Episode 210: A Dive Into Financial Due Diligence with Pierre-Alexandre Heurtebize
In 2019, Pierre-Alexandre Heurtebize launched one of the first financial due diligence practices, HoriZen Capital, which is 100% dedicated to SaaS businesses, and launched the first online course on how to conduct financial due diligence. As an ESSEC MBA alumni and PwC Transaction Services alumni, Pierre has accumulated nearly 10 years of financial due diligence experience, which includes 3 years fully dedicated to reviewing SaaS and subscription models. Prior to launching HoriZen Capital, Pierre spent many years as a Private Equity Investment Associate and M&A Advisor. His background has afforded him a unique and professional understanding of the process of professional investors. He has also written articles on FDD, M&A, and financial analysis for top-ranking websites such as TechCrunch, Toptal, and MicroAcquire.
Through reading a lot of Disney’s Mickey Mouse and Scrooge, by around the age of 12, Pierre knew he wanted to be a trader,but his idea of a trader at twelve-years-old wasn’t totally correct. He imagined traders were “people who would look at the newspaper, understand what’s happening from a geographical perspective and a geopolitical perspective in South America, figure out if there is a conflict in that country that impacts the production of oil and gas in another country, and then one thing leading to another… The price of a pen is going to skyrocket. So, let’s just by pen stock.” While his Disney perception of what a trader was wasn’t entirely correct, it was still a relatively sophisticated analysis for that age.
As he grew up, he learned what traders actually were – not something he actually wanted to be – and he found great interest in understanding the work, and how to use that knowledge to make good business investments.
A UNIQUE DEAL
Pierre’s first deal occurred about a decade ago, and involved investing in a wind turbine plant in France through a crowd-funding platform. The aim of the proposed wind turbine project was to bring wind-generated energy within the city streets – for instance Paris – by designing the turbines in the shape of trees, wherein each branch was the turbine.
This concept of designing something man-made to blend in with natural surroundings is called “biomimicry”. Recently, especially in the alternative energy discussion, biomimicry has become very popular to help preserve and blend in with the natural environment.
Investing in creating wind turbines designed to mimic nature isn’t something investors hear about every day. Pierre was interested in the equity investment scene, so he began doing research online, where he stumbled across the crowd funding platform. Initially he began to think he could utilize this platform to become a venture capitalist on his own, especially after finding the wind turbine project. The wind turbine project not only fascinated him, but he found it to be the most efficient wind turbine execution available.
FROM CROWD-FUNDED WIND TURBINES TO PRIVATE EQUITY
This browsing of a crowdfunding platform soon evolved to Pierre entering into private equity. When he was interning at a company that focused on hip-hop and urban media. The company was in the process of being acquired – this was his first experience with private equity. By the time he entered his third internship, he had decided to take the leap fully into private equity.
He began his venture into private equity through BNP Paribas Private Equity, which at that time, was branching off into Isatis Capital Team. Being a part of this journey proved to be good timing for Pierre, as this spin-off from BNP Paribas into Isatis allowed the team to essentially become independent. During his first year with Isatis, they worked on fifteen deals with five being completed. Isatis isa successful independent private equity firm today, and still growing.
EXPECTATION MEETS REALITY
During his schooling, Pierre says there are many resources at your disposal in order to learn the processes of business. This is true for almost all education, you have virtually limitless resources at your hands, without much struggle to find the information you need,however that information never fully prepares you for the real world. In the real-world, thenecessary resources and information aren’t as easily accessible. You can ask, but often you are you’re going to have to go out and find them on your own. A lot of this information you’ll require is imperative to your due diligence when in the M&A space; one piece of incorrect or missing information in the due diligence stage, and you can easily flip your deal upside down.
Another issue that comes up in the due diligence and information gathering phase is that you get a lot of information at once, most of which is disjointed or not exactly useful to your fact-finding mission. This is where ensuring your due diligence skills are sharp comes in handy. You have to be able to:
- Sort through the information efficiently
- Discern what information is useful, and what is not
- Understand the information given to you clearly
- Be able to utilize that information to be used practically in the deal-making process
Without the ability to do all these things, you once again will have a hard time creating a successful deal.
LESSONS LEARNED IN DISCERNMENT AND DISTINCTION
As we’ve established, schooling doesn’t fully prepare you for real-world navigation and application of due diligence. Pierre recognized this gap between formal education and being in the business world without the proverbial training wheels school offers you,but recognizing this gap didn’t come without his own lessons and experiences.
