How to Create a Value Chain Ecosystem

Value chain ecosystem approach

Going all the way back to my Verisign days, Verisign was originally a security company, but the internet was going through a lot of rapid evolution at that time, and they wanted to have a broader value chain.

They did two acquisitions. One was actually getting into the domain name business. That’s the first step of the internet. Get a domain name, then get it secured, and then you want to accept payments. The company that I was leading at the time was the leading online payment gateway company.

Get the domain name, secure it, and then be able to take payments–that’s a value chain. And by bringing those people together, you have a broader value proposition for a community of customers. 

Fast forward 20 years, and the last few opportunities I’ve had are really in different industries, whether it be people-based risk or more recently InsureTech. These industries are going through dramatic digital transformation. 

Oftentimes, there's point solutions along that value chain. And as industries go through digital transformation, the ability to interconnect those different value streams or point solutions into an optimized, frictionless solution for businesses or consumers, there's really a key part of the value proposition.

Number two, if you're really looking at how to increase value, wallet share, looking at that value chain, looking at adjacencies where you could expand either backwards or forwards in the value chain to deliver more value, reduce friction and increase what you're doing with your customers. Is this a great way to increase value and ultimately make you more valuable and may support an exit?

It could be, what are the other services of the buyer that you’re selling to today? Because you already have relationships. You may have an MSA or a Master Service Agreement. So what are the other products? What are the other skews that you can now take the market from a go-to-market perspective through that same relationship?

Also, many times, these value chains are very fractured. So, you have these organizations that have vendor or procurement groups, and they might be buying data or technology from 5, 10, 20, or 30 different companies. And as these companies go through consolidation, as it goes through a digital transformation, those same customers are actually looking to simplify their supply chain. 

And there is an opportunity to become more of a strategic partner to work with those companies to define value, define roadmaps, and deliver. And they’re actually open to having strategic relationships, moving the sales process away from or together with the traditional vendor procurement office and really moves you from being a supplier, more of a commodity to being a valued partner. One way to do that is to move up the stack with an increased value solution with multiple components woven together organically, through partnerships or ideally through acquisitions.

We’re all constrained by resources. Regardless of who your customer is, at some point, there is always a resource constraint. And as a strategic partner, you have the opportunity once you deliver that value to potentially take on more of that innovation, potentially start to do some of the development on your side to solve problems they have, which is a point solution or a commodity, you’d never be welcome at the table for those conversations. So to your point, it really moves you up in the stack, delivers value, and makes you a trusted partner. 

Real life example of value chain ecosystem

If I go back to the last company, I was at Apress, which we sold to Equifax. It had one core data asset and we saw an opportunity in the background screening market. The background screening market was about a 5 billion domestic market who knew about 600 different companies who were in that. So there's this whole ecosystem of end customers and all of them were buying data to deliver a background check from 30, 40 different companies out in the industry, a very fractured supply chain.

We had a differentiated data asset, but we saw the opportunity in talking to the customers to really consolidate part of that supply chain instead of them coming to us and seven or eight other companies to buy. If we could actually aggregate that together, they could come to us as a single supplier, number one and number two.

And importantly, as we brought those data assets in-house, we could actually start to weave them together. Gain insights and actually solve problems to deliver to the customer. And so instead of sending them, selling them the raw material, we could actually start to go higher up and do the production work on behalf of those partners and sell them an insight or a solution as opposed to the raw material. 

Moving part of the work from their side of the balance sheet over to ours, increasing our wallet, how much of the wallet we get because we're now actually taking on some of that work. And because we had all the data assets in-house, we could do it more automated, we could do it faster. We could do it with less manual labor and actually deliver a better product than they could do on their own and get rewarded for that. 

And so we went down that path. We acquired five companies over 24 months. We grew the business from 50 million to a couple hundred million. And we sold that business to Equifax for 1.8 to 5 billion as a part of that process.

