Transcript – From Billion Dollar Startup To Bankruptcy And Back Again
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John Warrillow: Next up is Sunny Vanderbeck, who started a company called Data Return. He ended up selling it twice. The first time was a disaster, and the second time around, he more than doubled his money. The contrast between the two exits provides a tremendous set of lessons for you as a listener. Listen out for his definition of reverse due diligence and why that is so important to do on a potential acquirer. He talks about three ways that you can avoid some of the psychological pain associated with selling your company. He’ll also talk about when to listen to your professional advisors, and if you can believe it or not, when to actually trust your gut instead. He’ll define something called fundamental reps and why they’re probably not that big a deal, as well as founder speak, which is a big deal. He’ll also talk about something called hero mode, which can really detract from the value of your company. Here to tell you the entire story is Sunny Vanderbeck.
John Warrillow: Sunny Vanderbeck, welcome to Built to Sell Radio.
Sunny Vanderbeck: Thanks for having me.
John Warrillow: Yeah, no. So I was reading, a little bit about you before the interview, and it turns out you’ve sold the same company twice. Let me get my head around that for a second. Once you sell a company, isn’t it kind of gone forever? You’ve got to kind of give me the backstory here, so. You started a company and then literally sold it twice. Take me through that.
Sunny Vanderbeck: Yeah, so here’s the story. So I started a company in 1996, took it public in 1999. That’s a whole story in and of itself, and it turned out we needed to sell the business. And so we sold it the first time in 2002. The sale to that acquirer didn’t go very well, and that acquirer actually didn’t make it. So a year later, they were out of business and we had the opportunity to buy it back. So we bought it back, ran it for another four years as a private company. I had a lot more fun as a private company CEO than a public company CEO, and then sold it in early 2007 and maybe sold it the right way the second time.
John Warrillow: Oh, that’s awesome. Okay, so we’re going to get into both stories. Let’s start with the one that maybe there were some … a mulligan you’d like to have or a do-over that you’d like to have. So you start this company. Let’s go back to 1996. What were you guys offering? What kind of company was it?
Sunny Vanderbeck: Yeah, so the other two co-founders and I were at Microsoft, and we had this crazy idea that people were going to use the internet to buy stuff. And at the time, right-
John Warrillow: This is 1996.
Sunny Vanderbeck: You rewind back to those days, it was a little crazy. And we were young, in our early 20s, and so that was the idea. And the opportunity that we saw was that, when it actually worked, when you had a complex system selling things on the internet, these systems were kind of sketchy. They didn’t work all the time, they were down a lot, and the customers were going to need help with that. So that was the basic premise of the business, but it ultimately grew into … We were responsible for the performance and availability of some of the world’s largest web sites.
John Warrillow: Can you list … Give us some names that we might know.
Sunny Vanderbeck: Sure, so H&R Block, online tax filing, which is, you can imagine for H&R Block, everything that matters happens in two one-day periods through the year. So those two one-day periods, game on. Can’t fix it tomorrow, it has to work today. Another example would be Match.com. So we were with Match from probably 20 servers in barely a basement to hundreds and hundreds of servers as they became a very large business. Insurance processing for John Hancock, surgical scheduling-
John Warrillow: So are you offering-
Sunny Vanderbeck: So-
John Warrillow: So they’re buying this server space. Was this the early days of companies like Rackspace where you’re kind of buying a little apartment on the internet, a little part of or an entire server? Were they actually purchasing the server from you or access to it?
Sunny Vanderbeck: Yeah, I would say two things. One, our customers tended to count in the tens or hundreds of servers. And it was less like an apartment and more like a hotel. So the distinction was, instead of, “Here’s some space. I hope it works out for you,” it was, “This is my critical business application. Help me figure out how to scale it when 100,000 people connect to it at the same time and I have to do transactions. And by the way, if it goes down, it’s your fault, not mine.” So that … it was … Look, we signed up for a lot. I slept with my cell phone for at least a decade. I still have to have it unfortunately. But it was pretty intense.
John Warrillow: And so you’re growing … Kind of give us a sense of the clip rate you were growing at from ’96 to ’99. Presumably pretty fast if you went public.
Sunny Vanderbeck: So yeah, pretty fast. We grew 40% every quarter. And that was over the last quarter. So our head count doubled every 120 days and did that for years.
John Warrillow: Wow. Why go public? What was the thinking there?
Sunny Vanderbeck: It was, and I feel like I kind of know better now, because we could, right? Our business was performing in such a way that allowed us to access the public markets for capital, and so we did, and we could. Not lots of opportunities for visibility, new customers, raised a significant amount of capital, we didn’t need a lot, gave us the opportunity to sustain that kind of growth for the years to come.
John Warrillow: What was the value of-
Sunny Vanderbeck: But mostly because we could.
John Warrillow: What was the value of the company as a public entity? What did the market capitalization reach?
Sunny Vanderbeck: Yeah, so when we took it public, I think our offering was around the high 200s, right? So call it $275 million, something like that, and I think-
John Warrillow: That was basically the market capitalization, meaning the value of all the outstanding shares.
Sunny Vanderbeck: That’s right, when we went public. And over the course of the next year or so, it grew to about $3 billion.
John Warrillow: Wow. You’re my first billionaire, Sunny.
Sunny Vanderbeck: Nice.
John Warrillow: This is great. Okay, so the-
Sunny Vanderbeck: Wait until you hear the rest of the story. You may not say that any more.
John Warrillow: Okay, alright, we’re coming to that. Okay, so you literally build a company from scratch to a market capitalization of $3 billion. How does that feel?
