About the episode:
Maz Pawar explains today how it’s OK to say no to a business, the importance of knowing your burn rate, and the true reality of investing. Maz brings over a decade of experience in the investing industry, and a load of knowledge that is ready to be unpacked.
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The Reality Of Investing | Maz Pawar
If you’re reading to any of the show, you know that I own a cybersecurity company, and I’m in the process of going public, specifically doing 50 to 70 acquisitions over the next two years. We’ve brought in experts on M&A, but before we dive into this, share this out with three people, especially if you’re a startup or thinking about starting something that’s amazing. You got this incredible idea. We’re going to talk about such amazing things with M&A, how to raise capital, how to have the right things together to even make your pitch. It’s going to be amazing.
Share this with three people, your partners, friends, girlfriend, boyfriend, whatever. That’s the only way we grow. We don’t take sponsorships. We don’t promote this on Google Ads, anything. The only way we help more people is when you share. My guest has been directly involved in more than 50 financing and M&A assignments totaling over $1 billion, many years of experience in the industry and is CEO and President of SA Capital Partners. Maz Pawar, how are you doing?
It’s good to be on your show. Thank you for bringing me on. I appreciate it. I’ve read a number of your episodes in the past. I liked the content. It’s fresh. Feels like there’s a nice educational component to it throughout your show.
Thank you. I appreciate that a lot. If you’ve been a fan for a while, we bring on a lot of different people from a lot of different industries. I feel like that’s a good sampling because no matter if you’re in any industry because I’m sure you’re into funding and helping startups. They’re probably in multiple different industries, but there are commonalities that take place in a lot of those unless you have a niche in some area, but still learning from other people outside your space was one of the best things that I could have ever done. That’s why I love doing this, but that’s also why you’re on here, too. We’re going to talk about the best thing in the world for business, money. That’s what we’re doing.
The fundamentals of business don’t change regardless of what industry you’re in. It doesn’t matter what industry you’re in, what your niche is. It’s essentially the same block and tackle that these basic fundamentals that everybody should know.
Your funding strategy, you’re into mostly startups these days. You had an investment banking firm at some point. Was that what you were looking at, like lower middle market businesses was with the investment banking firm?
With the investment banking firm, it was lower middle market as a boutique shop out of Chicago. It was a little bit more established businesses, companies generating revenues. Even if $1 billion, $1 million EBITDA on higher companies that we’ve primarily targeted with investment banking groups. With SA Capital Partners, the focus has been more on early-stage, growth-stage companies. In my opinion, it’s the largest sector out there, but it’s also the most under-serviced. Primarily being, you’re a little bit too early for going down the investment banking route. A lot of this stuff is bootstrapped. They can’t incur those types of costs. A lot of the services that are offered aren’t needed for a lot of early-stage, growth-stage companies.
There’s obviously a big value add in terms of having somebody on your team to walk you through the whole process. Essentially, we started this firm with the goal of identifying a void in the market. It’s a space that a lot of companies don’t delve into. We primarily focus in terms of working with early-stage, growth-stage companies, trying to give them all the strategies, all the tools that are necessary to make them the most attractive to attract potential investors.
Let’s talk about this gap that you’re explaining in the marketplace, too. Is that what you identified when you were in investment banking that drove you this direction?
Many years ago, most investors, investment groups, startups, early-stage companies were not going towards investing into a startup or an early-stage company. A lot of things within the landscape have changed over the years. There have been so many success stories of investors coming on board, pre-IPO, early-stage, growing stage were obviously from a valuation standpoint. You get more bang for your buck where there’s a high-risk, high reward. From that perspective, with a lot of these success stories, a lot of people are more open to investing in early-stage, growth stage businesses.
