Finding the right investor/business partner is hard. I’ve had good partners and tougher ones. And twice I chose to buy my company back from partners who threatened to stifle its success. The experience taught me several key lessons that any company searching for a business partner can learn from.
Make sure the financials match your goals
Our company’s first partner company invested roughly $330,000 back in 2000, and we grew tremendously. But there was a problem. As is the case with many startup entrepreneurs, my cofounders and I had a grand vision for our company. We weren’t looking to be an SME, we were looking to build the largest and most innovative quality assurance (QA) and testing company in the world.
To reach goals — and not just survive — takes money. At the time, our partner company was in a difficult financial situation. We were growing, but it didn’t have the capital resources to take us to the next level. We took our chances and bought QualiTest back for approximately $3.6 million and continued our quest for investment. If you’re in the process of taking on a partner organization, make sure it has the financial ability that matches the steps you’re looking to achieve on the way to your long-term goals.
Have the same vision
Our next partner was one of the largest companies in Israel — a domestic powerhouse with the cash we needed to expand and take our business to the next level. It looked like the sky was the limit.
Back in 2001 we were still an exclusively Israeli company with almost no business outside the country. With Israel’s population of only 8 million people, we knew that the future was overseas. After its investment, our partner revealed that they saw our expansion plans for the U.S. as too risky (we had a minor acquisition that didn’t go well), and they were dead set against it. They wanted to invest solely in operations in Israel.
We were growing under their ownership, but we knew that to secure a long-term future as a market leader, we needed to part ways and expand. Today, the U.S. market accounts for 60 percent of our profits, with the global market bringing that percentage to 70 percent. The main takeaway is that if you don’t have the same vision, don’t partner — and if you already have, don’t be afraid to part ways.
Beware of conflicts of interest
We also ran into a conflict of interest with that same partner. Whenever you’re an IT company looking to merge, conflicts of interest are often dangerous and potentially deal-breaking.
Our partner company offered its own QA solutions alongside ours – putting the two companies directly in competition. The solutions the other company was offering were not of the same caliber, which had the potential to do real damage to our brand.
If you’re in IT, a conflict of interest with a huge parent company is very difficult to avoid, and realistically, you may not be able to sidestep it completely. But don’t take the potential consequences lightly, and make sure you’re as certain as you can be that it won’t do lasting damage to your brand.
Find a partner that respects your space
Parent companies often have a parental complex and think they can do it better. We experienced this with our second partner company, which despite having limited background in the QA industry and no direct market experience, often tried to dictate our decisions. I learned quickly as the CEO of a company operating in a specialized, highly technical field, that following top down decisions can hurt your position in the industry.
Despite the risks I knew I faced, after seven years I decided to buy my company back for a second time. Our partner sold its stake in the company for $14.5 million (from an original investment of $3 million). We’d grown together and profited, but we had bad chemistry – a conflicting vision, a conflict of interest, and managerial difficulties. Despite the short-term success, buying the company back ensured our long-term vision.
There is a right partner for everyone
This past year, we took on a new partner. An investment firm acquired a majority stake in our company for $83 million. It wasn’t the best offer we received, but the firm agreed with our vision, valued our industry expertise, and presented no conflicts of interest.
After two buybacks, I’ve learned the common values of respect, trust, communication, and a shared vision for the future are all important — something every company looking to scale up should consider.
Ayal Zylberman is founder and CEO of QualiTest.