I sat down with Søren Jonas Bruun at the 1st Corporate Technologies offices in downtown Copenhagen.   Søren is straightforward and uses creative analogies to get his point across.  A candid interview.  (September 2008)

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Management buy-ins from New York; the elevator pitch; earning medals and scars

Alex Farcet (Q):  What’s your personal story?

Søren Jonas Bruun (A):  More than 20 years of helping companies grow internationally. 

I started off in classic industry. Prior to that, I was employed at Nordea, Denmark’s oldest bank, in New York.  I was expatriated there for a six month mission and ended up being there for two years. I worked with entrepreneurs who were building up companies in the States and helping them get financing through the bank I worked for. 

But I realized that the bank system was too tight for me.  So a friend and I started working on an escape plan.  We spent a year putting together a board, we got financing, and we contacted over five thousand lawyers and auditors in Denmark with a simple message: ‘If you see companies that need fresh blood, we’re a team ready to step in and take over’.   This was long before the recent trend in ‘generationskifte’ [generation change - many Danish company owners are or will be retiring soon, which has created an active company market] or management buy-outs; this was actually about management buy-ins because we came from the outside and bought our way in and installed ourselves as the new management team.    We finally found one and had the board approve the acquisition (which in itself was unusual because we had the board before we had the company!).  We borrowed 3 million USD, signed in blood since we had no rich aunts, and that was the start of my entrepreneurial career.  I suddenly found myself the CEO of a plastic injection moulding factory at the age of 25.

We grew from 60 employees to 170 in two years, made two big acquisitions, became the biggest in Denmark.

(Q):  Was there an exit?

(A):  Yes, we sold to a Norwegian company, Dyno.  I didn’t make any money, in fact I ended up owing money because we sold at the wrong time, but we had turned the company around and it was a fantastic ride.

I then went to work for large industrial companies and was sent on missions around the world helping industry groups make acquisitions, restructure, buy out, sell off and so on.

It was at that time I started my Executive MBA course at SIMI, which was a complete eye-opener for me. I had a mentor at the MBA program, Erik Kjær (who built one of Denmark’s leading consultancies in the area of corporate psychology, and is currently one of the top directors at Saxo Bank).  He put me in touch with Michael Mathiesen who was a big star in Denmark in the areas of IT and venture capital. 

So I’ve worked in international finance, industrial business development, and IT business development, internationally.  The common dominator has been international business development.

I now live in London with my family and come to Denmark once or twice a month and try to build this company of ours.

(Q):  Can you give me the elevator pitch for 1CT?

(A):  “We are a special partner to companies that need to grow internationally in 2-3 years to sell”.

If you want to grow intensively in 2-3 years to sell, you can work backwards from that and see what you need to do to make that happen – that’s a story which is longer than an elevator pitch.

To make that happen we approach the whole thing much differently than many of our colleagues in this industry.  I like the analogy of horse racing.  You need a horse, a jockey and you need to choose the right track – and be good at riding on that track.  If you can do that, you can win horse races.

We don’t see ourselves as venture capitalists, but rather private equity for small companies.  Private equity is about having a plan, executing to it and selling in 2-3 years.  That’s what the guys who own TDC are doing, even though they’re dealing with an old apple tree that needs to be cut back in order to find the life of the tree next spring. They’re restructuring in order to sell.  We work with young apple trees that don’t need to be cut back because they’re growing.  It’s similar to a nursery, where you need to grow a tree in a pot before it’s planted.

So there are two analogies.  The horse race  and the apple tree.  The planning part, knowing what you want to do from day one is different from VC’s because they like to get into something sexy which they think can become big in x years.  They have a more patient approach and they expect management to execute what needs to be done.  It’s a fair approach and it’s favored by some companies.  It’s a longer approach, it’s less exit-oriented up front and it’s less of an involved approach.  I’m not saying they don’t add value or that we’re smarter and our approach is better, it’s just a different business model.  So VC’s will do long runs where all three aspects of the horse story are in place: right horse, jockey and track.  Which put into management lingo means the right product with patents, the right management team and the right strategy.  If you can present these three elements to a VC and dazzle him, then he will invest, simple as that.  And I’ve been in that industry so I know how it works.

