Podcasts
Exit-Ready Essentials – How to Institutionalise for Maximum Value with Adrian Mendoza
When it comes to scaling and selling a business, preparation is everything. In the latest episode of the Exit Insights podcast, Adrian Mendoza, founder of Mendoza Ventures, shares his tried-and-tested formula for building a business that attracts investors.
As a former entrepreneur turned investor, Adrian has a unique perspective on what it takes to create a sellable business. His advice includes:
- Professionalising Finances: Hire a fractional CFO early to manage cash flow and prepare for scalability.
- Institutionalising Governance: Establish a board to provide strategic oversight and credibility.
- Focusing on Repeatable Revenue: Ensure your revenue streams are consistent and sustainable to maximise valuation.
Adrian emphasises the importance of documenting processes, contracts, and intangible assets. “The goal is to find the landmines before they blow up,” he says, highlighting the need for transparency to minimise surprises for potential buyers.
Watch the episode here:
Welcome to the podcast that’s dedicated to helping business owners prepare for exit so you can maximise the valuation and then exit on your terms. This is the exit insights podcast presented by Succession Plus I’m Darryl Bates-Brownsword and today, I’ve got one of those special episodes that I’m looking forward to. I’m talking to Adrian Mendoza. He’s the founder of Mendoza Ventures. But the cool thing about Adrian is that he is, I was going to say poacher term gamekeeper, but that’s probably all wrong. He is an entrepreneur, sold his business and then got set up and involved in investing in others and helping steer the path through, I guess, the minefield that is exit planning and maximising the valuation of your business and getting out.
Adrian, thanks joining me today and welcome.
Thanks, Darryl. Thanks for having me. I’m excited for the conversation and let’s jump into it.
Let’s jump into it because we haven’t got a lot of time and I know you’ve got so much. We’ve had a couple of pre-conversations now and Adrian is just is one of those guys that you want to have access to if you’re an entrepreneur and you’re going, how do I do this?
So, Adrian, why don’t you just tell us the, I guess how you got into this, the idea of once you exited your business, what led you to go? Hey, look, I’ll get involved in investing, you know, it seemed like a pretty easy path. So, why don’t I just, you know, take zero risk and rinse and repeat.
Yeah, I mean, it really started because my partner and I were tech founders. We had two venture-backed businesses and mid 2015, the board said we want to sell the company and like every founder, said, go find something to do. And we did. And so, what we did is we took our sort of exit and then we took a step back. And at that point, we were getting approached by other investors to look at their businesses, run their businesses. I actually ended up over three to six months to taking the time at what we were looking at, looked in, advised a few other businesses. And we realised that when you look at the process, who’s the one that does the best? It’s the investors.
So, he said, why not instead of going through, because one of the things that we always forget is that this is a life cycle. You start a business, you run a business, you exit. This is a five, 10, 15 year process. but a lot of time as a venture backed business, you have no opportunity to exit out, sell your shares. You’re fairly locked in, but who can sell an exit at any moment in time? The investors. And so, we said, well, why don’t we look at us as investor now, and it happened to be this is 2015, 2016, and we’d spend about a year looking at the types of businesses we wanted to be involved in, and then ended up that we really focus on business where we had direct expertise. This is, know, with any running selling investment, it’s all about the domain expertise. Can you provide value add to the business?
And for us, we had built products for the banks. We had built AI systems. We’d built cybersecurity. So, we said, we’re going to look at these businesses. And we started Windows of Ventures to make, you know, with our money to make, we ended up making three investments, one in FinTech, one in cybersecurity, one in a blockchain company. And it happened to be the second investment, the cybersecurity, they sold in five months of us investing. And we were in a to actually lining up the acquirer and getting the deal done and working through it, playing mini iBanker. Usually when you’re really early on in a company’s life cycle, you don’t hire an iBanker. These deals are way too small. Anything sub $100 million they don’t want to be involved in. And usually you need someone that knows the founders, that knows the business, that can get their hands in there. And that’s really kind of what kicked off what we do really well, which is not just Invest, but we’re very hands-on into the business.
