Engineering discipline in M&A

Before even talking about M&A, I think running a tech company today as an entrepreneur, founder, or CEO requires a technical background. Technology changes so fast, and you have to stay ahead of it. Otherwise, you're going to get disrupted by the market. 

It's really important for founders to either have that background or have partners on their team with a strong technical understanding to grasp what's happening.

From an M&A perspective, yes, the engineering discipline and research background help when thinking about and articulating what we want, how to drive deal dynamics, and maintaining focus on achieving objectives. It also helps take the emotion out of it. A lot of times in deals, there’s emotion, and you have to be mindful of that.

We've done five acquisitions since going public. Prior to that, we hadn't done any, and the company's been around for 20-plus years. There’s a deal cadence to things. We actively track and evaluate over 200 companies. Market conditions obviously matter. Sometimes the market is too frothy, but we're very focused on fundamentals.

We built this company with just $60 million in primary capital and no debt when we went public, so discipline and fundamentals are key. When we look at companies, we focus on those that aren't highly leveraged or burdened with significant liabilities, like large interest payments. 

I never believed in the type of market strategy where things are cobbled together for marketing but never truly integrated, especially in tech. In tech, anything we acquire needs to be re-coded, refactored, and fully integrated into a seamless platform that can be offered to customers and partners. That’s super important to consider.

Lessons in driving growth through organic and inorganic strategies 

When we went public in 2021, we had a healthy balance sheet with $230 million and no debt, and we were growing. Today, we’re cash generating and almost GAAP profitable. The difference is stock-based compensation, which is a real cost as a public company when issuing stock options to employees. 

By next year, we’ll be GAAP profitable as well. We're focused on profitable growth, meaning we need to be cash positive and also grow revenue and EBIT margin in double digits. 

We’ve just closed our sixth consecutive beat-and-raise quarter. We've been clear with the market that there are multiple ways to grow: organically and inorganically.

Organically, we grow our portfolio by investing in sales and marketing while making the process more efficient through channels, so sales costs go down while revenue goes up. We also invest in R&D to expand our portfolio and enhance our platform for customers and MSP partners.

In terms of inorganic expansion, we focus on multi-cloud environments. We’ve built a strong brand in the Microsoft cloud ecosystem, but the world is multi-cloud. 

Recent incidents like the CrowdStrike breach have shown enterprise customers the importance of multi-cloud setups for business resiliency. We’ve expanded into Google Cloud, AWS, and Salesforce, as well as Microsoft, to provide more value to our customers and partners.

We've taken an organic approach through sales, marketing, and product development but our acquisitions are largely product-driven to expand our offerings. 

Yes, we don't believe in acquiring just for revenue purposes. As a technology-driven company, we take tech debt seriously. We focus on acquiring interesting intellectual property (IP) that fits our global footprint. 

Today, 45% of our revenue is from North America, with the remaining 55% split between Western Europe and developed Asia markets like Japan, Singapore, and South Korea.

Over the last 20 years, we've built a solid foundation, and we believe we can add value by distributing acquired IP through our global channels and accelerating platform growth.

It's about both the distribution model and our existing customer footprint. We have a platform called the Confidence Platform, where we integrate new IP. 

For example, we acquired Tygraph, a Canadian company that captures signals in hybrid workspaces—things like who’s talking to whom, sentiments, and AI deployment areas. We quickly integrated Tygraph’s product into our Confidence Platform, and for existing customers, it’s as simple as checking a box to turn it on.

So, through our channels, we can sell and upsell new IP, while existing customers can easily access new features.

Building a strong distribution network

We started off as a direct sales organization because we were a bunch of engineers. We actually began in regulated industries like government and banks, which required a high-touch enterprise sales experience. 

But once we transitioned to the cloud, we realized that by becoming a software-as-a-service provider, we didn’t need customers to install anything on-premise.

We had to run our own cloud operations and security, becoming a global first-class citizen in that space. This removed a lot of headaches for our SMB customers since they could access enterprise-grade data management and security software without having to worry about installing, maintaining, or operating it.

