Navigating the PE and M&A Landscapes: Insights for Founders

00:01
Welcome to startup success, the podcast for startup founders and investors. Here you’ll find stories of success from others in the trenches as they work to scale some of the fastest growing startups in the world stories that will help you in your own journey. startup success starts now.

Kate 00:18
Welcome to startup success. Today, we have Gaurav Bhasin who is the managing director of Allied Advisers with us today. Welcome.

Gaurav 00:29
Thank you for having me. Pleasure to be here.

Kate 00:32
Thank you for being here. I’m a big fan of the content. And we’ll get into this later that Allied Advisers puts out and we’ll talk about that in a bit. But let’s start with just an overview for the listeners of what Allied Advisers does your role there and walk us through?

Gaurav 00:52
So just a bit about my background, I’ve been in the tech space for a little over 20 years, not always a banker, I actually lead a unit for a few years, moved to a management role. I think that experience was pretty valuable, because, you know, kind of gave me a good sense of how companies work, how do they build products? How do they sell products, so when you work with a client, some of that sort of, you know, empathy kind of seeps in into our projects. After business school, I moved to investment banking, I’ve done that for over 17 years, I worked at Bank of America Securities, we did IPOs, M&A and dept deals, you know, even back then the deals were at least half a billion or more, you know, while I enjoyed the experience, my heart was always kind of in mid-market M&A, which is, broadly speaking 20 million or 200 million exit value. And that’s what I’ve done for the last 30 plus years, I was at two different firms, both of which were successful, both of which got sold, one got sold to a larger firm, Duff & Phelps, I was the Managing Director there for about four years. Another one also got sold, I stayed for about a year post transaction, you know, my experience is when firms get sold, you know, sometimes the core focus changes. And I feel that you know, the firms kind of want to go upstream and do some different things. And the level of simulation goes away. And I saw that there was a market opportunity, frankly, to go serve mid-market technology companies, which was what I loved doing at these are the firms. That’s what sort of prompted me to start Allied Advisers and my wife kind of nudged me on to saying, hey, there’s all these clients, and you can kind of serve them better in an entrepreneurial environment. And that’s what led to me starting Allied Advisers in 2019.

Kate 02:39
That’s great. And your background is perfect. Like you said, it really lends itself to what you’re doing. And then the fact that you have a passion for it is an excellent combination.

Gaurav 02:50
Thank you really appreciate that. So I’ll tell you a bit about Allied Advisers. So we started the firm in 2019. What we do is we focus on B2B software businesses, about 85% of our workflow is on SaaS clients. They are generally private companies, we focus on middle market. So broadly speaking, they can go anywhere from 20 million exit value to 200 millionexit value. We do a little bit of deep tech. So we’ll do some AI / ML deals, but by and large think of as a software, M&A and capital raise firm. Some of our partners like another partner of mine, he’s, you know, Chicago, MBA, Goldman Sachs, 20 years in the industry. He’s also an engineer by training. Another partner is MIT grad, an entrepreneur. So the beauty of this is, you know, we’ve kind of been in the client’s shoes, we have been at firms where we have bought companies we have advised companies before and that gives us a kind of a unique advantage and how we sort of position these clients to the different buyers. Since we started the firm in 2019. We have closed over 20 transactions, which is remarkable. You know, as you know, the last four or five years have been choppy, right? You had a COVID Boom COVID Bust. You’ve had this prolonged downturn but despite that, we’ve been steadily closing transactions. So some of the clients we help them sell to guys like IBM and American Icon some leading AI companies like Alteryx we sold a software company to Walmart is a Fortune One company we sold a IML company to Activision Blizzard King, they’re the makers of Candy Crush, I’m sure you play that game, you know. And then we have also sold a software company a delight, the biggest ID consulting company in the world sold AI company to Elsevier, which is a big FTSE 50 company up in Europe. We have done deals with private equity firms like K1Capital, France Co Partners, clearly we just saw like I need to Providence Strategic Growth three months ago and we are multiple bears in that deal. So you know, talk to your audience via solely to Fortune 50 companies talk to your fans, and some of our work has been picked up in Washington Journal, Barron’s, TechCrunch and you know even your from Brooklyn was kind enough to distribute a report vertical SaaS was horizontal SaaS so you know, be having fun doing this. You know, and this is this is fun.