Okay, so, let’s set the scene a little bit before, because I do want to dig into that and ask you a bit more about the way you invest and what you look for and what have you. But before we go there, I just want to understand a little more about your background and your experience of when you were building your own business and what was your mindset to growing the business. Because some business owners, you know, they’ll go, hey, look, I was just scaling and especially tech businesses going, just trying to get more and more clients, more and more clients, know, and keep the minimise the churn rate and get as many clients as possible and just grow the revenue and get us into profitability and then bring on the next investor. Others go, no, no, no, no, Darryl, we were quite strategic. We were looking at our marketing funnels. We developed our sales process. We systemised everything. We made sure that we had training systems for bringing people in. Everything was methodical and they looked at the whole aspect of the business.
Can you give us an insight into the mindset of the founder? What was your approach? What was your strategy you’re thinking about growing your business?
Yeah, it was interesting because we started the first business in 2009-2010. Super difficult time to raise capital knowing this, we actually ended up building proof of concept interviewing customers. We went out to find reference customers before we raised the dime and we ended up bootstrapping the businesses doing, you know, building the mobile applications for some of the big banks just because part of what we needed to know is we were building a mobile business analytics platform.
And we were part of why I built the business is my prior 10 years before that. I’ve done a lot of work as a consultant for some of the large brands, everything from airports to retailers. So, I had this lived experience. had early 2000s work with mobility brands like handhelds, mobile phones, applications. So, I had this sort of funny odd niche experience that I had for 10 years and if you think about it, in 2008, this is when the iPhone comes out, 2007, 2008. And at that time, I’m taking this experience of having worked with a lot of these retailers and banks, and a lot of them are looking to try to get onto apps and mobile websites for the first time. And so, we saw that there was an opportunity there. I mean, the key of any founder is instead of building a solution, find the problem, talk to, we spent about one to two years actually doing requirements gathering, going out, meeting brands and say, look, I’m not selling you anything. I just want to learn about your problems and then start formulating what the solution was and then start building solution and then finding interesting creative ways to barter and find friends in the ecosystem to help build it out. And then once we were ready there, start finding those early customers. And then you really want to be able to attack, know, at that point, find funding sources, whether it’s angels, whether it’s venture capital, to then sort of get the growth slide, you know, because at a certain point, you do need capital to scale. There’s some stuff that you can do. But, you know, at the height of it, post funding, we were writing lines of code 24 seven, we had a development team in, you know, in India, we had Costa Rica here in the US and we were selling to retailers that you’ve heard of. But part of it is, what we forget is that once you sell into a customer, then they want customisations and they want integrations and then you’re not starting to build this out. And that really was for us this learned experience of getting to know how it all works.
But because I’ve had that lived experience of working with these brands, having people that we knew in these brands, and then building out a management team that had that core experience. Because early on, I tell the individuals that I wasn’t the CEO. I actually brought in an outside CEO because I knew it was, right, do I have better chances raising capital with myself, having never done it, or find someone who had actually just sold a business, had been a GM of another larger business. And that’s what we brought in to run this as a CEO.
Okay, so you were thinking strategically all along, you were identifying problems that needed to be solved and built your product around that. And then you just access to just, but you access the market that was looking to solve that problem by the sounds of things and managing all the competing pressures of scaling the team and getting the team paid, funding, bringing clients in and seeing the bigger term, the longer term, I guess, the bigger picture by bringing in a CEO yourself. that a fair two second summary?
Yeah, mean it really, I think very quickly one of things I realised is that you have to take your ego out and you have to find people and things that will help scale the business that may not be you. And that’s the important part of you know, even this conversation as you’re marching towards thinking, you know, the worst founders are the ones that are like, I’m going to exit right now. And you’re like, wait, wait, you don’t, you don’t have anything. But if you start laying the groundwork of a potential exit or what that looks like, but start laying the groundwork of whatever you do well, we’ll actually help you scale the business.
