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John Warrillow: Boyd talks a lot about how he financed the business using an interesting company called Decathlon, which I personally had never heard of, so I found that part of the discussion really unique. He talks about a debt instrument, and I’ll let him describe that as he goes. He talks about how he valued the acquisition that he made to start the business, which is really quite fascinating, how they used some of the lingo of the day, terms like artificial intelligence, machine-learning, and big data. All these sorta buzz words, and you’ll get Boyd’s perspective on the use of those terms.
John Warrillow: The beginning of the interview, I warn you, has a fairly technical angle to it for the first, maybe, 30 seconds. So just bear with us as we get through that, but once we get into that I think you’ll find the discussion to be very accessible and rich with insight about how to sell a company which is both product and service-business. Here to tell you the rest of the story is Boyd Davis.
John Warrillow: Boyd Davis, welcome to Built to Sell radio.
Boyd Davis: Good to be here.
John Warrillow: So, tell me about this company Kogentix. Am I pronouncing it correctly by the way?
Boyd Davis: Yeah. Kogentix. Yeah, that’s right.
John Warrillow: Kogentix. Kind of a cool … With a K.
Boyd Davis: Most people struggle with the spelling after they hear the term. You can imagine the kinds of spellings I’ve heard.
John Warrillow: Yeah.
Boyd Davis: So, Kogentix was founded in the early part of 2015. It was me and three co-founders. And we really had a vision that the emerging distributed platforms originating with the Dupe and then migrating to the Cloud with solutions like Amazon ZMR and Microsoft’s HD Insights, and the Google Cloud platform, would really unlock the capabilities of data when you applied a combination of that data management with advanced analytics and machine learning and artificial intelligence algorithms to drive business outcomes.
Boyd Davis: So, we set out to build a company that would help mostly larger organizations leverage their data and create business value by aggregating the data, wrangling the data, turning it into insights through advanced analytics, and then deploying those insights to make a business impact. And that’s what we set up with-
John Warrillow: That all sounds great for a technology geek, of which I’m not, so help me understand it in a layman’s terms. Can you give me an example of … Like, “Ford hired us to do X.” Or “General Electric hired us to do Y.” I love to put some meat on the bones to kind of make it make sense to people who are not super technical. When you say the Cloud, they think of the things in the sky, not the thing that computer geeks talk about.
Boyd Davis: Sure, sure, sure. You know, most of our customers view the work we did with them as a significant competitive advantage. So, then as now I can’t give you a specific client example and tell you a use case, but I can kinda give you an analogy and give you a sense of the kind of work we did.
Boyd Davis: The analogy is something that’s very familiar, everybody is … When you go to Amazon and you buy something, they’ll have an “Also recommended for you.” Or, when you go to Netflix and watch a movie, they’ll have, “Hey, if you like this movie you might like this other one.” That’s basically taking the data of your behavior, comparing it to the data of behavior of people that are like you, and saying, “Hey, you’re likely to like this other thing because somebody like you liked it.”
Boyd Davis: And it turns out to be … That’s a well-established practice on internet services, and it turns out to be a little bit easier for internet companies because all of their data is already digital, it’s already formatted in a way that it’s kind of easier to gain those insights. What we wanted to do was make that available to consumer-goods companies, people that sell groceries, people that were in the business of selling banking services. That challenge is much bigger because the data they gather on the behavior of their customers comes from a lot of different sources. Maybe it’s when you call up the bank and you have inquiries about your account. Maybe it’s when you visit the branch and have a transaction. In the case of consumer-package goods companies, they’re kind of removed from their customers.
Boyd Davis: They have to look at things like Nielsen Spending Data and transaction data from the retailers. That’s a very complex problem, so what we basically did was apply some of those modern internet techniques to a bigger range of data so that organizations could understand their customers better, anticipate their needs better, communicate that with them more effectively, and gender greater loyalty and drive greater profits. So, it’s really a very similar kind of approach to what people are used to seeing on the web, but it becomes much more complex when you have to aggregate data from a lot of different interactions.
John Warrillow: It sounds, in particular, where there are multiple channels involved-
Boyd Davis: Absolutely.
John Warrillow: … Like, you could go into a grocery store, you could buy online, you could buy over the phone, and then trying to identify that customer through the various different channels they choose to buy from must be a real challenge.
Boyd Davis: And then, also, engaging them in those same channels. So, we talk a lot about omni-channel customer engagement, and a full customer-
John Warrillow: There you go sounding like a geek again, Boyd! Come on, “Omni-channeled customer engagement”?
Boyd Davis: That’s exactly what you said, multiple channels. Omni-channel means all channels, and getting a really, really clear understanding of customers.
John Warrillow: You’re gonna make me so much smarter in the next hour. I can’t wait.
Boyd Davis: Yeah, I think it’s why there’s so much excitement, definitely a little bit of hype around artificial intelligence.
John Warrillow: Yeah.
Boyd Davis: And the kind of artificial intelligence we applied was not the science fiction stuff where the robots take over the world. It was relatively mundane things of very narrowly using the data at-scale to understand how to engage customers better. We also did some other kinds of work to do things like optimize, transportation networks, and predict failures on large trucks. There’s a lot of other applications of the same principle, but fundamentally it’s about gathering a bunch of data, applying math to it, gaining some insights from that data and that math, and then using those insights to try to change a behavior so that you can either engage your customers more effectively, or lower your cost of operations, or increase your service up time.
Boyd Davis: That’s basically the idea of modern AI in practice for large organizations.
John Warrillow: That’s helpful. The four of you that came together to form this company, how did you … Did you know one another before? Did you work in a previous company? How did you all kinda coalesce together?