We’re saying we don’t need all of those three to be completely lined up.  We just want the horse to be the right one.  We’ll fix the strategy with you and we’ll even find the people to put around you to go do it.  In fact, most companies, if they look hard at themselves in the mirror, will realize that the strategy may not be exactly as it should be, or perhaps the strategy they had until yesterday was right until then but they’re entering a new phase and it needs to be adjusted.

So if you are a company with a great promise that needs an evolution of strategy, or potentially need to strengthen your management team, or you’re entering a new market (for example, you want to conquer the States and need access to the right people in your industry), then you come to us.  That’s the difference.

(Q):  Can you describe your partnership with MLC LLP?

(A):  Well, part of the story of preparing the apple tree to move to its more permanent home is that you need the right people scouting the terrain for hungry gorillas.  MLC know the key people in the right companies (such as Cisco, VM Ware, Microsoft) and they have greatly expanded our reach into the large American companies, into which the best of our clients need to be fed. 

This is one example of how we are able to deliver when it comes to knowing the right people.  And even conduct the transaction with the right buyer.

(Q):  Are they a bank?

(A):  Let me explain what they did for us and you’ll understand.  In January, we closed a transaction with them for a company based in California.  This was a company – Thinstall – with a great product but no management team (just the founder and a few technicians), no commercial management, no distribution, no sales.  They had the most fantastic product but no strategy, a classic entrepreneurial approach.  So we brought in a CEO, someone who had relevant experience.  He set up the distribution system and took the company to a point where it was not only visible in the market but recognized as a leader in this emerging technology space (virtualization, allowing you to run everything from a USB memory stick).  Consequently, the company was built from a couple million dollars in initial valuation to a point where VMware was showing serious interest.  The trick at this point is to say no and to stay in the game – otherwise all the hungry guys go buy something else.  We then went to MLC and gave them the mandate to find other strategic buyers.  The first bid was 15 million USD. Four months later we sold the company at three times as high a valuation.  From 2 to 45 million USD in 18 months.

(Q):  You weren’t in on the 2 million but you were paid in ’sweat equity’ which turned into cash at the exit?

(A):  We’ve been in international business development, especially in this IT space which is a game of its own, for a long time.  Everybody here including Jonas (Pilgaard, the 1CT Partner running the Copenhagen office of 1CT), have been out there earning their medals – and their scars.  And it’s the same thing for MLC, they’re entrepreneurs as well.  They decided to create an investment bank and corporate finance advice boutique which is basically serving these hungry gorillas in the States who wake up every morning wanting to eat something.  We know what’s going on over there and eventually we’ll turn the current around and start delivering to the gorillas what they’ll eat in 6 months.  We have on-going discussions with Google, VMware, Corel and a few others so we know what we’re looking for.

Startups are too early.  You’re going to miss the party if you start something based on what your potential buyer says he wants to eat tomorrow.  Because you can’t get there soon enough.  You need to go out and find stuff that is more or less there and twist and turn it in terms of strategy and corporate focus into what these guys want.

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The secret sauce; from dating to getting married; building a track record

(Q):  Another analogy, this one you use on your website: dating, engagement, marriage.  How does it work and how to you get paid?