I feel you and I see a lot of pitches in this area, too. I was on stage with a shark and some other investors in taking some pitches for some things. It was interesting to see some of the questions that were being asked. I’m considered an investor because I’m active in M&A. I didn’t even label myself as that, to begin with, but then my branding agency is like, “Yes, you are because you’re acquiring companies, which means you’re essentially an investor.” I’m like, “That’s true.” If that’s black and white, then that’s black and white. Hearing some of these early stages or growth phase companies, at least the couple of pictures that I’ve heard, they don’t seem to have all their information together to even make the pitch, to begin with. Is this what you experienced, too?
The biggest misconception with a lot of early-stage, growth stage companies is this. They may have a great idea, but the execution of the plan is where there’s usually a lot of holes that most investors have a big issue with. If you’re going to come in and say, “I’m going to enter X market and it’s a $2 billion market. My goal is to acquire 25% of the market share.” Good luck with making that your closing argument to attract.
Without any sales yet.
The plan is where, I’m sure you probably see this as well through the multiple acquisitions that you’ve gone down, is where you want to understand is, what’s your plan? I liked the idea and the concept. Maybe it’s protected. You have the right IP behind you, PI and so on and so forth, but what is your plan to take this out into the marketplace? How are you going to attract people to utilize your product or your service? That’s where, early on, a lot of entrepreneurs fail to present that right type of plan.
There’s another conversation I’ve had, too, with some other investors. You’d be amazed at how many CEOs are broke and have rocks in their pockets but then they’ll come up in the pitch and be like, “I’m the idea guy. I’m the idea girl.” First, how do you differentiate between something that you want to get involved in? Also, if it’s something you don’t, how do you let them down easy, too?
From where we get involved with a lot of these companies, we’re not too concerned with your marketing strategy or sales strategy. We could help you with that. First and foremost, we got to be in love with the product, the service. There’s got to be a need for it. If you’re coming out there and saying, “I’m looking to replace Facebook.” Good luck. What do you have? Obviously, we have to look at what the product is, what the service is. Is there a need for it? Do we feel that it’s something that can come into the marketplace and come with a splash?
Those are the types of opportunities that we’re targeting. From a strategy standpoint, we’re not looking at it back because we know that once we get involved, there’s an advisory aspect to it. We can help work with any potential clients in terms of fine-tuning that plan and making sure their I’s are dotted, T’s are crossed prior to getting in front of an investor. Even if the product is great, the IP is very important. Is this product idea of the patents? Us this trademark?
It’s interesting to me, too, because there’s a couple of acquisitions that I’ve looked at to where there’s been some very legitimate IP. It’s interesting because they haven’t been able to market it. They were the idea people. They weren’t able to bring that like a SAS app or something. They weren’t able to bring that to markets because they didn’t have that skillset in-house. They didn’t seek out help externally either. They sat there stagnant for five years and I see them like, “This is amazing.” The stuff that’s there, it’s like, “I have the team to market it. I have the team to bring it to the market,” but the IP, they never even thought to patent protect it over the course of the years. It’s crazy. It was cool because it was the one.
Specifically, it was developed internally to solve a problem within their own company. They saw that there could be a need for other light companies too, which was cool, so they brought in a couple of customers, but then that’s as far as it went. Doing something like $50,000 a year in revenue, that’s it from this thing. I’m sitting along, “This thing’s amazing.” It’s like, first, with the acquisition one, I’m patent protecting this thing. Clear out of the gate, so it’s safe, but then something like that. Do you have those that are, I’m not trying to be mean, but that clueless that come to you? You’re like, “Do you know what you’re sitting on here?”
There are a lot of clients that don’t understand what they have. We’re trying to walk them through it. A lot of those clients are more geared towards more of that inventor or developer where they’re more, maybe the brains behind.
That was totally the case in this scenario, too.