Kate 04:57
Wow, remarkable. The list of some of the transactions you just went through. I mean, super impressive also sounds like it would be really fun. I mean, right?

Gaurav 05:11
over the finish line, and we’re thankful for the opportunity to work with them, I, frankly, the most important transaction in the company’s lifecycle, you know, the exit is, is a pretty important milestone for any founder, any investor and you know, being part of those processes are important to us. And we are thankful to be part of those.

Kate 05:31
I bet. And what recently caught my eye, I’ve been, you know, familiar with the work you’ve been doing for a while, but you just wrote an article for CrunchBase about PE investment and how a company should approach it when a PE firm is interested, if you could walk us through a little of that, because I know so many founders companies that are in that position in this market right now.

Gaurav 06:02
Yeah, absolutely. So you know, I’ve been doing this for 17 years, you know, earlier PE was in our processes, probably 10-15% of the time, you know, and we are putting on an M&A report, and he will see the private equity folks are in about 40% of SaaS deals. So there’s been about 1.5 to 2 trillion of capital raised, whether you look at PitchBook, or some other data sources, the private equity guys love SaaS businesses, their recurring businesses, high gross margin. So all of capital has gone into these private equity firms. What that means is, as a founder, you have a lot of capital chasing you, which is a good problem to have. That means, you know, you can dictate your terms. And I think that’s, that’s a good place to be. So given this much amount of private equity, they also know they want to try to get into these days early at a discount, frankly, you know, because they know other private equity firms are kind of chasing the same founder, same entrepreneur, same type of company. So what they’ve done strategically, is they’ve hired these young, smart college grads, which are two, three years out of school, as business development, folks or associates. And these folks constantly being found a CEO saying, can we have a chat, I’d love to learn a bit about you. Now, this is my advice, you know, when the founder CEO, get these kinds of emails is, you know, take some of those calls, but try to keep it short, 15 minutes, otherwise, he’s gonna be major times sucks. He got a business to run. So and then all from that will chase you. When you have these calls, quickly. Ask them, What kind of deals they invest in, what sectors they invest in, and why did they reach out that will tell you if they’re a good fit or not, you know, if you’re a 10 million ARR company, and if Carlyle reaches out, you should be flattered, but Carlyle is not the right buyer for you. So you got to figure out, you know, who is the right private equity firm that reached out, you know, why are they looking to invest? Ask the right questions. Also be careful that the associated the business development person is not going to make a decision is going to be the partner. That’s going to make a decision, but they are gatekeepers to the partners. The last few questions, you know, you may want to tell them a little bit about your revenue a little overboard a beta historic stuff, nothing in the future. I’ll tell you why. Because if you give them a projections, they’ll put this into the CRM, they’ll approach a year later and say, Hey, wait a minute, you said you were gonna do 20 million, you end up doing 14 What happened? Right? It hurts your credibility, harshly evaluation. And more importantly, they’re trying to get some information in the space, they may be talking to your competition. Why do you want expose that information out? So my suggestion is give them just the very little just make sure they’re fed on? Are you low in 15 minutes, or not? And then tell them they might say less, get further, he said, Look, I’m getting approached by others, I will run a process sometime I will hire a banker. They might say why are you hiring a banker or just deal with me directly. You know, private equity guys say that all the time, you know, but when they sell their own company, they always hire a banker because they want to get best value. But when they want to buy a company, they prefer not to have a banker. So you know, get the list there at some point, you know, my advice to founders is engage a banker, but there’s also someone else, you know, the banker will give you based on your industry. We have a big 1000 Plus private equity firms database. If you’re 20 million era company, we know which private equity firms to go to Effect 10, we know which private equity firms to go to, we can help you figure out you know, which private equity firms support, which not to approach, which ones changed price during a process, right, which was trying to retrain you, as a founder may want to keep majority control, therefore they do minority investments. And then when we run a process, we try to get them to put beds by indication date. So they’ll put in the beds will help you walk through because a lot that goes beyond just the valuation, you have to figure out is it a majority or is it a minority deal? Are you having to roll over your shares? Is it on out there lots of bells and whistles and the private equity folks are, I would say financial jockeys. So you want to make sure you’re kind of represented with someone who can speak their language can represent you well. And I would say having a firm like Burkland here will be very already available, because a lot of the founders and CEO of the company sometimes get by with basic financial support, right? If they don’t have a CFO in house, consider getting a firm like Burkland on board, just so you have all the financial metrics in place, you can give them customer retention data, you know, have the financial statement dashboards ready to go, I think all that will help you in creating value. So my suggestion is take those goals, give them just enough to keep them excited, quickly filter them out, if that makes sense or not. And you should run a process because that’s how you’re going to get maximum value. And a lot of private reforms there will be going to be putting out a report in about two weeks M&A In today’s market, and you will see some of the data there, like private equity is doing a lot of deals, they were Koopa software recently, they bought Qualtrics. And they’re also doing a lot of these lower bit market.