Boyd Davis: Yeah actually I spent a big chunk of my early career … Actually, most of my career at Intel Corporation, and while I was at Intel I ran a software business that was building a distribution of Apache Hadoop. So, similar to the work that Cloudera Hortonworks does today.
Boyd Davis: And through the course of that, we knew that we needed to help customers get value out of the software technology, so I acquired a small consulting firm out of Chicago that was actually founded by my other three co founders. Intel chose to take a little bit of a different direction in their strategy, so ultimately we all left, but we still had a very similar vision of using these modern, open-source, distributed technologies to help customers get value out of their data. So, we got together and formed Kogentix.
John Warrillow: When you say you acquired, do you mean you personally acquired, or you-
Boyd Davis: No, Intel.
John Warrillow: Intel. I see.
Boyd Davis: Intel acquired a consulting firm, and I happened to be the general manager of the sponsoring business unit for that acquisition.
John Warrillow: That’s helpful. How did you value that consultancy?
Boyd Davis: Oh, interesting. This was … You know, we drove evaluation that was based … Some on revenue, and then that consulting firm was small enough that we also could value it purely from a talent-acquisition perspective. So, there’s a number of ways to value companies.
Boyd Davis: I’ve been on, now, both sides. I’ve been acquirer, and been acquired. And from the acquirers perspective, we didn’t value that company’s clients so much, although they were a nice value added, we really would value the talent. So, in the realm of acquisitions, that was a little bit more of a talent acquisition, and the talent acquisitions are really, really dependent on the market environment.
John Warrillow: And so, I’ve heard of these “Acqui-hires”. I guess Google is most famous for making these acqui-hires. Is there any sort of formula you would put on? I’ve heard … In AI, for example, it’s a few hundred to high hundreds of thousands of dollars per employee. Like, on an acqui-hire, are you valuing on a per-head basis? And if so, how do you figure out-
Boyd Davis: Yes. Absolutely. You’re exactly right.
John Warrillow: Okay.
Boyd Davis: There’s a lot of different ways to view acquisitions. You could be acquiring revenue, you could be acquiring intellectual property, or you could be acquiring talent or some mix of those things. But when the evaluation driver is the people, then it becomes a price per head kind of thing. And the numbers you talked about are kind of consistent. Obviously, they vary greatly by the uniqueness and demand for the skills in the market.
John Warrillow: Right. And it occurs to me that it’s got to be a relative low number per head … Maybe not. Because I bet the competitive set would be to hire Heidrick & Struggles, or whatever top-tier recruiting firm is out there, pay them 30% of the first year salary, and go hire the talent. Is that the plan B if you can’t make the acquisition?
Boyd Davis: You know, interesting. This was several years ago that we made this acquisition. One of the things you don’t get with that model of hiring one at a time is a functioning team, and that matters. We had a team of … When Intel acquired the company of my three co founders, which was called Extreme Insights, they had a leadership team. They had a hierarchy of talent, from senior architects down to lower level developers. And they’ve proven to be effective as a team.
Boyd Davis: So it wasn’t just a hiring. We didn’t hire them and integrate them into some larger organization and have then managed in a different way. That’s why it wasn’t kind of what I think of as a pure acqui-hire. And very few acqui-hires of that nature are that pure, where you just kind of pull the people in and it’s just like you paid for a recruiting firm or something.
Boyd Davis: It really is, you’re acquiring a functioning team. That’s a lot more valuable than just acquiring a collection of individuals who have a certain skill set.
John Warrillow: So let me see if I follow the story along here. You’re at Intel, you buy Extreme Insights, where these three co founders are working, are founders. At some point Intel goes in a different direction and then does Intel sell you the company back essentially, or do you-
Boyd Davis: Oh no. We worked there for a period of time, different periods of time. I left quite shortly after Intel made an equity investment in Cloudera, which was the big change in direction is to not do it themselves basically to make an external investment. I left and I took as a job as a Chief Operating Officer of another start-up. My colleagues, what I think of now is my close friends-
John Warrillow: Mm-hmm (affirmative).
Boyd Davis: … they stuck around for a while longer and ultimately I think they all decided there wasn’t the career path that they wanted, because of the change of direction. So they left. I think we were all, spent a year or two kind of figuring out, no probably not two years. But a little over a year, trying to figure out what were going to go do next, and then the idea of coalesce and pull a company together.
John Warrillow: How did you guys finance the business? So four partners, did you kind of each kick in some money and then each take a quarter of the business basically? Or how did you guys figure it all-
Boyd Davis: Exactly. That is exactly it. We didn’t take any outside capital. We bootstrapped ourselves. We were very fortunate, or some combination of good luck and talent, to get some early clients who helped us scale the business very rapidly. Early on, we really didn’t have a need for external capital.
John Warrillow: And did that change as you progressed?
Boyd Davis: Yes. We kind of started out doing … We set out to be a software and services company with an emphasis on software. But our product concepts were not fully formed when we founded the company. So our early work was all consulting. As we formed a vision for the software offering that we ultimately brought to market, we started making an investment in that software product. And at that point, us scaling the consulting business and building the software product, made us believe that we needed a capital infusion. So we started looking at options for capital.
Boyd Davis: We looked at venture capital, private equity, some various debt instruments. We ultimately chose a very interesting debt instrument to help scale the business. Ultimately we got to a point where we felt, I think the purpose of this discussion is why did we come to sell, and we-
John Warrillow: Yep.
Boyd Davis: … decided to sell because the options for raising the level of capital that we needed to really compete in the space, were not materializing. We were doing really well. We were growing fast. We had a profitable business. We had the right strategy. But at that point in time, some of our software competitors were raising astronomical sums of venture money. 10’s and 10’s of millions of dollars of venture money.