Equifax was a channel. So going back to the ecosystem approach, if we think about it, the data itself, in this case, the raw materials that you’re putting into a product. There is also selling it to your customers. 

In our case, it was background screening organizations. It was a governmental agency and other customers. We had both a direct but really more of a channel model. And as we pivoted to a channel model, we worked with other larger data organizations that already had fed on the street, that had contracts, and trust. People like Equifax, Thomson Reuters, and LexisNexis as an example of others as a part of that distribution strategy.

We always thought that that actually might be a nice strategic exit for us. It provided us a time to get to know those organizations, understand the cultural fit, really drive and accelerate our sales and revenue, and in turn, increase value for us and increase stickiness for our channels.

At the end of the day, that strategy actually ultimately played itself out, accelerated the timeline in our exit. And Equifax again was the acquirer in the fall of 2021.

Emphasis on the exit planning

Every different asset or business has its own lifecycle. In our case, we’re private equity backed. So generally, private equity has its own cycle of four to five years as the timeline for them to be able to return capital to their shareholders and partners. That was the timeline we’re working towards and it can be faster or slower depending on execution and macroeconomic environment.

In our case, we have always assumed or likely assumed that the buyer would be a financial buyer. Another kind of private equity sponsor. We did believe there was an opportunity. It would be a strategic buyer and rather than have one or the other, we wanted to increase our exit optionality. We saw that by establishing some of those channel relationships, that would not only accelerate the value proposition, increased revenue, key KPIs, but also would increase our optionality from an exit standpoint.

It ended up happening faster because in the end, that exit is not only driven by time, but overall value that the shareholders are looking for in return. And we were able to actually get a meaningful return through the sale to Equifax, and a time that was a little sooner than I think the owners had expected.

But based on the dimensions of time and shareholder return, it allowed all those boxes to be checked. It happened again fluidly, organically, and frankly, it happened fairly quickly over the course of a few months. Part of it was accelerated by the relationship and the cultural understanding and the alignment between the acquirer and us that we had built over many quarters.

Traditional bank exit

I haven’t been to a pure traditional bank exit. Apress, the company I was at, went through a process owned by one private equity company, Insight Partners, out of New York, and we ended up doing a transaction. 

We brought Clear Lake into the relationship, and that was a fairly structured process in 2019. Nineteen different bankers and strategic organizations, and ultimately brought Clear Lake to the table. But I wouldn’t characterize it as more of a traditional exit. 

On the flip side, if I look at the acquisition side, I’ve probably been involved with many more acquisitions that were traditional sales processes, where there was a banker on the buy-side. But over the last seven or eight years, when I’ve been the CEO and taking this ecosystem approach, by and large, we try to do deals outside of a process.

Fortunately, it just happened organically and that the numbers were there to come together, but I think there's huge value.

There is a high number of deals that fail, and the number one reason for that, at least from my experience, is cultural fit. 

• How do they come together? 
• How do you have an aligned go-to-market approach?
• Is there a tech transformation needed? 
• Do you break relationships with customers? 

All those things are critical, and the benefit of having this ecosystem model and embedding what you do from a go-to-market standpoint and enabling that expansive, potentially strategic exit option, and ultimately either buying or selling, buying a product or a solution that you've embedded in your go-to-market and or inversely selling the company to somebody that you had that relationship with, the culture is a common. 

So you've reduced, if not eliminated the cultural risk, the go-to-market motion's very clear. You've already been working together on a go-to-market and messaging and customer relationships, so you've eliminated that risk.

Oftentimes you've already integrated from a technology perspective. So really you start to check off the boxes or eliminate or reduce the risk, and really what you're left with is execution. And so there's still risk, but you've dramatically reduced the risk from an outcome perspective, if you can influence it that way.

Benefits of an ecosystem approach

There are a number of benefits. One, it opens up the overall TAM. Oftentimes, a lot of the companies I’ve joined or companies I partner with, they offer a specific product. And when you look at their competition, they very narrowly define their competition or their wallet through the specific service or product they deliver.

