The Wise Exit

Cashing Out Podcast | Episode 6 | IPO or Strategic Sale - Selling ForeSee Results | Larry Freed

Todd: [00:00:00] Hello and welcome everyone. I'm Todd Sullivan. And this is Cashing Out. This show is an open dialogue with fellow founders and former business owners, sharing their stories and advice about selling their companies to some of the top acquirers in the world. Today, we have a special guest friend and founder of ForeSee results, Larry Freed.

Larry is a recognized industry expert in the field of customer experience. He speaks at events all across the country and is the author of two books managing forward and innovating analytics. ForeSee's technology was developed at the university of Michigan, and today provides customer satisfaction, analytics, and analysis to clients worldwide like Home Depot, Microsoft and Proctor and Gamble.

Larry grew foresee results from inception and went on a dual path to sell the company in 2013. On the one hand, he focused his investment banking team on taking his company public. While on the other hand, he managed strategic growth equity and private [00:01:00] equity inbound offers to buy his business just hours before the final decision had to be made things got hairy, hear how Larry managed this dual process and got all his stakeholders to go along with his final decision.
I hope you enjoy my conversation with Larry fried. Larry, thank you for doing this. I really appreciate you taking the time to share your exit story with our fellow founders. I think you have a remarkable story in that you are working with investment bankers going down this path towards an IPO. You you'd already filed an S1 or you were working on the S1.
And I know you, this is not just, I'm gonna make a random decision. This is a very calculated decision. You pull the plug and you sell to a strategic. So I, I make really excited to hear that story. I know your advice. Your insights in that it's gonna be gold to our fellow founders who could be in that situation, find themselves in that situation at some point in their careers.
But I do [00:02:00] have to say I was so fired up when you agreed to do this spot that I didn't think twice about bumping Mark Cuban from this time slot. So thank you. Thank you for being here.

Larry: My pleasure. It's great to be here. Thanks for having me.

Todd: Yeah, so I I've normally, I, I like to start with how we know each other and I can't quite put my finger on when we first met, but in Ann Arbor, we were both living Ann Arbor for a long time, both part of that entrepreneurial ecosystem, which is so supportive.
I've been in Chicago, New York, San Francisco even down in the south bay and then, you know, in Detroit and there's really, it's, uh, putting your finger on what Ann Arbor has. It's something special, some great technology companies built there. So I'm just assuming it's events, right? It's those meetups and just the kinship of entrepreneurship.
I don't know if you remember anything specific.

Larry: I, I don't remember specifically, but I'm, I'm sure it was somewhere at one of [00:03:00] those events and it is a great community. Um, we need to keep working on making it larger and getting, bring in more resources and more investors and so on, but it is a great community and everyone is very helpful to each other, which is.

Todd: Well, why don't we jump in, right? Maybe the beginning of your story. Super interesting.
You're working at Compuware you're [00:04:00] evaluating technology every day and you know, something lands on your lap that really changes the trajectory of your career. Can we start there?

Larry: Yeah, sure. It was interesting. You know, I spent the first 14, 15 years in the banking industry and technology was a, a CTO, one of the CTOs at, at, um, what was Bank One.
Um, we decided to outsource most of the Detroit staff to, [00:05:00] and I wasn't part of that, but I went along with it and ended up joining for about three years. Um, while there I did a bunch of different things, but mostly, you know, ran everything that in the services part of the business, that wasn't sort of a traditional staff supplementation, you know, we were getting an eCommerce over time.
I, at one point I took over the Y2K factory that was there just as it was finishing up and winding down. But mostly it was about sort of what we would call emerging technologies. And at that time, you know, it was eCommerce a new business and through that had lots of interesting conversations with lots of people.

Um, and we did some acquisitions, you know, uh, of, of web development companies and things like that to increase capabilities along the way. Got introduced to a professor at University of Michigan Claes Fornell who had a company called CFI Group and Compuware was doing some work for them. Uh, basically, you know, they needed some consulting work done and, and Compuware was doing it, uh, [00:06:00] as they were getting ready to close that deal.

Um, the folks at, at Claes and his team said, Hey, we have this business idea. You know, you guys interested in work for equity, you know, kind of a thing, which at that time was. Compuware through it, didn't do it, but other companies were doing it. Sure, sure. Right. We'll do the work, uh, for nothing. And instead we'll get a piece of the, of the, of the pie going forward.
Um, so I got called into it. I said, you know, we're not interested work for equity, happy to do the work for you. Happy to talk to you about the idea. And we ended up doing both of those. And literally I remember very well. I drove out to Ann Arbor for the time. You know, our office was in Farmington Hills, this before Compuware moved to Detroit, uh, drove out to Ann Arbor thinking, well, you know, probably nothing will come to this because that is usually the case.