Boyd Davis: We knew that that arms race was going to be very difficult to keep up with, because we had this combination of a software and consulting business model. So when we got to a point where we realized that there were no attractive capital options, that’s when we started saying, “Hey, we’d be better off if we partnered or sold ourselves to a larger organization, so we can continue the vision of being a market leader.”
Boyd Davis: We didn’t want to just have a nice boutique business that you could think of as kind of a back yard business. We really wanted to have a significant impact on the market and that really meant that we really had two choices. Either sell the company or find the capital. We just came to the conclusion that the capital options weren’t going to be workable. That’s when we decided to sell.
John Warrillow: Hell me square the circle. If other folks are raising a ton of money, in the venture capital markets for competitive products, why couldn’t you?
Boyd Davis: It was really a function of the business model. As we started competing in software, the bulk of our revenues were still consulting. The companies that were raising the venture money were more pure play software companies. Venture capitalist don’t like hybrid business models. They don’t like the consulting model. It doesn’t scale well. And the consultant people that would invest in and/or fund is some sort of way, potentially with private equity. Consulting firms didn’t like the drag of the software investments on a consulting business.
Boyd Davis: For us it was a function of, a strategy that worked outstanding for our clients. Our clients couldn’t just take a software product and make it work. But they didn’t want to just use and build everything from scratch using consultants. We were very customer focused, and had the right strategy for our customers to give them a software tool with the expertise to make that tool workable in their environment. But, from an investment perspective, it didn’t fit.
John Warrillow: So interesting. I have so many questions ’cause I think we’ve got a ton of listeners who are in that half pregnant situation of having a service company, but aspiring to have a product company. So there’s just a thousand questions I’ve got. Before I get there though, I want to ask you a question about the debt instrument. Can you describe what sort of debt instrument you used to finance the growth?
Boyd Davis: Yeah. So we had, like I think a lot of companies, one of the first things every company should do, is set up a line of credit against receivables. Particular if they’re receivables lag the investment in the business. Any consulting firm should have a line of credit against receivables. And the traditional kind of Silicon Valley Bank and equivalence of those kind of banks have those kinds of instruments.
Boyd Davis: So we had that relatively early on. But, that’s limiting because it really is a … It basically doesn’t give you anything other than just a modest amount of working capital. There’s no-
John Warrillow: Right.
Boyd Davis: … growth capital involved. We worked with a firm called Decathlon. And they have a very interesting instrument that is revenue based, debt financing. Basically it works like a balloon note. You can borrow a pretty sizeable amount and then you pay the loan back asa percentage, quite small percentage of your revenue. So it really does work as growth capital. And they really fund the business more like a BC.
Boyd Davis: They come in and look both at the financials but also the strategy of the company. The people that make the lending decisions at Decathlon, are practitioners. They’re not just pure banking people. I’m a huge fan of Decathlon and that model. They were really, really helpful to us. All the interests rates are high, every debt instrument is still a better value than an equity instrument.
John Warrillow: What would a typical interest rate be on an instrument like that? Here we are, recording this, I think Prime is somewhere around 3 1/2 or 4%, isn’t it? You know a secured line of credit, I don’t know, a couple points above that? We’re still in a fairly low interest rate.
Boyd Davis: If you’re a company that’s as young as we were, even the line of crediting against receivables has a much higher rate of interest. Double digit interest rates. I don’t think it’s fair for me to share Decathlon’s numbers, but they’re double that. Depending, the way their model works is if you pay off the loan early, the interest rates are a little higher because they have limited partners who, if you give them short term gains, have to pay quite a bit of tax on it.
Boyd Davis: The longer you hold the note, the lower the interest rate is, even though the interest payments are higher. When we first thought it was a little bit of a sticker shock.
John Warrillow: Yeah.
Boyd Davis: But again, when you compare it to giving up ownership of your company, then it’s really inexpensive. And because of the way they lend, it is a risk for them. They’re loaning money, pretty sizable amounts, based on the prospects of your organization being successful. As compared to traditional banks who take, what I think of as virtually no risk. I know they take risks. We had receivables from fortune 100 companies that we were paying pretty high interest rates on. I was frustrated by that.
Boyd Davis: Those were really low risk loans, and yet, they still came with what I thought of as high interest rates. When you look at it as a true growth capital investment, the debt I think, was a great value.
John Warrillow: Why did you guys want to be a product company?
Boyd Davis: Consulting is, I think of it a little bit like surfing. You can catch a great wave for some period of time, but eventually the wave crests and hits the shore and you’ve got to be on to the next thing. The waves are happening faster. You could have been a SAP implementation consultant in the late 80’s and through the 90’s, and had a 10 or 15 year run. But as the cycle times increase, the level of … Two things happen with any complex project that requires advanced consulting, the technical consulting we were doing.
Boyd Davis: I can talk a little bit about how it’s different now that we’re with a much larger organization. But for the kind of firm we were, it was really about technical acumen. We felt that those waves would come a lot faster. The cycle times would be a lot faster. We felt like having a product foundation would be a long term, better path to sustainable growth.
John Warrillow: Is there also some risk though, because once you make those investments in a product, it’s harder to pivot away from that product. Whereas in consulting, you can kind of change fairly quickly, no?
Boyd Davis: Well products evolve. I think the product we had conceived of and defined, would have evolved. All products evolve. We’re decades into almost all of the prominent software products, and they’ve evolved in various ways. You’re right. There is a risk factor, but I also think that, you’ve got to remember that we were focused on our customers, probably more than anything. I think our customers were looking for a way to have repeatability, to these use cases and these projects.
Boyd Davis: Most organizations that are visionary, want to have some of their own capability. They don’t want to be dependent purely on external companies to help them with something as strategic as taking care of their customers. For us, it was really about what our customers wanted.
