In 2012, Zawya, a UAE-based business media company, was sold to Thomson Reuters for a 20 times cash return by Saffar, a low-profile private equity company. I am the founding chief executive of Saffar and became chairman of Zawya after we acquired it, between 2001 and 2011. This is my story of how I bought a bankrupt, London-based company with five employees, moved it to the UAE, built it into a profitable company with more than 200 employees and then sold it to a global competitor, thus generating a 35 per cent annual rate of return over an 11-year period.
The first important lesson is that Saffar, then called ABQ Investments, was not reactive and did not sit waiting for investment ideas, let alone investment proposals. In 2001, we identified as part of our strategy a gap in the Mena markets and that was a single source of information and data for investors and businesses. Once we had identified the market opportunity we looked for solutions to monetise this opportunity via an organic approach and/or an acquisition. A proactive approach is key to a successful venture capital strategy; if you wait for the deal to land on your desk, you are bottom-feeding and your results will reflect that.
The second important lesson is that since Zawya had run out of cash and the implosion of the tech bubble meant that there were no other sources of cash, a realistic valuation would require a massive dilution of the founders. On the other hand, an overly aggressive approach could blow the deal. Balancing our duty to buy at a fair price to Saffar with the commercial good sense to keep the founding team in place for at least an 18-month transition was critical. Our solution was to offer what was a fair price, which meant a serious dilution for the founders, but we also added an equity-based retention element to the deal. This got us across the finish line. In our region the use of equity, direct or shadow, is anathema to most shareholders. Unfortunately such thinking often leads to conflicts of interest, formally known as the principal-agent problem.
Just as importantly, I was not afraid of buying a company with no clients and no revenue. Venture capital can mean many things, from funding an idea without even a business plan all the way to a company with clients and revenue that hasn’t achieved cash-flow break-even. Insisting on only the latter means you are not the driving investor and will therefore simply be there for the ride.
The third important lesson is disciplined cash-flow management during the foundational phase when cash flows are negative. The founders of Zawya were careful to insist that the full cash amount being injected into the company be done at the time of the transaction, a prudent move to protect Zawya. I had a duty to ensure that such cash was managed effectively and therefore I deposited the full amount into an account that was controlled by the board of directors and not the management. Each month, management had to achieve the targets that were promised for the following month’s budgeted amount to be transferred into an operating account. Far too often young entrepreneurs who have not had the experience of managing a full budget end up blowing through it too quickly. This method allowed the experienced board to mentor the less experienced management in managing the budget and avoiding a second insolvency event.
The fourth important lesson relates to corporate governance. I made the mistake of allowing three executives on the board of directors. The whole point of a board is to oversee the executives: there should at most be the chief executive on the board. We did realise that the board of a start-up needed an extremely active approach. We started by inviting an independent non-executive director, Steffen Schubert, who had most recently been the founding chief executive of DIFX, the predecessor to Nasdaq Dubai, and just as importantly was a chartered director of the Institute of Directors (UK). Another addition, amusing in how he joined, was Anthony Mallis, then chief executive of Sico, an established financial services firm based in Bahrain. Mr Mallis was a seed round investor in Zawya before Saffar got involved. He conscientiously showed up to a shareholder meeting and, quite rightly, pointed out that there was no representation from the original seed investors. After about 15 minutes of spirited discussion I simply nominated Mr Mallis to the board. The rest of the directors unanimously seconded and Mr Mallis was confirmed at the next AGM. I think that he still hasn’t fully forgiven me. Karma.
Governance for the board meant more than just showing up to board meetings. As I already described, we were active in managing the budget expenditure at a macro level but we also worked to manage non-financial facets, such as oversight of the chief executive’s ability to hire, promote, terminate or compensate his direct reports.
The fifth important lesson was managing positive cash flow. Unfortunately, people inexperienced in managing company-wide budgets simply do not understand how easy it is for incremental expenses to accumulate into massive expenditure increases. While other start-ups were renting in the more expensive areas of Bur Dubai, Zawya’s office was set up in Deira at about a quarter of the price. Our offices were more spacious than the ones on the other side of the creek. We ended up having a small office in DIFC, 10 people, as that was where many of our clients where based. But the bulk of our employees, about 200, were based out of our offices in Beirut. While foreigners wanted to live, and party, in Dubai, the savvier locals understood that Beirut had high-quality employees without the high cost of living.
The sixth important lesson was the financial crisis of 2008. Zawya’s main clients were in the financial services sector and this meant that the company was facing some serious challenges. As we looked around at how other companies in all sectors were behaving, there seemed to be two extremes – denial and continue as usual, or panic and hit the brakes hard. Neither was appealing. The board rejected the idea of business as usual and at the same time rejected the idea of cutting to the bone. To its credit the management came back with a dual approach that fit the board’s directive.
The first was the safety net – how and when to cut costs. Certain measures, such as cash levels and sales momentum, were used to determine warning levels. If these levels were hit then a cascading sequence of cash-management actions would be initiated: R&D and capital expenditure were cut, as were management salaries and finally employee salaries. I am so proud of the Zawya employees that they voted to take salary cuts rather than cut staff.
The second crisis response had to do with revenue. Again, management to its credit sent its sales teams to talk to clients. The feedback was simple – they all had three providers consisting of Reuters, Bloomberg and Zawya. They all had to cut one provider. Since Zawya was the cheapest and completely differentiated from the two global players, everyone indicated that they would stick to Zawya.
Then in January 2009 we increased our pricing due to the perceived high value indicated by our clients. Our revenue exploded, confirming that we provided value as opposed to a global name.
The seventh lesson was the sale. We tried it three times because we kept rejecting global players who tried to bully us. Everyone talks about this or that start-up in the region getting a huge valuation, but that valuation is not to those who built the company, it is to those who came late and convinced the value creators that they were receiving a good valuation. We got our 20 times cash because of our patience. Large private equity firms and other players would try to scare us, but we knew we had created something valuable and we stuck to our principles.
Venture capital is not about who gives you money the easiest. If that is what you are looking for, well, I don’t even have to draw the analogy here. Good venture capital is about who can work with you to create the most value, who understands the risks of a start-up and, more importantly, is willing to take the risk of a company with no revenue. Good venture capital is about promoting your investee company and not yourself – everybody knew of Zawya; nobody heard of the company that owned 60 per cent and controlled the board.
I used many of the same lessons to build an investment bank in Saudi Arabia, then sold a majority stake to Credit Suisse. But that story is for another day.
This article was originally published in The National.