Yeah. You know, might be a good idea, but it wasn't necessarily a good idea for ware and at least I'll get a good sandwich at Zingerman’s on my way. Yeah. Um, so right. Never pass that on. Uh, so, uh, get out there and, and met with Claes and his team and was blown away by what they had. Um, [00:07:00] so it was about really a, a methodology that he had developed, um, using something called latent variable, partially squares, regression, um, which was way over my head at the time.
And still a little bit over my head, over my head today. Yeah. Um, complicated, but it was a way to measure customer satisfaction. But we, he, the idea was to take that and apply it to measuring websites at the time. Right? So this was the, you know, the growth of the web and, and we thought it was a great idea, right on that meeting where whiteboarding, how this would work and become a business.
And so on, I took it back to Pete Karmanos and Pete was the CEO of Compuware. Joe was the President at the time and said, I think this is really very interesting and we should pursue it. They said, go ahead. We did some market research on it. You know, we dug deeper, we could build the plan and so on. And, and that's how force results really came to be the company that I then went and ran as CEO.
And, um, and co-founded with Claes and Compuware.

Todd: That's fantastic. So you're used to evaluating all these technologies that are kind of coming through the door and this is incredibly nascent. And so it's really okay. Maybe a proven technology in some other industry, it gets, Hey, here's an idea. We bring it to eCommerce.
The web is we expect to blow up [00:10:00] and there's gonna be a place for this. And then Karmanos and teams see the, the opportunity cuz you tell 'em right, this is something that's gonna be big, but they can't do it internally. So they're saying you run with it, right. Is that just, Hey, go for it and any resources behind it or do they just say, Hey, Larry's your guy and hands off.

Larry: Pretty much. It was um, Hey, you know, we, I was bringing it to contours, Hey, this, some Compuware should maybe do this. Yeah. And Pete said, you know what liked it. Great idea. Um, we had a few meetings, we brought Claes, had a meeting with him so they could get to know each other, which was, I think really important.

And um, they, they both had some really. Interesting aspects. And the thing that really stuck with me is both of them knew what they knew very, very well and were, you know, had a lot of confidence in the things that they were good at, but also knew what they didn't know. And so they weren't, you know, Claes is a business school professor, wasn't a sales and marketing guy, right.
Hadn't built a company, you know, Pete, wasn't a business school professor developing econometric modeling [00:11:00] and multivariable, partially squares, regression models, but he knew how to build a business and right, and, and had been very successful and they really respected each other's. Experience and, and value.

Right. Too many times we've come across people that just because they're good in one thing, think they know everything. Yeah. Um, and, uh, so that was the start of it. And, and basically, you know, Pete said, Hey, uh, I think this would be better as an independent company. You know, why don't we set it up? You know, we'll invest in it.

You know, we'll put the, the whole thing together. And so I started working with compers council and we met together and then it got to a point where there was a plan and, you know, and the documents and everyone was in an agreement. And I said to Pete, Hey, you know, someone you need to put in management team in place.

And he said, well, why don't you go do this? And so I thought about it for a day and came back and said, yep, I'll do that. And you know, um, about 40 years, early forties at the time, and it's like, you know, three kids and pretty big deal to step out and do a startup. But, um, we had support, we had comp were support to get started.

You know, we spent the first, probably [00:12:00] six or nine months in their offices and, uh, and things like that. And, and, you know, their general counsel and folks like that were a big help to us as we got started. And that was really, really helpful and, and made the starting of the business a lot easier.

Todd: Yeah Larry, everybody has a different tolerance for risk, right? When they go to start a company and you get to see and absorb everything before you say yes, when the keys are handed to you. Right. But you're still, Hey, I'm gonna leave this paying job to go do this startup and anything could happen. I'm sure you've seen them go in every direct.

Nice to have a little bit of funding behind you. I always like to start a business with that first early customer that's committed, right. Capital and, and revenue coming in. So yeah, I mean, it's the same risk you got kids and, and you took the leap. Yeah. So that's fantastic. All right. So the business grows over time was a kind of an overnight success.

Larry: No, it took a while. I mean, cuz we didn't start with a customer. We started with some funding in an idea and [00:13:00] we built a team and built a product, you know, six, six months or so. Um, our first beta customer was a week after nine-eleven. Um, which was a scary time Claes says economist. I would call them. It felt like every day saying what's gonna happen with the economy now.
And every, every day I got the same answer, which was, well, we should recover from this. It'll take some time, as long as there's not another terrorist attacked in the near future, we should be okay. Um, after a while I gave up, just stopped calling him about it because you know, I was getting the same answer.
Yeah. Um, so it was a tough time to start. Um, we happened to sort of fallen as some opportunities in government, which helped us get started. Uh, that was, you know, maybe a little bit of luck. It was someone across those connections that, um, they had done some, some stuff with the methodology at the government level.

Um, so it gave us a good, good pathway in there and we started, you know, I started. Selling right. First thing you do is before the product's done, you're calling up and showing demos and getting people involved. And, you know, we signed up some early customers through that effort, but, um, it was, uh, [00:14:00] it was an interesting process.

It was what I would call an evangelistic sale. In other words, it wasn't something that you knew you needed, you know, forest or Gartner, all the experts, didn't say you needed this. Um, it sounded similar to other things you were doing, which was getting you measurement around your website. Um, but it was a totally unique approach and it wasn't gonna replace anything that you were doing, right.
So it wasn't gonna save you budget. It was gonna cost you money. Right? So there was, at the time it was about, you know, very simple web analytics, um, basically clicks, hits, and page views and usability studies. This took it from the customer's perspective and what was so great about it. Became apparent to us pretty early on was is that a experience on the web wasn't ever gonna be just on the web, right?
Whether it's a product being delivered to your door or whether it was you're gonna browse online and buy in store. And all of those things, you know, the experience didn't necessarily equate to the click hits and page views, even to the [00:15:00] point of if you were looking at work computer, which of course everyone did because they had faster internet found the product.

