Highlights

1. If you are building a great tech company you must have a thorough understanding of the ecosystem you are disrupting
2. Partnerships are very important in long term value creation for distribution, innovation, and ultimately exit
3. Creating optionality for stakeholders is critical in the exit process

Setting the scene

The companies Notion invest in share much in common: they all want to build businesses that dominate categories, that scale and endure. At some point in their journey, they will want to realise the value of their hard work, allowing themselves as founders, and us as funders, to realise our investments. They may end up listing on the public markets or being acquired – the latter being more likely for European companies.  

That exit may well be far in the distance for many founders, even as they achieve significant success. Some people will say, “build a great business and the outcome will take care of itself” and while that is true to an extent, we also believe that long term readiness can have a significant and positive impact on that outcome. We call this “The Art of Exiteering”; taking the long term view, in order to maximise the value of an M&A or IPO. You can read more about that here.

David Eldridge has more experience in this space than most. He founded Alterian which he led through IPO and subsequent acquisition of four companies; Alterian was then acquired by SDL in 2011. He Chaired Idio, a Notion company for six years which was acquired by Episerver in 2019. David is now the Chair, formerly CEO, and joint founder of 3radical, Chair of Apperio and Non-exec Director at Neighbourly and Precision Point.

The exit rarely takes care of itself, deliberate strategy plays a part

Obviously, you’ve got to build a great business if you want to create value for all of the stakeholders involved. I think part of building that great business is having a really thorough understanding of the ecosystem in which you’re operating in:

• What is it you’re disrupting?
• What innovation are you bringing to market?
• What does that mean for different existing players in the market, as well as for your customers?
• Who then is the ideal buyer of your company?

I think that a real understanding of the ecosystem, the value proposition, what you’re bringing that other people aren’t, is obviously going to underpin your growth plans, your creation of your ideal customer and buyer profile and ultimately the exit itself.

Organisations that are thinking long term will not just create their go to market strategy and their ideal customer and buyer profile, and so on, but they’ll also be thinking about other parts of their stakeholder group. For example, they’ll be creating their ideal employee profile. The ideal employee profile will dictate a lot of how you get there because that’s the most important part of the mix.

You should be constantly thinking about and evolving your understanding of:

• Your ecosystem
• What’s my ideal customer and buyer profile?
• What’s my ideal employee profile?
• How I’m disrupting the ecosystem?
• Who should care about what I’m doing?

Keep these as part of the plan, as part of a living document that you develop over time. It might change as you go through, learn, pivot and develop the business in different ways, but it’s good to have that thought process from the beginning.

Founders must explicitly understand the change they are making

Founders that are successful in getting the backing of top venture capital firms, like Notion Capital for example, have a pretty clear understanding of what disruption and innovation they’re bringing to their market.

I think that a really important part of that is the impact a startup will have on their ecosystem and therefore who will be interested in acquiring them. It’s not just to identify your ideal customer and buyer profile for some distant exercise, but near term knowing your ‘ideal buyer’ for the company will help with some of your decisions around where you invest, how you innovate and who you partner with. I think that for a lot of organisations having great partners is not just a step up and a real help in developing the business, it’s also part of preparing the understanding of, and the route to, an exit.

In all the businesses I’m involved in I like to try and keep it pretty simple. I like a simple understanding of where we’re going as a business and who’s involved in that in the wider ecosystem. For my own purposes, I try to draw a diagram of the aspects of the marketplace; who we are complimentary with and can partner with, and who we’re competitive with. Therefore, we have to think about differentiation and how we’re going to disrupt their approach to market. In the partnership category, what kind of partnerships we could have, whether that’s distribution partnerships or technology partnerships. Then get out there and form those relationships, there’s no harm in going and talking to a broad range of people that are in the space and form those relationships. It’s amazing what great outcomes can result from making that effort of going out there and talking to the other organisations in the space.

There can be huge benefits. At Alterian, we started out as a partner only distribution model and we did that for several reasons. Part of it was because we knew that we were a part of the solution to people’s business problems, and we needed to align ourselves with the other parts to create the whole solution and drive the business outcome. We were a small company and back in those days, in the late 90s, it was difficult for the enterprise to buy from small companies, so finding partners to go to market with to help with that credibility and resilience was really important. But equally having that learning about how organisations are doing things today, either because you want to learn and get better like they are, or because you want to learn and do it differently by solving problems differently, can be really valuable.