That’s when we saw the power of channels. Channels allowed us to invest because they have a much broader outreach. The world is a very big place, and in the B2B space, we have a limited population of salespeople. So, to scale and have more conversations, we had to invest in channels.

To truly reach the SMB space, we needed to scale through channels. Microsoft is a 100% channel organization, with an incredibly low cost of sales—around 15%, compared to the SaaS industry average of about 30%. Fifty percent of Microsoft’s revenue comes from small to medium businesses, so we saw this massive, greenfield opportunity to invest in.

We started this exercise less than four years ago, and now channels account for 60% of our revenue, which is growing fast. It’s a way to reduce costs while continuing to increase growth and market coverage.

The importance of strategic capital raising for long-term growth

When we went public, not counting the IPO capital, we had raised about $60 million of primary capital across Series A, B, and C. 

Series A was with Summit Partners in 2006, with less than $6 million. Series B was with Goldman Merchant Banking in 2014, raising $100 million. 

Series C was with Sixth Street Partners, which used to be TPG Sixth Street, raising $125 million. We also raised another $50 million from friends and family during Series C.

At every step, we kept investors owning about a third of the business. Each new round involved the new investor buying out the previous one, so we didn’t lose too many shares. We took a little for primary capital to inject additional funds into the business.

We’ve always focused on cash flow as the foundation of our business. We didn’t need a lot of cash, which helped us avoid dilution and maintain control. That’s incredibly important for tech entrepreneurs. 

You want to retain the vision and continue driving growth because we understand our customers. I’m on the road all the time, meeting with CIOs and CEOs, figuring out their pain points.

My advice to entrepreneurs listening is: don’t give up control too early. In fact, raise your first round of capital as late as possible. Bootstrap as long as you can and get to revenue first. That’s the best time to raise capital because you don’t want to lose control too early. 

I’ve seen too many entrepreneurs sell their businesses before they’ve really hit that steep climb in valuation, missing out on the upside.

It’s crucial to only raise the amount of capital you need. Don’t go overboard and raise so much that you lose control. Ultimately, investors have their own investment timelines—three, five, or seven years—and they need to exit and return capital to their LPs. 

That’s when objectives can differ between founders and investors. Investors want to exit at the highest value at that moment, while founders want to continue building the business for the long term. As a founder and CEO, you have to manage that dynamic carefully.

Role Play

How to recapitalize and scale without losing control

Bootstrapping to this point with just 10 people and growing revenue at this clip is a great story. You should be able to get a really good valuation. The key is to figure out your exit plan, whether you want to be a platform or an acquisition target. And, as your business grows, your vision for it might change as well—you may become part of a much bigger platform.

It's really about the philosophy of the entrepreneur. I've seen many serial entrepreneurs who build businesses to $10 million, exit, and then start another.

The first one is always the hardest, and I don’t want to do that over and over. If you don’t need capital and you're growing 60% year-over-year, that’s fantastic—keep going. But there needs to be a purpose for raising capital. For us, our initial capital went toward international expansion, which is how we ended up in 18 countries today.

In the B2C world, companies raise insane amounts of capital and burn cash to grow revenue, but that model isn’t sustainable. The market no longer rewards that behavior. What you're doing—being prudent, disciplined, and continuing to execute—is smart. 

Raise capital only when you need it or when it makes sense to bring in an investor to take some cash off the table and de-risk your personal stake.

Selecting the right partner is crucial. Dumb money is easy to find, but finding a good partner who is aligned with your growth vision is the hard part. You want someone who will be with you for the first three to five years to maximize growth. It’s important to choose wisely to ensure you’re growing your vision together.

Structuring a recap

There's a lot you can do to accelerate growth. When you do a recap, you have two types of capital—primary and secondary. Primary capital is net new shares issued by the company, which would dilute all your existing shareholders, including yourself. That capital is used to accelerate growth, whether through acquisitions or international expansion.

Then there's secondary capital, which means you’re selling your personal shares to a new investor at a higher valuation, taking some chips off the table. This gives you a financial safety net, which can make a big difference, especially for entrepreneurs like you and me who started with nothing. 