They want went to their home computer and bought it. The web analytics at the time didn't connect those two. Oh wow. So most of the data you were getting was actually wrong. Right? And we looked at it and said, let's look at it from the customer's perspective, not throw away or replace what you're getting, cuz those are valuable.

But we were gonna tell you if the customer was satisfied, if they were likely to purchase, if they were likely to return to the side leak, they were likely to recommend and so on. And so we gave insights to, to basically to, you know, big customers. We were going after the fortune 500, um, that really gave them a better sense of, of what was going on.

And the beauty of this methodology, it helped you understand the levers to pull. So it was, uh, I called it a three level model. We looked at the drivers of the experience. The overall satisfaction experience and what the outcomes were gonna be. And the methodology that Claes had develop created an impact on those [00:16:00] between those elements.

So if you were gonna invest in search, what impact was that gonna have on satisfaction and purchase intent versus investing in maybe product images and you can make strategic decisions. So, um, but it was an evangelist sale and it started slow. You know, we were banging our head against the wall. Um, We offered to give it away for free to a couple of big clients thinking maybe this will get us going.
And basically we were gonna be talking to their customers so that didn't help at all. Um, and, but over time we convinced them and as we started to build traction and have great customers, you know, then we started to build that momentum. Yep.

Todd: But you're still as a brand. Are you flying under the radar?

People don't realize how big you're actually getting you're here in the Midwest and it's a B2B sale, right. You've kind of broken through. Yeah. Because the data's there, but like you said, you know, they're spending dollars to do it. It's not coming outta some other budget. It's a realization that this is actually gonna work and drive real profitable revenue for us.

Larry: Right. And we got early success with some clients where literally fortune 100 companies were using this data as part of their executive bonuses. Which, you know, I mean, we really were proving it, but it, it, yeah, it's, it's a tough road in the early days. I tell everybody this, the next stage of a business, when you're a startup, when you're looking to grow a business, the next stage of your business is always the hardest stage.

So you go from an idea to a product that's really, first of all, getting an idea that's hard. Then when you go from an idea to a product that's really hard, then you go from a product to your first customer. That's really hard. Then you go from your first customers to start to scale. Each stage gets harder.
It never gets easier until you walk away and you’re done.

Todd: All right. Well, that's a kind of a good segue. You get to this point and it becomes evident to you. Apparenty is there inbound interest, something drives you to say, Hey, we need to think about a liquidity event or another way to grow the business.

Can you walk us through that process of thinking about the exit and take us.

Larry: It was interesting. We [00:18:00] actually literally had someone come to us and wanna talk about an acquisition probably 18 months in, um, you know, they were a pre I P O company and sort of the measurement space, you know, made no sense like our, our revenue would never have justified the deal that would cause us to have said we're done.

Yep. Uh, so, but over time we did get some offers and, and we, at one point we had an offer from a public company and we decided that, you know what, it's not where we want it to be, but let's talk to some investment bankers let's maybe, you know, see what the market is. Let's let's we called it a whisper campaign.

Um, we basically hired an investment bank, um, and, and. Our board was critical in that process. Um, so the board was basically myself Claes Fornell the, the business school professor. Um, and at the time we, since we had started, we had brought VCs into buyout ware. Um, and so it was, uh, um, two VCs in investor growth, capital and data.

Um, and they both, they had great public company experience, great investment banking [00:19:00] experience. They really had their skills complimented my skills and classes skills to a great level. And that was really, really

Todd: critical. So you have your main investor Pete Karmanos and Compuware put in the initial capital.
And then at some point, whether it's, Hey, this is good for us, we're gonna step aside, you creating a liquidity event and bringing in very sophisticated venture capital firms that want to take you to the, the next level. Right. So that's before thinking about exit, but in a sense you've recapped the business, given liquidity to some of the investors.
Right, right. Okay.

Larry: Yeah. We actually did not take more capital into the business. Yeah. But we did create a liquidity event, had gone through changes and was, it was just to the point of, Hey, we wouldn't mind getting out. Um, which was, it was actually. I mean, it all sort of fall into place, a great series of events because we made that happen for them.

Um, and so in doing so we were also able to pick the partner. Right. Um, and so it was a very, very friendly and a good transaction for everybody. Yep. [00:20:00]

Todd: Um, and so that worked out really, really, well. Yeah. I mean, it's similar to putting the right people in the right seats on the bus, right. As you grow, you go down the road, the business changes, it needs a different level or different type of expertise.

And so you're able to bring that in. They're making an introduction to the investment bankers and what I love your whisper campaign. I think we run across this a lot of like founders that they don't quite know whether they should go to market or not. And they think it's a switch on or. This idea of very highly specialized investment banking in industries with deep relationships to have that whisper campaign.
Is this something that you're gonna be interested in? And what's the range of value that you think could be created and bringing that back in and not risking kind of the reputation or the word, getting out to customers, employees, other stakeholders that you might not want. So you ran through that, essentially that process, you got a great introduction.

Everybody trusts each other and you run the whisper [00:21:00] campaign. What happened then?