Kate 10:47
Tht was so helpful, because there is so much going on with private equity right now. And I like how you walked us through from that first phone call. Because you’re right, from the startups I’ve worked at, it’s always an associate. And you’re right, they always start asking about future. And just the way you spelled it out, and then how you need to get a banker, and you need to think about your financials and ownership, it that was really, really helpful, because I’ve seen some not so positive outcomes with private equity investment. I mean, let’s be honest. So I think you flagged a lot of things that people need to be paying attention to.

Gaurav 11:28
Yeah, that’s a good point here. You know, sometimes private equity gets a bad rap. And one of the other things, you know, we recommend is, if you take a term sheet from somebody, right, it’s almost like a, you know, marriage. In fact, in some ways you can get out of a marriage, but you got to invest on a cap table. So you got to be very careful who you bring into your company have built over 5,10,15 years. And also, before you signed the term sheet, or even sometimes have a client’s go talk to some of the founders they’ve invested in and figure out how this has worked for them. Over the next five years, you know, did the rollover share become 3x 5x? The second bite of the apple? Was it bigger than the first bite, that they pay them in their own out? Where they value add investors? Do they help them in the go to market they help them in recruiting all the things? They said they will do the revenue increase the beta increase? So you know, we kind of help you kind of ask those questions. Some of it, you may not even know what to ask what kind of help you that will also help you answer the question is crisply. Well, the priority we guys will ask you, so we kind of become a friend or coach or partner along the way. Because we want the best outcome for the founders.

Kate 12:33
You need that. And what an excellent suggestion to talk to other founders they’ve invested in because there’s a lot of talk right during the deal. All sounds so good. That’s excellent. So how does this compare to like an M&A deal? Because those, you know, just the consensus out there with a lot of people is just a better outcome. Right? Let’s be honest. So walk us through that and why people think that way. And that would be really helpful.

