acquisition conversation. So I will 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 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 keep on raising. It 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 had no choice. It's a different type of business model. Or if you're an AI company, you need to buy like 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. Do 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 of 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 help it. That's where I'm coming from, is life is a marathon. You can really pace yourself. Of course, in the news, we always hear outliers. Oh, this company, been around for six months, is now worth $700 million. Wouldn't we all love to have companies like that? But for majority of us, 99.999% of us, we focus on the fundamentals, grow our business and be sensible and control and to 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 the same role play. We had the 25 million returned, 250 value and then we did the recap deal. So 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 pretty good return. This is going to make your shareholders happy. We want to go bring a new investor in. Now I got the big institutional name brand firm that you're very familiar with. They're coming in. Is that 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. I 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 shares just because they come in at a high, 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 the $750 million value company now to a billion 5, 1.5 billion for example, you can double it in the next whatever, three years, four years, and you need some capital to grow. That'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 raised 30%, second time you probably raised 35%. Yep. 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%, 36 bucks to run your business.

Okay, so I see it. So we're still keeping that control. A little bit increase in the minority. But now we got pretty significant like a good amount of cash in there to deploy the next strategy.

That's right.

What's it like going public? I think this is the dream. We aspire for it. Then nine times out of ten 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 all and be all. What is the point of going public? It'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 Mark 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, including all your employees. So for me, because I'm a bit of a masochist, I like it because 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 if you take it to one extreme, it could make you incredibly short term focus. And that's not good either. Because if you want your company to be somewhere 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. And also the public market is brutal. They will judge you every step of the way. For example, a lot of companies take 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 know that process is hard when you actually execute and being judged on your progress every three months is extra hard. And that's why now they're private, they acquired. So 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 institutional 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. And 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 will you forecast where you foreshadowed. They keep you to your words and if you miss that word, if you don't do the B9 race market will penalize you. For it. That's why it makes a company. Provided you execute it makes a company better and more disciplined.

You'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 went 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 three months ago. Sure. My job is to make your money. Okay? Yes, sir.

Once you're public, is it easy to get quick capital? What does your vehicles look like? Because I 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 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. So yeah, 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 attention. So that's actually very good in attracting talent. Also to your point, cost of capital is cheaper. It's much cheaper because you're liquid, because your equity people can trade any time. So it's considered liquid versus a private company. Private company is illiquid. There's dark pools. If your private company is large enough that people trade. But relative to public company, its cost of capital, cost of borrowing is much higher. As a public company, you can borrow at a much lower rate. You can also give RSU stock options. This is what 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 company. So it's not just a cash conversation anymore. So there's many ways you leveraging the capital market to grow even faster. That's the benefit of being a public company.

Okay. So talent lower rate for cost of capital the stock you have to expense it. Is that like a public company thing that if you issue any stocks.

Oh yeah, real cost. This is why we talk about GAAP profitability and non GAAP profitability. If you look at SaaS companies, most of them talk about non GAAP numbers and we also talk about GAAP numbers. So we already at the investor day last March we say hey, by next year we will be GAAP profitable. So we are already generating cash. Last year, this year 30 plus million last year, more this year, even more next year. But we will be GAAP profitable next year because we then include the stock based comp as part of the costs.

This part sounds good. Now I'm more optimistic in terms of this positions 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 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 the where that business is at, where the CEO founder, where that person is at in terms of his or her career or aspiration that 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 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 continue 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. And if that founder is that person, we want to incentivize that person to stay as long as possible with us so 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, but ultimately to the entrepreneur, that person can make a lot more from the sell in subsequent years as the product performs in revenue than the upfront payment. 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 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 and if you lose, you lose together. It's all about alignment interest.

Wouldn't it be better just do an all stock deal?

All stock deal. So the issue with stock is that it's a blended because stock is basically a 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 while 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, it's getting the right mix and then figuring out what the founder's 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. We've got the sales and marketing, we're funding organically. We've got organic product development. Tj, like 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 to 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. The 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 cost of sales marketing for them, what's their operations cost, what's R and D cost and you benchmark yourself against that and say, hey, are you performing as efficient as other tech companies? I think that's a huge. Another interesting benefit. But when you're private, that's another. If you want to look at how well you're performing, a metrics perspective, look at public company 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, to look at or the comps basically because everybody's looking at you and all your information is public. The stock buyback as a tool is pretty interesting because that like a whole different dynamic, that their stock's cheap, like why not buy it back?

That's right.

And then as a private company, I guess it is more specific to like 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 like 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.

Oh, 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 feel the pain. When the market then judge you in the way that market does, it's incredibly unifying effect because everybody in that point is a shareholder. That's another major difference that when executed well, it's a very big force multiplier. I had private investor ask me this, hey, how do we war game this for our private companies as it's very hard. I don't think you can war game 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 work in 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 the fundamentals. I think Warren Buffett is such a great investor. He's not so much of Oracle Omaha. He's a person who really focus on fundamentals and that's what really lasts. Things come and go. You can have Meme stock for example, right? So 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 and life is a journey. You're gonna continue to grow yourself, grow your business, continue to have different type of challenges. By 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 much bigger company because that discipline required to be public. You'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 fault 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. So again, yeah, so go back to fundamentals that will carry you through all.

About building a great business. Tj, what's the craziest thing you've seen in M and A?

Is this just between you and I?

Just don't mention names and dates and then we're. 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 them.

So you guys need to switch over to our way and our system and everything because we bought you. Okay? Realize 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 non static. 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. In 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.

Totally agree. Aligning people. A great example of M and 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.

It's my pleasure. Thank you for having me on your show.

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