We brought these consultants in. We realized that the model was right. We just needed to do a better job of describing it. And we kind of came to the conclusion that, you know, and this is over a six or nine month or a year, year and a half period where, you know, what the, the, the floor for going public had come down.

Um, we were, we thought that we would be a very good public company. Um, we thought for various reasons, one was that we were very good at hitting our revenue targets, always within a percent or two or, or even closer than that. And we were always favorable to. Um, so, you know, great formula, the whole key, which you're gonna go public.

Yep. Right. You know, you gotta beat and then raise the expectations, right? Yeah. Yeah. [00:25:00] And you know, they're gonna raise on you. So you've got, you've gotta be able to really do a good job of, of being able to predict what's gonna happen and forecast it, which is hard. Um, and so we felt that, and the other thing was, is we were starting to get a lot of press for our, our data that we were providing.
I mean, we would, we would get calls on, you know, um, company would new a story on a retailer online retailer or, or bricks and mortar retailer, and want to talk about the online experience and they'd call us for our opinion. Yeah. We'd become [00:27:00] experts in that, right? Yeah. Um, now that we're, if we become a public company it's gonna.

Really helped raise our exposure. We figured it's a 10 to 15% growth in revenue just in that process. Right. It's obviously a huge cost to do it and a lot of work. Um, and so we really started to get ready for that. Um, we talked to people and when we hired the bankers, you know, they, they did a great job of coaching us and it was the same guys that we used to do the whisper campaign, same group.
Okay. Although we did go out and talk to a bunch of others. Yeah. Which is a really interesting process. Um, and it was interesting because probably because they knew us. Yep. Pretty well. Yep. And they had built the relationship, you know, and it was a mutual relationship. Um, but a lot of the other bankers that were interested because they liked what we did and they liked the opportunity, but they wanted us to have a big New Yorker, Silicon Valley law firm.

They wanted us to have. I don't what used to be when I was growing up in business, the big six, I was probably the big four then or something. Yeah. You understand those big accounting firms. And we did, we had really good, solid [00:28:00] Midwestern law firm and a really good, solid Midwestern accounting firm that both had public experience, but not to the level of those.

Yeah. And they were saying, well, you gotta change. And I'm thinking about this. And, and the other advice we got is you gotta figure out as the CEO you gotta figure, you're gonna spend at least half of your time just dealing with the fact that you're going public and being public. Yep. So we started to bring people up and, and, you know, I used to speak at a lot of conferences and we started distributing that across some of our team members and building the team out a little bit better and stronger.
And we felt really, really good about all that. Um, and then the idea of having to change out our law firm and our accounting firm at the same time was a little scary, to be honest with you. Right. Um, and, and Stifel, who we ended up going with, who was, we had built a relationship said. We, we lot firm, you were fine with, you know, they had a lot of experience, um, and the accounting firm was like, let's wait and see.

That would be the worst case scenario. Um, and it might be like a year down the road. [00:29:00] Um, and so we said, okay, let's go down that path. And so we started to draft our S1 one and started to go through that process and they put us in front of analysts and, you know, to start to get our feet wet on that and to get feedback on it.

And we were going down that path.

Todd: That's great. So it's an interesting decision. You go with Stifel moving forward, the legal side, right. Of M&A, I see in the deals that we do, we bring that to the table as well. One of the things that I've learned is you absolutely have to right size the law firm for the size of the deal.
If you are a smaller transaction, you can't have eight people on every call kind of learning and recycling knowledge amongst too many people on a law firm side, that's just gonna drive up cost. And it it's not efficient. But you're in a different level. So maybe that, that was a real choice. Right? You could have gone with a much bigger firm and you're not caring as as much about fees, but you defer the group that you're comfortable with and Stifel was comfortable.

Larry: Right. And the law firm was great. And, um, David was our guy at, at Honigman and, and they, they were, you know, he had done a lot of deals. He had a lot of experience and, and he, he was very, we had a great trusting relationship and that was, I thought really critical as we go through this process.
Right. You wanna be [00:31:00] able to trust your lawyer and your accountant, that they're not just in it for the fees. Right. And, uh, and, and those, our partners were, they, they were great partners.

Todd: They have a fantastic track record now. So, yeah. Okay. So you had the right firm.

Larry: But back in the day, I mean, you know, again, they, they, the big, big investment bankers, you know, oh, they're a Detroit firm that won't work, you know, that's a flyover state, right?
Yeah. And, uh, yet he had a ton of experience and, and was great. That's

Todd: great. So you've got the expert team you're following this path, then something derails that, right. And you gotta make the call. You gotta rally the troops. You gotta make a big decision. Cuz you know, you got all the elements of being a good public company.
I understand that. Like maybe like you said a little bit small, but the ability to predict how your business is going from quarter to quarter is a big element and you were able to do that better than most. So what derailed it, what made you make the decision?

Larry: So, you know, the growth equity guys, you know, after we brought the VCs into Compuware, [00:32:00] we never raised any more capital.
Um, and we were, we took a Midwest approach to the business. Uh, we got to a point after four or five years, three, four or five years that we were cash flow positive, and our strategy was invest back everything into the business to keep the growth. And, um, but at the same time we wanna stay just slightly on that cashflow positive side, mainly so we could control our own destiny, um, and worked out great.