Sunny Vanderbeck: Yeah. There was no time to notice how it felt, at the time. It was just all day, every day. You hear the stories and metaphors of sleeping under your desk. You really actually did sleep under the desk. I got really good at running on four hours of sleep. And again, just as a reminder, think about inside your own business what the chaos would look like if every four months, you had twice as many employees.
John Warrillow: Can’t imagine.
Sunny Vanderbeck: And then you did it again. It’s not that you did it one time, it’s that you’re now on the 7th generation of doubling head count again, and you need new rules, like you’re not allowed to have any full teams of people that have only worked at the company less than 90 days. Guess how you find out that problem, or get that rule, right? Because you make the mistake, and you realize, “Why is this … This whole team has no idea what’s going on? Why?” And you look and you go, “Oh, they’re all new.” So it was pretty crazy.
John Warrillow: Where does it go from there? So you’re at $3 billion. Ultimately, you sold the company, so fill in the blanks for us.
Sunny Vanderbeck: It was a little messy between $3 billion and when we sold the company. So here’s how this played out. We were rocking along, growing at 40% a quarter, which to be clear, if you’re growing at 40% a quarter and you have to build your infrastructure to manage that kind of growth, that means you’re always kind of 50% larger than you should be for your current revenue, which is fine when you continue to grow. But along comes the dot com crash, and about half of our customer base either went out of business or had to significantly curtail their activities because they couldn’t raise financing. And so the business went to flat very quickly. It was unfortunate. We were one quarter away from profitability. And so that had a pretty big effect on our business. We needed to do a couple rounds of layoffs, got lots of learning about that. Probably one of the more painful things I’ve had to go through, to actually kind of shrink that business.
Sunny Vanderbeck: And over time, the market obviously responded to that. Our market cap got cut in about a third, and then ultimately became smaller, largely because I think the world sort of realized, “Okay, this growth that you had before may not be the growth you have in the future.” And so it just kind of continued to drag along, where the world … At large, the economy wasn’t doing great because of this, but certainly in the ecosystem of technology, we were in the trough of disillusionment about the internet. And so everything had slowed down, and we were not yet profitable. And ultimately our decision came down to this. We either needed to merge with a larger company or take on a significant amount of capital. And the decision I made was, it was unclear how long this is going to last. So it was unclear how much capital we would need to raise to kind of wait it out and hope it got better.
Sunny Vanderbeck: And I think in general, my advice, waiting it out and hoping it’s going to get better, it’s usually not a good plan. It’s literally, you’re just betting on hope and things that have nothing to do with you or your ability to influence the world. And so we said, “Look, we’ve … Let’s look at the other option.” And we had an extraordinary fit in an acquirer. We had one of our investors was Compaq computer. We had been very close with the company for many years, sort of best of friends, worked together deeply, shared a board member. And so Compaq made a very substantial offer for the business, and it was a perfect fit. And to make a long story short, Compaq merged with HP, and we didn’t have a deal any more. So it was feeling-
John Warrillow: What was the offering?
Sunny Vanderbeck: A little chilly out in the world. About a billion.
John Warrillow: Can you share what their offer was? What very substantial is?
Sunny Vanderbeck: Oh, it was about a billion dollars.
John Warrillow: Wow, okay. So you go from three down to a billion, but things aren’t … in terms of market capital as a public company, but things aren’t looking great. The growth has definitely slowed, you’ve had to go through the layoffs. And so the Compaq offer was what presumably was this amazing sort of … I can’t think of the word. It’s not olive branch, but it’s an amazing sort of life ring. Maybe that’s too dramatic.
Sunny Vanderbeck: How about we call it too good to be true given the benefit of hindsight?
John Warrillow: I see, sure.
Sunny Vanderbeck: It was perfect on every dimension. Look, the financial outcome was extraordinary.
John Warrillow: So maybe Sunny you could describe what you saw at this strategic fit with Compaq.
Sunny Vanderbeck: Yeah, so here was the strategic fit through the lens of customer. Compaq had obviously a very broad suite of IT services based largely on their acquisition of digital equipment. They had all of the physical platforms, the hardware, and so forth, and they had built what at the time was the primary relationship with Microsoft, which we were focused on that platform. And so our key fundamental issue was that when we found the right profile of customer, we always won. But for us to sift and sort through the market and find the right profile of customer was extraordinarily expensive and time consuming.
Sunny Vanderbeck: And so Compaq had embedded in its customer base all of our future customers. And so we would get 1,000 sales people and customers that were queued up and lined up and already great fits for what we did. Which in contrast, our world was, we had 25 salespeople that were struggling to find the right fit. And so on the customer dimension, just in terms of customer acquisition and extraordinary fit, and if you were already a believer in their platform and their way of doing things, then buying service from my company would have been an easy yes. And so that was the essence of the fit. Everything was great, and then later on as … Well, let me back up. I’m going to tell you this story so you can live it with me.
John Warrillow: Sure.
Sunny Vanderbeck: So we’re in a time where fax machines are still a thing, and it’s Friday, and we need one more piece of paper and the deal’s done, okay? One paper, one piece, and it’s going out on the wire and it’s done. And it’s a Friday. And remember, we were close. We were close to the leadership team of this business. And so Friday morning came and no fax, and I’m kind of getting a little itchy, and I’m trying to be a grown-up and not call and freak out. It’s not working very well, but I’m at least able to keep my hands off the phone. But I couldn’t keep my hands off the fax machine. I literally would go out and I would check the fax and check the phone line and print a test fax page. And I faxed something to myself to make sure the fax machine was working. And all through this time, I’m supposed to work that day. And there’s no way I could get any work done. And I just keep checking it and fiddling with it and testing it, and I’m growing more and more agitated. And this Friday, close of business comes and I just kind of take a big deep breath, and I go, “Well …” It was a long weekend. I just go home and just relax and not worry about this.