Boyd Davis: So our mindset was, jumpstart the customer. Get them used to the product. Teach them how to use the tools and then give them a degree of self sufficiency. Now, some customers would never be self sufficient. But by giving them that option, it made it differentiated value proposition for us.
John Warrillow: That’s helpful. So you had built this data analytics software. Can I call it that? Data analytics software, that you wrapped consulting around?
Boyd Davis: Yes.
John Warrillow: Excellent. By the time you actually took the business to market, just give us a trajectory, because when I saw the numbers I had to look twice, and how quickly you had grown. You started in 2015, how many employees were you at by the time 2018 rolled around?
Boyd Davis: We had, I think around 240. We had something like 70 or 80 in the United States. A couple dozen in Singapore. Then a really strong footprint in India.
John Warrillow: Were these all full time Kogentix employees, or-
Boyd Davis: We had very few contractors. Mostly full time employees.
John Warrillow: How do you have on board 240 people in three years? To me, that just sounds unbelievable.
Boyd Davis: I can say that my co founders all have very strong ties to India. I think that’s a huge blessing. I think it’s very, very difficult to not have an on-shore, off-shore model either for software development or for consulting candidly. And yet, if you don’t have personal experience and a personal network in India, it can be very risky and challenging. We were very, very lucky to have my co founders have a strong foundation to build from.
Boyd Davis: We had some very strong leadership. We also built our team in Hyderabad India, which wasn’t quite as, I’d say saturated or over penetrated as a place like Bangalore. And so Hyderabad was more of a, I don’t want to call it a greenfield opportunity, because it clearly had a lot of progress even to the point we were at. I think by picking the right place, having the right people in place, we were able to scale there.
Boyd Davis: In the United States it was, we just had people very committed to the company. I love the people that work for Kogentix, vast majority of whom currently work for Accenture. They were very committed and they leveraged their person networks. We were constantly recruiting, constantly hiring. Once we found the right fit, we could bring people on.
Boyd Davis: It was great because for technical people in particular, they’re obviously motivated by compensation at some level. But that’s not the primary motivation. Most really talented technical people want to work on wicked cool projects that are challenging them, pushing them, helping them learn and we were lucky enough to have that kind of quality of project underway.
John Warrillow: That’s helpful. We you also taking advantage of some of the natural arbitrage between your salaries in India, versus those in the United States? Was there, I don’t know the current salary range, my sense is that salaries are still lower in India. Were you taking advantage of some of that, kind of natural arbitrage between the two markets?
Boyd Davis: We obviously paid market competitive rates. We were a little bit above. Our goal was to be a little bit above market, in every country we serve. Our philosophy is as a company was to treat, prioritize employees. Every firm has to decide are you going to serve the [endlers 00:31:30], the customers or the employees? We made a very conscious decision early on that our focus, our priority was going to be our employees.
Boyd Davis: If you take care of your employees, they’ll take care of your customers and then evaluation will follow. Some people take a different approach, I understand that. But for us, it was about the employees. So we took good care of them and they took very good care of us.
John Warrillow: Boyd, beyond slighter higher than market rate salary for the employees, can you give me a very tactical, specific thing that you did to take care of your employees? To be employee centric versus your shareholder customer centric. Can you give me something tangible, lik foosball tables in the office or, free beer after work? Was there anything like that, that you specifically did?
Boyd Davis: We were a pretty mature company. Yeah, we had a ping pong table and we had a lot of fun. I’ll give you maybe one of the critical examples that mattered more to our most senior employees. As we paid for 100% of the health care benefits for our employees and 50% for their dependents. Our healthcare plan was a really good plan. Admittedly, the younger workers neither took advantage of it, nor valued it as much. That just tends to be true of younger people.
Boyd Davis: When you’re coming to people that are longer in their career and have kids, that really matters. It was a very conscious decision, to invest that money. We were well above any metric for our peer group for the quality of our healthcare. We also took very good care of our employees relative to their immigration status. So we had some folks who were doing optional practical training off of an F1B. Some that wanted to apply for an H1B.
Boyd Davis: H1B employees that wanted to apply for a green card. So we had a good mix of immigrants. I think immigrants are incredibly valuable to our country. We weren’t doing the kind of thing that I think is abusive in the sense that there are some organizations that apply for a gazillion H1B’s, ship people over from India, for the ones that get an H1B and they don’t really plan to be here for the long haul.
Boyd Davis: All of our employees that we were helping through the immigration process, were committed to be American workers for the long haul. I’m very proud of that. I’m very proud of the immigrants who worked for our company. And when you have that passion, to stay in the United States and build your life and your family here, then having a company that really takes care of you from an immigration perspective, it matters.
John Warrillow: Those are super illustrative for us and I appreciate you sharing those. So let’s get into the actual transaction itself. It’s 2018, the four of your guys are looking the way the winds are blowing and as I understand it, there’s a raft of companies that are raising a boatload of venture capital to create their own analytics products. You guys were a little bit of a hybrid. You’ve got a product, but you’ve also got this consulting wrapper. You come to the realization that maybe it’s time to fall into the hands, I guess of somebody else. Maybe take us through, was there a triggering event that made you decide to sell? Or was there a straw that broke the proverbial camel’s back?
Boyd Davis: We were executing a strategy. We wanted to be at a certain place, by the end of 2017, from a capital perspective and growth perspective. And we had decided probably by the end of ’16, that if we didn’t that milestone, then we’d pursue exit options. It was very planned. It wasn’t a kind of emotional or impulsive decision. It was we’d reached a point that we had planned to reach and when we decided to sell, we actually decided to sell toward the end of 2017. Once we made that decision, we started looking to hire a banker and enter a process when we were still very strong, very healthy, profitable and growing.
Boyd Davis: As opposed to waiting for some of the capital challenges we faced to begin to devalue the company.
