(PART III OF VI): SELLING THE EXTERNALLY FUNDED COMPANY
This week on “In Process: Conversations about Business in the 21st Century,” we continue our third annual series of podcast episodes dedicated to the topic of preparing and selling your business.
In this third installment of our six part podcast series, John Monahon, Partner at Trusted Counsel spoke with Peter Paglia, an executive based in Massachusetts. Paglia was the Chief Operations Officer and Chief Revenue Officer of OnBoard, Inc., a cyber security solutions provider for the automotive and IoT organizations. Paglia led OnBoard’s sale to Qualcomm Technologies, Inc. (QTI) in 2019. He discusses the key factors leading to that decision, as well as a prior sale of Anritsu.
Paglia states, “It’s incumbent upon the CEO of the selling company to continue to understand and align expectations for the strategy of the company, the valuation of the company, and the timing of the exit with investors, and the board of directors. Not everyone is going to agree, but the expectations need to be understood when you’re driving a transaction.”
Prior to the sale of Anritsu in 2013, Paglia was involved in a sale which fell through. That experience resulted in learning a number of things, some he wishes to forget and others he has considered helpful in future opportunities.
When raising capital, it’s important to find a balance between the raise process and the market opportunity. In other words, raising capital is time consuming. If pursued too frequently, it is counterproductive to executing the business.
Identify and construct the right strategic customer and partner relationships. This will help not only to validate the business model, but also help to build it out.
The leadership team must be able to scale to the opportunity and align it with the strategy for the business. This is particularly true if the business is in a pivotal position. Without the right leadership team in place, this can be disruptive, hurt the M&A process and the business.
The CEO should continue to understand and align expectations for the strategy of the company, the valuation, and the timing of the exit with the investors and the board. Be sure to have frequent conversations about valuation, exit, and strategy with your leadership team.
During the course of the podcast, entrepreneurs, business owners and C-level executives will learn about:
- Factors to decide to sell
- Hiring the investment banking firm
- Due diligence
- Lessons learned
Learn more about the executive steps involved with getting to the point of selling a business by streaming the conversation in its entirety in the player below or download it to your mobile device via iTunes. Don’t miss a single episode, subscribe to our show “In Process Podcast” on iTunes to receive this episode as well as future episodes to your smartphone.
For more information on selling a business, visit our virtual event happening now at www.preppingtheprincess.com.
Is Your Business Ready to Sell: (Part III of VI)
With IT Executive Peter Paglia
Trusted Counsel (Ashley) LLC. All Rights Reserved.
Announcer: It’s time for In Process, conversations about business in the 21st century with Evelyn Ashley and John Monahon. Presented by Trusted Counsel, a corporate and intellectual property law firm. For more information, visit trusted-counsel.com.
John Monahon: Welcome to In Process. Today is the third episode in a six part series for Prepping The Princess. This is a podcast series dedicated to preparing your business for sale, things that you need to do from a financial/legal perspective, and even operational perspective to get your business ready to be attractive to potential acquirers. We’re very lucky today. We have Peter Paglia, former COO of OnBoard Security, Inc. Hi, Peter.
Peter Paglia: Good afternoon, John. How are you?
John Monahon: Good. Welcome to the show.
Peter Paglia: Thank you for having me.
John Monahon: You’ve had quite the history here. I’ll give you a short intro, and then I’ll allow you to say it in your own words. But let me introduce Peter to the audience. Peter is an entrepreneurial executive with a proven track record transforming strategy, building and scaling economy centric, high value business models, and leading strategic M&A at venture backed organizations. He has a passion for solving complex problems, delivering scalable and sustainable and value securing, lasting partnerships and creating winning team cultures. Over his career, Peter has repeatedly built high performing teams, led organizations through growth and transformational phases, collaborated with business leaders, sold and integrated two venture backed businesses, both of which we’ll hear about today. And these experiences have enabled him to appreciate what it takes to create a world-class organization, deliver sustainable value to the market, and maximize company valuation. Peter, so glad you could join us.
Peter Paglia: Thank you again. Glad to help.
John Monahon: You’ve had quite a few successful exits as an executive, but tell us a little bit about your early background and education.