Sunny Vanderbeck: And so on Monday, which was a holiday, news comes across CNN that says Compaq and HQ agree to merge. And here’s what that means. Deal’s over, it’s off. The perfect fit at the perfect price with people you know that are going to be a great … Everything’s great. You couldn’t have asked for a better outcome. Deal’s off. That’s it. It’s over. So that was kind of a rough day.
John Warrillow: What did you … How did you make the connection between the CNN story you were watching and the deal being off? Did someone pick up the phone and say, “Oh, by the way Sunny, have you seen the news? The deal’s off.”? Or did you lace two and two together on your own?
Sunny Vanderbeck: Yeah, so it was obvious … Look, we tried. We called them and said, “Hey, we can still do this. We read your merger agreement. Let’s go.” But that was a bit of a hail Mary, because we knew better. And here’s why, right? You think about, you have these two very large organizations in the midst of a very complex merger that they both need. They’ve decided as companies that it’s important to them. Anything that could derail that merger wasn’t worth it. The long and short of it was, completing our transaction had some risk for Compaq in potentially creating an issue for HP. And for no other reason, their entire leadership team was consumed with, “How do we pull this merger off and make this work?” And so any time they spent working on our stuff just wasn’t as important as their $25 billion merger.
John Warrillow: So how does … How did you feel about the executives at Compaq on the other side of that, of your deal? In your own words, you were friendly, you’d known them, they were partners. Obviously they were hiding something for you along the way. They must have known that this HP deal was in the pipeline.
Sunny Vanderbeck: Yeah, so a couple of things. One, because of the implications of this transaction, a very, very small number of people knew about the transaction. The vast majority of the organization, even at the senior leadership team was effectively surprised by it. Because it was one that if it leaked, it would break the transaction. And so both teams decided to keep it into a very, very small group of people. So on one hand, you can go, “Wow, they knew.” On the other hand, if I was in their shoes, I wouldn’t tell me either because I’d be putting a $25 billion merger at risk. It’s … There’s sort of very little upside and mostly downside. So it was hard to harbor any ill will because they made the right choice for their company.
John Warrillow: And it’s easy to say 18 years later. At the time, how did you feel?
Sunny Vanderbeck: I was bummed, right? Because it was so lined up and everything was great. And as a reminder, it meant I didn’t have to be a public company CEO any more, which is a hard job. And it would let me just kind of go back and focus a little more on the things I loved most. And so it was, look, you’re literally minutes away from a perfect outcome, and then it’s gone. And so, but, it’s … look, it’s … As CEO, you’ve got about 30 seconds to grieve over it and then get on with it. Your company’s still relying on you. Your customers are relying on you. Your employees are relying on you, so you pick yourself up out of the dirt and get to it, so.
John Warrillow: Well, how many employees did you have at the time Sunny? Give me a sense of the size revenue wise or number of employees?
Sunny Vanderbeck: Yeah, I would say … I would guess we were probably in the $50, $60 million revenue range and 300 to 400 employees.
John Warrillow: Okay. Got it. So it’s significant business, and Compaq was going to pay a significant, like 20 times revenue. That’s not a bad number.
Sunny Vanderbeck: Yes. Yes.
John Warrillow: Where does it go from there?
Sunny Vanderbeck: So we kind of regrouped. We had on again, off again worked with investment bankers to have conversations around everything from follow on public offerings to potential acquirers that were talking to us. So there were lots of people that talked to us along the way up. I’ll sort of skip those stories. So we went back to our investment bankers and said, “Okay, well, now what?” And so we had had some other conversations with some other people, and I was speaking at a conference, a Wall Street conference, and an investment banker came up to me … This was probably two weeks after that, and said, “Hey, I’ve got an idea for you. I’ve got an acquirer who’s not somebody you would normally think of. But here’s my rationale.” And he took me through his rationale about where it fit, and it actually made a lot of sense. I was like, “Wow. I never would’ve thought of them, but that’s a great idea.” And so we did the early M&A dance and exchanged some stuff and started talking, and it got real serious, and ultimately got to a point where we had an offer from them.
Sunny Vanderbeck: And I think this … One of my critical mistakes in this transaction was not doing enough reverse due diligence. So we have this set of beliefs about who a company is and what they stand for and what their plans are and what the culture’s like, good or bad. And they’re just beliefs. They’re opinions. And my advice to my old self is, “Yeah, go find out for sure.” You may think they have a horrible culture. Go find out. Maybe it’s great. I’ve seen it turn out that way. You may think the culture’s awesome, and the leadership’s awesome and the plan is awesome and everything’s awesome, and you’re super excited because they’re giving you this offer. And it may not actually have any truth to it at all.
Sunny Vanderbeck: And so I think with the benefit of hindsight, yeah, I did probably check the box on this. We spent a day doing reverse due diligence. Who are these people and what are they doing and what are their plans, and all those questions. And look, to be a bit compassionate with our situation, we were in a bit of a bind too. We needed to get after it and we needed to get something done.
John Warrillow: Is that … Sunny, help me understand that. Was there, at this point, after the Compaq merger had died, or acquisition had died, were you on a kind of a burning platform? Were you burning cash and needed to sell-
Sunny Vanderbeck: Yes.
