Buyers and Builders
00:11:16 · Felix Jander
[00:11:16] S1: Yes, good point. Yeah, I mean, no. Our process with investors was more like bilateral relationship based, right? We first first when we started, when we started, we didn't have a clear idea of how we want to structure this. Yeah, We ended up structuring it like a search fund. You maybe know from search funds there is this 30 to 35% for the founders and then the rest for investors. You do like one time financing of equity and so we had something like this in mind. First we started just talking to some people out of our extended contacts and network basis and we started looping them in into regular discussions. Every month or so we spoke to them and told them, Look, we find roll up interesting or we find this specific market interesting or look we talked to these three companies and they have pretty impressive margins. We had like a circle of 10 then 20 then 30 people that we that we entertained on a regular basis. Yeah, we did like monthly investor updates how we called it. And then at some point we we kind of nailed down some terms. So we did a term sheet and we presented to the spaces. I think it was like six months in February or March. This is how we want to do it. Are you fine with this? And then we had one or two lead investors who we renegotiated some little things with them. But in the end we ended up at exactly what I mentioned earlier like a search fund like structure so there was a time based vesting portion and there was a performance based vesting portion and the performance based vesting portion was based on money multiple that we would give to investors at exit Or that the investment would provide to investors at exit.
00:12:57 · Mikk
[00:12:57] S0: And personally, how was this period for you at the moment? You're this calm, relaxed. It's a beautiful summer. You've seen a great amount of success. But during this time of doing it all, how did you feel? And because I think these type of people who have been going through this period, I wouldn't say they're like different animals, but they have this level of grit, persistence, not giving up. They're tough people in a best way possible. So how was it for you this period? Did you ever have like tougher days or is there anything you'd like to bring out? What helped you to keep going?
00:13:32 · Felix Jander
[00:13:32] S1: So actually, I mean, if you want to have a frank response, it was kind of, I think the best time of my life. Yeah, I was never again. So it's, you know, it's very you building every day something. It's very creative as well. When you're iterating, you're sparring with smart people. So you don't have the burden of leadership, Of developing people, which sometimes also is tough and needs a lot of effort. You're just surrounded by like minded smart people. You can iterate every day and you move very fast. So I I found that back in the days, I found it super cool. Yeah. So like the first six to twelve months, I tell everyone were were the best, so to say. Yeah. Also the times afterwards were were super cool. Yeah. But like this fast moving pace, really intrigued. Yeah. And look, by nature, I'm actually... I I wouldn't say I'm such a brave person. Actually, I'm pretty cautious, and I wouldn't say hesitant, but but cautious, I think, is better to say because I could have also started something similar just right after BCG. Right? But I did not feel ready. I first wanted to get some more entrepreneurial experience and so on. I wouldn't even say that I was like the classical startup founder that did this bootstrapping. Don't know, of €100 a day. Had some savings. I knew I was fine, know. Still obviously it was also a tough period. Mean when we tried to save every cent we could we could run longer for looking for businesses and markets. And I remember very well when Alex and I, I mean we slept together in Ibis hotels for €60 a night. We were very cost conscious. And yeah, but it was cool. Yeah, I liked it. Though the sleep was not the best, yeah.
00:15:14 · Mikk
[00:15:14] S0: You mentioned the VC background. What's interesting the other day, a week ago, I had a podcast with a gentleman, Eric. He built a startup, but during COVID, they had to let go 80 people and eventually close down the business. And then he started reading about Constellation Software and eventually he found an investor and partner. And now they bought over 10 businesses and building this diversified holding company in Malaysia. So it's interesting to see in the future, the guys from the VC world, how many of them might want to or willing to try the, let's call it more stable route of buying a business with a positive cash flow.
00:15:54 · Felix Jander
[00:15:54] S1: Yeah, I see that trend totally. Yeah, like in Berlin, have, let's name some funds you have Creandum, have Cherry Ventures, have Project A, General Catalyst and the likes who all move into that space and also have done some investments in roll ups already. I feel I mean they have the difficulty of telling their LPs. I mean for their LPs they're still in the asset class of venture capital right which is in mindset of I produce one outlier and nine write offs. But the outlier has to return more than 10x and putting that return expectation on roll up I think is unhealthy because in the end you're going to try to reach that expectation even if it's not 10x. But a roll up hardly is an eight, nine, 10x case. So if you want to have that possibility of achieving it, then you need to take more risks in the beginning, which means you do something with software, you have a burn rate, you hire upfront a lot of people whom you are then hoping to generate some margin value creation or some growth value creation or so. But you know it's a significant risk that they're taking there and I think they're making it a bet so to say. And I think that's what they're doing is they're taking the beauty out of this roll up concept, which is the stability, is buying stable cash flows, which also is leveraged by the way, that you can leverage quite well. And they put on a lot more equity and a lot more risk and I don't think that's healthy for the concept. So what we try to do with Arsipa is that we try to stay out of those markets. So we try to stay out of those markets that are prone to be VC financed. It also tends to be the larger ones. So real estate brokers or tax advisors in Germany, very hot topics. Where VCs move into very large markets, super many targets, can enter at low multiples, but then we say, okay, look, maybe that's not our market. We rather focus on something more niche y where we don't have that risk because it kills your entry multiples when you have too much money in the market.
00:18:00 · Mikk
[00:18:00] S0: I want to spend a bit of more time on the very early days of now you getting the meetings, because it's like 100% proprietary deal flow. You didn't do it through a broker or investment banker. How were the first meetings and conversations with owner operators and maybe most importantly, valuation part of you going there, I want to buy your business, and then they will give you those extremely high valuation expectations. How did you survive this period and found the good ones?