Gaurav 13:02
At the end of the day, strategics, I would say 90% of the time, and I say 90%, by and large end up paying more than private equity, right? I mean, private equity over the five year period may be a better outcome. Because the rollover shares, if you roll 20,30% of the deal may become three to 5x. So you may be more but by and large, if you’re looking at our friend value, strategics like Google buys your maximize you, you know, end up paying you a lot and you will make a lot of money through stock and other things there. So you know, I think, first of all, as a founder or CEO of a venture backed company, or a bootstrap company in this market, a couple of things you need to be aware of, right? If you’re a venture backed company, you know, talk to your board, make sure everyone is aligned before you start a process like, Hey, guys, I think the market is changing, I think we are better off going for the bigger company, which has sales distribution, they can grow us faster, we can raise money, but maybe better just exit out. We’re getting approached, let’s run our process, make sure they’re aligned with you, because you will need the support to the process. So first, have that discussion and sophisticated founders, sophisticated CEOs do that, you know, get everyone on board. So everyone’s same table. And then you know, if you raise money in 2018 2019 2020, you might have raised a 50x 100x AR, well, good for you. But the challenge is today’s market, you know, you’re probably not gonna get that multiple SaaS multiples used to be 15x They’re going to 6x So you know, if you have grown nicely, then maybe you can come on, you know, those 30-40x multiples, but if you haven’t, chances are that your multiples will be more in line with today’s market, if that’s what happens. You know, look at scenarios, get a banker on board or get advice on board could talk to the board and the founder and say okay, you know, based on where you are, where the market is, this is where you might exit out and then look at a liquidation preference if you raise a lot of money, if the value of the exit is lower than liquidation preference, chances are the CEO and founder is going to make nothing and you know that sort of situation you are being And, you know, investors by and large are thoughtful because they know they’re kind of investing in a bunch of company they want good for the founders, maybe you have a chat with them before you go the process, hey, if my exit proceeds is less than my liquidation preference, can I get a carve out, you know, because at the end of the day, the way I look at it is symbiotic relationship founders, you the driving the bus investor putting gas in the car, guiding them, one country without the other. So you want to make sure that you both aligned so that come exit time, if there’s a scenario where unfortunately, you have grown, but not as much as you have ambitions rested, everyone is still happy for to make some money because they spend the time on it, investors get to exit which helps them recycle capital, give money back to the LPs and you can have a good outcome. So that’s one and then you know, when you kind of go through the process, what I would say is, if you were the bank, or what we will do is we were one sit down with you find out your goals, we will come up with a buyer list, you would have your names, if you were to have a names who would talk to you about why a certain buyer would have interest not have interest. One of the things we also recommend to CEOs and founders is build relationships with these strategics early because they move slowly. Private Equity moves like a rocket because they have nothing to do other than buy companies and sell companies and grow companies. strategics on the other hand, have to report to shareholders, they got to hire people, they got to you know, sell products to do all these things. And then M&A is like 10% of activity, Private Equity is like 100% of activity. So build these relationships early. So many banker have caused them. There’s already somebody who’s kind of looking to the commercial partnership already has invested in you those transaction my experience go a lot better as your article in this, therefore it’s picked up, it’s on our website, you can find us I encourage you to read it. But if you have the relationship that helps, then what we do is we kind of put together a offering memorandum the company like what’s attractive about the company, you know, why should you buy it? What are the differentiators? Talk about the team, the tech the product, the revenue, the go to market? We also talk about you know synergies you know, for example, not everyone is saying be breakeven or cashflow positive. Well if you’re burning money, we look at something they can cut costs like buyers probably have ai finance team, hopefully using Burkland. They don’t want to HR I mean, they’ve got good HR people, they probably are better salespeople than you know of the cost their you know, customer success, they probably have an army of customer success team. And then you know, the other costs like Cloud costs and software cost which you can release under buyer. So we actually put together synergy models that showcase you know, under Day Zero post acquisition, all these costs can be stripped out. Again, we rely on the company to provide financial but again firm like Burkland can be super helpful, you know, because you can prescripts three certain financial model in our data, net retention data across retention data, you know, how does your margins look like all that good stuffs packaged correctly, we help our clients put together real rooms in real rooms, we you know, we’ll put together a cap table a clean cap table that shows how much is gone and who the ownership is, make sure the assignment of IP is done by all the developers so that way, the buyer is not chasing you, or you’re not cheating some developer who worked on the product, the buyer not gonna sign off on the deal. Otherwise, we make sure the customer vendor contracts and everything else there, we actually have a fairly good list of …i, which we send to a client. So when buyers are interested, we can let them go in there, and they can look at it. And that also builds kind of buyer confidence. So there are many things we can do to make sure the process goes well. And then we reach out broad in this market yet, you will also have to reach broad as you know, different buyers have different ability to pay, different perceived synergies, we have been transactions by some buyers offer 3x the value another buyer has. And that’s the way you as a foreigner will optimize your value. If you’re just negotiating with one, you’re frankly hurting yourself. And you know, if you and I were to sell a house in the Bay Area, kid, we would definitely try to market to as many people as possible, was just trying to sell it to one, I think that’s the optimal value.