Yeah. And I just want to go back a couple of seconds there, Adrian, because you said something that seemed to roll off the tongue really easily. And as I digested it, it’s gone, hang on a sec. That’s really easy to say, but how hard is it to do in practice? And you said, yeah, you just got to get your ego out of the way. So, like for entrepreneurs, they do have a big, and I’m to say healthy ego. They’re full of self-confidence. They’re full of get out of my way. I’m going to make this happen. If you say no, well, sorry.
Yeah, I believe this is going to work. So they’re confident people. And with that comes a bit of ego and it’s required to knock walls down to make things happen. How easy is it in practice to just go, well, I’ll just get my ego out of the way and I’ll employ this person because they can do that role better than me.
It’s, you know, it’s very hard. I have been in situations now in the last, Mendoza Ventures is coming up to nine years in January. So, we’ve seen a lot of replacing of CEOs, changing of the guard. And funny enough, the first investment we ever made, which was an AI company, I sat down with the CEO and I kind of sat and said, this is where the movie’s gonna go.
This is what happens when you raise capital. This was happened when you were the movie. I laid out the plot of the movie. I said, let me sit and tell you the plot of the movie. You know, we hadn’t even raised the first round of funding, but I said, this is how it’s going to go. And here’s the script. And I said, when you raise a B round, you will be replaced. And he’s like, wait, what, are you talking about? And I said, like it.
Where the… did you say this is where the movie’s going to go?
Okay.
It is the script, the plot. I like it.
Have you ever run a business with 100 to 200 employees? No. Why do you think you can run a business with 100 to 200 employees? And funny enough, seven years later, they raise a Series B, well-known venture capitalist, and what do you know, here comes new CEO. And he’s shocked. And the CEO and other co-founder of the business looks at him and said, Adrian told you this was gonna happen. Why are you surprised?
He told you the script of the movie. You read the script. You agreed to the script. It’s going to happen. And it did. And it’s funny because the business that I helped sell, when you talk to the founder, one of the things that he appreciates and he tells anyone, if everyone ever asked him for a reference about me, he said, Adrian told me what was going to happen and at every point he was right. And so, but.
Okay.
In order to figure out how to write the script, you have to be in your own movie first.
Yeah, good point. So, does that mean you’ve got your script is or the plot for your movie? Yeah, translate. You’ve got a process for how to build businesses and when you invest them. If you’ve got a standard process that you follow and go, here’s our template, we’ll just adjust the words of script around this plot, so to speak. Or do you look at every over every new opportunity and go, right, what’s the plot for this one?
Yeah, well, it’s interesting because there’s parts of the movie that are consistent across everything. And those are when you’re looking to achieve scale. One of the things that we do as investors is we bring in fractional CFOs because at a certain point, you know, though the founder may have or business owner may have some background in finance, that’s not their job.
Yeah
Because part of one of the things that happens, and this happens a lot for those businesses that are whether they’re looking to scale, whether they’re looking to exit, whether post exit, pre exit, you have to start institutionalising parts of the businesses. And the first part you institutionalise is finances. So, that every quarter there’s a board reporting package. And so, you may have an entrepreneur that knows how to raise money, you may have, but like that reporting to a board now, the creation of a board, the creation of governance.
So,one of the things that we walk in and we do this now every time we invest is we put it in actually in the term sheet. You’re going to hire a fractional CFO. You’re going to build a board. Here’s who we sit. Here’s what we want. You’re then also going to build subcommittees, comm committees, info set committees. And it’s just the basic governance because you have to start as you’re building the business, as you’re scaling, checking those boxes to have them in place.
Yeah. So, Adrian, I know the, so the businesses that you invest in, have you got a rule of thumb where you go at this stage, this size of, or this point in evolution of your business is when we expect you just to start creating a board. Have you got a point of, Hey, look, once you get to X amount of revenue or some trigger point where you need a fractional CFO, have you got rules of thumb that you apply there? Just hope his zone is good.