But along that period of time, you know, from then on, we were getting calls from, you know, the growth equity guys that would say, Hey, we'd love to, you know, hear about your business. And, you [00:35:00] know, you guys looking to raise any capital and so on and you take those calls. Uh, you know, I mean, it, it would consume your time.

Uh, but in my opinion was, you know, hash feel free to call me next quarter, if you want. And you know, I'll give 'em a 30 minute update on the business and they'd say, Hey, can we dive deeper? Or are you looking to raise capital? Not now, but we'll let you know if we are so. Played that for, you know, 3, 4, 5 years.

Right. And, but it, it ended up in TA & Associates called one day and said, Hey, there's a company we'd like to introduce you to. And I said, okay. And so we met with them, um, had a first call, you know, they were looking to acquire companies. Uh, you know, it was okay to be honest with you. I never saw any synergy between their company and ours, but nonetheless, you know, you want to talk, I'll listen.
And so they came back and, you know, and TA called and said, Hey, they wanna go further. Are you guys open to that said, oh, alright. We'll, you know, we will, I'm not gonna waste a lot of time on it, but we will.

Todd: So TA are they the private [00:36:00] equity firm? And they're asking you to talk with platforms or they're looking for companies that they might be able to bring together.

Larry: So they had invest in a company called answers.com. Yep. Yep. Okay. And answers.com was looking to acquire companies. They had acquired a few. So, um, they and TA and Summit, I think were their big investors who both knew us very, very well from just, you know, the industry. And that's how we got introduced.

Todd: The decision to take these phone calls. Right? That's not a trivial one. You come from the banking world . So you speak some of this language already, right? You're at a level of sophistication. That's up there in finance. And we see a lot of our founders, you know, they're just hitting delete on their emails. They're not returning phone calls because it's just this onslaught from private equity, investment bankers, anytime there's a, a heartbeat on a company, the phones are ringing off the hooks and it's a lot of analysts that are just collecting information.

They don't know how to kind of traverse that onslaught. [00:37:00] Somebody like you can take that call filter what is not right. What is gonna be of high value and move it down that path have great friends at TA what a prolific firm, great firm to be with. So there coming, knocking, answer.com is their platform.
And immediately you didn't see synergies or you did?

Larry: I did not. Okay. I, I did not see any synergies, right? They were search engine. Yep. They had acquired a couple of other companies along the way. Um, one was like a content distribution. I can't remember the name of it made, also acquired a company called reseller ratings, which sort of did kind of a reviews off websites as a way to promote them on search.
But we never played in that game. Um, our, our research that we were doing wasn't for marketing purposes, it was for the company's purpose to decide strategically where they're gonna go and how to measure their success. Um, so there was very little synergy, um, And, you know, they caught at one point, then they, [00:38:00] I remember this, they, they said, will you guys come down and visit with us for a day?

So me and my CFO get on the plane to go there. And literally as I, as we're walking on the plane, I'm like, this is the biggest waste of time ever and take five, six steps forward. And I turn around and say, this is probably the deal that happened. Right. Cause it doesn't make any sense. Um, and sure enough.
After another, you know, day with them and so on, they made an offer and it wasn't even in the ballpark to be honest. And so we said, no, thanks. You know, we're, we're good. We're gonna keep doing what we’re doing.

Todd: And you're doing this outside of the effort with Stifel, correct?

Larry: Yeah, they were, we were working with them on the IPO.
Yep. We told them what was going on. Yeah. Told obviously I told our board, um, and said, but you know, they're nowhere in the ballpark. They're like, do you want us to get involved? I'm like, no, we're okay. Yep. Um, you know, I'll, but I appreciate it. And I'll let you know if I need your help.

Todd: You know, it kind of felt like that, you know, it, it really, it speaks to your ability to manage your M&A experts, the investment bank, you're going down a path, you've got an expertise there. We've gotta plan, keep going, and I'm gonna explore some other things.
And that's largely [00:40:00] what we do for founders is we keep people very focused to make sure that the ball is not dropped. And if there are things to explore, we can help do that. But you're doing that on your own. I don't know if you felt it was a fiduciary responsibility or inquisitive or, Hey, let's create something better, you know?
No stone unturned.

Larry: Yeah. I mean, the, the problem, to be honest with you, there's just, there, weren't a lot of people to go to, to get that help. You know, guys like you, like, I, if I had known you back then I probably would, and you were doing what you're doing. I probably would said, Hey, come in and talk to me.
Let's talk about this. Yeah. Yep. Because the biggest risk. Even when someone just makes an acquisition offer, if you're at all serious about it, forget about even an IPO is you lose total sight of the business, cuz you're focused on that deal and it can go south on you in a hurry. And now you have no leverage you're forced to sell because the business is going in the wrong direction and that price is gonna come down a hundred percent.

Todd: A hundred percent. Let's really get to that. The exit, the [00:42:00] decision. Right. So now TA is. You know, they're sniffing around. They're not making an offer. That makes any sense. And I'm guessing that you are comparing that to what going public looks like from an economic standpoint to the shareholders.

Right. So do you get to the point where it's like, Hey, I understand the number that it needs to be in order to go of the private equity route or sell to a strategic, do you get there and then that's how you make a decision or is it something else?

