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1/ After more than a decade investing in tech startups, you made the decision in 2020 to focus on investing in SFs. Why did you make this change and how did Scipio Holding come to be?
Actually, I was very active investing in startups from 2013 to 2018, but from 2018 I started to reduce my investments significantly and limited most of my start-up investing activity to follow-on investments in existing portfolio companies. I felt that the context was changing: valuations were skyrocketing while competition for the same opportunities was toughening. In 2015, you had 3-4 startups competing in a space, just 3 years later, you had 10-12. So, with a long-term investing view, for the same business opportunity you had roughly half the chance of success (due to the increased competition) and half the upside in terms of multiples due to the increase in valuations. It was a far worse environment in which to operate and invest unless you were speculating. Far more importantly, I began to feel that the focus of many (not all) entrepreneurs had changed. Entrepreneurs went from focusing on building a great business in an attractive space to focusing on raising rounds at the highest valuation possible… and I was not aligned with that.
Also, to provide further context, even though I invested in tech startups for some years, I have always been and remain a value investor. I started investing in stocks when I was around 16 years old and in 2008 (when I was 20) I created a vehicle to invest my family’s savings. While I started investing in large companies, I soon moved my focus to International Small and Microcaps, and started not only looking for attractive valuations, but also some growth potential (although always at a reasonable price). In fact, the kind of companies I was investing in were very similar to the ones you can find in the SF ecosystem.
So, going back to your question, in 2019 I came across the SF model and for me it was a perfect match. It combined my two worlds: my experience of many years analyzing and investing in mature companies with my experience supporting and investing in talent: actually, in startups I’ve always invested in pre-seed, in many cases being the first investor and investing before they even had any revenue. So, it all felt very natural to me under a model with which I soon fell in-love.
I made my first investment in a SF in 2019 even before founding Scipio, after my partner Alejandro introduced me to the searcher. This allowed us to get in contact with the ecosystem and after seeing the kind of opportunities that you could find under the model, as well as its philosophy and culture, we realized that we wanted to be part of this.
2/ After these 4 years of investing, what is the balance of Scipio? You are among the few who truly invest on a global scale, having closed transactions on 3 continents and backed searchers in 5 continents. How do you add value to a company that is thousands of kilometers away, such as in Australia and New Zealand for example?
To date, we’ve invested in over 40 SFs, and we’ve participated in the acquisition of 12 companies in 7 different countries: Spain, France, Australia, New Zealand, the UK, Brazil and Italy. In that sense, our approach has always been global: we invest in the best talent independently of where it resides and we look for the best companies wherever they are.
With respect to how we help searchers and companies that are very far away, and in different time-zones, I think that there are lots of areas where we can add value. It is true that for certain activities we have to lean on our local co-investors: we often don’t have a local network of advisors, we are less familiar with local business practices and sometimes it is more difficult for us to complete a site visit in advance of an acquisition. Notwithstanding this, however, I believe that we are able to support our searchers and their acquisitions effectively.
Once we have a live deal on the table, we try to get very involved with the searcher. We do our own independent analysis of the market, competition, as well as the company’s business model, revenue profile and financial performance. We work with the searcher to address real issues with the deal and help them structure a deal that makes sense for all parties. I like to think that we are able to help searchers make better decisions when the time comes for them to acquire a company.
Also, based on our acquisition experience in other sectors, we are starting to build a post-acquisition playbook adapted to the challenges that searchers face after completing an acquisition. We use this playbook to work with the searchers so that they are better able to transition into running the company. It is early days, but, so far, we are seeing a positive impact from this work with the searchers independent of where they operate.
I also think that, in many cases, we bring some experience that adds value to the searcher both before and after the acquisition. As an organization, we tend to like businesses that we refer to as Tech Adjacent – consolidated businesses that have an important associated technological element. My partners and I have a lot of experience investing in and running tech companies and this experience matters no matter where the business is located.
Going back to your question around how we can help a company in New Zealand. In this case, this is a Cybersecurity company, and my partner Monte not only founded a start-up in this area, but he also ran the Australian business for NTT (the Japanese Telco) for 4 years. Cybersecurity is an area he understands quite well and where he has a lot of knowledge and network in the area where the company operates. But we are aware that in many other industries and regions, where we are not experts and we don’t have a network, our help will be limited to that of many other SF investors: some financial support/advice, sharing best practices under the SF model and general common sense based on our business experience. So, we know, in many cases, there will be other investors who can bring more to the table. That’s the beauty of this model!
We believe the key to success investing globally and supporting the searchers effectively remains in the collaborative nature of the ecosystem. Under this model we co-invest with many great investors around the world, each of them with their expertise and network in a given area, so while in some cases we can be the ones supporting more, in other cases we have to rely on some of our co-investors. This is one of the great advantages of this model and it’s what allows us to invest in many different countries and industries, providing many benefits in terms of diversification to our investors while maintaining the potential for great returns.
We have companies in 7 countries (so far) in sectors that go from industrial services in France, to pharmaceutical logistics in Brazil, to cybersecurity in New Zealand. All of them with stable and growing recurring or repetitive revenues, manageable debt levels that are reduced every year, and we invest in these companies with average FCF yield levels north of 20%. Under this context, I cannot imagine how we can lose money from a portfolio perspective -unless we have a scenario where money is no longer important-. All this would be impossible without this collaborative model.
3/ Recently, you decided to partner with Swanlaab Venture Factory SGEIC to launch a new fund. What is the target size and what will be your investment strategy?