Peter Paglia: Sure. So I got my bachelor’s degree in electrical engineering from Worchester Polytech, and my master’s degree in engineering from Northeastern University. So I’ve spent my career really in technology right from the first job out of college where I was a develop engineer at Raytheon. After a few years in a development role, I decided to leverage my technical background into more commercial and customer facing roles. So I moved on from Raytheon and moved into the semiconductor industry where I was responsible for new business development initiatives and ran strategic accounts for a public company. I did that for about six years, at which time I joined a VC backed company called Virata. We build components and software for the emerging broadband communications market, and successfully went public in 1999. I very much enjoyed that entrepreneurial pace of Virata, and really since then, I’ve spent my time working with and building venture backed startups.
John Monahon: I thought it was interesting since you had an engineering background, but then you moved into sales and strategy. Was that an intentional move?
Peter Paglia: Yes, it was. I mean, I’ve always had an infinity for technology. My first few years as a design engineer gave me a great understanding of and appreciation for technology. But what it always really interested me is ways to determine how technology could be used to solve complex problems, and the way to do that, frankly, was to work closely with the market, closely with customers, understand their needs, understand what problems they’re trying to solve. And that was really the impetus for me to shift my mindset from engineering into a more sales and strategy focused career.
John Monahon: And I know that you said that you had already been with a company that went public in 1999, and you enjoyed the entrepreneurial focus of it. But I guess in 2004 you joined Azimuth Systems, right? Can you tell me where that company was at the time you joined them because you eventually rose to CEO and raised several rounds of financing and help them sell. Where were they at the point that you joined their team?
Peter Paglia: Sure. Good question. As Azimuth was a venture backed company in the Boston area, funded by, at the time, two tier one VCs, North Bridge and Kodiak. We developed products and solutions that validated the performance and interoperability of wireless devices, networks, and services. Back in 2002 when the company was founded, wifi was really in its early stages of growth. And the problem that Azimuth was trying to solve was the inconsistent performance of wifi devices and networks. Similarly, many wifi devices were hitting the market at that time, and it was no standardized way for OEMs to validate the interoperability between devices. So Azimuth worked with industry leading OEMs such as Intel and Cisco, as well as standard bodies such as the Wifi Alliance to develop solutions that tested their performance and interoperability of those devices, networks, and services. As you would imagine, it was a highly complex set of problems we were trying to solve, and as a result, it was a highly technical and collaborative sales process. So I joined a couple of years after the founding and after the early stage investments to help lead the growth strategy for the company and to build out the channel footprint.
John Monahon: What role did you initially join them in?
Peter Paglia: So I initially joined in a sales role to run part of the international business and to build some of the major accounts, and during the first few years of the company and after I had joined the business, we remained focused solely on the wifi market. So the challenge for us at the time was that wifi was a best effort service. Most of the products at that time were low cost retail devices, and there were only a few companies that cared enough about the performance to invest in the solutions like the ones Azimuth developed. So while we had strategic relationships in business with companies like Intel and Cisco, it wasn’t a broad enough market opportunity for us to get the profitability. So we actually got to a point in 2006 where the company was losing significant money and wholesale changes were made across the team.
In 2007, I was promoted to run global sales and strategy, and a new CEO was brought in by one of our investors to really assess the business case. The CEO was not from the wireless business. So he worked closely with me and the rest of the team to assess strategy and go-to-market. What we decided to do, John, at that point, was to really pivot. Pivot the business away from wifi and towards the cellular market, towards the emerging 4G standard that was being developed. This was a much larger opportunity, more importantly, the quality, the performance. Everything that we delivered was much more highly valued.
This really pivoting of the business, of the company launched our growth, and for the next four years, my role was to lead commercial operations. I ran sales, business development, the go-to-market strategy, our partnerships. And we grew that cellular business significantly.
In 2013, we’re at a point where our venture folks were looking to sell the business because we were in portfolios that were at the end of their life, of our venture firms, and our venture folks were not raising new funds. So they wanted to sell the business, and we actually were very close to a sell in late 2013. That deal unfortunately fell through, and after that, the board asked me to step in as president and CEO. And the former CEO who was planning to retire, stepped down at that point and time. So at that point, I took over to run the business.