Larry: Yeah, pretty much. I mean, it got to a point where it was a, it was a reasonable number.
It was a good enough number that, Hey, if we, if we weren't doing anything else, then that number came along. We would probably take it. Okay. So we sat down as a board and talked about it and here's where it got really interesting. Um, the first thing was I, along with, I think the entire board never thought the deal would go through and end up happening because we didn't think it made sense.
Right. Yep. So if we don't think it makes sense to combine these two companies. My guess is they're gonna figure that out at [00:43:00] some point anyways.

Right. Um, so none of us felt really confident it was gonna happen and, and we wouldn't have taken a penny less. So we decided let's go down a parallel path and which. Was an easy decision to come to at that point. And there's sort of a second piece of that, but the first piece is, yeah, let's just do both, right.
Oh, sure. No problem. No problem. So we're this, we're getting in a, like we're in a Q Q2 Q3 of 2013 at this point and in the SaaS business. And for us, especially, you know, the contracts you closing Q4 determine a good part of your next year revenue, right. Uh, because of the whole ARR and how you're recognizing revenue and all of that.

And, and so [00:45:00] we're, we knew that if we were gonna go public and, and now we're sort of targeting like Q1 or 2014 that we had to have a great two great Q4. We had to just kill it. Right. Um, and because we would know all that revenues coming in in the following year, um, and build from there. And, and at the same time, we're trying to draft our S1.

And at the same time, now we're going down this path with a potential acquirer and going through due diligence and all of that. And so basically what we did was we really tried to compartmentalize both of those things. Um, and I think it was part of our success, um, in that we had a great Q4, we, we beat our numbers.

Right. Um, and so we knew we had bad leverage, uh, but we basically, it was, it was me and our general counselor, our CFO were pretty much the only people dealing with both of those. Um, literally we turned our mansion team and said, you know, here's, what's going on. I, I need you guys to run the business. Yep.

[00:46:00] And, and just keep executing, don't lose sight of that. And I, in hindsight, The fact that they weren't all that involved in the process, I think made them not get, you know, uh, those big eyes, oh, there's gonna be, you know, we're going public or we're doing, you know, they were just focused on the business. No distraction.

That's great. No distraction. Yeah. And it worked really, really well. And they performed, they just, they excelled. I mean, they just nailed it. And you know, for me, it was, you. The 60 hour, 80 hour weeks were now 80 to 120, you know, which made, made, uh, put some other challenges in your life for sure. But, you know, um, we, we got through that and we got down to the wire, um, where it's like, all right, you know, this deal isn't going away.

Um, at some point we gotta make a decision and there were a few times where, you know, lawyers being lawyers, they, and, and, you know, they wanted, you need, you know, their side, big Silicon Valley firm costing them a ton of money. Yeah. Um, and they, they're not gonna [00:47:00] settle through this word, this wording, it's gotta be this way.

And I talked to our lawyers and they were great. They they'd explain, you know, what the issue was, you know, and if it was something that. Significant. I would just get on the phone and say, we're not sorry. We're not betting on that. You know? Good luck. Um, now the other thing that, that I didn't mention is often when you go through this process, you're signing exclusivity, right.
To go deeper into it. Yep. And we did, but we wrote in there that we could pull out in any time because we're pursuing, going public. Perfect. Um, I, I think they were thought we were blocking. Yeah. To be honest. Yep. Yep. Um, at the same time, default came to us and said, you want us to help you manage it? And I'm like, you know, no, at this point we're fine.

You know, we know our number and we're gonna, you know, but they were really great about it. And we worked out an arrangement with them to make everything good there. Sure. So then we get down to the point where it's getting close, you know, and a few times, you know, it's like, Hey, we're done.
And they they'd agree to what we wanted and we keep going. Um, and we got to a point where we had to make a decision and here's where it got really interesting. Okay. Um, and. I, I, I never really thought about this earlier. Um, but it, it makes all the sense in the world and probably, and people smarter than me.

Would've thought about it a lot earlier than I came to this conclusion. But, um, everyone has a different sort of objective and their agenda that you're on and those accounts and those objectives is different based on where they are. And that is true for, you know, we had a business school profess. And this was a, you know, a big, he had a big piece of this.

And so it meant a lot and he was very successful already, but this was, you know, he wasn't a diversified person in terms of, you know, he hadn’t invested in 40 companies. [00:49:00] It was ours. Right. And, uh, and then you had two VCs that were, you know, both good size VCs. You know, one was, uh, a part of inve investor, AB a Swedish investment bank.

You know, they were at the time a $1.7 billion evergreen investment, you know, fund, um, and update. I think we were in their third or fourth fund. They're probably on their seventh or eighth now. And, you know, I think it was about a third 50 million fund. So these guys were, you know, big players. Um, and, and yet they're where they are in their next fundraise.

Where they are in their current fund, that they're, your, your investment is from makes a whole lot of difference in how they view things. Absolutely rightfully so. Yeah. Right. So we had, we had an, you know, one that was in evergreen, in other words, they weren't raising money ever. Right? So for them, it was a different decision update, a more traditional VC, you know, growth, equity, VC that, you know, they're gonna raise another fund.

So, you know, they need their funds to close up. They need to, you know, have the performance to go raise the next one and [00:50:00] so on. And they were very successful. So that factored into their decision. And then you had a business school professor, you know, who also had his perspective and was in a totally different ballpark.