Kate 18:50
That was so interesting, because I’ve been through some M&A’s, and you hit on everything, like the alignment, which is so important, the building relationships early, which when you talk to these people, that was a key component. But I love how you talked about the synergies, like, you know, with HR and sales and service delivery, and how you help founders with that, because I think that’s a big component that, you know, can really help deals when you align like that, and just how you compared it to private equity, that it’s a lot slower. It’s a much different process. I think, you know, that was really helpful for people listening. Thank you.

Gaurav 19:33
Yeah, just one more thing I’ll add. In this market especially is to make sure you have nine months or 12 months of runway, because, you know, sometimes we have clients come to us and say hey, we have two months of runway and that case, you know, we kind of give them guidance, but we generally don’t take them on because M&A processes take a while you know it’s like having a baby right takes nine months. It used to be six months but now it’s like nine to 12 months and you know just make sure you enough cash to do the process and buyers see that right? If they see your loan cash, they can take advantage even strategics. Do that. So that’s one piece of advice in this environment.

Kate 20:09
That’s an excellent point to bring up because there’s the desperation when you don’t have cash. Right. You’re, you’re out of options. And they know that right away. Absolutely. And let’s talk about that. Because you mentioned the market a couple of times, the fundraising market, today’s fundraising market’s completely changed. It’s everyone describes it differently. What are your thoughts on the fund raising market?

Gaurav 20:34
Yeah, so it’s smart, like it wasn’t 2020, where almost anything that moved and was a company and did something was getting a term sheet, or less extreme, but you know, it’s not quite there. I think today, the market has changed dramatically and drastically. I think, you know, a couple of sectors are in vogue – AI, you know, but again, keep in mind that a lot of AI companies, some companies are sucking in all the oxygen and all the capital. And a lot of wannabes, which don’t get the capital security is resilient, still getting funded, repeat founders get funded, because you know, they’ve been through that cycle before inception to exit, they’re hardened, they know, pitfalls, to avoid things to kind of, you know, grow the company. So they are in vogue. If we look at Series D that had completely cratered, right, because after Series D, Series E, the next step was to go public. But they were funding these companies at 30x AAR at the public market, if you look at Bessemer, SaaS index fell from 15 to six. So you know, how can you go public with a 30x Multiple and the public markets are six, and they haven’t performed? Well, as banks give a bad name to the public markets, right? Good news is the series D is improving Databricks is in talks to raise funding at 41 billion, the last was 38. So is going to be step up. So I think that’s good. Hopefully Klaviyo, which is profitable, ARM and Instacart, they all go public nicely, they’ll have the series D market. So I think that’s gonna improve, I think we look at Series A, you know, earlier could be a million dollar company, and you could get a million ARR and you can get 50 million valuation, those things have changed. Now investor the look for two to 3 million, and they also look at not growth at all costs, they will look at a rule of 40 Are you close to break even or your profitable growth. So they will put all the bells and whistles right. And that’s where a firm like Burkland can put those metrics in place so that we reward the investor and Seed it didn’t change as much. Because Seed, you know, has to be at Horizon right for exit to funding. So there was still kind of active. And if you look globally at the quarter report card has said that q2 was better than q1 Up 26%. So that’s a positive, I think the downrods increased to 20%. And I think that’s a positive because you know why? Because sellers expectations are moderate. And that will lead to more deals. So they are holding back to 2020 numbers 2021 Number, they’re kind of like more this new market. So that downloads for it, it will get deals done. And then you know, investor friendly term like liquidation multipliers have kind of come down on Carta, which is also good. And you know how to invest in my house for dinner last week, and he said, Look, now I’m thrilled to invest because earlier these investors like Tiger and Sequoia were putting term sheets are insane valuations. I just couldn’t compete. But now these guys are like, you know, we have the capital, I’ve got fresh capital to deploy. So long term, I think, you know, it’s improved. It’s not as easy as it was 2020. But I think there’s some, some some positives we’re seeing happen, which I think is going to be good for founders and entrepreneurs.