I feel that the launch of this fund is the natural evolution of our project. When Alejandro and I created Scipio back in 2020 (Scipio is a Holding company in the Netherlands), it was a side project, and our plan was to invest our own capital. Soon afterwards Sara joined the team and also invested. After over a year of investing in SFs and getting to know the ecosystem, we felt that the opportunity in search was large and that we should focus completely on this project. In that sense, to get a little extra firepower but also share what we were doing with the people close to us, we opened the capital of our company to our close network (friends, co-investors in other companies, family…). This is actually when Monte (the fourth partner in the company) first invested and soon afterwards decided to join the team.
Under this structure we invested in almost 30 SFs and 10 companies, until we realized that our capital and that of these close friends was not going to be enough to support our increased activity and the growing deal flow to which we had access. We felt that we had more great opportunities than capital. Also, a larger capital base would allow us to create the team we feel we need to be able to support the portfolio in the way we wanted. In that sense, Veronica (leading the legal area), is our latest addition.
To enable this growth and professionalization in our activity, a traditional fund seemed a better structure. Swanlaab was the natural partner for a project like this. They have 10 years of experience managing venture capital funds and we match quite well in terms of values. So, it was an easy decision for us.
Our target size is from €15M to €25M and we are investing €6M ourselves, as we are in this project because we believe it is the best place for our money. Actually, we advanced some of this capital to start operating with the fund during this year, funding our investment in 2 companies (acquisitions) and 8 SFs even before the first closing with external investors took place.
Our idea with this fund is to invest in 20 to 30 new companies around the globe. While we have some bias in the kind of companies that we like more, the fund will be agnostic in terms of sectors. The only limitation will be some diversification criteria as we won’t invest more than 30% of the fund in one country.
4/ The market is growing everywhere, and more and more new searchers are launching. Do you notice a significant increase in deal flow from new searchers and what qualities must they have to attract your attention?
For sure, the sector is growing a lot and as we are operating internationally, we are receiving increasing deal flow up to a point that it is becoming difficult to manage. When we started, we decided that we wanted to try to dedicate time to every searcher at every stage of their process. This has been increasingly difficult lately. My partner Alejandro is in charge of Deal Flow of SFs and I know he is doing all he can to respond to as many people as possible. Unfortunately, as we dedicate more and more time supporting our growing portfolio, it has become a huge challenge for us in general and for Alejandro specifically.
Regarding the qualities that we look for in a Searcher, in general we invest in the people in whom we trust to be the best CEOs when they complete an acquisition (focusing less on their ability to search itself). In that sense, the Search is a small bet that, besides providing us the right of first refusal, allows us to get to know the Searcher well. As we say, for us it is the “dating phase”, where the risk we assume is low. On the other hand, when we acquire a company it’s when we make the large bet and when the risk is higher for us. It’s what we call the “marriage phase” and here… we better be right! So, all our efforts are focused on trying to identify the best people possible for the operation phase.
In that sense, the kind of searcher we like has some commonalities: we look for people who have some leadership skills. Somebody who has experience managing a diverse team, that has the ability to develop a top management agenda and understands what’s important and makes a business more valuable. Also, we like to see that they have assumed risks in their careers, in that sense, we appreciate if they were entrepreneurs in the past or at least managed a P&L -we believe that managing a P&L is a turning point in somebody’s career-. Also, we like to understand their path to search – how they found out about the model and why they decided to raise a SF. This also relates to the fact that searching is hard and being a CEO even more so, up to the point that it will test your limits. So, we want to invest in somebody that has resilience and that they are doing it for the right reasons so when the tough times come (and they will come) they have what it takes and the right motivation to keep going and work harder when things turn nasty. On the other hand, we don’t like somebody who decided to do this just because it was an easy next step in their careers or because following the statistics it looks like an easy way to make a few millions.
Finally, we have decided to limit ourselves to investing in only one searcher per month and lately it has been extremely difficult for us to choose, up to the point that we couldn’t invest in many that fit our criteria perfectly.
5/ The sector is booming… how do you see its evolution? What trends are you noticing in terms of deals, valuation, new structures like build-up or long-term hold?
While we are rather new in the ecosystem, we’ve seen the sector explode. It feels like a lifetime has passed since we started in 2020. This growth has some positives and some negatives.
It is true that we are seeing slightly higher valuations, higher SF budgets, and build-ups are more common as the capital available to searchers has increased. But so far, we haven’t seen any deterioration on the deals that are being closed.
Having said that, we are starting to see some saturation in some markets, Spain being the clearest example. While the number of SMEs that fit the SF criteria is huge, if you narrow it down to a company that fits all the criteria of the SF model, that is at the right time for a succession and that the owners decide to sell it to a SF instead of PE or a competitor, this narrows the number a lot. If we -as investors- stick to our criteria and we don’t lower the threshold to invest (and at least at Scipio we won’t), this should translate into a lower number of successful searches. So, while the number of International SFs that don’t close an acquisition is close to 1 in 4, I think this will go down to levels closer to those of the US (of 1 in 3).
With respect to innovation and different structures, outside the US and Canada we still haven’t seen much specialization: we don’t see things like truly sector focused SFs (or investors) or long-term holding structures either in SFs or Institutional Investors. But we believe this will come at some point and will be the natural evolution and maturity of the sector.
At Scipio, we are big believers in structures that allow investors to hold the companies that they acquire through search for the longer term. The best performing acquisitions have the longest holding periods. In fact, when we first launched Scipio, we designed our holding company with permanent, patient and recyclable capital for this very reason. It is true that with the launch of our traditional fund, we have deviated from this initial strategy. We finally decided to do so because we saw that many of our co-investors were traditional funds with expiry dates and we saw that we would not be able to take advantage of our permanent capital structure. Today, the market seems to be going further away from long-term holding. I imagine that overtime this will continue to adapt.
Finally, we can’t help but wonder how this huge inflow of new investors will impact the continuity of the culture, core values and criteria of the SF model. But we were the new entrants 4 years ago, so we are happy to welcome, and we look forward to working with them in the years to come.