John Monahon: Was that something that you contemplated, that you thought that you one day might be CEO of a company?
Peter Paglia: Yes. Yes and no. I’d say the CEO and I had a very good working relationship. We complimented one another very well. He included me in discussions with the investment banks, with strategic partners, and he also informed me that he was planning to retire in the not-too-distant future. So I did know there was a succession plan that was being contemplated. What I didn’t know was if I were going to be put into that role before or after the company got acquired. So at that point when the transaction of Azimuth in 2013 did not go through, that was when the decision was made to promote me to the role of CEO.
John Monahon: How were the conversations around selling the company? It looks like the funds had decided that it was time to sell just due to their natural life cycle. But where was the company at that point? Was it ready to sell? I mean, was it a good fit at the time?
Peter Paglia: Yes. So there was three factors, John, that was driving the interest in a sell. The first was, as I mentioned earlier, our lead investors were at the end of their funds, and no additional funds were being raised. So that was clearly an interest in driving the sell. We could’ve continued the business with new investors, but there were a couple of other factors that we had to contemplate.
Secondly, we recognized that we were playing in a telecom market that was highly cyclical. We rode the wave to 2012, 2013 where that market was in a growth phase, but starting really in 2013 and beyond, we were entering a saturation, a transition phase of the market cycle. So as a result, some of the natural acquirers for our business were actually becoming sellers themselves. Given the long sales cycle in the telecom space, we were faced with a declining number of potential strategic acquirers over the next handful of years. So that kind of created an impetus for us to consider a sale.
The third factor is something that also we had to take very serious was there was, quite frankly, a level of fatigue within the business, both at the executive level and at the board level. Given the amount of capital that was put into the business in its early years, the market opportunity just wasn’t large enough to create what I’ll call venture level returns. Kind of 10X returns that a venture firm is looking for, and the management team knew that. So this created an additional sense of urgency to get a deal done. So those are really three factors that caused us to consider the sale of the business.
John Monahon: What were some of the things once you all decided that you wanted to sell the business, what were some of the things you as CEO were thinking about with respect to the sale?
Peter Paglia: Given the headwinds I mentioned, the focus for me at that point was to pivot the company once again, but pivot more towards the next market opportunity it would attract a strategic exit. So the first priority was to get back to our core niche. We had multiple product lines that we had built over the last handful of years, and by 2014, what I had done is I decided we were going to consolidate that product strategy and focus the company on its core brand. Wireless performance was the core brand for the business, and I wanted to make sure that that was recognized throughout the potential universe of buyers that we were going to get back to that brand.
What we then did is we focused on leveraging that core competency and actually expand it into adjacent markets where we could increase our universe of potential buyers. By doing this, what we’re able to do is quickly tool up a new product line that was focused on IoT. It was a natural leverage point for us, and it helped broaden not only our market opportunity but that attracted a broader set of potential buyers.
We then had optimized… Done a lot of work with the CFO to optimize our P&L and really realign the company so that we could demonstrate that our business would be a creative to an acquirer. From there, it was essential that we had timely execution and that we had a pipeline of new business around these new ventures. So I constructed some incentive plans for the entire company that really incented delivery schedules and incented building the pipeline around those new market opportunities, and that helped us validate our strategy even ahead of a sales process.
At that point, as some of these initiatives were taking place, by 2015, I began the strategic outreach. So I started to meet with the prospective acquirers, started to discuss operational and the strategic synergies, and that led us early in 2016 where I connected with the company that eventually acquired us, Anritsu. We had a working relationship with them, with prior business in Japan, but we really started to engage more strategically with Anritsu back in 2016, and generated sufficient interests from other prospective companies that we formally engaged a banker, and launched in the process in 2016 that culminated in the sale to Anritsu in September of that year.
John Monahon: So you had already known Anritsu before you engaged a banker. Is that correct? I mean, they were known to you. You had a relationship.
Peter Paglia: That’s correct. In fact, the real value that our bank provided as at the time was really to create that competitive process to engage some other companies that we were not speaking to. But for the most part, given the relatively small ecosystem that we had in our business, we were either engaged with or certainly knew the prospective buyers. In the case of Anritsu, I had a relationship with them that pre-dated the banker.
