Think about it. In the past two decades, India has produced very few exits in the software product industry. Cisco bought out cloud communications software venture IMImobile in 2020. Idera acquired data visualisation start-up FusionCharts a year later. Freshworks got publicly listed on the NASDAQ in 2021. But you have to cast your mind back to 2005 when Oracle bought out banking software venture i-flex Solutions, or when Sterling Commerce acquired supply chain software firm Yantra. Most acquisitions of product companies from India tend to be acquihire transactions for buyers.
From the outside, the time period of a start-up exit catches the common eye. By most accounts, it is described as a progressive – almost step by step – outcome for founders in presumably normal circumstances. So, the question of timing is what repeatedly surfaces.
Nothing can be farther from the truth.
The myth of perfect timing
If there is one thumb rule that has served me well, it is that trying to time the market perfectly is an exercise in futility. It is an elusive goal. We founders are far better off channelling those energies to build leverage by making our ventures profitable. That presents an array of options for all stakeholders concerned – most of all, you, as Founder and CEO.
Coffee farms in Vietnam – Growth of coffee cultivation in Vietnam in 2000s provided an edge
My early days in commodities trading taught me the pitfalls of chasing perfect timing. Managing large customers like Nestlè and Lavazza and keeping an eye on global coffee markets, I learned that unseen variables can drastically impact outcomes. For instance, coffee traders often sell high and buy low, but unforeseen events like Brazil’s devastating frost in 2021 can upend these strategies.
Instead of trying to predict the market, I focused on managing risks and maintaining liquidity. This approach allowed for flexibility and better decision-making, a principle that applies equally well to running a company.
Profitability as leverage
The same is true while running a company as well. As an entrepreneur, I took the experiences from my commodity trading days to heart. You can never find the perfect bottom or the perfect top. Instead of solving for timing, what the best founders do is ensure that the company gets profitable at scale. It is the single biggest metric, which gives founders the leverage they want.
So, capital allocation – as opposed to raising more capital – becomes super-important for your company. That position emanates from profitability. Raising capital is not an endless game. It was an option for founders in India for 12 years when the cost of capital was near zero. But that changed in May 2022, when the US Federal Reserve raised interest rates by 50 basis points – the largest increase in 15 years – to tackle inflation. Since July 2023, its key benchmark index has been at 5.25% to 5.50%. This has significantly impacted the capital markets globally.
When profitable, company founders can continue to invest in the business at the pace he or she wants. At the same time, if you have external investors, you can discuss the options of an exit with the board of the company and other investors. (More on this later.)
But first, as far as risks are concerned, you have to answer the fundamental question: do I want to exit or not?
If the answer is that you want to run the company for the longer term, the company’s profitability empowers you to provide an exit to external investors. This is your responsibility: to give them the option of an exit. You can explore the following options.
So, there are a variety of options for founders. Once you decide the option you want to take, the process takes over. But all these options become available based on how well you are solving for profitability.
Exit trade offs
My experience of an exit
In the case of Eka Software, the number of buyout offers began to grow in 2019, especially because Eka Software had strengthened its technology platform on cloud for commodity trading and risk management (CTRM).
We had built a strong management team and systems to address the market and changing environments, even as consolidation was rife in the CTRM software industry. The delegation to management was a vital milestone for Eka if I had to take a step back from day-to-day management in 2022, especially in operational matters of the business.
As a founder or co-founder, you have seen the venture grow from scratch. But as the company grows, you are mindful of the many interests at play when it comes to where to take your start-up. So a decision,like a strategic sale, needs to be taken in the light of these interest groups.
For customers, how robustly your management has designed the systems and processes becomes the best proof of continuity amid an ownership change. The market needs to know the company is ready to outlive the founder.
For key management personnel, it is important to sensitise them about larger changes afoot, reassure them about the rationale and their significance to maintaining business as usual. You need to take them into confidence about what you’re thinking – and what’s in it for them,
For the board of the company, discussing your buyout offers and listening to their inputs is important for the strategic direction of your venture. Eka Software had large institutional investors and a family office. So, the feedback from each investor was unique, given their varying time horizons on investments. It called for introspection.