John Warrillow: At that point roughly, what proportion of your revenue is consulting versus products?
Boyd Davis: The vast majority of the revenue was still consulting. Although virtually all of our engagements by the second half of ’17 were a combination of our software and our consulting. So we successfully made the transition to bring the software product to market, and sell it successfully to the first half dozen customers. Part of it is revenue recognition, right? You sell the software subscription you recognize the revenue rapidly over the period of the subscription.
Boyd Davis: Whereas when you sell consulting work, you recognize the revenue by the milestones of the work output. So some of it was that, but still a large body of the revenue was consulting.
John Warrillow: So you go and you hire an M & A Banker, is that right?
Boyd Davis: That’s correct. We interviewed three.
John Warrillow: How did you pick the one you picked?
Boyd Davis: We picked Clearsight Advisors and they were not at the biggest firm. We looked at a couple of bigger firms. We were too small to look at the massive M & A firms. It was actually quite simple when they came and did oral presentations to us. We looked for the firm that had the most relevant examples to us. We had one banker that we really loved, but when they came in and did examples of their transaction history, they had one that was a lot like us. But their second example they shared with us, was a very large company that had raised several hundred million dollars.
Boyd Davis: I don’t think it was pure sale. It was some sort of a debt financing or something like that. And we’re like, “Okay. If that’s your second example, that’s far afield from us.” Whereas Clearsight had all of the examples they gave us were very close to home. We felt like the understood our business, and we picked right. They’re a fabulous firm.
John Warrillow: So what did they do next?
Boyd Davis: If anyone would like an introduction to Clearsight and Gretchen. I think she’d be happy for me to pass that along. They can reach out to me on LinkedIn or something. I’m a huge fan of what they did for us.
John Warrillow: At the end, I’ll make sure we get you connected up and we’ll put that in the show notes as well. So it was Gretchen that lead the mandate from your perspective at Clearsight?
Boyd Davis: Yeah. Gretchen, she’s the managing director. She had a small team with her. We love them all. They were just a fabulous team. They were very attentive all the way around.
John Warrillow: Where did it go from there in terms of, so you engage them. What was the next step?
Boyd Davis: Well they have a process. And that’s one of the … When I talk to other entrepreneurs, I think there’s a lot of skepticism about bankers. Seems like their fees are high and people wonder what they get. And it’s funny, in our case that I’m such a huge advocate. If you look at our business and our business model, Accenture would have been one of the top two or three likely acquires. I had contacts at Accenture.
Boyd Davis: We didn’t need Clearsight to necessarily find Accenture as a buyer for us. But they have a very clear process they go through, and they helped us position our business in a way that an acquirer would want to see it. They gave us access to buyers that we engaged with, that we would have never thought to engage with. Some of them we’d never even heard of. So we just went through their process and trusted them.
Boyd Davis: My point of view was, we hired a banker. They do this for a living. Let them guide their process. I’d say we got about, interestingly I’d say we get about 30 to 40% of the value from Clearsight on finding the buyer and getting to a commitment and then down the wire, an MOU or ultimately an MOU I guess.
Boyd Davis: The majority of the value, I felt like we got was post having a buyer. How did they help us through the process of the sale? They were just utterly invaluable.
John Warrillow: I want to get to that. But first, how many businesses did have on your short list of folks who took a genuine interest in the company? Either gave you an LOI or you had management meetings with? How many different companies in addition to Accenture was there?
Boyd Davis: I want to say, may a half dozen got to a very serious discussion point.
John Warrillow: Some people listening to that are going to say, “Boyd, that makes me so squeamish to hear six different companies would know I’m thinking of selling. I’d be revealing all these secrets to my potential competitors. How do I manage that?” How did you guys answer those questions?
Boyd Davis: I have marketing background from earlier in my career, and one of my adages about marketing was, nobody really cares about you as much as you think they do. A goal of marketing is to get them to care. So part of it was that. Also part of it is, everybody that is involved in this process understands the criticality of discretion. Larger organizations firewall off other parts of the organization from knowing that something’s even in play.
Boyd Davis: People like Gretchen in Clearsight, and Gretchen’s team at Clearsight put us in contact were professional people. I wasn’t terribly worried. We talked to potential acquirers that had competitive offerings to us and we were very comfortable with it. Once you decide to go down the path, then I think you do yourself as a company, a disservice if you try to game it or be too cute.
John Warrillow: What types of industries were in that long list of candidates? Was it all the other consultancies, like Accenture? Or were there other software companies? What was the-
Boyd Davis: Yeah. There were very large consulting practices. There were very large internet and Cloud service providers that were interested. There were some interesting companies that had a desire to expand into this space as an adjacent business-
John Warrillow: So what did they-
Boyd Davis: … different business, but they wanted to have this capability.
John Warrillow: What did they see in you, Boyd, that … What was the jewel in the crown of your company? What was it that they saw in you that they wanted?
Boyd Davis: I think it’s true for a lot of the companies that anybody looks at. They look for the real world example of what you’ve done for clients. Even now to a certain extent, if you look at the range of successful use cases of machine learning and artificial intelligence in large organizations, they’re not that common. We had very successful projects under our belt with very large organizations. As I mentioned, we tended to focus on very larger companies for a lot of reasons.
Boyd Davis: Small companies don’t always have the resources to invest in this space. I think the jewel was use cases that we had.
John Warrillow: How interesting. You mentioned earlier, or I kind of asked, “Can you give me a real life example?” You said, “I can’t share the name of the companies.” Once the buyer’s in under a non disclosure agreement with, these six more serious conversations, and they’ve signed an NDA, are you at that point able to share the name of the use case? It was General Motors or it was Proctor and Gamble or whatever?
Boyd Davis: Yeah.
John Warrillow: Okay.