If you expand the aperture, either from a value chain perspective of: 

• What are the spaces, upstream or downstream? 
• What are the other markets I can potentially move into? 
• What are the channels I can deliver it in, maybe to get to new markets that I wouldn’t otherwise?

You dramatically increase your potential TAM, your potential wallet opportunity. Obviously, a key part of the exit process is not only:

• What is your existing white space?
• How much of the market and the products I'm selling do I have today?
• What is my growth path for the new buyer: financial buyer, or strategic buyer, to continue or accelerate growth?

If you do not have enough TAM or growth optionality, that’s either going to remove your exit or dramatically dampen the multiple you’re going to get because you don’t have the growth profile. So, it increases the TAM, gives you that growth optionality, and ultimately leads to a better exit for you or one set of positive attributes of an ecosystem approach.

That’s on the sell-side. Also, as a company and as a leader, it actually starts to map out what your acquisition strategy is. Because when you take that value chain or ecosystem approach, you’re going to not only identify your growth path. You probably start to identify some tuck-in acquisitions that can accelerate your growth, whether it be through increased distribution or increased products, which is a faster growth path than just doing everything organically. So you have both the acquiring side as well as the selling side benefits to that approach.

Bringing fresh perspectives

In my own experience in the last three companies that I’m in, including the one right now, I had zero industry experience, whether it be people-based risk, insuretech, or in the whole securitization process, which was a company before that had never been there. 

One of the things I found early on was these founders or leadership teams who had done a phenomenal job building a brand, building a deep moat around a specific product. And maybe one of the challenges is they actually were running out of TAM. 

It was unclear how to grow it, but they often were so close to the market and the product. They had a hard time really stepping back and really thinking of it from an ecosystem perspective or thinking about the digital transformation that either was coming or starting to happen, and the implications on that for the business.

And oftentimes as a CEO, as I step into these organizations, some of the resistance I see initially is actually from the really smart, successful employees who were there because maybe they tried something five years ago or maybe they've been so close to it. 

But now, by bringing in a set of fresh eyes, you can start to ask different questions and really start to see the art of the possible through that fresh perspective. It's worked for me. I've seen it work for others, and it's something that I continue to invest in as I build out my organizations.

There is no perfect playbook. To go into it is very much just going in, building trust, having a leadership team and working with that leadership team to really set a clear growth strategy to really set our mission, our purpose, our values. 

It may seem a little hokey to say that, but oftentimes, these organizations that have been very successful in a product or an area or even have grown more holistic through to an ecosystem, have gotten away from a clear view of the strategy, a vision, a mission, and a purpose.

Going back to its roots and establishing that really provides a north star, not only for the leadership team to assure they’re aligned in marching towards, but really to bring the employees along on that journey, which is so critical. Part of it is going in and just facilitating those conversations, breaking down the barriers or the silos between the functional groups. 

Oftentimes getting it already what’s inside of your leaders head, think of it as a consulting organization coming in. Get the best out of the people around the table and really packaging that up and getting buy-in and then going to execute. Not a perfect playbook, but that’s a path I’ve taken and it’s worked a number of times.

Ecosystem Playbook 

One is, have a working session. Get on a whiteboard and ask some of the simple questions like: How do we grow? That’s our mission. As a leadership team, if we don’t have a strategy and we’re not growing, you don’t need us here. Then you’re in a maintained mode. 

When the answer isn’t “we can’t grow” or “we’re running out of room,” or “we’ve sold to all the existing customers,” then you start to ask the next level of questions.

• Who are our customers today?
• What are the water coolers?
• What are the problems they have?
• Where are they aggregating together to learn? Is it different conferences, newsletters, or LinkedIn groups?

Start to look at those places to learn more about the industry and the emerging players, coaching your team to have more thought-provoking conversations with the customer. Not about what keeps you up at night, but about:

• Who's the most interesting startup company that’s been here in the last month?
• Who are the most disruptive organizations that you're seeing? 

