Avoid These Startup Pitfalls for a Successful Exit

Full transcript

The blocker in the room

Welcome back to the podcast, guys. Today we are joined by Chris Maresca. Chris, welcome to the podcast. Thanks for having me today. Do you mind giving us a brief introduction? No. My name's Chris Maresca. I'm based in Silicon Valley. I'm a serial entrepreneur. I've done 14 startups. I've had seven exits including one IPO. I currently work as a consultant helping with mergers and acquisitions advisory, turnarounds, and leadership coaching. Most recently, I was COO of a company called Square Rate, which was a tech platform started by the largest inbound cargo handlers in The United States. I read a line that you have on your LinkedIn. You there is I turn messy tech companies into clean investments. Yeah. Could you briefly explain was that what does that actually mean in practice? Like, where do you tend to start first? Is it people, product? So that came out of my experience in private equity. So in the last eighteen months, I've been doing a lot of work with private equity, some of the largest private equity funds in the world, helping them buy companies.

And what I realized is that there's a lot of companies that are not sort of purchase ready. And there's a lot of reasons for that but mostly entrepreneurs, especially tech startup entrepreneurs don't really understand what buyers are looking for. So when a company is looking for an acquisition, they have certain basic requirements that they wanna see in the company. And often the companies, they don't understand that. And there's a lot of messiness in the companies that needs to be cleaned up. What usually happens in an acquisition, especially with well, in any acquisition really, you there'll be people like me, I'm a tech I do technology due diligence, but there will also be financial, obviously financial, legal, intellectual property, commercial, which is sort of market and everything like that. Everything that's related to market and marketing and things like that. There'll be sometimes there's an HR due diligence. It it just depends on what the company is. But each one of those functional areas will do will start to document the things that are wrong with the company. You know, that that they will that need to be

fixed. And all of that is generically called remediation costs. So you know, if you look at for example, know you know, your your well let's talk about tech for a sec for a second, excuse me. The your technology stack may be out of date. Maybe everything needs to be updated. Well there's a cost to that. The cost might be it might be you know $300,000 but it could also be 20,000,000 depending on the size of the company. And that's remediation cost. And each one of those costs will go against your valuation at exit. So if you're if you're let's say you're doing $10,000,000 in ARR, then your company might be valued at exit at $50,000,000. But if you have, you know, a million dollars of remediation costs, then all of a sudden that 50,000,000 becomes 45,000,000. Because you assume a million of what you can see, but what you can't see, you know, you gotta take into account some flexibility. So in order to avoid that,

you know, I've been approached by companies that are in the process of doing exits. How do we avoid this? How do you prep for this? I recently had a discussion with a company and I said, you need and they're a they're an early stage company. And I said, you need to start doing things now to prepare for that exit. Because if you have to do it at the end when you're trying to exit, then it it's a lot more expensive than if you start doing it now. There's there's really simple stuff like you know, get your accounting systems sorted out. You know, it sounds really stupid and you know, when you're young and and you have three people, it's relatively easy to do. But if you have a terrible accounting system that's not set up correctly and you try to fix it when you have a $100,000,000 in ARR and you have you know 200 people, then it doesn't work. Like you know, I mean it's gonna cost you a huge amount of money and time. So you know, always tell people, start early. You know, documentation.

Document what the processes are, what the you know, how things work, know, how do you onboard clients, you know, these kinds of things. If if the way the company works is in people's heads, then that's very bad at an exit. Because you know, those people can leave, the knowledge walks out the door. And that that often happens when companies are bought. Right? So you know, all kinds of stuff like that. So it's it's a lot of small things, a lot of simple things, but a lot of things that people just don't wanna do. And so that's pretty important. And that's at least that's you know when you look at exits that's really important. I think you know, we I I was working with a company last year and halfway through the due diligence process they fired the chief financial officer. And you think, how does this happen? You get through, you know, this was a half $1,000,000,000 exit and all of a sudden halfway through the process of acquisition, you let go of a critical person because they weren't performing? How did you not realize this beforehand?