Yeah, originally when we started investing, we were coming in really early, you know maybe won 200K in revenue, started building the boards. And then we realise you’re still really early. You’re not there yet. don’t know why you have it yet. Though you need the governance, you’re not ready for it. You still want to have the scrappy, ego-driven founder to go out and do it. And then what we realize is that magic inflection point is when you’re at the 1 million in revenue and you now have a go-to-market strategy, you now have paying customers, you’re now ready to start scaling. Assuming that this is 100 % ARR, ready to go, that you can start going from one to three to five, at that inflection point, that’s when you need the help, because now you can build a board. One of the things that we also do is we also build an advisory board. Looking at some of the vast customers, pulling them into the fold to be able to get advice, to be able to help with sales leads. And that’s critical to start putting the names on the frames of people that are actually helpful.
And also at that point, you also try to remove who’s not helpful, whether you have a board that’s not helpful, whether you have a series of advisors. I usually do this exercise when we are starting to do due diligence on investment. We’ll go through the advisors list and say, this person, are they investor? Have they brought you a customer? No. Why are they here? Get rid of them.
And we literally clean out because part of as you start institutionalising the business, you also have to start cleaning up the cap table, the ownership structure. The more you do that earlier, you you don’t want to do it when you’re a seed company. You don’t want to do it when you have 100K, but when you’re at that inflection point, and you’re now structuring a board and advisors and companies, you want to start cleaning up the ownership there. You want to start before real institutional dollars comes in. The faster you do it, when there is not this big name breathing down your neck.
It is 10 to 100 times harder to do that cleanup when now someone wants to buy the business or someone wants to invest five, 10, $20 million into the business. It is next to impossible because what we do is a three to six month window of due diligence. And we’re going through the cap table and we’re going through the finances. And you asked me like, there are things that are mechanical that we do. There’s also a portion 10 to 30% of that are case by case basis. You there are some CEOs that you just look at them and you’re like, they’re the domain expert. They know how to run this business. There are some that you’re like, they are great, but you need to tack on a really good operations person. You need to tack on a really good head of sales. So, that’s really on a case by case basis, but you want to always do that before the money comes in.
So, it sounds like you’ve got a formula of what you’re looking for, which we might call a template. And the way you apply that formula is dependent upon the specific business you’re working with. Because if the founder is a strong COO, you might go, well, I need to get, well, I’ll always get in a CFO first because we need to professionalise the finance function. You touched on, that might be at a million revenue.
But it’s more to do with is the business at an inflection point where they’ve built all the foundations, they’ve got all the platforms in their business and that they’re about to take off. And if they take off fast, we need a COO, we need that proper functional structure in place with the CFO that are going to be able to cope with that growth and keep everything under control as a business scales quickly. So, it’s more about looking at where they are in their life cycle rather than the revenue of the business. Have I understood that correctly?
Yeah, well, and it’s interesting because one of the exercises we do, and I learned this from a really good investor friend of mine, he would classify revenue as either high grade revenue or low grade revenue. And I love that so much. I use it as part of our formula and we’ll sit with the CEO of the business, not the head of sales. I’ll sit with the CEO because that’s your job. Your job is to tell me what is high-grade revenue? Is that million dollars annual recurring revenue? Or is it not? Because early on, especially when you’re looking at a company, they’re like, we’re a million in revenue. And it’s like, great. Walk me through, is it a repeatable process? Because look, I’ve met businesses that are at the million dollars in revenue. It’s not repeatable.
Mm-hmm.
There are things that I’m like, look, you managed to trip over these customers. You managed to find a couple of buddies that got you into this place. Can you do it over again? The likely answer may be no. So, you don’t want to institutionalise a business when they, you know, you can’t replicate that million dollars to get it $3 million. You need to break it down to, don’t walk me through the contracts. I’ve met some incredible founders that are like, we have this contract. I’m like, what?
What’s the enterprise contract value today? How do you, and well, it’s gonna be X amount of dollars for a three-year contract. And I was like, no, no, no, you can’t book that this year because it starts next year. So, this year, you’re at Gusek. Next year, well, it’ll be whatever, $3 million for three years. Well, you can’t book that for $3 million this year.