Having a couple of million in the bank gives you peace of mind. It often makes you think and act more aggressively in your business, knowing that you have that nest egg.

For primary capital, you and your senior leadership need to decide how to use the funds. If you’re raising to maintain control, giving up around a third or 40% of the business, you need to think about how that capital can help you grow the platform. 

If you want to acquire companies, there are different ways to structure deals—cash acquisitions, part cash/part equity, and earn-outs. It takes an entrepreneur to understand entrepreneurs, so you need to ensure that everyone’s interests are aligned when structuring these deals.

Balancing primary and secondary capital

If there’s a common ratio between raising primary versus secondary capital. What would that look like? Even for a new investor coming in, if too much is secondary, it will raise red flags. A good rule of thumb is a two-to-one ratio—two-thirds primary, one-third secondary. Of course, you can adjust it a bit, but that’s generally a good rule. 

Investors want most of the money, say two-thirds, to go into growing the business. That way, both parties are aligned in growing the platform to a higher valuation, so everybody wins.

One-third can be secondary, providing a safety net for you and your senior leadership. As I mentioned, having that psychological effect of financial security allows you to lean into the business more aggressively. 

You’ve probably bootstrapped this business for the first few years without taking much of a salary, so this compensates for that—your sweat equity returning some value. So, the two-to-one ratio is a solid approach and shouldn’t be flipped the other way.

So even at roughly 30% of $250 million, that’d be about $75 million. I’d say $50 million goes to primary, and $25 million goes to secondary. You’d have $50 million on the balance sheet to start doing deals.

Maintaining control and avoiding founder dilution

At a certain point, your investors will want out, and you’ll need to provide them an exit. Of course, they’ll want out at the maximum valuation possible, and there’s a dynamic there. Sometimes achieving that maximum valuation may require a majority sale, which is why it’s important to maintain majority control from the start. 

You need to be able to say, “I’m the core of the business, and if you force a majority sale, the business will be worth less to all of us.” This is why I suggest keeping your ownership to around a third, and between 33% and 49%, there’s room to raise additional primary capital in future rounds without losing control. 

Ideally, you want to keep 51% ownership for maximum leverage in negotiations. I’ve seen too many cases where founders give up too much equity too early. 

In acquisition conversations, I’ll be negotiating with a founder, only to find out they own less than 51%—sometimes as little as 40%—and I realize I need to negotiate with the board or a larger investor group instead. It just complicates things.

What you said is true: you often hear about companies constantly raising capital, as if the CEO’s job is just raising money, like a politician fundraising every six months. But those businesses often have no choice, especially capital-intensive models like AI companies that need billions for GPUs. Not every business is in that situation.

For most companies, you need to focus on running your business with discipline, understanding if you really need to burn cash to grow. Do you truly need that capital? The more equity you give up, the less control you retain. Eventually, the company you’ve spent decades building is no longer yours.

I’ve seen situations where founder-CEOs, even of public companies, get fired by activist investors after owning less than 1% of the company. It’s a sad situation. You want to avoid that if you can.

Life is a marathon, and you can pace yourself. Don’t get swept up by the outliers you hear in the news—companies that reach a $700 million valuation in six months. For the vast majority of us, it’s about focusing on the fundamentals, being sensible, and maintaining control over your destiny.

Maximizing returns while retaining control

The second time around, it’s going to be majority secondary and minority primary because you want to maintain majority control. So, in this scenario, you want the Series B investor to buy out the Series A investor as much as possible. The Series A investor is happy with their returns and exits, or they might keep a small piece if they believe there’s still upside.

The new investor will become the primary, and they might negotiate for a preferred class of shares since they’re coming in at a much higher valuation. But you’ll do a bigger secondary than primary. 

The primary should only be the capital you need to grow the business to the next phase. If you believe you can take the $750 million company to $1.5 billion in the next three or four years and need capital to get there, that’s where the primary comes in.