Boyd Davis: We have NDA’s with far more companies than we had meetings with. Well north of that half dozen. I can’t remember the exact number of NDA’s we had signed, but Clearsight wouldn’t give anybody anything without an NDA.
John Warrillow: Would it have been dozens, like plural, maybe under NDA?
Boyd Davis: Maybe as many as 20. Yeah.
John Warrillow: Yeah. And so for those listening along, any M & A process, one of the first gates that a potential acquirer needs to pass through is signing a non disclosure agreement or an NDA, which gives them, grants them more than just some superficial information about the company. You can then see much more detail about the company, but in return you’ve got to sign an NDA. So that’s the first sort of gate a potential acquirer needs to pass through in order to a look under the hood in this case.
John Warrillow: One of the questions I wanted to ask earlier, but I wanted to save ’til now because I think it’s fascinating, I’m old enough to remember back in the old direct marketing days when we used to actually send mail. Credit card offers and stuff worth. A modeling methodology called NLP or next logical product. You buy a home and low and behold, three months later, you get some life insurance offering because the likelihood that you’re going to have kid within two years of buying your first home is astronomical. It’s natural.
John Warrillow: This was years before we talked about quote, unquote “big data” or “AI” or “machine learning”. But of course those words were very much part of your lexicon. I took a look at the press release and sure enough, they’re there in the verbiage. How intentional were you abut using the lexicon of the day? Again, kind of sexy words. Lots of buzz around things like AI, and machine learning and big data.
John Warrillow: Those are terms people kind of hear a lot and know there’s a lot of activity. Were you intentional about using those because you knew they would play well with potential acquirers?
Boyd Davis: I’d say probably no. I think we described what we did. It just happened to be what we did was what some many people are interested in. Obviously put your best foot forward, but we didn’t try to do anything too exotic. One of the things I think gets frustrating for acquirers is when you throw in a bunch of buzz words, and then they strip away the venire and there’s nothing there. People that do visualization products that suggest they’re doing AI when they’re really doing visualization.
Boyd Davis: I think it’s important to use the most specific descriptive language on what you actually do, rather than trying to throw a little bit of market pixie dust on it. The one thing I would say is acquirers, the vast majority of acquirers that we ever talked to, were really sophisticated, really smart people. By the way, I’d say the same thing about venture capitalists and private equity firms. We weren’t able to come to agreement with any of them, but I think underestimating these external people, is at the peril of the entrepreneur.
Boyd Davis: People are going to be able to see through it. And you’re actually in a hole if you created one perception and then they strip away and look at the data and find a different reality. You haven’t done any favors. You’ve actually dug a hole for yourself in terms of credibility and the next steps.
John Warrillow: Because now they’re questioning everything you say. Oh the six more serious conversations, how many of them presented a letter of intent or a memo of understanding? Did you get an LOI from each of the six?
Boyd Davis: No. Part of it was timing. Part of it was the fit for us. I can’t speak highly enough about Accenture. Their process, their timeline. They were fast. They were aggressive. When they decided that they wanted to move forward with us, they made a very fair offer. So we had one firm who gave a real low-ball offer, and was just trying to see if they could get us panic a little bit. I can’t remember at the time now, how many we could have gotten to, but Accenture’s very mature in the way they do things.
Boyd Davis: A lot of people may not realize that Accenture has acquired lots and lots of companies over the last few years, developed a strong capability to do it. Accenture’s turned in now to be the world’s largest digital marketing agency.
John Warrillow: Is that right? I had no idea.
Boyd Davis: Yeah. We bought design companies, marketing agencies. So applied intelligence, which is that artificial intelligence and analytics arm, is part of a larger group called Accenture Digital, which also has Accenture Interactive is part of it. And the interactive practice is our digital marketing agency. They didn’t come in trying to save a million dollars or something. So when they made an offer, it was just easy to accept.
Boyd Davis: They were a perfect cultural fit. They were the kind of company that could give us what we said we wanted most, which was an opportunity to be market leaders. To help shape the direction of the industry. Accenture is, I think unquestionably in my mind, the market leader in this space. So they basically took us out. They took us off the table before some of the other people could make a move.
John Warrillow: How did you value the company in your own mind? The four of you as founders clearly had lots of skin in the game personally. What did you think the company was worth?
Boyd Davis: We had a pretty realistic view. We’re kind of very familiar with the multiples . Revenue multiples is a crude way of valuing a company. Consulting firms can range from .5 to 2x multiple of revenue. Software companies can be up to 10x or even more for valuations, depending on growth rates of annual reccurring revenue. The difference between the long-term value of a client and the cost of customer acquisition and so forth. We-
John Warrillow: What would the bottom end by, Boyd? You said your consulting would be 0.5 times top line revenue, all the way to say 2x top line revenue. What would the sort of low end of a software company multiple look like? The high being 10x or even more.
Boyd Davis: Probably 5x, I’d say. I don’t know. There are people smarter than I am that know the numbers a lot better, but we knew we’d come in somewhere in between that range. We also trusted Clearsight’s advice on what the valuations were. We knew what a fair offer looked like. One of the things I really value about Accenture was they didn’t just take care of the owners, but they also made a sizable investment in the employees.
Boyd Davis: So our employees got to participate more in the success of the company, thanks to Accenture. They could have otherwise just flipped the number of stock offers they had.
John Warrillow: So to be clear, they benefited from the actual transaction, or they will benefit in the future because they’re now Accenture option holders?
Boyd Davis: Both. Accenture made an investment in our employees, as well as … Obviously the opportunity for our employees at a place like Accenture to do really interesting work are bigger than we could have provided.
John Warrillow: How did you handle, because in your own admission, your employees at your company, you made all the investments in healthcare and so forth. How did you tell the rank and file employee that you had decided to sell to Accenture?