What does it say about the rest of your executive team? You know, that you guys are your board for that matter. That nobody realized this person was incompetent or whatever it was. I don't know. So, you know, I think there's a lot of that going on. Mhmm. So it's really fixing the leaks before doing the exit? Yeah. So the way I look at it is, you know, companies have a value creation chain. Right? So they have at one end, they're they have some resources that they're bringing in whether it's people or materials or whatever. And then they're transforming that into something of value that then they're selling to customers at the other end. And there's a process for doing that, know, like a value creation chain. And each one of the steps in that value creation chain needs to be cogent and robust and well documented and repeatable. Right? And and if it if it isn't, if there's a hole, you know, or you know, there's one guy who knows how to do this critical thing, one woman, that's

a problem, you know? And the same goes with the other side of it is, you know, customer acquisition. That's also part of your valuation chain. Like how do you acquire customers? How do you bring them on board? How do you how do you what does your sales process look like? How are you closing the loop? How are you closing your deals? How are you structuring the deals? What your pricing models are? All these things feed into your value creation chain. And if any of it is broken or weak, then that's that's gonna be a problem. It's gonna be a problem not just not just at exit but also it's a problem when you're running at the company. Right? Because you are you're you're literally what you're doing is you're putting you're holding back the potential of your company. Right? So yeah. That's where I Chris, you also wrote about the company that had pipeline but couldn't actually close because of leadership Mhmm. That was sabotaging deals at the kind of final stage. Mhmm. How common is that the blocker is in the room problem, and how do you sort of diagnose it without,

you know, politics taking over? You know, fundamentally, people are the most difficult thing. I always tell, especially because I'm in Silicon Valley, deal with a lot of engineering driven companies. I always tell them engineering's the easy bit. The hard bit is the people side, whether it's sales and marketing or HR or whatever. And as the company grows, those problems grow exponentially. Right? So you get these situations where you have somebody in the company which is really causing disruptive we've all seen it. If you're in that kind of an environment, you know who this person is. Right? Everybody in the company knows who that person is. In this case, you know, it was someone in the leadership who just was not very good at closing deals. And that happens. One of the things that leaders can do best is recognize their own weaknesses. Right? If you're not good at something, it's okay. You don't need to be good at everything.

I always joke that I always try to hire people that are smarter than me so I don't have to do anything. And I mean, you're hiring people to do the work, you're not hiring to do their work. You don't wanna do their work. You're hiring them so they can do go off and do something. So I think part of the problem is you get the situation where some people think they know better and and that causes issues. Right? Because sometimes they just don't. Oftentimes they just don't. Why are you hiring an expert if you think you know better? I I don't understand that logic. I'll tell you a story actually. I was in a board so I was hired to do a turnaround of a company. And I was in the I was we had done a strategy for this company for it to turn it around. And the company was in desperate state. There were you know five people left, they were running out of money. It was you know going down the tubes. So the investors had hired my company, me and my company to come and do a turnaround.

And I was actually in a board meeting doing a presentation about the turnaround strategy. And one of the VPs who was one of the founders of the company stood up and he said, oh, I have a strategy. Out of the blue. Right? He had a strategy. In a board meeting. And he said and he stood up and he presented his strategy. And his strategy was to change the logo to an animal. And which was pretty terrible. And then he said, oh I have other meetings and he walked out. And I I already knew from other people that this person was a problem. And then after the you know, I did my presentation and everything and the board loved our strategy and everything. They wanted to move forward. And afterwards, know, the chairman of the board called me up and said, know, what do you think? And I said, I think you need to get rid of this guy because he is the blocker that's keeping that's holding the company back. You know? And you know, this was on a Wednesday and by Friday he was fired.

And I felt a little bad because it was like two weeks before Christmas. But but at the end of the day the company wound up selling for $200,000,000. So clearly, know what we put together worked. And I'm not sure whether the animal strategy would've worked. But you know sometimes you you you have to get rid of the people that are causing the problems in in the company that are causing friction. Among teams, but in sales, whatever, we've all met those people and they can be really toxic. And you know the other thing I acknowledge is sometimes I can be that person, know. That's entirely possible. And I would hope that somebody would tell me because otherwise, you you you can't necessarily be self aware. So What do you think is the sort of least predictable part of the value creation for most teams that you see? I think customer acquisition is the is the most difficult thing. I think, you know, especially now where everybody's overwhelmed with sort of requests or everything, it's very difficult. I think, you know, you you hope that you can build a strong enough brand and a strong enough product