John Warrillow: Or were you basically sort of-.
Sunny Vanderbeck: Yeah, so we were … As a reminder, we were one quarter away from profitability. But if you remember the scale of our growth, that meant we were 40% too large. And so while we had been able to cut lots of expenses, we were not, just given the nature of how the business scaled, not really able to get it down to break even. And so yeah, we were running out of time. And with the Compaq merger imminent, it didn’t make sense to re-adjust the business. I have to go back to Compaq and say, “Hey, by the way, we cut costs another 20%.” And they’re like, “What are you doing? That’s what I’m trying to buy, and …” And so yeah, we were running out of time at this point. We probably had about six months of cash left, which meant we were either going to have to raise cash on some bad terms or complete another sale. And sort of my view was, raising more cash wasn’t going to actually help any of the issues anyway.
Sunny Vanderbeck: And so we decided to go through with the sale. And so the way it played out, we basically got about 20 … They were also a public company. Our investors, our shareholders got 20% of their company, which seemed interesting. They had a billion of revenue, pretty big business, thousands of employees, so forth. And that thing didn’t go well.
John Warrillow: Let me just pause there. I want more on that, but. So this is an IT roll-up that was, had a billion dollars in revenue that in exchange for your company, you got 20% of their company.
Sunny Vanderbeck: That’s right.
John Warrillow: Okay.
Sunny Vanderbeck: So it seemed like a reasonable deal, given relative scales of the business. It may be even disproportionate based on revenue. But our business was more recurring revenue than theirs, so, fine. So we get on the other side of the transaction. And long story short, we figure out that their strategy and execution are not connected at all, that their roll-up of 40 companies felt like a roll-up of 40 companies thrown in a pile, and that the one thing we needed most, access to customers, the sales force of the combined business wasn’t ready to give to us. And it was everything from compensation systems to just complexity of sell. It’s easier to sell consulting than it is to sell mission critical managed hosting. And so we weren’t finding actually a ton of value in the combination, and we saw lots and lots of problems inside the business.
Sunny Vanderbeck: And so, I think many of the problems stemmed from, if you put 40 companies together really fast, it just doesn’t work very well. It’s going to take time to work all those kinds of things out, and there’s going to be lots of bumps.
John Warrillow: And so for you-
Sunny Vanderbeck: The bumps-
John Warrillow: Sorry Sunny, but just to be clear, for you personally, when you went through this merger I guess where you’re getting 20% of their company, what is your role in the new entity? Are you the division leader, or? What’s your personal job at that time?
Sunny Vanderbeck: Yeah, so that’s right. My role was the division leader for this set of services. They had also acquired a similar company to ours, and so my task was to merge that company basically into ours and we were going to be a part of that. So, probably four or five business unit leaders and I was one of them. That’s also where I got to learn … I’m actually not good at that business unit leader stuff. I’m kind of unemployable, because I’m not good at rules that other people make, and so forth, so. But that was-
John Warrillow: I’m so surprised Sunny.
Sunny Vanderbeck: Yeah, it’s an entrepreneurial thing I think where, when we tell ourselves we’re going to fit just fine inside the big corporate behemoth, it’s rare. It happens sometimes, but it’s really, really rare. And so-
John Warrillow: So where does it go from there?
Sunny Vanderbeck: Yeah, so where it goes from there. So their business was also not profitable, but at least at the time had lots of cash, and the story about why they weren’t profitable made sense, and. But, 12 months later, they filed for Chapter 11. And you would think that’s bad news. You’re like, “Oh no, the world is falling apart. It’s the end.” And we didn’t look at it that way. We looked at it like, “Hey, we have a shot at a do-over that most people never get. We can buy it back.” So we-
John Warrillow: Who’s the we at this point?
Sunny Vanderbeck: Bought it back.
John Warrillow: Who’s the we-
Sunny Vanderbeck: Yeah, our team, our founding team and some investors that we had hooked up with. And so we bought it back about a year after the sale. It was-
John Warrillow: I think that was-
Sunny Vanderbeck: Got the old business cards out and kept doing what we were doing.
John Warrillow: I think that that was made public, wasn’t it, the … when you-
Sunny Vanderbeck: Yes, yes.
John Warrillow: Bought it back. What do you buy it back for?
Sunny Vanderbeck: Yeah, I think it would have been … It was probably $30 million.
John Warrillow: Amazing. So you go from a $3 billion market cap to a billion with Compaq to bankruptcy, essentially, but then back to … And then you’re buying out of the ashes of that business, if I’m paraphrasing. You’re picking up the assets that you knew best that had inherent value and paid roughly $30 million for that.
Sunny Vanderbeck: And here’s the funny thing. If you remember earlier, I said, “Hey, we just, we needed one more quarter of growth to be profitable.” And so when we bought it back, the thing we bought back was profitable.
John Warrillow: And what was that thing called? What was the name of the company?
Sunny Vanderbeck: So the name of the company was Data Return.
John Warrillow: Data Return, okay. So you bought Data Return back essentially for $30 million, which you raised … your founding partners, your former colleagues at Microsoft, and then some investors.
Sunny Vanderbeck: Yes.
John Warrillow: Got it.
Sunny Vanderbeck: Yeah, so we bought it back. We had lots of things to unwind and clean up and rebuild and fix, but it was a lot of fun, because we were out on our own again doing what we loved, which was building a company.
John Warrillow: And your role is CEO at this point, in the next iteration?
Sunny Vanderbeck: Yes, yes.
John Warrillow: Okay.