So we didn't all agree. Um, and it was interesting at one point they said, uh, to me, what do you wanna. Um, and that's a it was a tough spot to see it. Yeah. There was a part of me that down deep said, let's take this public, I want this to be, you know, good for the community. And, you know, you know that if you sell, you're gonna it's at some point it's the company name's gonna change the, you know, the, the headquarters is gonna change.

Those things happen at some point in time. Um, more than likely, right? Yeah. Uh, you know, so there's a, there's that aspect of it, but you know, also, you know, putting money in the bank is not a bad thing. And that's why you build these companies. One of the reasons you build these companies is to create value for shareholders.

So I was, I thought both were actually, and everyone agreed that both were good outcomes, right? So [00:51:00] it wasn't like we had a bad deal and a good deal. Right, right. One had a little higher risk, but we had a lot of confidence. We, you know, we had a great again, we were having a great Q4, um, and all of that. So we came to the conclusion and, and the consensus that if we could close this deal by year end, For not a penny less.

We're not given in anything. We'll do it. If not, we're done talking about it. No extensions. We're not gonna shop it. We're going public in Q1. Everyone said, okay. Yep. Right. Yep. So now we had our marching orders and I, I, I literally could tell you exactly where I was when we had that last conversation. Yep.

Um, it was my son's birthday. Uh, the family had come up to Ann Harbor. I was working too hard to go any, you know, to come home and, and, uh, I literal, I had one of my kids or was in college. I think I had two in college at the time, picked them up. I drove 'em the restaurant. I dropped them off while I'm on the, the board members having this call.

And, and I said, tell mom, I'll be there in a few minutes. right. You know? And like, when I get that and I'm driving around Ann Arbor, pulling a parking lot and finished the call. So, you [00:52:00] know, you, you remember those those days?

Todd: Oh yeah. I can just see, like, you're bringing me back. You're the enthusiasm in your face, right?
The intensity of all, all of that, right. You, yeah. Everybody's agreed on. Okay. Here's the number? Here's the date? You either do it or you don't. How much time do you have?

Larry: Not a lot. Yeah. It was probably the 13th December, which is my son's birthday.
Yeah. It was probably that day to be. And, uh, um, so we, we say, okay, we're gonna close the deal. If it happens, if not, we're done. And we schedule for the 20th along the way, um, answers for whatever reason, which I have some opinions on, but those aren't important [00:53:00] decided not to take the equity from their current investors, but to raise.

And use that to fund this, um, which, you know, their choice, their call. Right. Um, it's a whole, probably a whole other hour discussion about that. Yeah. Yep. We won't go into it, but, um, nonetheless, it, it complicated it because there was a bunch of different banks involved on their side. And so Christmas fell that year in the middle of the week.

So really the last day to close was December 20th, which was a Friday. Okay. The next week there would never be enough people around. Yeah. So, uh, so now we're, we're going towards that. We're gonna close on the 20th, going through all the preparations on that, the final stuff, you know, figuring out our communication plan or our company to our, our, you know, our customers, our employees and all of that.

Right. Yeah. And we put the IPO work on hold, but in, in all honesty, I still, and I think the board also was still had this. Hmm. Maybe this isn't gonna happen. Right. Um, so then [00:54:00] literally the night before some, they wanna renegotiate something and I just said, we're done. You know, we're not going, we're done. I warned you.

I told you we're going public. If this doesn't happen, I gave you the deadline. We all, you know, and we're not changing anything. Um, interesting in that I kind of hung up the phone and that was it. Um, didn't call my board right away, cuz I didn't expect that it would be over. But um, nonetheless, you know, a couple hours later they call say, okay, we're good where we're at and we move forward.
Um, and so we closed on the 20th, which was a Friday. Um, and that was it.

Todd: Unbelievable. I mean, interesting times. Uh, yeah, but there just so many learnings in that. I think one of the biggest is that you kept your team focused on just killing it in Q4. Right? Cause that's the leverage that you created for both scenarios, right?
So the, the going public, you have all the confidence in doing that. You know what revenue's gonna look like. You're gonna tell a great story on the road. And that gives you all the leverage with [00:55:00] TA and you make the decision and get the number that you want, and that everybody's happy with the number of balls you had to be juggling to make all that happen.
I can't imagine. And on your son's birthday, that's fantastic. Yeah. That's fun. That is awesome. Right. You know, um, if you had to distill like kind of one or two points, the things that you would convey to fellow founders, they're never gonna be in your exact situation, but anything that you would wanna share about somebody who's built a business, and now they're thinking about, you know, an exit and they don't have your experience here.
Right? So where's the guidance or the, the nuggets.

Larry: Think there's a couple things that sort of jump out to me. Um, one is, you know, having great advisors and great people you can lean on is really important. Um, whether they you're board, hopefully they're your board members. You know, that whole board startup relationship sometimes is interesting.
Yeah. You know, they're investors, their, you know, they don't always. They bring something to you. There's great value. [00:56:00] And you know, but it's not always the right pieces that compliment your experience and skills. Sometimes it's it's overlap. Right. Which is, so if you don't have it in your board, you gotta have that, right.