It’s a million dollars every year. So, great, you now have three years. You’re not a three million, you’re only in a million this year. And that sort of getting someone like myself that has had that experience before, whether it be an investor or whether it even be an advisor to the company to actually really get into the details to be like let’s talk about revenue, let’s talk about it because that’s what makes you attractive. And there’s a difference because there’s some people that start talking to me and say, man, we’re a great acquisition target. And I’m like, all right, is that revenue or is that EBITDA? And they’re like, well, it’s not EBITDA. I’m like, there’s no multiple there. It’s like, yes, if you’re at a million in EBITDA, then let’s start talking about a five to a 10x multiple. That’s not going to be the same case on revenue.
Yeah. So, okay, we’re looking at the platforms, we’re looking at formulas. We’ve got, we want to know like how we got there. So, is the revenue repeatable? There’s no good scaling the business if we don’t know how we got to where we are. So, we need to understand that the revenue is repeatable and we’ve got a formula for that revenue. And if it’s a repeatable structure, if you like, of how we achieve that revenue, then then theoretically we can just keep doing more of the same and that revenue will expand and extend.
Absolutely. This is where I have been big believer that investment dollars should be, you should be able to quantify it as do I pour this gasoline and the car goes faster? Because if I pour the gasoline and the car doesn’t go faster, it just goes flat. Or my favorite one is you see that they’re bringing in dollars, but then expenses go up.
Yeah.
So, I’m like, you’re never gonna get to break even. You’re never gonna get the profitability is if revenue goes up, but then expenses goes up and then they start eating to your margin. It’s like, no, that’s not what the money’s for because then you’re worth exactly the same thing because your OpEx is going up. And part of that exercise is also a lot to, I once had a founder that, it was working with a CFO and this is also the danger of it and you have to sort of and I said, well, walk me through the model and the model was eight tabs on a spreadsheet, super complicated. And I literally threw the model away and I was like, why do you have this ridiculous model? Well, because we have this product and this product and I’m like you need as a CEO, though you need to track revenue on a month by month basis, you also need to predict and model out on a month by month basis. So, what if next month something doesn’t happen?
And surprisingly enough, that thought of modeling is something that I have very rarely see with a good CEO because they’re not thinking about, you know, the bad CEOs are the ones that are going to model out five years ahead of time. And I’m like, that’s BS. You can’t predict what’s going to happen next year. You could at most predict six months to a year, but also you have to model out how revenue comes in. So, example, I had a potential company we were looking at. I’m talking to the CEO, great business school that they came out of. And I said, walk me through this revenue source that you’re getting. And they’re like, great, we have a channel partner and they’re injecting revenue and they’re driving customers. I said, when do you pay back the finder’s fee to that channel partner? Well, in 60 days. Have you put that in the model? No.
So, therefore, what we modeled out by 60 days, they would be like negative because money would be coming in, but then they’d be paying it out at the same time. that compounds. So, you’re not going to find that in your model. You’re not going to find it in your operating model where you’re looking at what’s happened in the past. You’ve got to predict because now that CEO had a shortfall of $100,000 in three months.
I said, so, it’s like, you have to have the conversation. Is this deal worth it for you? And that’s where I try to push on a CEO with a business. Their craft needs to be the finances or craft, they have to be the orchestra director. They need to know, and that’s why I push on them to be like, tell me about revenue. Because they need to know every point of the business. Not enough to like run the business, but enough to be dangerous because they need to know what’s going on in the sales organisation. They need to know what’s going on with finance. They need to know every part of the business so that they can make an educated decision on the direction of the business.
Yeah, so and and we know that that entrepreneurs are the ultimate optimists and know, they’re they’re always expecting and and knowing and as you were alluding to earlier Adrian about the the revenue that’s going to come in and the the revenue that this is going to happen and this is going to happen and we’re going to do this and that’s going to happen and They’re forward-thinking people and they’re they’re always very optimistic. Is that why you focus on getting the reporting right and getting the getting the CEO of this fast scaling business because if you want controlled growth, you need to be all over the numbers and the monitoring system so that you can make those informed choices. And if you’ve got leading indicators as well as lagging indicators, you can make decisions and you can change tactics quickly if you have to before it’s too late. Is that what we’re talking about here?
Yeah, I mean, the goal of it is to find the landmines. The goal of it is to find the landmines, the things that are going to blow up in your face when you’re not looking at them.
Yeah, exactly.
