Buyers and Builders
00:21:42 · Giuseppe Balzano
So, you know, the Italian companies hopefully will not buy some other contents, especially in this decade, I would say, unfortunately. So it's important to have someone in your continent that you trust, you know, to do this component. Without the components, there is no flight. So they're not gonna... They're they're gonna leave land, and they're not gonna work. So it's either you buy from me, us, or you decide to put something which is critical for the success of your flight, as you... And you and you can imagine, you know, what kind of flights, you know, could be civil or not, in the hands of someone else. And and the question then is, who is the other person? Who is the other company? What kind of interest that the company has? Who's behind? You know? So it's it's a sort of regulatory macro kind of defensibility. On the engineering side, it's not... They don't have they don't have an IP. They have 700 IPs, so they have a class of IPs for different applications. But it's important to notice that there are two, three other companies in the world that can do the same stuff. So the same application with different IP. So it's... Technically, we have competitors. But that kind of component with that design, with that use case is not gonna be the same in another company. So then the question is, if you wanna change your supplier, are you ready to change 20,000 helicopters? And maybe you you have to to to buy the component from another, you know, country. So this kind of stickiness, you know, is what I'm looking I'm looking for in the in the companies we buy. Third acquisition is a... And first strategy for me in another sector is in the water management. And the water management is another industrial company. They do a system, okay, that can be used for, you know, managing to to create some pressures in the in the water system... In the... In water systems in a way. It's like a mix of a of a pump and a filter that can do that can do two kind of jobs depending on on the application... The final application. Hopefully, we have this company. Maybe for for the next interview in in in some years, I will tell you if we ended up buying it. But for now, there is an exclusivity, and we are trying to win the deal.
00:24:24 · Mikk
[00:24:24] S0: What is your approach when it comes to post acquisition, having been working the VC firms? VC firm, you have to grow those companies reasonably aggressively. So what is your approach now when it comes to improving and growing those companies organically?
00:24:43 · Giuseppe Balzano
[00:24:43] S1: As another mentor of mine says, and he's also the chairman of the company, he will tell you he will tell you, let's try to not go backwards. So all good, but don't go backwards, which is completely different than venture capital. You know? I remember pushing back on some founders growing 15, 17, 20% per year and saying, you know, we should deploy faster. We should grow faster and hire more people. Then what happened is, you know, the the bubble popped in in some geographies, including Italy and and Europe, I would say. US is different. You're you're you're just painting money, you know, so you have cash indefinitely in the future. No. Just joking. But venture capital, I think, also went under stress. You know? And and the way you do deals is very different than in the twenty eighteen, twenty nineteen kind of investment thesis. I don't know if you remember Tiger. You know? I don't like to do names, but it's famous. You know? The Tiger Global started to put hundreds of millions here and there. You know? Or gorillas in Italy. You know? They had an amazing, you know, clash after after an amazing loaf. You know? I just wanted to go far as much... How do say, as far as possible from from that kind of of of of system. Because the only way to make that kind of deals work is you have to go indefinitely in the future. There's no... And we have some sort of... There there are some synergies now now that I'm thinking with some compounders, you know, also new compounders. There is this need of buying, buying, buying, buying. Because if you don't buy, you're not justifying, you know, the the the amount of leverage or the cost of capital or the valuation that you have. You know? And as soon as you start to be more patient, bam, you collapse. You know? And and this is something I never told, so thank you for the interview. What I'm looking for post acquisition is to keep the company as it is. If there is a big opportunity whose return on invested capital is clear, like, have orders in Asia. If we if we hire someone, if we open the office, we will have 50 orders. It's gonna cost us then, you know, that... Let's see if we do the the deal or not. That is clear. I try to avoid those deals in which the founder or the the living founder has an expectation of a lot of CapEx involved, which is tricky.
00:27:16 · Giuseppe Balzano
It's tricky because when you do industrials, you're also accepting that your position in the world is to do innovation. You you want to be technological defensible. So there is a there is a good, how do you say, between, you know, between not doing anything and doing a lot. My company survives if there is cash flow every year. But something that maybe I forget is that I I I want I want the company to have cash flow in the future as well. So maybe I'm protecting, you know, the the the dividends now. I'm gonna have 100% of the dividends, and my shareholders will be very happy for the first five years. But maybe in the sixth year or in the seventh year, there is a big competitor that innovated, and and they just disrupt the market, you know. So we want to allocate a percentage of research and development, but AirgainD must be approved by the board, and I'm technically one of the decision maker in the in the in the board, and then there is the manager of the subsidiary. As you see, you know, for me, it's a subsidiary, you know, of the group deciding, you know, the the the budget. Sometimes I think what could happen is the subsidiary needs more cash. Maybe there is really a big opportunity. Like, maybe we become, you know, the monopolistic player in the board, and we have to expand capacity by 10 x. You know, maybe we need capital. So the group, you know, will will just finance, you know, the the the the the CapEx needed for increasing production. So the way we are thinking is very, hopefully, is very entrepreneurial. You know? We are we are a company. We're not doing a roll up. We're not doing a fund. We're not doing just one deal. We just want to survive, you know, and and build an amazing company for the future. Sometimes we have to make choices which are completely different than what we said. Maybe some years, we will not have any positive cash flow because we have to deploy 20,000,000 in a new new facility to become the the champion, you know, on a given market. We will do that. We will do that only if there is a mathematical financial reason to believe that the project is successful. No one is gonna give you the the, you know, the the stamp. You know, this is 100% sure. But if there is a reason to believe, we're happy to take more risks as a company for the long term.
00:29:48 · Mikk
[00:29:48] S0: And your approach when it comes to calling or writing to those companies, I guess you just mentioned some of those owners are very old in 70s and 80s. You just give them a call or just, I don't know, go and knock on the on the factory store. Are those 1,300 you mentioned, are those active sellers or just a list of companies you're you'd be interested acquiring?
00:30:13 · Giuseppe Balzano
[00:30:13] S1: So you're asking about, I think, the secret sauce of of the company. In the end, if you think, we don't have any IP. So we we are buying IP. The IP of Novaterra is maybe me, hopefully, until my shareholders decides that I can be the founder and CEO. Joking. There is a pipeline. You know? It's it's it's an IP. There's the reputation, maybe. There's the ability to do something, but in the end, we are a vehicle, you know, for now. Maybe in the future, you know, we will be recognized like Berkshire, you know, Constellation. You know, there is a brand behind the the subsidiaries. But clearly, that's not the case for us since we we just started. We we will try to go there. So in the meantime, the the the way we we we approach the the program is to defend the assets as much as possible. So I'm not gonna go into a lot of details on on the scouting process, but the main... The two main strategies are outbound, inbound. On the inbound, you know, it's it's easy. You just receive calls from accountants, notaries, and banks, and advisers, and so on. At the moment, we have 130 mandates. So there's there's an m and a agreement. In case we ended up buying the company, We will pay a a provision, a fee for... As as a scouter, you know, to to these boutiques, like an introduction fee. And the second the second big investment that we have done is on the outbound. Now on the outbound, I think it depends a lot on who is your leader. You know? If you're sending an email to the founder of a SaaS in Canada, and they are doing 1,000,000, and they started five years ago, and the founder is 25, and and then you want to buy them. I think, just, you know, out of logic, it's completely different than trying to reach out to a 75, 80 old gentleman from the province of Brescia that doesn't speak Italian. You know? Because you must know that in Italy, we have thousands of different dialects. You know. So if you Well,