You’ll likely raise a bit more than 30% this time. Say, the first time you raised 30%; the second time, you might raise 35%. Thirty percent of that would go to paying out the first investor, and the extra 5% would be primary capital to grow the business.

For example, if your valuation is $750 million, 10% would be $75 million. So 5% would be around $36 million to run the business.

So you’re still keeping control with a minority position, but now we have significant cash to deploy for the next strategy.

How going public challenges companies to maintain discipline and long-term focus

I heard a recent stat that there were 500 delistings on the NYSE and NASDAQ last year—two or three times the usual churn. Seems like private companies are becoming more popular these days.

People don’t realize that going public, at least for me, is just a financing event. I don’t want entrepreneurs to think going public is the end-all, be-all. What’s the point of going public? It’s really just a fundraising exercise, but with a lot more work.

It raises your brand and makes your equity liquid, which makes everyone happy—your investors and employees. But it’s a lot of work because every three months, you get a report card, and the market is brutal. 

It judges your earnings, and sometimes it’s just following market trends that have nothing to do with what you did. But that report card is seen by everyone, including your employees.

For me, because I’m a bit of a masochist, I like it. It keeps us focused. The founder of Tipalti once said, "The best companies are made in the crucible of being a public company," because when you’re public, you focus on the metrics that matter. It forces you to become a disciplined and focused company.

But not everyone enjoys that pressure. It can push you toward short-term thinking, which isn’t good if you’re planning for the long-term success of the company. The need to justify your decisions to investors every three months can become a pain. The public market is also ruthless, judging every step.

Take Splunk, for example. They were a high-flying company, then they decided to shift to a subscription model, moving from perpetual licenses to SaaS. Everyone knew that transition would be hard, but executing it while being judged every quarter is extra difficult. 

That’s why they ended up being acquired and going private. Adobe managed to do it successfully, but even for them, it wasn’t easy in the beginning.

As a public company CEO, you also take on a new role—managing institutional investors and retail investors, especially the former. These institutional investors, like Fidelity, hire very smart people who are excellent at modeling businesses in Excel. 

Every quarter, you’re talking to analysts from banks who build detailed models of your business. You have to be disciplined and transparent because the market doesn’t forget what you promised last year or last quarter. 

If you don’t meet those expectations, the market penalizes you. That’s why going public can make a company better and more disciplined, provided you execute well.

Capital advantages of going public

I’ve talked about the headaches and additional work that comes with being public, but there are tremendous benefits as well. One is the brand benefit—you attract really good talent as long as you’re performing and executing.

When your stock price is doing well, that gets attention. For example, we’re one of the largest public companies in the Microsoft ecosystem, and our stock has been increasing at a much faster rate than Microsoft’s. That’s very appealing when attracting talent.

On top of that, the cost of capital is cheaper when you’re public because your equity is liquid. Investors can trade anytime, so it’s considered liquid compared to a private company, which is illiquid. 

Private companies may have dark pools for trading if they’re large enough, but borrowing costs are much higher than for public companies. Public companies can borrow at a much lower rate.

You can also offer RSUs (Restricted Stock Units) and stock options. This is why stock-based compensation is considered a real cost, but you can use it to incentivize talent, retain existing employees, acquire new talent, and even acquire companies. 

It’s not just about cash anymore—there are many ways to leverage capital markets to grow faster. That’s the key benefit of being public.

So, talent acquisition, lower cost of capital, and stock-based compensation—though you have to expense it. 

Stock-based compensation is a real cost. This is why we talk about GAAP profitability versus non-GAAP profitability. If you look at most SaaS companies, they report non-GAAP numbers. We also talk about both. 

At our investor day last March, we said we’d be GAAP profitable by next year. We’ve already been generating cash—over $30 million last year and even more this year. Next year, we’ll be GAAP profitable because we’re accounting for stock-based compensation as part of our costs. Being public really positions you better to do deals.

Structuring acquisitions and aligning acquirer and founder interests

Every acquisition is different, depending on where the business is and where the CEO or founder is in their career or aspirations. That dictates how the deal is structured. Ownership also plays a big role—is it mostly VCs or just the founders? These factors change the dynamics significantly.