Boyd Davis: It’s interesting. One of the surprises for us, our company was so small and very tight knit. We kind of thought that there was a really strong rumor mill already formed. So we were actually quite taken aback. We pulled the team in the United State together in our headquarters in Schomberg. It’s outside of Chicago. And we had the Accenture leadership team with us, and basically made an announcement that same day as the press release went out.
Boyd Davis: You have to stage these things very carefully because of the sensitivities involved and the transaction. We laid out to them a lot of what I’ve told you. Why did we sell. What did we think of the opportunity at Accenture. Why was Accenture such a good fit? I’d say more of the employees were surprised that I expected. In retrospect, I don’t know that there’s anything we could have done about that.
Boyd Davis: But the goal, when you go into a process like that, you have to keep is discrete. Because if it doesn’t happen, you don’t want your employees to be distracted by it. We had a business to run. So we basically pulled the team together and told them all at once.
John Warrillow: And when you say they were surprised, how did that manifest itself? What was their reaction? How did you know they were surprised?
Boyd Davis: Well part of it was feedback after initial roll out. We were surprised there were fewer questions. Fewer comments. I think one of our employees, she told me it was a lot to absorb. And it wasn’t a bad thing. It was just a lot to absorb. I think when you go into something like this, taking care of communicating with your employees, both at the time you announce the transaction, but then really a high degree of frequency after that, because it’s going to take people time to internalize.
Boyd Davis: We probably didn’t have as much of an awareness of … We’d been at this for six months almost. We’d been deep in the throes of due diligence, at multiple levels. You get through some due diligence to get to an ally. And then you go through a whole different level of due diligence to get to an actual purchase agreement. So we had been in it for so long it was hard for us to put ourselves in the shoes of our employees who were hearing it for the first time.
John Warrillow: When you went through the valuation piece and you’re considering offers, I wonder if there was any effort to manipulate, that’s not the right word because I’m not suggesting there was anything underhanded, or untoward going on. But, clearly there was a massive delta between valuing your consulting revenue, somewhere between .5% of revenue and 2x revenue, and the revenue you were deriving from software sales, which was clearly massive premium.
John Warrillow: How did you, because I’m assuming that for a client they would have consulting component to their bill, but they’d also have some element of software. Was it crystal clear what proportion of your revenue was consulting, versus what proportion was software? Or was there a little room for interpretation there and how did you handle that if there was?
Boyd Davis: I wouldn’t say completely crystal clear. Almost every client had a separate services agreement from their software subscription and different fees associated with each. But when you click down a layer, and think about the motivation. Some clients were motivated more by the consulting, and some were motivated more by the software. It wasn’t as readily apparent. It wasn’t as obvious as you think.
Boyd Davis: The numbers were clear. We were very disciplined in our accounting. And by the way, I think for every small company that doesn’t invest in very vigorous accounting and follow git principles and all that, you’re going to suffer later for failure to invest now. But the intangibles of why. That was not as entirely clear.
John Warrillow: That’s helpful. You mentioned Gretchen and the team at Clearsight did a great job, or did yeoman’s work–those are my words, not yours–after LOI was accepted, before this your purchase agreement was signed during that diligence phase, can you describe what that was like? The kind of effort they were putting in, the kids of things? Because for people who haven’t gone through diligence, as you say, it’s a whole nother level of scrutiny. Can you illustrate that or describe that?
Boyd Davis: There were only the four of us. The co founders who were aware of the transaction. And due diligence is a lot of work. And Clearsight never shied away from being part of our team. To put the financials or any other of the metrics that Accenture was looking for in the context or in the format, or whatever it was that they needed. I just don’t know how we could have done it. They were very versatile.
Boyd Davis: They just really helped a lot. If you get to due diligence with a large organization, you should be in a position where the fallout from an LOI through due diligence, should be pretty minimal. You have to find something that was misrepresented or something like that probably. It’s still critical that you take the process seriously. I think they did a lot of that work for us, and put in many hours and many late nights.
Boyd Davis: Like I said, I don’t think we could have done it without them.
John Warrillow: A lot of people I’ve spoken with have gone through diligence. There’s always that moment, maybe it’s six weeks or eight weeks in, it feels like the people on the buy side are, the analysts are just asking for data after data after data. Eventually you just have to say, “Stop. Either you guys wants the company or you don’t.” Did you guys ever get to that point, where you had to put the brakes on and say, “Enough is enough. We’ve given you enough data.” Crapper get off the pot, so to speak. Did you ever get to that point?
Boyd Davis: No. We got to a point where we would have loved to have said that. A company like Accenture is a great company because they have proven best practices and approaches that work. So I don’t think we ever expected … I’ve given one point of feedback to my new colleagues at Accenture. They have a little bit of a one size fits all approach. So their due diligence process would be very similar for a company 5x or 10x our size. When you have that, there are more knowers. There are more functional experts who can help, compared to what we had.
Boyd Davis: But, no. I think we knew this was the path the company had chosen. It was our job to make it work.
John Warrillow: And you’re now an employee again, as I understand it. How does it feel to be back in a big company environment? You went from Intel to entrepreneurship and now back to Accenture. How does it feel to be back?
Boyd Davis: Accenture’s a very entrepreneurial company.
John Warrillow: Is it? Yep.
Boyd Davis: It’s kind of got its heritage as a partnership. As a partnership you end up having partners which they now call managing directors, of which, I’m one. Have kind of a broad latitude to go create. So I think that’s similar. There are other areas that are different. Not all of them positive, of course. But many of them positive. One of the things we faced as Kogentix is that people loved our technical capability, but a lot of times the obstacles to success in these kinds of projects has nothing to do with technology. It has to do with operating models and talent and strategy, and domain knowledge.