Sunny Vanderbeck: Yes. So I was founder and CEO and business unit head for a year, and then back to CEO. And so we ran as a private company for the next four years, probably a good bit slower growth. I would guess we were probably average 15% a year growth. As you might imagine, we were a good bit conservative on how we ran things, maybe too much so in fact, given those recent experiences. I mean, look, one of the things we didn’t mention is right in the middle of all of this was 9/11.
John Warrillow: Right.
Sunny Vanderbeck: And so we had dot com crash and 9/11. Those, you get a couple of experiences like that, right, in a row, they can cause you to be a bit too conservative perhaps. But, look, it turned out well. We ran it as a private company for four years. We built the first enterprise cloud computing. We launched in 2005. It was sort of-
John Warrillow: And enterprise cloud computing won’t mean anything to … It doesn’t mean anything to me, so that’s when you’re hosting big companies’ web sites? Is that right?
Sunny Vanderbeck: Yeah, so if you think about it, you hear about all this stuff, cloud computing, Amazon EC2 and so on and so forth, where effectively, your applications don’t run on specific servers. They run on a big pile of servers, and they can move around from server to server. And so it gives you the ability-
John Warrillow: Oh okay. One server gets … okay, got it.
Sunny Vanderbeck: Yeah. And so that’s, they call it the cloud. We called it something else at the time. So because that was our customer base were these mission critical applications. And one of us had come to us and said, “Look, if you can figure this out, we’d love to give you lots of stuff.” And I said, “Well, it doesn’t matter if no one’s done it. Let’s figure it out.” And so we did. And so that was probably in 2005 and ultimately, sold the business the second time in May of 2007. And we like to think we learned a lot along the way. The second time we sold the business, we had a much clearer sense of what we wanted, much clearer sense of how to do reverse due diligence, and so lots of lessons learned on the second go-round.
John Warrillow: And what did you sell it for the second time?
Sunny Vanderbeck: I think second time, we sold it for … I think $85 million at close. It ended up being a good bit more than that, because we took some stock. The acquirer was a public company, so we took some stock in that deal as well.
John Warrillow: Got it. Okay. So it ended up being a fantastic transaction. You buy for 30, four years later you sell for 85.
Sunny Vanderbeck: Worked out alright.
John Warrillow: That sounds like a pretty good deal to me. The second transaction, when you sell for 85, what was that like? Was that a kind of a dog and pony show where the M&A bankers kind of trot you out to a few acquirers? What triggered that desire to sell in 2007 and sort of how did you go about doing it?
Sunny Vanderbeck: Yeah, I think on this one, we saw a couple of things here. One, we were at about the 10 year mark for the business. Two, we were starting to hear these radio ads about home loans with no money down and no interest payments and no checking of income. And these were things that were sort of foreshadowing the financial crisis. And I had that moment where I heard the radio ad, and usually if I was in the car, I was on the phone, like an entrepreneur. Every available moment, I had something going on. I’m not listening to the radio.
Sunny Vanderbeck: And I heard this ad come, and I drove back to the office, and I got the team in the room, and I said … And we had been together for a really long time. I said, “Look guys, here’s the deal. Here’s this ad. I don’t really know what’s going to happen, but this sounds a lot like kind of 1999, 2000 era stuff. This doesn’t feel very sane. So here’s what I need from you. We need to either sign up for another full five years, because who knows what the trough is going to look like. We’ve just got to gut it out for five years. Things are good now, but we don’t know how they’re going to be in a while, and so you just need to be ready for a full five years. Or, this is a great time and place in our history to have an exit.”
Sunny Vanderbeck: One of the things we had done during the second half of the business, that second four years, is we got the business to a place where I was not involved in any day-to-day processes. There were no things that happened on a Tuesday that required me. There was no line at my door. And so all of my time was on strategy and forward thinking and new product. And so that gave us the opportunity to look at the business and say, “It’s actually ready to fit somewhere else. It’s ready to have another owner. It’s probably worth more.” But my opinion is, that moment where the founder disconnects and isn’t needed on any given Tuesday is a really important moment in a company’s history.
John Warrillow: Why is that? What is it about when the founder’s sort of able to step away that … Why do you think that’s such a seminal moment?
Sunny Vanderbeck: I think it … because it says a lot on how … Have you built something of enduring value? Right? If it requires your hand on it every day, do you really have anything yet other than an extension of yourself? But once you’ve extended past yourself, if it can stand on its own two feet … so a bit analogous to your kids actually being grown up and being able to provide for themselves. And frankly, for me personally, I enjoyed it more anyway. And so I remember that moment where I realized I have an extraordinary team that knows what they’re doing, and the very best thing I can do for them is to stay out of their way. Right?
Sunny Vanderbeck: And so my job turned entirely to, where are we going in the future, and how does this team work together instead of me being in the CFO’s business, trying to do their job for them or what have you. And so something important … And my belief is, it’s important whether you’re going to sell or not, but if you’re in a sale process, acquirers know this stuff. They know how to read it, they know how to see it, and so if you’re in hero mode when you’re doing these dog and ponies, and your acquirer, every conversation you have is about how important you are and this big hero thing you did, and, “Oh, I’ve got the relationship with our 10 largest customers.” Okay, let me tell you, on the other side as an acquirer, that stuff is terrifying. You never want to hear it. Because what that says is, your whole bet relies on one person instead of relying on a system and relying on a team. And so that, you’ve got to get all the hero out of your business for it to be able to stand alone.