Let’s spend some time on the value of discussing options with the board of directors. This is because founders might feel hesitant to discuss the subject, as it may be perceived as a weak signal of his or her long-term aspirations for the company. There is the latent fear that you may get fired. But offers are an important theme for direct conversations (‘Why now!’ and ‘What next?’) with investors and board members from time to time.
As founders, decide what is directionally best for the company, so that value continues to accrue with or without you. Then, it’s about getting the buy-in of most – if not all – stakeholders.
If your business is in good health with a strong track record of using your technology dollar, there is little to fear about such discussions. Performance is the best signal of your ability and stamina as a founder. For example, Eka Software had raised $45 million over a decade and a half. As it was profitable in high double digits, the B2B venture could fuel the R&D and innovation pipeline between 2016 and 2020. We could also hire the best enterprise technology talent – and sales folk – in the market. For a B2C venture, the metrics could well be high growth, if not upfront profits.
I had been through the experiences of turning Eka profitable and turning it into a cloud product. So, the exit offers were an easier matter to discuss with the board, keeping in mind how investors also need an exit at some time. Be mindful that you are selling a company which is a living organisation. That empathy is imperative. It’s not a transactional matter.
The process : How it played out
We started talking to potential buyers two years ago. We soon discovered that buyers are unfamiliar with software product ventures that are built from India. In addition to this, I gauged what a potential buyer needs: readiness of finance operations, compliance around the globe, customer satisfaction, steady pipeline conversion, and above all a good gross margin and profitability profile.
Let’s face it: India is still building its brand as a software product nation, as opposed to the US where buyers and investors have a pool of more than 5,000+ revenue producing software product companies at any time. Large US companies use M&A effectively to grow. The M&A playbook for the product landscape in India is still developing.
As a result, Eka spent up to 18 months demonstrating its capabilities to run a software product company out of India. This is the effort that goes beyond the standard due diligence –- since 2022, it became a strategic priority for me as a founder.
In all, Eka Software spoke with 50 prospective buyers, including strategic buyers (enterprise technology companies). The list narrowed to three or four companies in 2023. By August last year, I decided who the buyer would be: STG Partners, as they had a three-year thesis on CTRM software. In 2022, the private equity firm had acquired Brady Technologies’ commodities business. STG Partner’s Quor Group thesis on CTRM was an ideal fit for Eka’s next stage of growth – it is a call my board backed me on.
The whole process took around 18 months. As a founder, if you want to sell the start-up you have built, you want the right buyer. With its management – and a world-class product and engineering team – Eka Software is ready to be the platform to consolidate CTRM industry. I am available as a board advisor to the Quor Group, as Eka becomes a strategic part of it.
Emotional detachment
Even as I prepared to move on from Eka Software last year, I realised the value of being bold in building a new identity around the next opportunity that excites you as a founder.
Founders often struggle to understand when is the right time to sell because your startup becomes your identity over the years. If you are running a profitable business, you can run it forever as long as you run the organisation well.
When the founder’s identity overlaps the company’s identity, the decision naturally becomes a highly emotional one. So, a key aspect of a successful exit is to detach yourself emotionally from the company at some point in time. It’s easier said than done. But this is really, really important, especially for founders from India because we tend to be more culturally rooted with the company we build, which makes the decision to move on harder.
Looking ahead
For nearly two decades, my identity was inextricably linked with Eka. But I now feel ready to start afresh in areas like A.I. In a sense, the Together Fund with Girish Mathrubootham and SaaSBoomi – the community mission of creating global software product companies from India – have given me platforms to apply my skills and experience for a larger and more meaningful cause. These have worked for me in terms of ‘what next?’.
At the same time, I am embracing the path of working with complete freedom on technology ideas that excite me – and then, build a strong and sustainable business around them. As an entrepreneur, it is liberating to begin anew with a primary focus on innovation, before arriving at the phase of managing the stakeholder expectations. We are all excited about the next wave. I will miss Eka, but I leave it knowing it’s in good hands.