And part of why I pushed that on the CEO, because funny, one of the things I said, you’re completely right. The founder CEO, business owner is the optimist. That full-time CFO is the pessimist.
Yeah.
Things are going wrong. God, like I remember like I was working with the CFO and they’re like, we’re running out of money. And I’m like, you still have a million dollars in the bank. Call me when you’re at 100K. Like what’s wrong with you? Like you’re bringing up the alarm bells. So, they’re like, we just dipped under a million. And it was like, no, that’s not when I get stressed. When you’re like under 100K and thinking about making payroll.
Yeah.
You’ve got to tell me with three months in advance, but that’s part of the exercise is let’s look out here because let’s say you have this incredible enterprise contract that’s going to come in and guess what? You’ve got a hire ahead of that. You’ve got a staff ahead of that.
You need to balance.
If there’s any cost of goods sold in a tech business, whether it be server costs, you’ve got to get all this cost. There are costs of goods sold associated with that. And if they’re not paying upfront and they’re now paying you monthly on a three-year contract, you’re more than likely going to find a month where you need coverage. And if you don’t have cash in the bank, you need to, to your board and to the investors say, hey guys, in three months, I’ve modeled it out that we may be short X amount of dollars, even though the next month we’re gonna be up by 300,000. But that’s next month, this month, you know, and you want to be able to look at that. And that’s where I think a good owner slash CEO founder, again, doesn’t want to be the pessimistic. They do need to be the optimist, but they also need to know because ahead of time not a month ahead, not a week, two, three months ahead, or six months even in the better. That makes me feel good and warm and fuzzy inside. And know when there’s a potential gap. Because that’s what…
Yeah, all the CFOs that I know, you the first thing they do is they go in and they start modeling the cash flow and get that cash flow forecast under control so that they’ve got some visibility of what’s happening. And it’s always, whenever they share it with the founders, the CEOs of the SMEs they’re working with, you know, it’s such an eye-opener because often, you know, these guys have only ever worked with last year’s accounts or monthly P &Ls at best with some management reporting.
But once they get a CFO lens on their reporting and cash flow, it’s like a massive LED torch that just shines things and gives them so much more information and clarity of what’s working and what’s not working.
Yeah, Darryl, one of the things that we do when we bring on that CFO, we now have a network of them that know us really well, that I don’t even have to tell them what to do. They’ll come in, they already know that I asked for multiple things. One, I asked for you know, at every board deck, what’s the cash flow at the end of the month, at the end of the quarter to what’s our monthly burn? Because I need to know what are we burning? How much is our runway with profit? Or if we close nothing, what’s our runway? And all of a sudden it’s really interesting to see that CEO founder that can tell you I’ve got 30 months of runway. And it’s like, no, if you close nothing, you really only have a 10.
And then all of a sudden they’re like, the panic sets in. Holy cow. So, I’m like, then after that, like, see, every time you close something, you’re now extending your runway. But we need to know if nothing happens, what does that look like?
And then within that, I have another interesting exercise that I’ll share is what I do is I go to the CFO and the founder and say, I need three tracks, the annual use of funds, like where we want to be. And then we want to have a conservative one. And then we want to have an aggressive one because let’s say you crush it and things are going well. The train needs to switch over to the aggressive one.
Because you don’t want to be too conservative. You don’t want to be in the middle. You want to be like, you know what? The dollars are working. I pour the fuel in the flame. The car goes faster. Let’s go faster. Or let’s say things are not as closing as fast as you want them to be. Or the dollars aren’t coming. You you think they’re going to come in 30 to 60 days, but now they’re 90, 120 days. Then you need to take the train on the slow track.
So, what we’ve been talking about Adrian is you’ve got some, it’s been great to get some insight from the business owner who’s been there, through it, gone through the journey, felt the pain along the way, gone, I wish I had all this stuff in my business sooner. You’re now applying that into businesses you work with. It sounds like you always look at going, let’s get a board set up with the governance and make sure we’ve got the leverage of having a board on side when we can let’s professionalise the finance function. We’ll get a CFO in there taking control of the financials, which frees up the CEO, flash slash founder to work on the things, strategies, the big picture, important tasks they need to be working on and get them out of the operational and the support tasks. What else do you do? And you’ve shared some other tips along the way as well, but what else do you do to when you’re working with a business or looking at a business, assessing a business, let me rephrase the question. Start again. What could a business owner do that’s looking for PE investment to make their business more attractive to someone like you? There, I got it out.
