Guest Speakers

Bruce Milne

Let’s move on to our special guest, Chris Mattieu. Chris recently sold his company Nodestar to AppFog. Congratulations to you, too, Chris.

Chris Mattieu

Thank you very much, Bruce. Nodester was the second company of mine that I’ve had acquired over the last two years. It was basically an open-source cloud-based platform as a service for Node.JS. If anyone has been tracking that, it’s one of the hottest developer frameworks to hit the market. It is the engine behind all of the new real-time web applications being developed today.

It started off really as just a project of mine to scratch an itch I had for needing a platform to host my Node.JS applications. It was all open source, as I mentioned earlier. I think that fueled the fire on the press. It was picked up by Mashable, Hacker News, and ReadWriteWeb within the first week of me open sourcing the project. At that point we realized that it really needed to be a service. People were clamoring, asking for hosted apps on Nodester. So we picked up a few sponsors that paid all of our hosting fees, did that for about a year. This was a 24/7 operation, we weren’t ready to charge for services, the platform was still growing with lots of community contributors and developers from all over the world helping build the project up.

At the same time, I accepted an executive position for Bechtel, a hundred-year old, $30B company. I was getting tired of the 24/7 requirements for the company, at the same time, new competitors were coming into the space, including Red Hat, Microsoft, and Google. I realized the timing was right to exit while we had such a nice brand built up and a good following.

I had a conversation with a buddy of mine, the founder of Mindshare PR in San Francisco, and I asked him for help. We worked out a simple commission deal with them and within two weeks she had put me in touch with six companies that were interested in having discussions about Nodester, possibly acquisitions. We were very transparent with all of them. We didn’t have NDAs with them originally, so we said, “listen, here’s all of the people at the table that we’re talking to.”

I was really concerned as to what we could get out of the company as a price tag because we had no revenue, all of the application was open source, which was also part of what made it so popular, and after talking to a few folks, some of our competitors were just looking to buy our customer list, email addresses, kind of low ball figures on those numbers.

AppFog stepped in, we had a really good vibe with those guys, they’re an up and coming company, I think they have $10 million in funding, they were very interested in growing the Nodester community, using it as a lead generation tool into their platform as a service play and really they offered a buy it now price that we negotiated for us to stop talking with the other six companies, within about a week. We closed within thirty days of due diligence and it has been a smooth transition period. Cash and stock deal, great guys to work with, definitely a platform as a service company to watch. Very excited about that closure in my life and I’m starting on a new project idea.

Bruce Milne

That’s great. I want to hear down the road about your next big thing.

People ask us all the time what the smallest firm we can sell and we say that we’re back in the days where just a good idea sometimes sells. It doesn’t have to be a big up and running company.

We have another presenter. What do you do when you’re not a candidate for traditional M&A? I know that applies to a lot of you online here. Well, one of the companies that will buy companies like yours is a firm like Versata. Austin, tell us about your model there. Austin Scee is the general manager for Versata.

Austin Scee

Yeah, I’m the head of corporate development for Versata. I ran a company for them previously and was a general manager/CEO. Prior to that, I spent five or six years in PE, and eighteen years looking at software companies in different capacities.

What I will say is that you can think of Versata as a buyer of last resort. I know that sounds a little harsh, but that is what we do. We buy very quickly, we do very light due diligence, move quick, pay cash with 100% certainty. There are a couple of other strategies like that out there, but instead of getting into that, what I’d really like to do is tell you how to avoid being in a position where a one-time revenue exit is what you’re looking at.

I’ll do that by sharing what our playbook is. It’s not for you to replicate, practically speaking that’s not easy, but it is quite simple. The first thing in a software business that we look at is pricing. I’ll tell you that in the years I spent in PE, every time I asked someone who owned or ran a software business how they priced their product, the answers ranged from the market besides formity to I have this spreadsheet, when really the only answer is I raise prices until my customer retention reaches a point that is unsatisfactory. That really is my best advice for software companies that are in a position where it is difficult to be profitable or as profitable as you want to be, where a $20-30M revenue business may not be possible, it may be possible to reset prices and customer expectations and raise prices. Our experience is that it doesn’t always work, but it works a lot more often than people think and that’s because primarily as a software CEO and a business owner, you listen to your sales people and they have different incentives than the shareholders and you get caught in that challenge. First thing, look seriously about raising prices, take that risk, many times it works.

The second thing, the businesses that we acquire, that we run, are businesses that don’t have the capability of growing 20-30% a year. Some of them are trying to do that, and so they find that their customer acquisition costs are very high and their return on investment is not high enough to justify the investment. We focus on operating efficiencies and we source our talent globally and we eliminate almost every office lease, people work from home, people take on multiple tasks, and we get lots of operating efficiency that way. I’ll tell you that for many $5-10M software companies, it’s very possible to run at 40-50% EBITDA margins and keep your customers very happy.

I’ll end there.

Bruce Milne

That was great stuff. That’s one of the first things that we see when representing privately-held firms is that in almost all cases they are underpricing or not charging enough for maintenance, red carpet service, whatever, and generally the buyers represent brand name distribution and can raise those prices fairly significantly and move into the profit zone.