Of course, when it comes to dealmaking, every person who has a seat at the table is there for a purpose, you benefit from the individual and combined experience of each person at the table, and logically, the more experience you have – especially specialized experience – the easier it gets. To make your overall experience as easy as possible, you want to make sure you’re bringing to the table your skillset at its sharpest – and this especially includes your ability to effectively do due diligence.
Discernment and distinction in what we outlined above is priority. Without the ability to effectively discern and make distinctions between information given to you, your deal will likely struggle. A general guideline Pierre gives is: Discern what are the highest priorities, and ensure they are covered; then, if you have the time, work yourself down the list of non-high priority items. Deciding what is high priority includes:
- Make sure you understand revenue generation – Are you at risk of losing revenue going forward?
- Understand the markets – Are you sure the market is going to thrive, or is the market large enough?
- Identify any red flags – Identifying what can go wrong, and if and how it can be prevented.
Beyond those, the biggest surprise for Pierre in the adjustment from being a student to an actual professional was in the valuation process. In school you learn about DCF (Discounted Cash-Flow), the mathematics behind it, how your discount factor must be reflective of the industry you’re in, etc. Then you go into small cap private equity – large cap is a different conversation – and the precision of what you learned in school is much looser. The smaller the deal, the more apt it is to just be whatever the parties end up negotiating. You really will need to adapt to the person in front of you when working on smaller deals, and a lot of times that means a lot less technicality to the deal.
SAAS AND SUBSCRIPTION-BASED BUSINESSES
As Pierre’s experience and talents were nurtured, he began to see that he was prepared to go out on his own and begin his own business. Pierre chooses to focus on SaaS businesses versus any other business because he finds them to be quite easy, stating once you develop the software, it’s quite simple to operate.
To refresh: A SaaS (Software as a Service) company, as defined by DigitalGuardian.com, is a company that “maintains servers, databases, and software that allow the application to be accessed over the internet — most likely by web browsers. Users can access the software from almost any device.”
Pierre finds the easiness with focusing on SaaS and subscription-based businesses comes from:
- You don’t have the same logistic issues
- You don’t have inventory
- You really don’t have any networking capital
- Your focus at that stage is driving revenue and keeping your customers
WHERE’S THE FOCUS?
When it comes to SaaS and subscription-based companies, customers are key. Your goal is to ensure you have a loyal customer base that will stick with you. When you start a SaaS business, your first initial customers are going to be the ones that will stick with you through your company’s lifetime; they really want the product you’re offering. As you bring in more customers, those customers are less likely to automatically be desiring to stick with you, so you need to figure out the best way to retain those customers for as long as possible.
While bringing in new customers is great, you want to do all you can to retain those new customers. If you’re losing customers just as quickly as you’re gaining them, it can have a major impact to your gross revenue;much more than if you were to establish a loyal customer base that sticks with your company through its lifespan. It can also greatly impact your company valuation, especially during an M&A deal.
THE ROLE OF PIERRE AND HORIZEN CAPITAL
Pierre has an expansive background, and he certainly can help you with the valuation process, however, his role is to be an advisor. With that comes:
- Get the word out about your company
- Get as many people around the table as possible
- Work out the whole process to ensure you get the most value
- Help you present the numbers better – making sure you’re presenting clean numbers to investors
HoriZen Capital is providing financial due diligence (FDD) services for your SaaS targets, from $100k to $50m in ARR. HoriZen Capital's objective is to advise you on your SaaS company and offer you their network of capital and expertise in order to take your SaaS company to the next level of growth. Ultimately, you will find someone who is more than happy to buy your business.
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FOR MORE ON PIERRE-ALEXANDRE HEURTEBIZE AND HORIZEN CAPITAL:
The HoriZen Capital Team is currently raising their Tech Investment Fund: Finding great SaaS product with poor SEO, Conversion Rate and Paid Ads Execution, providing money for growth and applying their growth marketing playbook. To learn more, check out: https://horizencapital.com/tech-fund/
Corey Kupfer is an expert strategist, negotiator, and dealmaker. He has more than 35 years of professional deal-making and negotiating experience. Corey is a successful entrepreneur, attorney, consultant, author, and professional speaker. He is deeply passionate about deal-driven growth. He is also the creator and host of the DealQuest Podcast.
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