Perfect. You got exactly to the right part of it. And I think the most important thing is to institutionalise what the sales pipeline looks like. Because here’s the thing where absolutely..
But really prove the sales process and the pipeline.
Well, part of it is not just improving the sales pipeline. You know, because in an ideal world, when you get approached by VCE or private equity, you want to go what, you know, what I call the fat snake, you know, great looking funnel, but heavy in the middle. And then sort of of tapers off, but you know that there’s things in the pipe because one of the other things about this process, especially when you’re establishing the board.
I will go and say, there is the financial side, there is the organisational side. I also want to have slides on, tell me what the pipeline looks like. I don’t need to know how many leads are in the funnel. I really don’t care. I need to know, you know, if what’s 50 % more confidence to close.
And then what I say is, tell me what you’re going to close this month. Tell me what you’re going to close next month. And then in the next board meeting, tell me the delta between what you told me and what actually happened. Did it go up? Did it go down?
And then if you have an account that is 75 % walk me through why you’re closing it, what are things that got you to close it so that we’re always talking about the most important part is revenue and the customers. And that really gets down to them to start looking through the pipe because I think the biggest failure with anyone, with any owner or entrepreneur or founder the optimist will talk about this great deal. I’m going to close this deal and it’s going to be a million in revenue and then you go to the board and hey well what about this million dollar deal you’re going to close well it got pushed back and then it got pushed back again well that never happened and you need to be like no this is if it’s not if it’s under 50 percent it doesn’t exist it’s imaginary it’s still in the funnel at that point.
And then really starting to dig in, like, where are we? Are we in contract phase? Are we in due diligence phase? Because one of the things that these founders forget is that once you start cooking with gas, if you’re a technology company, you’re going to need a fleet of sales engineers that are going out. Because the worst thing is you close a customer, a big deal, and you can’t support it. You don’t have the bodies.
If they’re on site, you’ve got to find bodies. You now have to find professional services arm. That’s not ARR anymore. That’s now low grade revenue.
If you don’t have a good margin, it’s going to murder you. And all of a sudden it is just, you’re going down a track of building a different business. And look, sometimes you can, like the business we sold that first cybersecurity business, that founder was a master of this. He had a company that was software. And then he went out and built a professional services business that had like 34, 38 % margin. And then he would hire these people and he would put them on the client side and they would sit there. They weren’t part of the core team. These guys were just contractors that they would sit there and do the integration and make sure that ensure that that would close and you would have them lined up and he was just like a machine. And the reason they were bought is they were bought by a firm that was doing professional services that said, I love your model. I want to do the same thing you’re doing in scale. I want to take your product and now I want to go sell it because I want the two to three million dollars that it comes with the professional services. That’s the core of our business and that’s how the business got sold.
Beautiful. Adrian, look, I really appreciate you sharing your insights and you it’s amazing what you’ve got stored just from so many years of experience of doing this. I’m just wondering for the listeners today, so all those business owners who are thinking about exiting their business today and that could be they’re looking for a partial exit or a de-risk by bringing some investors in to help them scale or they’re looking to even just do a complete trade sale or sell and just exit their business in one fell swoop. What would you like them to take out of our conversation and from learning from you today?
It really is about taking everything that you’re doing and putting it on paper that, you know, cause here’s what the governed deck does for you. Tells you where sales are at that given quarter or month. Tells you where burn is, tell you cashflow. It’s about getting everything that that business owner does that that founder does, putting it on paper so that when you are approached by look, cause if you get to one 5 million and EBITDA.
All of these lower middle market private equity funds are going ring ring and you don’t want to make it hard for them. You need to be like here here’s the latest board deck here’s where we are because part of one of the things that they want to see is they want to see what’s growth month over month what’s growth year over year.