They may be lacking the business acumen to propel this. That’s where we look for a synergistic fit in terms of possibly bringing a potential investor that could fill in those voids that they’re lacking. To answer your question in terms of certain clients that may approach us where we’re like, “It’s going to be a tall order.” From our perspective, we’re advisors any way that you look at it. The only thing that we can do is do right by our clients and obviously, we can give our input. A lot of times, it’s trying to make them understand that this is why this is going to be a challenging opportunity and why it’s probably not a good step for us at this stage of the game, but if you can get these questions answered or make these adjustments, then yes, it’s something that we could take a look at down the road.
Do you help them with identifying those things like in the initial conversation, too, like, “Here’s what I see that you need to work on and what we can reconvene in six months or something?”
First and foremost, anybody that approaches us, we obviously want to take a look at what their business plan is. They have a deck repaired grade. If they don’t have those things, then right off the bat I’ll tell them, “Put some thought into it. You have to put a business plan together.” That’s the only way we can work through something and have a firm understanding in terms of what they’re planning, goals, and objectives are. Whatever product or service they have.
I appreciate your approach to that, too. That’s similar to me in my industry. Mine’s a roll-up play. When I look at a potential acquisition, because there’s a lot that comes across and this one might not be right or the EBITDA might be too low for this one. I’ve even compared from the stage in one of my talks an acquisition because I’m targeting between $500,000 to $5 million in top-line revenue for what I’m doing as an acquisition target, like the very first qualifier to make sense for me.
There was one doing $500,000. There was another one that was doing $2 million and their SDE, Seller Discretionary Earnings, was identical, $100,000 a year and they were in the same industry too. You saw whatever the multiples were, but essentially, one business that was doing $500,000 that was more of like a startup compared to one that was doing $2 million was worth the same exact thing. Their valuation was identical. I saw it. It’s like, “I’m going to inherit another $1.5 million of crap if I go for that one.”
Comparing and contrasting those two, I went for that one thing and they were on my desk at the same time. I went for the $500,000 because of the potential and it was a little bit cleaner versus trying to undo a lot of other things. Both of them were in the same boat. They were both looking for investment and money to be acquired. The one that was also smaller had its finances in order versus the other one, we had to dig around for some things. Do you have some things that you can tell people that like, “Bring this with you to our first meeting, please, before we even talk?” Do you have things that you tell them? “I need to see these right out of the gate?”
Your projections are important. Five-year projections are necessary. You have to know your numbers, so if somebody is asking you specific numbers in terms of how much capital has been invested, what’s your burn rate? These are basic things that you’re sitting there and you have no idea. For any potential investor, that’s a huge red flag. I’m sure if you’re looking to invest into a company and you ask somebody, “What’s your burn rate? How much are you burning to run on a monthly basis?” They’re like, “I have no idea.” You’re not going to be comfortable writing them a check for $1 million or $5 million or whatever the case may be. You’re going to be like, “You don’t know how much you’re spending now. I feel uncomfortable giving you my money because tomorrow I won’t know how my money is being spent.”
Six weeks is going to be gone. Potential is there.
Knowing their numbers inside out is important. That’s a huge red flag. If you present anything to an investor, you should know where you’re coming from because they’re going to want to know how you got to a certain number. If you come up with some pie in the sky, number of, “In three years, we’re going to be doing $1 billion,” you better have a very strong plan to back up how you’re going to get to $1 billion in revenues now or whatever the case may be. Those are things that we take a lot of time and try to understand. It can be one of those generic, “We’re going to capture 20% market share.” That takes a lot of capital to acquire a 20% market share of any industry that you’re in. Where are these marketing dollars going to be spent? What separates you from potential competitors out there? All of those things are important.
What is it about what you do that excites you? You’re very intelligible obviously with this, but what do you see that’s like, “I’m glad I got up today?”
I’ll be completely candid with you. It’s seeing the growth that some of our clients have. When we have that first conversation and six months a year into, seeing how they handle potential investor management calls, being on calls, and seeing the growth within them, there’s an aspect of that where it’s pretty cool. There’s no other way to describe it. You get involved pretty early on. Any potential client that comes to you, they’re bringing their baby and when you see their baby grow, it’s a cool feeling. That excitement makes it all worthwhile. It’s pretty cool to get involved with a lot of companies that early on in the process.