that you know, it's gonna resonate in the marketplace. But these days the the the there there's a multiple multiple issues right now. So customer acquisition has always been quite difficult. And the people who figure out how to do that are oftentimes more valuable than people who are doing the engineering. Now, the the problem that there is now is as soon as you come out in the marketplace with a new product that's really interesting, you're gonna get 50 clones in the next four days because AI makes it so easy to create, you know, new platforms and new tech and so on. Doesn't mean that any of them will be any good, but now you have the added difficulty of that competition that emerges immediately. I think the other thing that's going on in in tech right now is and I've seen this with one of my clients is that there's a lot of insourcing because of AI. They're like, oh, we don't need to hire,

you know, a company to help build this. We don't need to pay an outsider. We can just use AI on our own staff to build the same solution and build bring it in house. And I think that's going on too. And that's really difficult because that just makes the sales process that much more complicated. You know, and I and you know, what people don't realize is that sales is often relationship driven. It's got nothing to do with, you know, the quality of your product. It's got to do with the fact that you've built a relationship with somebody. You know, Accenture famously sponsors golf tournaments and there's a reason for that because that allows them to build a lot of relationships. And the relationships are are for them is where the big money is. That's how you get the $203,100,000,000 dollar contract. And so, you know, to answer your question I think, you know, again it's that people side of things. Right? How do you deal with the people?

And the current environment, you know, how do you push back against, oh, we can do this in house with, you know, half a developer and clawed AI. Yeah. Mhmm. What do you think differentiates in today's age of AI like a good company from a bad one? I well, it's a little hard to tell, I think, oftentimes. But, you know, repeatability, documentation, a structured process for doing things. I think we we haven't yet seen the downside of AI, but I'm sure that it's gonna show up at some point. And the downside is gonna be that people are creating all this stuff and they don't know how it works. And and because they don't know how it works, if it breaks, they don't know how to fix it. And people's answer oftentimes as well, I'll use AI to fix it. That assumes that AI actually understands what is going on in this thing some other AI has built some time ago. And I think, you know, there's there's a a company I worked with in Sweden that does helps refactor people's code bases.

And their largest growth area is actually AI generated code because oftentimes the code works but it's terrible. It's terrible. It doesn't scale. It doesn't it's very difficult to modify. You know, all these things. And so you you you get pushed into a corner where you get this really terrific solution that you've built using AI, and it works really well, and you're attracting a lot of customers. And all of a sudden somebody else comes out with a competitor and you need to improve your product or whatever and you can't do it because you're stuck. Know? And I think I think there's a very much a risk of that. That's a very much a risk that's coming up. The other thing that I worry about is because companies are not hiring people out of college that the the senior engineers that you're gonna need in five to ten years to help fix all this broken stuff, They won't exist because you didn't hire the people just coming out of college who became plumbers or electricians instead. And now there's nobody there's no seniors left because

they all they all went and did some other profession because there was no work for them in the in the early days. You see this for example in some niche areas of tech like, you know, COBOL engineers or something that you know how to, you know, work on mainframes. And so there's that kind of risk, you know, in in the next ten years or so that's gonna come up. So what's a good company? I think it's a good company is, you know, do you have everything is everything well run, documented? Do you know what your value creation process looks like? Is it structured? Is it repeatable? You know, do you do you have a do you have a defensive moat that's gonna help you avoid getting completely disintermediated by AI? Those are probably the things you're looking at. Chris, is there any advice that you live by? I think you have to learn continuously. I I think one of the one of the realities of the modern world is you can never stop learning. And and one of the problems is that technology has had this accelerated effect over the last, you know, fifty years.

And the amount of stuff you need to know in order to keep you know, to stay even slightly ahead of everything is enormous which puts a lot of pressure on just continuously learning. And I think for me, you know, it's not so much what have you learned in school? It's just more like how can you continue to learn? And that's really important. And a lot of people are sort of resting on what they know and so on. But I think you have to learn continuously all the time. So keep adapting. Well it's not just adapting, you need to keep understanding what's out there and what's new. And you need to stay on top of it. And I would say especially if you're in a leadership position, it's critical that you do that because if you don't understand how this stuff is applicable to your organization then somebody's gonna come along and take you out. And that's that's not a good feeling. So I think I think, you know, it's a little harder when you're an executive and you have a lot of pressures,

know, but you need to keep learning about what's going on in the in everything. So that's my Right, Chris. Okay. So thanks, Chris, for joining. I will leave links so people can check you out, and we'll see you in the next one. Great. Great talking to you. Thanks for the