John Monahon: Was there any pushback on that from the board or maybe Anritsu of, “Hey, we don’t need to get any bankers involved here. We got a good thing going,” or did you know exactly what you wanted to do? That this had to create a competitive market.
Peter Paglia: No, it was the board was fully supported and was certainly in favor of bringing in the bank, primarily for the reason of creating the competitive process. We were very upfront with Anritsu, for the reasons I mentioned earlier, most notably the investors needing to end their funds, that we were going to launch a process. So this was very much out in the open with Anritsu, and they were accepting of it.
John Monahon: Right. I know just sometimes business owners and it’s different. You all were at a very large size at that point, which might change the dynamics. I know that for some of our clients and the people that maybe listening to the podcast, they sometimes are worried. If they know that a company is interested, whether they should engage a banker, but in our experience, it always leads to a better valuation at the end of the day.
Peter Paglia: Yes, absolutely.
John Monahon: One thing that was interesting is you mentioned in 2013 there was a sale that didn’t work. Did you learn anything from that process that you were able to use before leading up to the sale to Anritsu?
Peter Paglia: Yes, there were a handful of things that we learned along the way. Some you choose to forget, some you choose to take advantage of. But I’d say first thing is when you’re considering investments, there’s always a question of how much capital a company needs to raise. Raising capital is time consuming, and if done too frequently, it’s counterproductive to executing the business. So it’s important to balance the capital raise to the market opportunity and to continue to test that market opportunity up against the business model, to ensure that you can create increasing enterprise valuation overtime. I think on one of the issues that I think Azimuth had in the first couple of years of its existence is a lot of capital was brought in that created very high level of enterprise valuation expectations. In those valuation expectations, clearly are expected to go up over time. So you have to learn I think as you’re running a business how do you balance the right amount of capital with the business opportunity. That’s number one.
Secondly, it’s critical to identify and construct the right strategic customer and partner relationships within an ecosystem. It not only helps you validate the business model, but it also helps to build that. I guess I’d say a sustainable value proposition to the potential acquirer. We do this very well at Azimuth. Our partnerships actually created a pull through effect for our technology, and it got to the point where some of the potential strategics that were talking to us understood that the ecosystem that Azimuth built was highly strategic. And we were very much in the middle of that.
Thirdly, I’d say that make sure the leadership team that’s in place is able to scale to the opportunity and is aligned with the strategy for the business. Particularly if you’ve got to go through a pivot. Now we went through two pivots at Azimuth. They can be very disruptive, and if you don’t have the right leadership team in place, that can hurt an M&A process, let alone hurt the business.
And then I’d say finally it’s incumbent upon the CEO to continue to understand and align expectations for the strategy of the company, the valuation of the company, and the timing of the exit with the investors and the board of directors. When I took over in 2014, we had very frequent conversations about valuation, exit timing, and strategy. And not that everyone’s going to agree, but the expectations need to be understood when you’re driving a transaction.
John Monahon: It seems like also between I guess the 2014… It seems like you took a year to regroup and figure things out before you actually went to market. Is that correct? I mean, do I have the timing on that? It seems like you took a breather to line things up. Was that-
Peter Paglia: Correct.
John Monahon: … you focusing on the valuation and-
Peter Paglia: Really back in… From effectively the end of 2013, beginning of 2014, into the middle of 2015 is when we were focused on the product strategy, expanding some of the core competencies. So we launched effectively a couple of product lines over an 18 month period that allowed us to begin to broaden our strategic interest or the strategic interest we were going to get from potential buyers, and we did that really into the better part of 2015 as we at that point then started to do a strategic outreach. So really 2014 and 2015 were the years that we pivoted the strategy to focus on the next market opportunity, namely IoT, and that lead us to the M&A process in 2016.
John Monahon: And so then you were fortunate enough to have an exit, which is fantastic, and then afterwards, you joined OnBoard Security as a chief operations officer and chief revenue officer. So at another company that was growing fast. What was interesting to you about that opportunity?