Sunny Vanderbeck: And to be clear, no matter what you think is going to happen, every business someday will be run by somebody else. It’s one of the inevitabilities, even if you were like, “Well, I’m going to give it to my kids.” Okay, somebody else is going to run it and somebody else is going to own it, and it’s not going to be … And so thinking about how to make your business run better and thinking about how to make your business run without you ultimately makes it more valuable. And not just in a monetary sense, and then all of the other things that are of value.
John Warrillow: It brings me to your book, the book that’s coming out in … Well, actually, by the time this episode will be live, it’s actually going to be available. Excuse me. So the book is called Selling Without Selling Out. Give me the subtitle again. It’s a great subtitle.
Sunny Vanderbeck: Yeah, the subtitle is, How to Sell Your Business Without Selling Your Soul.
John Warrillow: So what prompted you to want to write this book?
Sunny Vanderbeck: That’s a good question now. Two and a half years later, I wonder why. And I actually have a real answer-
John Warrillow: That’s not a good sign.
Sunny Vanderbeck: Right, and good for those of you that have written a book. It has to be a labor of love, because it’s otherwise too hard. Here’s the deal. I wrote the book that I wish I had read before I sold my company the first time. These are lessons to my 20 years ago self about things I’ve experienced since then, things that other CEOs have experienced since then, about how to get an outcome that meets all of your needs. And so one of the realizations was that … We talk about value all the time and how to get more of it, but we don’t really talk about what value is. What do you actually care about? My own personal experience, and I think this is true for most CEOs, is that money is a component of value, but there are lots of other things that matter to us. And I’m going to give you the quick question to ask yourself to figure out, “Do I only care about money or not?”
Sunny Vanderbeck: So you have an acquirer who you find out is going to fire everybody the day of close and shut the company down. So it’s over. If you’ve got a plant, they’re shutting it down. All the employees are fired. They’re getting rid of all the customers. They just want to take you out, get you out of the market. How much more do they have to pay? My own experience is, lots of CEOs recoil at even the idea of that, and there’s not a number that somebody could pay that would make it okay to fire everybody. There are some of us that it just, it’s entirely an economic transaction. That’s fine. And by the way, that’s not who the book’s for. If you only … If money’s the only thing that matters, don’t read it. It’s not useful to you.
Sunny Vanderbeck: But if you answer the question about, “Well, I wouldn’t want an acquirer to do that, and they couldn’t pay me to do that,” then it starts to beg the question of, “Okay, well what do you really care about?” And let’s go on the journey and explore what is it that we care about and what is it that we want to see happen the day after a close? The premise is, closing day’s not the important day. It’s the day after.
John Warrillow: What other lessons, in addition to the … figuring out your relationship to value and what value means just beyond economic. What other kind of tactical or tangible lessons does the book have? I know there’s probably hundreds, but is there one or two given the nature of what we do on this show that you might draw out for our listeners?
Sunny Vanderbeck: Yeah, I would say there are a couple of things that come to mind, or we’ll call it three. So first, write it down. And when I say write things down, I mean figure out what you value and write them down on actual paper and look at them over and over again over time. It’ll take a little while, kind of unpack what you really care about and what you really prioritize. And-
John Warrillow: So for a lot of entrepreneurs, they’re-
Sunny Vanderbeck: For those who list as their-
John Warrillow: A lot of entrepreneurs are going to listen to that and go, “Sunny, I care about money,” right? “I want to cash out.” How would you respond to someone who’d say that?
Sunny Vanderbeck: I don’t believe you. I think-
John Warrillow: Go further.
Sunny Vanderbeck: I just don’t. I don’t.
John Warrillow: What would you ask them?
Sunny Vanderbeck: Go sell your company and only care about money, and then call me the day after close when you’re crying or have a 102 fever and you realize they’re dismantling your life’s work and you don’t feel good about it, and ask me how that worked out. It’s very rare. So you … Look, it’s really easy to get tied up in the golden bell or the brass ring or all the stuff. And here’s what we found. We talked to a bunch of CEOs, and the story over and over again was the same thing. The thing that drove their happiness in the sale wasn’t the price they got. It was a whole bunch of other stuff.
John Warrillow: Like what?
Sunny Vanderbeck: Price was important. It’s a threshold. It’s what they do with the company afterwards. What happened to the customers? What happened to my employees? It turns out that there are … There’s an easy way to figure out at least who or what you could care about, and then you have to decide what you want for them. So we use a term stakeholders, and that’s who cares about your business. And so for each of us, we can make a list, and I’ve got some tools on my website sunnyVanderbeckk.com where you can kind of help unpack this, to say, “Okay, who do I care about? The customers and suppliers and the community I’m in,” and so on and so forth, and you write that down. And then you write down what you want for each of those, and what you want for yourself, and what you want for your family. And the process of doing that, you’ll get clear on what matters to you as it relates to your employees.
Sunny Vanderbeck: So I’ll give you an example. I had a friend who sold his business to a large Japanese firm. One of the things he negotiated in the transaction was that seniority and tenure in his firm translated to the Japanese firm. And here’s why. The Japanese firm, this particular one, time at the company mattered a lot. It was big ceremony, big importance, big sort of influence in the company. If you had been at the company 20 years, you had more say than if you had been at the company 10 years. And so he negotiated that into his agreement with his acquirer to say, if somebody’s been here 18 years, that counts. And so he got to see his employees get 20 year pents two years after the transaction. So that’s a very specific example, but just figure out what you care about, because as you go into the transaction, then you’ll know how to know if you’re getting what you want.