Kate 23:19
We’re seeing that as well. We’re seeing the shifts that you talked about. And it’s, it’s nice to see. And that brings me to you’ve shared such phenomenal insight today, I want to talk about all the resources you have on your website, and where founders can go because you have so many great blog posts and articles there. I go there like around SaaS metrics, and, you know, fundraising. So if you could tell us your web URL, and it give us a little overview of what you have the resources there, that would be great.

Gaurav 23:54
Yeah, appreciate that. So you know, when, when COVID hit, I wasn’t traveling as much. And you know, oftentimes, earlier in my career as a banker, I always wanted to kind of pick up things, but I never found reports. So I was like, you know, what, if there was a report, everyone talks about vertical Saas being better than horizontal SaaS. Well, why is it so we wrote a blog on it, and other people loved it, then rule of 40 Why does it matter? Well, we wrote a blog. And you can see the vanishing differences between the company that follow rule of 40 versus that don’t you know, across 12 different sectors, then, you know, we looked at SMB SaaS, like, why should you care? It’s a neglected child. Well, you should carry some interesting aspects. You know, we write stuff about things that happened in M&A deals or stuff which is happening in the market. We are just putting out a simple blog post in a week or two on gross margin and why you should care, right? So we try to put out report which is differentiated, which is not from the economic or the mainstream. It’s more our years of experience that kind of come in. We just put out a report on how to prepare for M&A. Big report. It’s a big read, read over the weekend over a cup of coffee. Hopefully you get some out of it, but you know, I think when We do a transaction, we say what can we write that may be of interest. Like we were doing a lot of deals where our clients had folks in different countries. And we said, let’s write a blog on outsourcing. And the value could be in an M&A process, right. So we try to be creative, we try to be thoughtful, we try to, you know, we also learn, frankly, by writing this because we have to do our own research. And our goal is, hopefully founders, entrepreneurs, investors resonate, and, you know, we have gotten good compliments from even big buyer, strategic buyer, they’re like, you know, your reports, very different from the banks, because there’s cookie cutter, you know, just transaction comps and public comps, and you actually write reports that, you know, I think, educate the market. So, so we enjoy doing that, we’ll do more of it, you know, put in a lock and key. And our goal is, you know, to learn and, you know, share the education with others, what we learn along the way,

Kate 25:44
That’s great to pay it forward like that. And it’s excellent content. And like my conversation with you today, the content, it really shows the expertise and the knowledge that Allied Advisers is bringing, I mean, it’s, it’s seriously, it’s really exciting. So if I’m listening, and I’m interested in using your services want to get in touch, what’s the best way to do that?

Gaurav 26:09
Yeah, so you can either send me an email or you can go to a website is called Allied Advisers with e rs.com. And my email is gbhasin @ Alliedadvisers.com. So, you know, or you can send an email through that site and one of us will get in touch with you.

Kate 26:29
Excellent. Thank you so much. We could you know, pick your brain for hours here right now. The founders listening, you know, got a lot of insights. So thanks for being here today and making the time

Gaurav 26:41
Thanks, Kate, for inviting; really fun talking to you.

26:43
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