Peter Paglia: I stayed with Azimuth for a year after the acquisition, and after the one year integration, I was doing some advisory work with companies in the IoT space. I was introduced to OnBoard Security by one of its investors. OnBoard was a 25 person company that developed IoT cybersecurity software. And they had built a very strong brand in the automotive market that connected autonomous vehicle market to secure communications in computing. And the company OnBoard was actually a spin out. They incubated within a larger security business, and were spun out before I joined to grow independently. After some initial meetings with the CEO and the team, I became very impressed with the reputation and the leadership position that such a small team was able to build with a large set of conservative buyers in the automotive market and in markets, quite frankly, that where safety and privacy were mission critical. So the board was looking to bring on an executive that could scale growth across some of these IoT verticals, lead a series A investment round because they were looking to organically grow post-spin out, and then eventually succeed the current CEO that had plans to retire.
So I believe in the opportunity, felt my experience was highly relevant, and I joined in 2018.
John Monahon: The CEO and COO positions are somewhat different, but even besides that, I think one of the things is you went from a fairly larger entity down to 25 people. How was that shift for you?
Peter Paglia: The problems might be somewhat different, but the speed of the business and what you’re trying to accomplish is not so different. Azimuth was slightly larger, but even in the case of a 25 person company, there are a lot of expectations, functional roles within the company that have to be addressed. And so I’d say whether it’s the COO or CRO for that matter, what’s important from my perspective is to be able to translate strategy to execution. This includes product deliverables, acquiring customers, getting profit, revenue and profit targets, all of these things. Whether it’s a 25 person team or frankly a much longer team, those are still execution deliverables that need to happen. So I’ve been fortunate with both OnBoard Security and with Azimuth to have a good relationship and rapport with CEOs. I think it’s essential that you got a complimentary relationship between the CEO and whether it’s CRO or COO.
When I was in OnBoard, the CEO and I work very well together. We instantly understood how we complimented each other and how he was looking to me to help drive some of this operational execution. Similarly, at Azimuth, prior to my becoming CEO, I was entrusted to execute the commercial operations for the business, which made the transition for me to CEO much easier. So again, I’d say in both opportunities, my ability to define that strategy and then translate that to an execution plan for the business is what helped me be successful at both companies.
John Monahon: One thing about OnBoard Security, which we’ll talk about later, is you all were eventually sold and used Growth Point Technology as the banker to do it, which of course our partner in Prepping The Princess. But before we even get there, it happened within a short timeframe. It looks like you were there for a year, a series A round was raised at OnBoard Security, which is what you said you were brought there to do. So mission accomplished there. But were you expecting the company to sell that quickly? I mean, that’s pretty fast.
Peter Paglia: No. So things changed. I guess I’d say evolved fairly quickly. Just to clarify, when I joined, we were planning to organically grow. The plan was to use the series A to fund the development and the commercial team. About 60 days into that series A process, we received a term sheet from a strategic investor that planned to lead the round. What we did is we went back out to the rest of the investors that were looking to participate, and through those discussions, we actually received some inbound interest from potential investors that wanted to acquire the business. By the way, that interest was coming from a wide variety of companies in the IoT space, including companies focused on the automotive market.
So we had a board meeting last fall, and we discussed the options. Do we move ahead with the series A, or do we pivot to a strategic acquisition? At that point, the company was particularly in the automotive business was designed into numerous pilots. But we understood that at least in the automotive market, it can take 18 to 24 months from pilot to production. That represents a risk to the revenue plan, clearly. So the board saw this potential risk, and the risk in their mind was that future valuations for the business could be effected if we did see a push out. And that could effect subsequent valuations and subsequent investment rounds.
So the board actually at that point decided to pivot from a series A to M&A. So we actually at that point abandoned the investment route and moved to the acquisition path.
John Monahon: That’s interesting. I don’t know if I’ve ever seen it that compressed. That is unusual, but great. I mean, I imagine that the conversations there were very good. It must have been a very compelling offer. I imagine that you received from the strategic that made the numbers work over time for you.