And you start to piece together those breadcrumbs to understand:

• Who are the emerging companies?
• What are the problems that they have?
• Where are those water coolers that you and your team and your sales team and product organization can start to go participate in?

It really is a coaching and a participation exercise to get there. With that, you can start to flesh out what are your growth vectors? Is it new verticals? Is it these adjacencies? From there, start to prioritize. It may start with a whiteboard engagement and then evolve into a number of different tactics and programs to get the data and set a path forward.

How to create a value chain ecosystem

It might sound overly simplistic, but actually writing it down, laying it down in an Excel sheet and ultimately into a PowerPoint on a whiteboard to literally understand each step of the value chain is what I would add to the steps. 

• When there's data or a participant, who are they handing it off to?
• What are the underlying platforms they’re using? 
• Is there a platform or workflow that the customer is using that takes all those elements?
• Who is leading those workflows?
• Are those companies going through disruption?
• Are there opportunities to partner with those organizations to drive stickiness and reduce friction, which I’m a big fan of, to deliver value?

To map it out, in addition to then going out and asking your customers, talk to bankers to understand who are the emerging companies that they’re seeing going to different innovation forums. It really is about mapping it out and putting it on paper and then continuing to iterate and learn.

Understanding water coolers

When I was talking about water coolers, I was referring to them from an ecosystem perspective. Where are the respective places where customers and partners are coming together to talk to learn about what's happening? 

Those can be LinkedIn sharing groups, there might be conferences, they might be customer advisory councils. There might be thought leaders that have their own kind of blog or newsletters such as you do around M&A. 

Where are those water cooler opportunities that either I can learn from or participate in the conversation to start to get our point of view on? I think the point you were making, which is not what I was mentioning, but I think is equally as important is: who are those internal thought leaders? Where are those  places where different functions are coming together? Oftentimes they don't exist internally, and how you create them is critically important. So we got internal and external water coolers.

Documenting the value chain ecosystem

The way I think of it…think of a value chain in a classic Chevron step. What are all the steps, left to right? What are the kinds of systems underneath? And start to add logos. I’m a big visual person, where you might have this three-step or 15-cent value chain, and then underneath each one, hopefully, you’re adding logos, and that becomes the types of companies you’re looking to partner with or integrate.

As you start to understand one particular chevron step, you may find out that there’s another vector you haven’t thought about. It could be companies that are doing that in a different industry. It could be companies that are doing that, but you’re only in the US market, but they’re doing it in the Canadian market. Can we actually move into the Canadian market by partnering or acquiring that company? So, by mapping it out and having rigorous conversations as a team, you start to identify those growth vectors.

You also can’t be afraid, and this is key. Oftentimes, people are afraid to talk to and reach out to competition, or afraid to reach out to companies that may be in adjacent spaces, and you just have to get over it. 

You have to pick up the phone and call them. Then tell them what you do, and ask how you can work together to reduce friction and accelerate value for your respective customers. Is it a product integration? Is it go-to-market? If you have one customer base and they have another, maybe you can take their product to market? 

Ultimately, it may go nowhere, but those conversations and peeling it back are just so important to continue to build out and iterate, and many companies just don’t do that well or are afraid to do it.

It could be different markets, it could also be different verticals, depending on the product or service you’re in. Primarily, today, you might own the financial  services industry, but you’re running out of market. But by going through it, you find out that if you took what you had and you tweaked it a bit, you could now take that same service into the chemical industry. So part of it is understanding those vectors, what the competitive landscape is and where you might have an opportunity or remote to go something different.

Talk to people

After we map all this stuff out, we’re going to talk to people: to the customers, bankers, and find the innovation events and conversations happening. And at a minimum, when you now go talk to the customers, you’re really positioning yourself as a trusted advisor because you know the ecosystem. 