The overall thesis for our acquisitions is that we are entrepreneurs, and we understand entrepreneurs. If the founder is the core of the company and its innovation engine, we want to incentivize them to stay with us as long as possible. 

We usually acquire companies for their IP, meaning we’re acquiring domain knowledge we don’t have. We want to grow with the founder and leverage their expertise to maximize returns.

For that reason, I favor an earn-out model. We pay some upfront, and then pay incrementally more over time, usually tied to revenue performance. That way, the founder can make more from the sale in subsequent years if the product performs well, rather than just a large upfront payment. 

For the acquiring company, it also offers downside protection—if the product doesn’t perform, we pay less over time.

Financial forecasts often show a hockey stick projection, but the earn-out model aligns interests and creates a longer horizon, typically three years or more. If the product succeeds, everyone wins together. If it doesn’t, the risk is shared.

The issue with an all-stock deal is that it’s blended—it reflects the overall performance of the acquiring company, not just the product being acquired. We usually acquire smaller companies for their IP, not revenue. 

If the acquired product underperforms while the acquiring company is doing well, it introduces a free-rider problem. The entrepreneur could benefit from the overall performance without the product performing as expected. So it’s about getting the right mix and aligning the founder’s incentives.

Strategic capital allocation to drive growth

Capital allocation is different for private versus public companies. In a public company, you have things like stock buybacks and dividends—ways to use capital to benefit overall shareholder value.

For a private company, the capital is really there to grow the business. I encourage looking at industry metrics. The beauty of being public is that all the data is available, so you can compare yourself against industry peers.

That’s another advantage. When you're private, it’s harder to make those comparisons. But when you're public, you’re in the major leagues—you’re comparing your performance to other companies that are also executing at a high level.

You can look at what other companies are spending on sales and marketing, operations, and R&D, and benchmark yourself. Ask, “Are we as efficient as other tech companies?” That’s a significant benefit of being public.

For private companies, I suggest looking at public companies to see how they allocate capital. Compare their spending on sales and marketing, operations, and development, and use that as a guide to think about how you should allocate your resources to drive the outcomes you want.

Key advice for growing, raising capital, and allocating resources

One thing I forgot to mention about the difference between public and private companies is the unifying impact of being public. When you're private and you screw up a quarter or a year, you might get yelled at by investors in a board meeting, but the rank-and-file employees don’t feel that pressure. 

When you're public, everyone feels it when the market judges you. That unifying effect can be incredibly powerful because everyone in the company is a shareholder. If executed well, it can be a huge force multiplier. 

A private investor once asked me how they could create that same sentiment in a private company, but it’s hard. You can’t replicate the feeling of watching your stock after earnings—whether it goes up or down—and having that impact spread across the whole company.

As for advice, I think it goes back to focusing on the fundamentals. That’s why people like Warren Buffett are so respected. He’s not just the “Oracle of Omaha”; he focuses on the fundamentals, and that’s what lasts. 

Trends come and go—things like meme stocks can be hot today and gone tomorrow—but as a business, you need to focus on running a cash-generating, growing company year after year. That resilience is what makes a business strong, no matter what’s happening in the macro environment.

As an entrepreneur, it’s a marathon. You’ll continue to grow, face new challenges, but at the end of the day, you want to build something strong and resilient. That’s the legacy you’ll leave, whether for your partners, your family, or your investors.

My only regret is that we didn’t go public 10 years earlier. We had eight straight years of exponential growth between Series A and B, but that was during the on-prem days, not SaaS. 

We could’ve gone public and would be a much bigger company today. That discipline of being public is valuable, but you’re never ready until you’re ready.

There’s a certain level of maturity required to go public. You need a management team with depth. You need fault tolerance—if someone leaves, the company needs to keep running. You can’t have single points of failure. 

That kind of maturity and depth is essential for being in the spotlight every quarter, under scrutiny from the market. So, again, focus on the fundamentals, and that will carry you through.

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