Peter Paglia: It was, and it was a compressed process for a couple of reasons. One is we did want to execute the growth strategy, and it’s a very distracting process, as you know, to run an investment process let alone run an M&A process. And we had some customers that we were on the hook to deliver solutions for in a market that we’re building our brand in. So we didn’t want to undermine that. But secondly, we had cashflow, and I knew coming in we were looking to raise cash. But it was an even more compressed time period to raise cash than what the board was lead to believe before I joined. We needed to make some decisions around cashflow. So we were fortunate that the term sheet resulted in inbound interests and that we were able to bring on Growth Point to drive the process.
John Monahon: Yeah, and so, again, you had a situation where you had a strategic, I guess, interested, and then you were faced with the choice of getting a banker. And of course, as we mentioned, that’s always a wise decision. How did you all get introduced to Growth Point?
Peter Paglia: I was introduced to Growth Point by our board because the parent company that OnBoard spun out of had an existing relationship with one of the partners there. So I had discussions with them going back to last summer. We were just discussing the market opportunity and the security space that we were in, and my initial feeling was they had a very good grasp of our segment within the overall security market. Security is a very fragmented market, but they had a grasp of the part of the business we were in. And they’d done transactions in that space. So even prior to hiring them as a banker, we saw the expertise they had there.
I also felt they were very realistic in terms of the valuation expectation for the business. Again, going back to one of the earlier points is aligning expectations with the board, I thought that was critically important. So the market expertise, they were understanding of some of the potential buyers because they’d done transactions and the fact that they… I think they were realistic and aggressive but aggressively realistic on valuation are the reasons why I recommended that we move ahead. And we did. We brought them onboard to officially… I think it might have been October 1.
John Monahon: What were some of the things that you were thinking about with respect to this sale at that point? It seems like it was still somewhat early in OnBoard Security’s life cycle.
Peter Paglia: Sure.
John Monahon: What was the company from a being ready to sell standpoint?
Peter Paglia: When I joined, my first priority was to evaluate a couple of things. Evaluate whether our strategy for the business aligned with the growth projection and also assess how well the strategy would hold up even in an investment diligence process, let alone an M&A process. After that quick assessment of the current state of the business, I then focused on a few things. Firstly, preparing our investor deck, which included we refined the value proposition and updated our messaging around the market opportunity, the strategy, and the financial outlook so that we were very much becoming a valued commodity.
Secondly, I work with the management team to develop a prioritized roadmap. There were a handful of things that were planned, but what we did is we put a lot of effort into prioritizing the roadmap and prioritizing the pricing strategy. Developing a pricing strategy that ultimately would drive a larger opportunity for us in some of the IoT verticals we were addressing.
And then thirdly, I led an effort to develop a five year business plan and P&L that leveraged this newly defined roadmap.
So those three things really were kind of where my efforts were focused with the team to prepare us for initially an investment but ultimately the sale of the business.
John Monahon: And what about from the financial perspective? I mean, was it being run as an early stage company, or because they had spun out from a larger organization, did they largely have those financial issues in line? Because we see that often be a problem for companies that are getting ready to sell. They haven’t really gotten their financials into shape.
Peter Paglia: So I’d say that’s absolutely the case. One of the things that you look at when you spin out is are you operating with sufficient capital to spin out, and is the operating plan that you’re going to spin out to achieve realistic. And I think like as always the case with a forecast, if you’re not planning for the downside case, you very much need to make sure you’ve got the cashflow to sustain that. So I think that was one of the challenges the business had is there was some market dynamics that were pushing out some of the revenue traction. While at the same time, a cash situation that was not optimized for the downside case. So that necessitated the acceleration of the investment.
John Monahon: What were some of the things that you think were key in sort of the diligence process in supporting value. I mean, you’ve obviously talked about having the right pricing, having the right financials. Were there any things that I guess that you took note of that are key must-haves, that if you don’t have this in order, then your sale is not going to go as smoothly, or you’re not going to be as attractive to an acquirer?
Peter Paglia: So a couple things. Firstly, if I think about the process with Growth Point, we spent about eight weeks from October through November effectively reengaging the earlier stage series A investors as well as reaching out to new potential buyers. It was clearly a recognized sense of urgency on behalf of the interested parties, and creating that through Growth Point was critical. In fact, one of the differences between the discussions we had around investment versus acquisition is the acquisition discussions became a lot more time based. So that led to an increase in not only interest but also it drove a more competitive process. That was key, and that really resulted in our achieving multiple orders that we… Or offers, I should say, that we were evaluating in the December timeframe.