Instead of just going in and selling your products or services, you can have a conversation with them about other problems. Are they working with company A, B, or C? Surprisingly, the customers will open up, and say who they’ve come to work with and which company is best and why. They will tell you which company is great to partner with. The customers will lead you in that direction and support you in that integration or they can tell which company is horrible. 

So, understanding the ecosystem and not just talking about what you do allows you to have those more strategic conversations and ultimately positions you more as a trusted advisor. And it’s surprising how much you can learn by asking questions.

Considering the maturity of partner ecosystems

Considering the maturity of partner ecosystems depends. I’ve been a part of companies where I was the big dog, and I was trying to engage what’s much smaller, and I certainly have been to the other side of that. And it’s always all relative. 

A $20-million company is a big dog for a million dollar company, and a 20 million company is a little dog for a billion dollar company. If you’re the little dog, going to that big company who has their own revenue goals, they already have their own priorities. They have their revenue goals, and when you’re going to them, you’re probably an anklebiter. 

Whether I am or you are, as an anklebiter, and you’re trying to get their attention, part of it is, can you actually go prove it out? So in your case:

• Can you go to some of your existing clients who’ve done deals and work with you across the various things that you mentioned from a lifecycle perspective and how you engage with them? 
• Who do they work with from a reps and warranty standpoint? 
• How do they think the two of you partnering together might add value to them?

That’s the key, and so if you can find a common customer to really start to understand that if you and the other company can do this together, that would actually help them. You do that a couple of times, then you’re going to the big dog and telling them a mutual customer would see value in you working together and you now have brought something to the table. Now you will have a conversation. So, part of it is proving it out and coming to the table with a hypothesis or ideas that a customer has endorsed.

Even if that original idea isn’t the right idea, your customers may suggest alternatives or other things that you never even would have thought of, but now you’re having a conversation.

A lot of the companies I’ve been at and where I’m at right now, it’s still early on, so there’s a lot of coaching because this is a new muscle that they’re learning. Where I’m at now, it’s been more of a direct sales model. The ecosystem is literally going through a digital transformation. The last two shows I went to, that was the starting slide at both of the keynotes from both the CEOs as digital disruption, taking more of an ecosystem approach.

My team looked at me and said I’ve been talking about the ecosystem and business development and partnerships, and they didn’t get it. But now there are these two key partners who are starting their entire presentation with it, and they get it.

So, early on, often meet with them either internally or going to those conversations. But over time, and time is probably measured in months, not quarters, people get comfortable in anything, like in sales.

Once you’ve made the sales pitch a number of times, and you’ve handled objections, you can now go sell on your own. So, once you’ve now engaged with different partners, you start to learn that muscle and more of it’s happening down at the business development or in some cases, the product level, depending on where you are in the value chain.

Tying it back to the M&A perspective, you’re probably going to identify some of those partnerships from a distribution, technology, or product that are a good fit. You’ve now proven the value. 

You’ve proven you can take it to market to your existing customers and may shine a spotlight on which acquisition you should look at. So, it’s really about increasing your wallet organically or through those acquisitions. In the inverse of that, through that process, you may identify potentially strategic buyers who start to look at you on the same lens. 

To get to that point, the process really depends. And the reason I say it depends is that you need to think about what is your capital structure? What is your ownership structure? If you’re a venture-backed deal, that looks very different than if you’re a private equity-backed deal that may specifically have more strategic M&A as part of the playbook. 

Versus if you’re a founder and you’re bootstrapping the business, your gut may be there. But then, the ability and the interest to actually go pull it off is not only based on your gut, but your timelines, horizon, your capital structure and the interest and motivations of your owners.

I prefer an organic long-term aligned sales process. Everything is always based on your point of view and experience. I certainly have seen you can get top dollar without going through a bank process, because part of that is you understand the strategic value that you’re bringing to that strategic buyer. 