Yep. Because none of us know everything. Um, and you know, you, you want someone, you can trust that you're asking not at the last minute, you know, Trying to figure out, Hey, I gotta make decision tomorrow. What do I do? Where do I, you know, and ask everyone, you know, um, for help. So that's really important. And in services like you guys provide is just phenomenal to help companies get through that.

Todd: You know, I, I don't wanna, um, jump past that because some of the best compliments that we get when we go through a process is I say, how, how would you define us in your exit? And they'll say you are my most valuable board member. And I never really thought of building this business to be that, but yeah, you gotta surround yourself and it's not me personally.
Right? It's the team that gets bill, every one of those advisors that brings something to the table that you somehow got the best out of [00:57:00] everybody and brought them to that conclusion. Right. That's a very difficult thing while you're, uh, building a business. So, yeah. Awesome.

Larry: Our lawyer was great in that I trusted him and I had known him for a number of years.
And that's the idea of like changing out your law firm a year before or in the last year is to me is scary because, you know, you just, don't, haven't built up that trust. Yeah. You know? And so things like that were really, really important. So that, that to me was one big, big, big thing. Okay. Um, I think the other thing is, is that, um, you know, when you can keep app leverage in the deal all the better and the leverage could be, we don't need to sell.

Now if this deal doesn't happen. Um, you know, we, we have two it's, even if you have two competing companies at some point. They're gonna, one of 'em gonna force you to go exclusive and you're gonna, and you're, you're gonna lose that leverage. So you need to keep that leverage of being able to perform. So you cannot take your eye off the ball and, uh, you know, not firsthand secondhand, [00:58:00] you know, I have someone that I know very well that they had that challenge when they were, they got an offer and they got so excited about it.
They totally lost focus on the business. You know, it wasn't a horrible outcome, but it could have been a far better outcome.

Todd: You managed to do that twice, right? Once in the 2008, 2009 timeframe, keeping your company profitable. Being able to call your own shots, right.

Larry: And back out of something, right. It's the same concept, right?
It was funny. The, um, later on the answers brought in another big, big, big, big private equity company to buy out their existing investors. And they put a ton of debt on the business and, you know, the, the end story theres, it didn't end well. But, um, we actually met, they were talking to them as this deal was happening.

And so they said, Hey, would you spend a day, you know, or half a day giving them an update on your business. And I said, I'd be happy to, but no one for my management team is going to, but I will be happy and I'll never forget. The company said, wow, you guys are doing great. We let we're familiar. We know you, you know, how come your casual flow [00:59:00] positive?
Why don't you invest doubling down and putting so much money into the business? You know, you could raise money easily and. To me, it, it, it was like, well, we could, but you know, there's a risk reward and you know, all too many times when ’08 / ’09 comes, the, the risk kills you and you're dead. Right. And so it's finding that right balance for you and for the company.

Um, and, and for us, it allowed us to keep that leverage. So you gotta have that leverage, even if it's like, well, if this deal doesn't happen, you know, we're gonna go back and run our business. And, you know, sometimes you're in a position where you don't have that op option, but the longer you can have it the better.

And then the last thing I would say, And, and this is also really tough is, um, you know, there's an old saying, if someone buys your house, they can paint any color. They want someone buys your company, they can do whatever they want with it. And you know, you've gotta get yourself emotionally comfortable with that.

That's gonna happen. Um, and you know, you probably aren't gonna agree with the things that they [01:00:00] do. Maybe they'll work out great. Maybe they won't, but either way, you've gotta, you've gotta be ready emotionally when you're gonna sell your company that that's gonna happen. Cause you can't sell it and still keep control.

You can't, you probably won't be running it for very long. I left three weeks later. Um, but you know, there, and it's just the reality of it. And, but it's a lot easier emotionally. And even, even when you and I was ready for it, like, cuz we had had offers earlier on. And I remember the, you know, as I mentioned, the, you know, probably 18 or 24 months, someone approached us about it and I'm like, wow, I'm not really ready to do this yet.

You know? And, and I started thinking about it. Um, and. At the end of the day, you're there to help serve the employees and the shareholders and the customers. And you have to put them first, but nonetheless, you've gotta get your head there. And if not, it's gonna be a bad situation.
Todd: It is your baby. It's something that you've built from literally, you know, the ground up.
Yep. And it is hard to get, pull the emotion out of that. I would say, you know, we ask that question quite a bit. What are the things that you [01:01:00] really need to see is that the brand that you want to see continue is that all the employees, you know, get great jobs. What part of the business continues to be nurtured the way you would nurture it?

And you can shoot for that. Right? You can try to find that ideal fit. I would say often the ideal fit and the top economic outcome don't necessarily match. So yeah, you gotta go in knowing I'm not making the decisions here, so, yeah. Great, great. Larry. Thank you so much for this time. This was really good, right?

I think, um, hearing the history, the rationale, the decisions, maintaining that leverage all the way through, and then just advice to our fellow founders. It's just gold. So, uh, thank you so much for making the time to do it.

Larry: My pleasure. It was great talking with you.

Todd: Thanks again for listening to the cashing out podcast.

For more founder, exit stories, please subscribe to the cashing out podcast on apple iTunes, Spotify, or wherever you listen to your favorite podcasts. And please remember exit wise.com and [01:02:00] the cashing out podcast are for entertainment purposes. Only. This should not be relied upon as the basis for investment decisions.