A lot of organisations and their CEOs spend a lot of time focusing on the development of their own business and at times are possibly slightly too inward looking. It’s a huge benefit and a fantastic investment of time to get out there and talk to other people in the space. As I say, even if they’re competitors forming those relationships and having that learning is a really important part of both developing the business, then positioning it for an exit or the next stage of it’s growth.

Building, listing and exiting Alterian

Alterian was formed around 1997. We IPO’d in 2000 and the business was sold in 2011. I think the thing that appealed to the public markets is the same thing that would appeal to the venture capital market or the private equity market; some really interesting, scalable technology that was solving real business problems that were only going to grow. There was a clear path to grow because the market opportunity was there and the ability to get out and convert clients into our way of solving the problem with technology, was easily understood and clearly seen. Particularly for an IPO, the legal side of it, the processes, the HR processes, the records, the accounting, everything like that needs to be more advanced than usual for a small business and we had built properly from the ground up at Alterian.

I think when we listed Alterian we had all those things. We had technology that had a lot of headroom and I think the public markets could see that by providing some capital, by providing the profile, that being a publicly listed company provided something that was going to give the business a pretty good chance to generate a good return for all of the stakeholders over time. We were at a stage which was definitely a little bit earlier than businesses which typically IPO today, but we had some great brand name customers and a good pipeline of paid pilots that people could see we’re going to convert. We had a pretty clear machine to do that whilst having the ambition, both on the technology roadmap and the geographic expansion side of things, to become a serious player in the marketing platform space. That’s what people invested in, alongside a management team that they felt would be able to deliver and they could trust. It was great! We had a very successful IPO and we generated the capital that we required to take the next step.

Over the next 10 years, we had two principal strands of development and we very much stuck to what we put in our prospectus. In 2000, we invested in geographical expansion predominantly in the US. Also, we invested in our technology to broaden its capability from an analytics platform to add channels of communication for marketers to be able to use that analytics to execute communications in real time. For example, it’s important to get the results of those communications back into the analytics engine to optimise cross channel communications. We did our geographic expansion organically; we hired people in the US and then further afield, we did our technology development, both organically and inorganically, and we made four acquisitions over that period. This was definitely helped by being a public company.

Over those ten years, we bought a selection of companies including;

• An email service provider on the west coast of America
• A web content management company that was actually another listed company
• A marketing resource management company that was a UK company
• A social media listening platform that was in Rochester, New York

We integrated these all together. We built up a business with around 1,500 enterprise clients worldwide and one of the first cross channel marketing platforms. Alongside that, I think the luxury we had with the capital that we’d raised through an IPO was that we could think about licencing models slightly differently to some of the other players at the time. So, instead of following the traditional path of the shot in the arm of a perpetual licence and starting each quarter with nothing, we actually started from the beginning with subscription licences. Whilst we weren’t a full SaaS business (I’m not sure if that term or exact phrase had been invented back then!), we managed to build up repeatable revenues which is so important for the public markets.

At Idio the founders were very focused on building strategic relationships

Idio, where I was the Chairman, had a really fantastic management team, as well as obviously great stakeholders and investors around the board. I think that Ed Barrow, Andrew Davies and the rest of the team did a really good job of not just looking inwardly but looking outwardly. We were good at thinking about the ecosystem and having a deep understanding of what value we were bringing, who we were competing with, who we were complementing and naturally forming relationships with, and whether those kinds of relationships could lead to acquisition. I wouldn’t say that we sat around every month and said, “Who’s the top acquirer this month?” and then got on the phone to them. I don’t think it has to work that way. I think it can naturally go together with who are the right organisations to try and form partnerships with anyway, because we’re really complementary and bring value to each other.

Idio had plenty of strategic options, but a dual track IPO and M&A process was the best one to realise the potential of the business

One of the great things about Idio was that we weren’t running out of road in terms of market opportunity and the capability or the passion of the people involved in the business. We always had lots of options open to the business. I think at each stage, good businesses and boards will say, “Well, the next stage of our development has multiple options, we can carry on as we are and we can seek to develop the business without fresh capital. We can inject fresh capital, either from the private or the public markets and grow organically or inorganically, or we can seek an exit”. Now, at different times and for different stakeholders, they’ll have different drivers towards which of those kinds of routes they prefer. But, Idio were fantastically lucky to have very supportive stakeholders and investors who were happy to support management in whatever the right route was to continue to create value.