What we wanted to do though is select a company that really not only strategically was offering a compelling offer for the business but also aligned with the goal of the team. I think our board did a very good job of trying to understand what the synergies were both from a talent perspective and from a product’s perspective. And I think that lended itself very well to selecting the ultimately Qualcomm, which has technologies that span the markets that OnBoard is in.
So that all really culminated in a relatively quick process. We brought Qualcomm into an exclusive arrangement starting in January, and closed the transaction, a 10 week process. So I’d say just I think we did a good job of preparing for the process. But then creating that competitive element during that eight week process, and then working closely to make sure that we weren’t just going with the highest offer. We were going with the right strategic partner was critical to the success.
John Monahon: Did the whole company know that you were looking to sell or did you keep it sort of quiet?
Peter Paglia: So the philosophy at that point because the company was, again, a small company. You tend to me more open with people. Certainly the company knew we were considering and actively investigating an investment round. The team knew I was there to help lead. When it migrated to an acquisition, at first, we needed to be careful as to what we were able to say until we were officially deep into an exclusive process here. So I’d say early on the team knew we were raising capital but did not know about the M&A process until we were well into that process.
John Monahon: How did you manage that once the team did become aware? That’s a big fear for them is that the team will find out and maybe some of them will be worried about their near future, and of course the team’s important to keep intact.
Peter Paglia: Absolutely. And I’d say I’ve been fortunate in both at Azimuth and with OnBoard that we did a very good job in both cases of retaining the talent because you’re right, it’s very much focused on the people. I think there’s nothing really elegant there that you can do other than being open, as open as you can be, to let people understand that, “Look, there’s a lot opportunities. And the question that we have is not that we don’t want to continue to grow the business, but what puts the company in the best shape to capitalize on the opportunity.” In some cases, it is through some inorganic integration, and as long as the company trusts that they are part of that and the talent within the company is one of the primary reasons for the acquisition, which typically in companies this size that is the case, then you tend to retain people. You’re always going to get people worried, but that’s when you just need to make sure you’re staying in close communication with every individual.
John Monahon: When you’re going through a sale process, some acquirers focus on different things. I mean, some people are solely… Well, they’re never solely anything. But some of them are very technology focused. They very much believe that they’re acquiring a company for its IP. Other people for the market opportunity and maybe a first mover advantage. And then others, of course, due to the IBIDA and the money that the company generates. I mean, what’s your view on… You’ve been through this a couple times. Where does that land do you think in valuation? To what should companies be focusing on before they go-to-market?
Peter Paglia: That’s a good question. I mean, I’d say the diligence process was different in both the sales that I led. In the case of Azimuth, the process… I mean, the financial diligence was very similar. But I would say during the Azimuth transaction, the diligence was much more focused around the sales growth, the pipeline, and the forecast accuracy. Are you going to hit the quarter year end. The worse quarter to miss is the quarter that’s when you’re in a process.
John Monahon: Right.
Peter Paglia: That was a relatively commercially-driven transaction. The OnBoard diligence, however, was very different in the given the size of Qualcomm, their focus was much less on the standalone revenue. But it was more on the synergies. Synergies that could be resulting in increased revenue or an increased portfolio or increased IP, and really I think this… Really you need to understand what the motivations are for the buyer. I don’t think the valuation multiple would not have been tremendously effected in the OnBoard transaction if our revenue were slightly larger. I think it still came down to basing the multiple on the IP, the technology, and the team. Whereas in some other transactions, as you said, if it’s not instantly accretive, you’re going to see that reflected in valuation. So I really think it depends on the motivation of the buyer.
John Monahon: It’s interesting because you had a series A, and then an exit right on the heels of it. I guess how did the team feel about the difference between the intensity of let’s say a preferred round versus an M&A, diligencing, and transaction. One, that just seems exhausting. But two, was it covering a lot of the same ground, or did they feel like one was significantly harder than the other?