You’ve reduced the risks from a go-to-market, cultural, and a technology perspective. And as a strategic buyer, they may then be more willing to lean in. You have higher deal certainty, less distraction from management. And when you weigh all those out, the benefits of that approach outweigh the potential slightly lower multiple on a protracted bank process.

Valuation

What I look to do each and every day, get up with myself and my team and build a long-term sustainable business, and ensure that I’m creating value for the customers, the employees, and increasing enterprise value.

The last thing I want to do or can do is really try to build a company and make decisions based on one outcome. That one outcome being going public, selling to a specific strategic buyer or to a financial buyer. Because, ultimately, depending on the time when you go to sell, one or more of those doors may close.

I do think some of those things, but also I just need to be more cautious to make sure we’re making decisions that increase the optionality and don’t take us down just one path or another, because it may ultimately not get us there.

Best practices on deal execution 

Part of it is transparency and trust. Just like in any business, whether it’s in a customer relationship or a partnership relationship, or the sales or a sales process, there’s going to be challenging times and conversations. 

But as long as you can be transparent about the situation, and you have your fiduciary responsibilities and certainly be conscious of those, just being truthful and candid is paramount in maintaining those relationships.

Be responsive. I’m a big believer that whatever side you’re on, you want to be responsive to the process, which goes back to actually building trust and people really not playing games. And therefore, if you’re responsive and transparent, when somebody tells you something, you’re more likely to believe it.

In that kind of gamesmanship, ultimately you get to the right and the best outcome faster by that level of trust, transparency, and responsiveness.

Secondly, it’s about the right team. In my case, it’s about having the right kind of CFO or financial partner, having the right technology partner, and then myself as the CEO. It’s about having that right kind of core team that you need to go out. Sometimes you’re supported by buy-side or sell-side advisors. But, be transparent, have the right team, and be responsive to me or just table stakes. 

Transparency rules 

In my personal view, when I’m meeting with the CEO and leadership team, when we’re in the first meeting as it relates to the potential acquisition, whether it be in or outside of a formal process, probably the last question I have in that first conversation is “what are your plans?” 

It’s okay if their answer is that they’re looking to take some chips off the table and go do something else, that’s okay. I totally respect it. If they really have the interest to stay on and drive the growth, that’s great and I’d love to have the conversation. But really understanding where people are at, what their expectations are, is paramount because you, as the acquirer or the seller, if you have a misaligned expectation, very quickly it’s either going to take the deal sideways and you’re waiting a lot of time, or it’s going to lead to problems post-close from an execution perspective.

On the flip side, if part of your thesis is cost synergy versus revenue synergy, and on the cost synergy side, it could be product, sales, and your example. Certainly, that’s a conversation you want to have with the other senior leadership team. 

If part of their thesis is the cost synergy, the key thing is, have you already made the decision? Because to me, if you’re going to consolidate sales teams, you’re going to look at everyone in that example to say who is the right leader?

And in many cases, the right leader may not be in the buying organization. It might be on the selling organization. And to me, a true leader and a true process is really being open to how you layer and leverage some of those resources in the asset that you’re acquiring because they may be better than what you have, but that’s a hard practice to get comfortable with.

At the end of the day, we all want to win together. Let’s make sure we have the best team on the field aligned. And sometimes you don’t know who the athletes are unless you have that discussion.

Reading between the lines

During our earlier conversation, you mentioned that a part of understanding what someone is truly thinking versus what they're saying comes from your gut feeling. If you've followed this approach, whether on the buy-side or sell-side, and have worked with an individual or a leadership team for several months, if not quarters, you should have a good idea of who they are as a person and a leader, including their interests.

When someone makes a statement and shares how much they can tell you, part of it requires a gut check. You need to ask yourself: 

• Who is this person? 
• What are they representing? 
• Can I trust them? 
• Is this a leadership team I want to be a part of?

This gut feeling is based on your experience and the time you've invested in getting to know these individuals, and vice versa.

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