I wouldn’t have said that at Idio, we thought, ‘we need to exit within a year and that means we’ve got to start the process’. We were always thinking about what our options were for the next stage of development of the business. The process that we actually ended up going through happened because we’d had various discussions and inbound approaches from people, but possibly not at a level that we felt was optimal. We decided that we really needed to create optionality for all the stakeholders and we decided that rather than initiate either just a fundraising process or just an exit process, what we should do is run a dual track where both options were open to us. It was really interesting that there wasn’t a requirement to go down the exit route, because we could have raised capital, and the IPO gave those who wanted to stay in the ability to do so as well as those who wanted to realise their investment at that point. When we did a dual track IPO and strategic sale, we could equally as happily have gone down the IPO route, raised capital and taken the business to the next level as an independent public company as opposed to selling it. I think that gave everyone lots of optionality, lots of confidence and the ability to choose the right path for the business and the stakeholders.

You’ve got to create competition to give you the best outcome

As you can imagine, we had lots of debates at the board about the best way to go. Ultimately, I think everyone was very happy with the process that we ran. It was really hard work though. I’m sure you can imagine running both an IPO and the sale process, full bore in parallel was tough. But clearly, there are overlaps. A lot of the work that we did on the IPO track meant that once we decided that there was a viable offer to buy the company on the table the work done could be used to short circuit the sale process. Regardless, it was important to keep the IPR alive in parallel, to make sure that the process kept everyone honest.

Working with good advisors was very important to us achieving our goal

One of the benefits is that you get to work with a broad range of different people and advisors, and learn how they work. We obviously did beauty parades across the piece when we were looking at the dual track process and we ended up with Canaccord Genuity as financial advisors. They could handle both the public market track, as well as the strategic sale route. Canaccord Genuity, before we appointed them, had bought a company called Petsky Prunier, which was more of an M&A boutique to augment their M&A capabilities in the information technology, data and marketing space. I’d worked with both Canaccord before on the public markets side and Petsky Prunier, who had bought an email company for me at Alterian. We knew them both well and were happy to work with them, but also knew that they would do a great job. And then indeed they did!

They were clearly fundamental to the process of keeping both of those tracks going with separate teams, but making sure that their information requests were actually feasible for management in a relatively small business to execute. Then alongside the brokers capability; you need good lawyers, accountants and advisors who identify the problems and find the solution, rather than just identifying the problems. In the past, I’ve used Osborne Clarke on the lawyers side of transactions and used BDO, on the accountant side, and knew them to be those types of firms. They both worked really well together with the brokers to make it as smooth a process as possible for management and for the interested parties when you’re in such an intense period.

Aligning all stakeholders is an important, ongoing and open discussion

One of the issues that a lot of venture backed businesses have is aligning the different stakeholders. Some of those stakeholders may well be VC firms that have invested from a particular fund that’s coming towards the end of its lifetime, others might be earlier in that process, there might be the management who aren’t ready to exit and of course, exits meaning lots of different things to different people. In the case of Idio, I think that the guys made a fantastic decision to go down the route of joining forces with Episerver because it was an opportunity for management to take part in a bigger business and be a really important part of that as well as satisfying the other stakeholders. There’s lots of different aspects of choosing which route to go down, and having a really open and effective discussion ongoing about it, whilst finding solutions that will match key aspirations of those stakeholders, is an important element. It’s no good if you find yourself in a position where you haven’t had those discussions and all of a sudden it’s important that the business has an exit because the provider of capital wants their money back. It needs to be an ongoing and open discussion.

The quality of the management team has a very strong correlation with a successful exit process

The people that are leading these businesses are exceptional and have a fantastic vision of where they’re going. I would encourage them to think about their companies in terms of the ecosystem in which they’re operating, the ICP (Ideal Customer Profile) and how they’re going to create a really fantastic team, which becomes a critical piece of the puzzle when it comes to the exit too.

For every acquisition I’ve done the management team has been an absolute core piece of the transaction and looking back at Idio, they really formed a fantastic team that I think was very attractive for the acquirers and for the potential public market investors.

Some final advice for early stage founders playing a long game

One other thing I encourage founders to do, which may seem contradictory with VCs, is “don’t spend all of your time focused on quarterly numbers.” I was very guilty of this at Alterian. I didn’t spend enough time out with competitors, with other people in the space in the ecosystem; it feels like a luxury but actually it can add so much value.

I would also make sure that you’re partnering with the right providers of capital that you have a shared vision with and that you can actually have an honest discussion with as the business develops and strong support on your board; having an independent chair can be extremely valuable. An independent chair is something that really helps in the exit process, not just the development of the business. If you’ve got someone who has done that before, know where the pitfalls are and that can really dedicate some time to help management with that process.  Whether it’s fundraising, exit or a dual track combination of both, it’s something important to get in place early; aim to build those working, trusting relationships and have all that in place for when the excitement of a process gets underway.

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