Peter Paglia: I don’t think there was any doubt the M&A diligence was significantly harder. In fact, during the series A, most of the work fell on the CEO and myself. And even when it came to the M&A diligence, what we tried to do because, again, it’s a big distraction, we focused most of the heavy lifting among the VP of finance, the CEO, and myself. And the rest of the management team was brought in later in diligence when some of the technical and IP diligence items were being addressed. I’d say none of that really during the investment diligence ever happened.
John Monahon: Right.
Peter Paglia: It was really towards the later part of the M&A piece that the rest of the team started to notice this is a very time consuming event.
John Monahon: Yeah. And I’ve heard you mention that a couple times, and I think it’s absolutely right, which is this is very time consuming to have a sale of a business. It seems like you prefer to keep it among a few until it has to go to the broader management team or others. Has that process worked for you? Is that what you would recommend to others as far as limiting how many resources this takes away?
Peter Paglia: I would. Again, every situation is unique in terms of the level of urgency. We were at a point where, again, because we knew we needed to raise capital anyway and we were getting to the point where that was getting critical, that the management team was clearly involved in the urgency of the transaction. But in situations where that might not be the case, then to the extent you can limit the distraction, you want to do that.
John Monahon: So what are some things, having been through this a couple times, that you wish you would’ve known at the very beginning?
Peter Paglia: As I look at both processes, I guess I’d come back to some of the earlier points, but I’d probably say three things. First, make sure the market opportunity and the business model justifies the investment capital that you bring into the capital. I think that it starts with that, and it starts with knowing how much capital you need needs to be the size of the business you think you can build and continue to pass that, continue to stress that business model.
The second thing is I mentioned the leadership team a couple of times. I think that’s absolutely critical. Surround yourself with the leadership team that can lead and fold up under these kinds of circumstances. And I’d say I do a specific shout out the finance person. I was fortunate to have a CFO at Azimuth and a VP of finance at OnBoard that really were essential. Without them, neither deal would’ve happened. You’ve got to make sure I think maybe more than any role that that person is prepared to go through the diligence. In a small company, you’re wearing a lot of hats, and the finance person touches so much that that role is critical.
And then thirdly, I’d say, again, just work closely with the investors, your board of directors, making sure that the expectations are set up front. And I think we did a good job of that, particularly at OnBoard Security to involved them from the beginning so that when we got to the stage where we were looking to pivot from investment to an acquisition, it was a relatively easy conversation.
John Monahon: Now that you have two solidly behind you, home runs, what are you up to these days? How are things going post-sale?
Peter Paglia: Yeah, I would say for me, after the acquisition of OnBoard, what I’ve been doing, John, I’ve been doing some advisory work. I’ve been advising and consulting for growth stage companies really looking for help around this idea of how do you define strategy, translate that strategy to go-to-market that scales, and then companies that are also looking at strategic investments. I’m seeing a lot of companies in that stage where they’re trying to scale, and they’re trying to find out does their business model scale. Are they getting the right level of investment, and then what is that strategic ecosystem look like ultimately when you’re starting to think about some exit down the road. So that’s what I’ve been doing really since March is working with a handful of companies. It’s been a ton of fun, and at some point, I plan to take on a full time operating role in the not too distant future.
John Monahon: There’s no lack of businesses out there that need that sort of advice. So that’s a fortunate thing. Well, Peter, this has been fantastic. I mean, I loved hearing about your experience about how you’ve taken two companies now successfully through, and the things that you’ve learned to get there. This has been very enjoyable. I mean, is there anywhere that our listeners can get in touch with you?
Peter Paglia: Sure. You can connect with me on LinkedIn. LinkedIn.com/in/PeterPaglia. That’s P-E-T-E-R P-A-G-L-I-A.
John Monahon: Thank you, Peter. This has been a wonderful episode. I really appreciate it.
Peter Paglia: Thank you, John.
Announcer: This has been In Process, conversations about business in the 21st century with Evelyn Ashley and John Monahon. Presented by Trusted Counsel, a corporate and intellectual property law firm. Are you interested in being a guest on our show? Email our show producers at email@example.com. For more information on Trusted Counsel, please visit trusted-counsel.com.