Sunny Vanderbeck: So the first thing is just simply figure out who you care about, what you want for them, what you care about, and maybe if there’s some non-negotiables. Maybe fire everybody is a non-negotiable. Just get clear on that. So, and write it down. And I know I’ve said write it down six times. I should probably say it 12. Something magic happens when you write it down on paper. Because when you go back and look at those words, you’ll find, “Oh, I don’t really mean that,” or you’ll find nuances and tune-ups. And here’s what I’ve seen a few entrepreneurs do. They’ll take that paper, and by the way, that also includes the money stuff, and put it in a sealed envelope. It can be really useful later on when the deal gets sideways. Lots of deals get a little sideways during the process.
Sunny Vanderbeck: And so this would be my second tip. Some stuff’s going to happen in the process of selling your company that’s going to make you mad or sad. And you’re going to have an emotional response to it. But get over it. Get over it, and get over yourself. Because the thing you have to ask is not, “Is this term that’s in front of me now, is this particular term fair or not?” It actually doesn’t matter. What matters is, take it as a whole. Given what I’m trying to solve, is this a good deal or not? And if it’s not a good deal, then don’t do it. But if there’s some term that just sets you sideways, you may just have to get over it. Because if that thing is not one of your real priorities, then it’s just not a priority. Don’t get wrapped up about it.
Sunny Vanderbeck: And this transitions into my third tip. There’s a funny line between listening to your advisors because you paid them money to advise you and they’re supposed to give you good advice, and not listening to them because their objectives are not exactly the same as yours. So your advisors generally, their success means they got the highest price, and they got the transaction closed. That’s what they care about. But if you remember from the first one, you actually care about a bunch of other stuff. Look, all the bankers and lawyers, transaction’s done? They go home, they move onto their next thing, and you’re left with the consequences of your decisions and your actions, and only you. And so half of my advice here is, you have to listen to your advisors. If they’re telling you, as an example, “Hey, this term in a purchase contract is just standard. This is how things are. Quit being wrapped up about this,” then you probably actually need to quit being wrapped up about it.
Sunny Vanderbeck: I know a CEO who walked away from a sale that was perfect on all fronts, but for this one term called fundamental reps. And the idea around fundamental reps is, you have to warrant to the buyer that you actually own the company you’re selling and you haven’t committed any overt fraud. That’s standard.
John Warrillow: Seems like a pretty easy thing to agree to.
Sunny Vanderbeck: You-
John Warrillow: Yes, it’s my company.
Sunny Vanderbeck: Yeah, you really own this. And it looks big and scary, because the penalties are up to the entire transaction price. And so this entrepreneur got scared, which is reasonable to be scared. “Well golly, this is … You could make me give the whole purchase price back.” I’m like, “Yeah, if it wasn’t your company in the first place and you made fraudulent documents, yes.” And his attorney was like, “Look, man. There are no transactions that happen without this. This is, say, we’re negotiating the wrong thing.” And he just couldn’t hear it. There was too much fear. He couldn’t listen to his attorney that was like, “Look, this is … Of all the things to negotiate or be freaked out about, this is not the thing.” And so he walked away from the deal. And I feel for him, because if he’s ever going to sell the business, instead of it being handed abruptly to his children when he passes, he’s going to have to make a fundamental rep. But he just got stuck on it.
Sunny Vanderbeck: Well look, we’re entrepreneurs. We get obstinate about things. I think it’s in our job description to be obstinate and unreasonable about things, because that’s how we’re able to create some of the success we create. This is one of those places where there … Sometimes you’ve actually got to listen to what your advisors are telling you about a situation or a term or something like that. But here’s the tough part. The other half of the time, you have to ignore them, because they don’t know what they’re talking about. And so, it takes some nuance to think about, “Okay, where might they really know …” So if your attorney’s telling you a contract term is standard and has been negotiated by a thousand companies, you probably get over it. On the other hand, if you remember our second sale that in my mind turned out to be extraordinary. All of our stakeholders got what they wanted and needed, employees got promoted, customers were happy. It was great. Our investment banker said they didn’t want to put that company on the list because they weren’t a real buyer. And I had to just-
John Warrillow: Why did they not think they were a real buyer?
Sunny Vanderbeck: Because they hadn’t done any other acquisitions.
John Warrillow: What was the … Who was the acquirer?
Sunny Vanderbeck: A company called Terremark.
John Warrillow: Okay. And they hadn’t done … They didn’t have a history of making transactions, and so they said-
Sunny Vanderbeck: That’s right.
John Warrillow: “Look, these guys aren’t going to … They’re not going to be interested.”
Sunny Vanderbeck: Yeah, the bankers said, “Look, they’re tire kickers. They’re never actually going to close. They’re-
John Warrillow: Why were you so-
Sunny Vanderbeck: Just a waste of time.”
John Warrillow: Why were you so convinced that they would be a good fit?
Sunny Vanderbeck: I had had a conversation with the CEO directly who was also a founder. And sometimes founders, we can talk to each other in founder speak sometimes and pick up lots of nuance in a conversation.
John Warrillow: What did he say that gave you-
Sunny Vanderbeck: And so-
John Warrillow: What founder speak did he use that gave you a sense he was real?
Sunny Vanderbeck: Unfortunately, it’s been so long. All I can remember is the essence of the thing, and the essence of the thing was this. The things that our company was extraordinary at, they weren’t, and the things they were extraordinary at, we weren’t. There was almost no overlap in the actual service capabilities of the business. But our customers were all trying to buy the same thematic outcome. They were all trying to buy the best. Now, they did co-location. So total hands-off, here’s the space in Iraq, I hope it turns out for you. And we did this ultra high-end managed service stuff. And so, their thesis was this. Customers that buy lots of co-location that want to buy high-end and have mission critical applications may have some parts where they want somebody to run it for them. Customers that buy this high-end stuff may have some parts where they want to run it themselves. Let’s put it together and go out into the market.