Boyd Davis: As I mentioned earlier, I talk about this idea of riding waves, Accenture’s well built to ride the waves because we are aligned by industries and we really understand these industries, and can offer a lot more value than Kogentix could offer. It’s been great. It’s been a great experience. I told our employees early on, that there will be some downsides. There will be some negatives.
Boyd Davis: Our goal was to make sure that the positive, the opportunities, significantly outweighed the challenges or the negatives. And I think that’s been true for not just the four co founders, but for the vast majority of our employees.
John Warrillow: How did you mark the sale of Kogentix? You guys came together, you built this juggernaut over three years. It’s unbelievable growth. Zero to 240 employees. How did you mark that achievement?
Boyd Davis: It’s funny. We celebrated with our employees some. But for the four of us, I should only speak for myself. I could let my colleagues speak to you any other time. I’ve never run a marathon. I’m not a big athlete guy. But, I almost have a sense that we felt kind of like finishing a marathon. We were just too exhausted to maybe feel the euphoria at the time that you might have expected, when you started out on the journey. Like, “Oh wow. This is all going to be done. We’re going to be so excited.”
Boyd Davis: It was, emotionally for me at least, a little bit anti climatic. As time has gone on, we’ve had a chance to reflect, and maybe enjoy the achievement of creating something that was worth enough that an organization like Accenture wanted to buy it. And to really kind of celebrate what we created with our employees. At the time though, with the day the transaction closed, it was almost like more a sense of relief than anything.
John Warrillow: This is more just a personal question for you. Do you crave a break? Do yo crave that six months to go live somewhere else, to not think about work? Do you have those yearnings?
Boyd Davis: No. Maybe because it wasn’t really feasible, but I never thought of that. You know something, I think I get bored after a relatively short period of time. I like to work. I like what I do. I enjoy dealing with clients. It’s been exciting to meet a range of new people at Accenture. So, no. I never felt that. It was a great journey. I think the one thing you do end up thinking is, If I was ever in a position to start another company … There’s so many things. We did really well, but there’s so many things you can’t help but think, “I could have done better.”
John Warrillow: Like what?
Boyd Davis: We don’t have time to get into it. That’s probably one of the things that makes, for serial entrepreneurs, is this knowledge that every step, even a success or a failure, is a learning journey and you have some level of desire at some point in the future to apply that learning.
John Warrillow: Leave us with one. Even if it’s super tactical that you might do differently, if you had it to do all over again.
Boyd Davis: I think we kept, for a lot of reasons, we kept our control over profitability at a relatively high level. So for a consulting firm, we didn’t have super rigorous time keeping and therefore we lacked some of the visibility I would have like to have had.
Boyd Davis: Understand the profitability of my client by resource, and look for ways to improve that. That’s one specific example that was unique to us. I feel like early on, I’d done a stint at a start-up, and had a lot of big company experience. And you have to get a sense of what level of process is relevant to a small company. You have to have the right amount. You can’t have none.
Boyd Davis: But you can’t have the kind of process you might have with a big company. I feel like I have a far better feel for that. We entered southeast Asia, and did a lot of business in Indonesia and that turned out to be challenging. I think if I had it to do over again, I might’ve been a little more cautious or respectful of doing business in a country like Indonesia. So there’s just a handful of examples.
Boyd Davis: You learn from doing. It’s fun. You have to get used to the fact that, when you’re in a start-up environment, to be successful, you kind of got to be less competent than you’re used to, at a lot of different things.
John Warrillow: It’s funny. One of the reasons I’m so passionate about people actually getting a business sold under their belt, because it’s the only way you get to apply all the lessons you learn the first time is to actually sell one and go do it again. But if you stay with one business for 30, 40 years, you never get a chance to … You never get the do over, the mulligan, so to speak. I appreciate you sharing those.
John Warrillow: Boyd, you mentioned in the beginning you might be willing to entertain LinkedIn requests or, is there a place that people can reach out and either learn about you or the applied intelligence division at Accenture? What’s the best way for people to reach out?
Boyd Davis: Well certainly to learn about Accenture, you go to Accenture.com and you can take a look at applied intelligence and look at our offerings. Relative to me personally, if people want to reach out on LinkedIn, and I think if you just Google Boyd Davis, Accenture, or searched on LinkedIn for Boyd Davis, Accenture, you’d find me. I don’t view LinkedIn as … I’m very selective who I take in my personal social media. But for LinkedIn, as a professional contact, I tend to view that as an opportunity to cast a broader net and have a broader network.
Boyd Davis: So I’m happy to accept connections on LinkedIn. If people, like I said, have a desire for introductions to Clearsight or anything like that, I’m sure Clearsight’s online. I didn’t find them online, but I’m sure they’re online. You can probably go to their website, but I’m also happy to make an introduction for Gretchen, if that would be helpful to people.
John Warrillow: Well that’s very generous. Boyd, I really appreciate you spending the time with us today. You’ve shared a tremendous amount of wisdom and I’m grateful for you doing that.
Boyd Davis: I enjoyed it. I hope it was helpful to your audience. If there’s anything I can do for you, your audience or something, reach out. Can’t be certain I’ll be able to help, but one of the things is I think is super gratifying about the start-up world that I found, compared to the large corporate environment is that, people want to help. They never know when you help somebody today, that turns out to end up at different company, or could become an acquirer, investor, an employee, a hirer.
Boyd Davis: All sorts, right? I’ve really been gratified by the experience of meeting people in the start-up community and seeing how in general, it’s not a cutthroat world. People love for each other to be successful. That’s certainly my feeling, so I’m glad to have had some time to share my perspective with your audience.
John Warrillow: Well said. Thanks for joining us Boyd.
Boyd Davis: All right. Thank you very much. Bye.