Op-Eds

Escuela del Sur #7: Let’s Talk about Sex (and Exits)

I get two questions about Patagon and its sale to Santander at a transaction value of more than $705M.  If the person asking the question is under 30, they inevitably ask, “What was Patagon?” (answer: Patagon was the first online financial institution in LatAm).  

However, if the person asking the question is over 40, they always ask, “How did you guys ever justify that price to Santander?” (answer and the topic of this article: we didn’t).

Think about that for a minute: We convinced one of the largest financial institutions in the world Banco Santander and one of the then richest people in the world Santander’s controlling shareholder Emilio Botin and his daughter Ana Patricia to buy Patagon, a start-up that wasn’t even 4 years old, for over $700M.  And we never once justified the price Santander paid.  Actually we told Santander (and Citibank and BBVA, the other suitors) that Patagon couldn’t possibly be worth $700M and we were slightly embarrassed at the price.  Smile.

As I described in my very first Escuela del Sur column, Patagon’s legacy in the TecnoLatino is complicated. However Patagon should be a case study as to how to engineer an exit.  

Any entrepreneur in Latin America putting her blood, sweat, and tears into building a company should think about how she can best engineer an exit even before she starts to work on an MVP. 

Set your intention and visualize your result: 

Before an entrepreneur commits to build a business, she needs to set an intention.  Ask herself what is her “WHY?”.  Why do you want to build this business?  (Spoiler Alert: If your “why” is “to make a lot of money”, you are going to fail).  

At Patagon our “why“ was simple and noble.  We wanted “to leverage technology to make the dismal banking experience less dismal for the working middle class in LatAm”.   And then from almost Day One we were clear with our intention.  Our end-goal was “to sell Patagon to one of largest banks in the world”.  We were not interested in going public.  We were not interested in growing the business ourselves.  We were sellers. And we built a company to sell. 

Most entrepreneurs I meet from Latin America usually have one goal: to get to Series A financing where they can raise over $1M and grow their business out of their home country.  That is great. But that isn’t an intention or an end-goal.  

If your end-goal is to list your company on a stock exchange, you build your company one way.  However if your goal is to keep your company private and eventually turn it into a cash cow, well, you build your company another way.  And if your goal is a private-sale, that is a wholly different project. Only if an entrepreneur is honest about why she is building her business and what her real end-goal is, can she properly scale her company to achieve that intention or end-goal.

Delicately create competition: 

Assuming an entrepreneur’s goal is to sell her company, she needs to engineer interest from possible acquirors without appearing to do so. A bit like in mating game, often being too pushy or appearing too interested is a turn-off rather than a turn-on. 

At Patagon we created interest by attending every fintech conference.  With the big-banks in the audience we would lay out a completely new vision for how the new interconnected world would transform banking.  We never went up to the Head of Mergers and Acquisitions at some bulge bracket bank and asked them if they might be interested in buying Patagon.  We never hired an investment banker.  We sent the message to the market that we were not for sale—companies just like people, want what they can’t have…

Most entrepreneurs from Latin America are too aggressive bringing up the possibility of selling.   I was recently at a tech conference with a senior executive from Amazon.  In a span of 45 minutes he was approached by seven different entrepreneurs each of them wanting to pitch to him to buy their business.  He pointed out to me that Amazon on average builds a relationship with founders for five years before even entertaining the possibility of acquiring a company.  

If you want to sell your business and achieve a good price, rarely does it work to go out and market your interest in selling.  Just like in matchmaking, rarely is it a good idea to advertise that you really want to find a boyfriend or girlfriend or a spouse.  A far better approach is to show how smart you are and that there is good chemistry.  A relationship will naturally flow without seeming forced.  

And the more relationships a Latin entrepreneur nurtures with companies that could be potential buyers, the more likely it is that when the time comes, that entrepreneur will have several offers on the table and not have to justify her outrageous sale price—just like we didn’t have to justify our sale price at Patagon once we had Citibank, BBVA, and Santander interested. 

Do not split the difference:

Patagon signed a term sheet with Santander in March in 2000, a few days before the NASDAQ-100 high of over 5,000 points.  By the time we closed the sale with Santander in September 2000, the NASDAQ-100 had by fallen 25% and would eventually fall 78% from its peak. 

Of course due to the huge slide in the economy and the tech bubble bursting, Santander tried to renegotiate the purchase price before closing.  We knew that if we tried to save the deal by beginning to accept changes to the basic terms, the deal would collapse.  Instead of lowering the price, we stuck firm to the price.  

We realized, again just like in love, that if you lower your standards you will always be disappointed—it never turns out well.  

Keep your standards high, and don’t split the difference. 

Not bad advice for life and not bad advice for when you want to sell your company. 

In the next Escuela del Sur column I will review terms we are seeing for private sales/exits in the TecnoLatino. 

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