Sunny Vanderbeck: So here’s what happened in the market. Our salespeople and their salespeople no longer had to try to compete against a substitute, another way to get it done. If a customer said, “Hey, I don’t want you guys to mess with it. I just want the best co-location,” the sales guys of the combined company could say, “That’s great, we have that.” If they said, “Hey, I need you to run this for me,” then the sales guys of the combined company could just say, “Yeah, we do that, and we’re extraordinary at it.” And so all this time and energy, both of our sales forces spent selling not necessarily directly against each other, but against each other’s category, were gone. And we could just say, “Yes we can, and it’s going to be great.” And so what happened is when we put the companies together, growth rate doubled. Because it was right. The thesis made a lot of sense.
Sunny Vanderbeck: So look, I talked to this guy, he was genuine. His story about where the capital was going to come from was very believable. The strategy made a lot of sense. And we had learned our lesson before, like “Okay, that all sounds cool, but you’ve got to do a lot of reverse due diligence, spend a bunch of time vetting it out.” So we had a sane strategy. He had really given some thought to the why and the how he was going to do the transaction. My read was that he was serious and the bankers were being lazy. And so I just said, “I don’t care. I know you don’t think they’re a viable acquirer. Put them on the list anyway.” And there was some uncomfortable silence on the phone, and they said, “Okay,” and we moved on. But that was one of those moments I remember where I was standing when we had that conversation, because as it turned out, it was a very important conversation. But sometimes you have to take a stand for what you care about.
Sunny Vanderbeck: And so you get in … here’s one of the things that’s going to happen is you’re going to get in this swirl of the transaction where it’s … Transactions have a pace and a timing, and everybody in the whole deal knows what’s going on except for you. Everybody else has done this a bunch of times. You don’t really, and so it’s going to run away with you if you haven’t written down what you care about.
Sunny Vanderbeck: And something you told the banker you cared about early on in the process verbally, they’ll just brush aside. They send you a big old spreadsheet with a bunch of price and terms in it and say, “We think row number three is the best buyer, because they’ve got the highest price and the highest probability of close.” And nowhere in that spreadsheet is, “Yeah, but what happens to my employees, and what about my customers, and we do this thing in the community that matters to me, and what’s their strategy?” and all these other questions that are non-financial things. They get cut out of the spreadsheet. And so that opportunity for you to take a stand in the middle of this whirlwind that … And if you don’t do anything, it will carry you to the end, and you will get the highest probability of close and the highest price, but you may not be happy. And so being able to understand what you want and need well enough to take a stand is important.
Sunny Vanderbeck: And so back to this Terremark acquisition. I actually knew what we were looking for, because I got it wrong the first time. And when I looked at Terremark, it actually looked like it was going to be a great fit.
John Warrillow: When you talk about reverse due diligence, and you’ve brought it up a couple of times, what I’ve heard from you on that score is, understand where the capital is going to come from, the buyer’s capital, is it real? Understand some of the operational issues like the difficulty of stitching 40 companies together is going to be problematic. Understand the salespeople and how their commissions are structured, and try to understand if you can plug your business into their sales funnel and their sales commission structure. What else would you look at in a reverse due diligence to evaluate a potential acquirer?
Sunny Vanderbeck: Yeah, a couple things. One, what’s the culture really like, of the acquirer? And you can’t do that without spending time there, physically spending time at the company. And just watch it. Just watching how, are people excited, or are they happy? Are they having a good time? Are people shuffling around staring at the floor? Understanding what the acquirer’s culture is like is going to tell you a lot. The second one is, just this big open-ended question, and you’ll have to keep at this question, “What are you going to do with it?” So just the simple question of, “What are you going to do with it?”
Sunny Vanderbeck: The first answer you’re going to get, it’s just going to be this kind of glad-handed answer about, “Oh, we’re going to X, Y, Z.” Don’t take that BS. Really go, “No, let’s get on the white board. Show me what happens. How does this work? Who’s going to report to who? Show me the org chart. Where do my salespeople go? Where do my operations people go? What are we going to do with the plant? How does it fit?” And actually spending time to go through … Because in most cases, the acquirer knows what they’re going to do with it. They may not have just told you yet, and they’re not used to being asked questions like that, like, “Specifically, what are you going to do? Okay, transaction closes. Now what? Take me through the next 100 days. Take me through the strategic plan. Are we going to roll this out to your other customers?” Ask real, serious questions about, how is this going to work out?
Sunny Vanderbeck: And that’s the big reframe that I’m trying to get at in the book is that everybody’s energy and attention is focused on getting from, “I’ve decided I want to sell or take on an investor,” to closing day. And what I’m suggesting is, it’s all the stuff that happens after a closing date that actually will determine whether or not you’re happy with the outcome or not. And so that sitting down with the acquirer and forcing the issue to, “What are you really going to do with it?” You’re going to learn so much in that conversation. And just remember, don’t take the first answer. Dig in more.
John Warrillow: I have learned a ton from you, Sunny, and I think our listeners have as well. I really appreciate you spending the time with us. I think your candor and humility through the whole process of ups and downs, just tremendous, and I’m glad it has worked out so well in the end. The book is called Selling Without Selling Out. It’s available anywhere books are sold. Sunny, thanks for joining us.
Sunny Vanderbeck: Thanks for having me.