Their success becomes your success too. It’s awesome because, yes, you’re making money, but for starters, you’re not going to invest in something that has a high potential of failure. There’s obviously a risk that’s inherent in any investment, for sure. The people are the exciting part when you see them start to skyrocket and see their lives fulfilled and at the same time, I’m like, “I’m making money, but this is awesome to be a part of this journey too.”
You developed throughout the process. You’re spending a lot of time with a lot of these clients. You developed relationships. I’ve had clients that we became great friends with after working with them on multiple deals.
Coming out of the pandemic here and I don’t used to say that, but then you see these waves that come and go. The market has been so volatile. In the phase we’re at now and probably for the next year or so, what advice do you have to startups that are raising capital in this business to multifarious of a marketplace we’re in now?
I try to tell every client is, know what you’re getting into. We are in an extremely competitive landscape. There are deals getting done now. With 2020, things came to a standstill in the M&A world, aside from the deals that were already in the works, new deals that developed during that time, not funded or far on view. You had a flow over deals from 2020 and obviously, you have deals that are coming out now.
It’s a competitive landscape but that’s where it’s that much more important that you should have everything buttoned up on your end, so when you do have that opportunity to get in front of an investor, it’s that much more important for you to be on you’re A-game. Not sit back and don’t know where you’re going and not understanding or not explaining your business or your plan the right way to potential investors.
It’s going to be interesting to see what happens over the course of 2022. I remember seeing that. Even with my public offering, we didn’t make much movement on it in 2020 because things were so crazy with stuff but now, coming out of it, at least in my industry in cybersecurity and IT services, it seems like a buyer’s market. It’s like everything’s on sale.
Things have picked up, but obviously, going through something like this, something that nobody’s ever experienced, these are the times where you got to look at things and put things in perspective. Even certain holes within your business. Let’s say you were generating revenues and you came to a standstill. How are you going to handle this? Let’s say hypothetically, something happens down the line and hopefully, God forbid it doesn’t happen but if it does, how are you going to handle that if there’s a lockdown or whatever the case may be?
What’s next for you over? You got any things that you’re excited about?
Now we’re working with a number of promising clients. We’re always looking for new client’s interest, interesting things. Continually, we’re trying to get our brand out there, get the message out there and what we’re trying to accomplish. You don’t just build up that word of mouth following any other businesses are trying to do now.
Are there any segments or industries that are more attractive to you than others?
With early-stage growth stage companies, we’re industry agnostic, so we’ll take a look at everything now. There’s not a focus or a niche. Keep in mind that a lot of the investors that we work with, when you’re investing in startups or early-stage companies, your investment criteria are forever changing. Every few months, they’re looking at different types of industries. Now when you get a little bit more upstream and yes, you’re going to obviously get more industry-specific investors but those aren’t the investors that we’re approaching that are not going to go up and get in front of some of this larger private equity or VC groups majority of the top.
You’ve been amazing. Thank you. Where can everyone find you?
We’re SACapitalPartnersLLC.com. There’s obviously a client inquiry tab. Fill up your information, reach out to the team. They’ll reach out too quickly. Start gathering some information to make sense. They’ll schedule an initial consultation.
Thanks for providing some amazing info to people that need it because there are a lot of individuals coming out of 2020. I’ve been calling them like COVID-preneurs. Laid off, don’t have a job, whatever it is but that’s some of that. Now, they’ve got time to try to figure out where they want to go in life, and it’s like a kick in the pants to make a good shift.
The amount of various different masks that I’ve seen in terms of different startups where they came up with different creative ideas, there’s been a lot out there, let’s say that.
You’re amazing. Thank you so much for bringing the energy. That’s a great time to say we’re done. Thanks.
Take care. Thank you again for having me on the show.