What’s OpEx? What’s like things that are just the basics, but you wouldn’t believe how many of these founders that I mean that aren’t ready. Even the ones that are have won five million in EBITDA. They’re just not ready to put these things on paper. And now they’re pulling things out. And let alone, you know, the business isn’t institutionalised yet. They’re still family member working in the business. They’re still like, you know, the shadow employee, there’s still things that like they’re doing that they can’t quantify the pipe earlier when you start scaling that you can institutionalise that and put that on paper and find those pieces of the puzzle that are now the assets of the business on paper makes it 10 times easier to put that in front of somebody.
So, we’re talking about documenting the business model, identifying the intangible assets, identifying the systems and demonstrating that if you’ve got training systems in place to show the potential buyers that look, this business doesn’t repent. It’s not running from memory. It’s everything of the way we do things in this business is documented. It’s not dependent on me being there. Anything we can do to demonstrate that is what someone like yourself is looking for.
Yeah, absolutely. And not just the intangible, also, what are the tangible assets? Like you have inventory, how does that reflect the cost of goods sold? How does that reflect the cost of inventory that’s now sitting at a warehouse for software, all right, what are these ongoing cost of services, let’s say web services, all of the software, because no one wants to buy it. And also not only that, what are the contracts do you have in place?
Like because some of these contracts, like the worst thing, and I’ve had this situation, you go through an acquisition and I’ve gone through the work of having to kill contracts because the acquirer was, I don’t want these. These are not my contracts. These are liabilities. So, before I take the business, you have to kill them because I have my own contracts with these same vendors. So, now you’re going through the process at 50 % of the time, it’s worth it. The other 50 % of the time I’m like..
And if it’s documented, you can address it. And because if everything’s documented, there’s no surprises, right? And that’s what buyers want. They want no surprises. They want a boring.
Yes. No, surprise. Mean, I’ll tell you a good example. If you’re not documenting your contracts and you don’t have a repository of them and I’ll tell you right now if you go to a business owner or a founder and say, Hey, do you have a repository of all your contracts? They’re like, well, this one’s over here and that one’s over here. And then I’ll say, all right, if there’s an acquisition or majority buyout is there language in the contract that the contract is null and void? And they’re like, what do you mean? I said, read your contract. And then they’ll get to a section on acquisition and they realise that if the business gets sold, this contract is null and void. And all of a sudden, hard to keep that as an asset when you know that if someone buys it, the contract evaporates.
There’s a key insight. Adrian Mendoza, I really appreciate you sharing your time and experience and your exit insights with us today. Thank you.
Had fun
Good stuff.
About Adrian Mendoza
Adrian is the founder and General Partner at Mendoza Ventures, which is both Latinx and woman-owned and the first Latinx-founded VC fund on the East Coast based in Boston. With 20 years of experience in building technology products and teams, Adrian is an experienced entrepreneur, operator, and veteran of the Boston startup ecosystem. Adrian founded Mendoza Ventures to take an in-depth-focused approach to venture capital, looking for founders who demonstrate domain expertise in one of his three focus areas: fintech, AI, and cybersecurity. Adrian prides himself on being a hands-on investor by setting up companies for success beyond just writing a check, creating strong funding syndicates, making customer introductions, and assisting with partnership conversations.
His firm, Mendoza Ventures, focuses on investments in Fintech, AI, and Cybersecurity, with diversity playing an important role in their investment decisions—about 90% of their portfolio consists of startups led by people of color and women. Since its founding seven years ago, Mendoza Ventures has raised two funds and had four successful exits. The firm is currently raising its third fund, a $100M fintech fund anchored by Bank of America.
In 2022, Axios Magazine listed Adrian as one of the five most influential people in Boston, and the LA Times honored Adrian as a DEI visionary, recognizing him as one of California’s most prominent game-changers and thought leaders in the business world today. Adrian is also a regular contributor on CNBC on the state of venture capital in the US, and the firm has recently been covered in Forbes, Bloomberg, and The Boston Globe.
Adrian received his Bachelor’s from the University of Southern California and his Master’s from Harvard University.
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