(A):  There’s a number of components to the secret sauce here.  We’ve talked about one which is that we’re all entrepreneurs.  The other is that we’re exit focused from day one.  We know who wants to buy, or which one out of three is likely to buy.  That may sound simple but it’s not.  Component number three is that there’s no substitute for hard work when it comes to planning and getting it right from day one.  If you just get married like you can in Las Vegas without necessarily knowing each other beyond initial the love affair . then unhappy divorce is the most likely result.  Our first step is to work with the entrepreneurs.  Like you and I did with our wives.  Dating, figuring out what kind of person she is, where are we going to go if we share life together.  Managing expectations: are we going to have kids? are we going to live in the country side? Dating may not be as structured but  you do get a feel for these things.  We do things in a very structured way to match expectations. We have a couple of very powerful tools. We have workshops and a 30-step process where we go through expectation management and what we think are the traps and triggers, defining the go-to-market strategy based on valuable market intelligence that they don’t have at the start.

Dating is about managing expectations.  For example, what’s the value we expect to get out of this, and by when?  Because if I expect to get 30 million USD in 3 years and the entrepreneur wants to go 5 years and only sell at 100 million USD, we have problem.  There needs to be a balancing of positions.  The end position may be different than what we both thought at the beginning, but we have a shared idea.  So the landing zone is always clear – where to go, how far, for how much.  Then we do the planning part, which is all the boring stuff about go-to-market strategy, the product roadmap, IP-strategy.  Some of the companies have this, most of them don’t, even though they claim to.  We think it’s completely natural not to have it, because if you’re busy running your business and you’re successful you don’t get around to these things.  In fact we are skeptical if the presentation is too sleek because most likely management is spending more time talking to investors than they are building the business. The result being that the business is moving at a seriously reduced speed,  if at all. We basically force each other into a process that takes 2-3 months of getting all this lined up.  This is the engagement phase, after we’ve exchanged rings.  We can still both walk away, and there’s a mechanism to do that which will cost them a bit of money, we will have wasted some time, but they’ll have had their strategy laid out.

The fourth secret sauce component is we bring in the experts.  In football there are 2-3 substitutes allowed for 11 players on the field.  We have one hundred experts lined up, whom we know – they’re signed up, they’re project partners and wearing the 1CT badge.  And they’re hungry for businesses where the match is right.

(Q):  How are they compensated?

(A):  They do this because this is brilliant process for them to figure out if they want to engage in the business.

We’re getting to the fifth and final component of the secret sauce.  Once we’ve gone through all this, we’ve hopefully gotten way beyond the point of proving we deliver something other else than money – by helping them on this end-to-end journey.

We then have an option to exercise and buy more shares at the same price at which we invest, in compensation for the services that we come up with.  And basically, we can share those options with those experts, or our investors.

(Q):  On top of that, you now have an investment fund, which gives you the possibility of injecting cash. That’s new?

(A):  That is new, we raised the money before summer.  Before that we’ve done 13 exits as consultants which is difficult because you really have to be serious about your delivery of value to clients  – otherwise you can’t live as a consultant.  We did that over the course of 3 ½ years with one purpose: to raise that fund and getting into the leverage game of owning companies.

(Q):  You’ve been building a track record?

(A):  Exactly.  After 3 ½ years, we decided the time was right, and we said we want people on board who’ve made money doing the things that our customers do.  We want role models, high caliber investors.  These are people who are in the dream situation for the entrepreneurs we work with in that they can decide to carve a bit of their free cash into our investment vehicle – which is based in Luxembourg.  We’ve called the first 30 million kroner.  We’re making investments where the number of kroner is not the key point, we just need enough to take the company the 2-3 years down the line.  We don’t like the idea of permanent under water swimming, we like real businesses with customers and revenue, which generates multiples.  We don’t mind if companies lose money in the first year, but we expect them to break even in the second or third year.  And then we might decide further accelerate growth which requires more money, but there needs to be a plan of how to get there.  It means that the money that is needed to support the 2-3 year journey isn’t that dramatic.  So we can get quite far for this money and we’ll make the first 4-5 investments in this next half-year.

(Q):  Is the fund running on the typical 2+20 set up? [venture funds typically require investors to pay 2% of the fund's value for running costs, and take 20% of carried interest, once an exit takes place]

(A):  No, no, no.  I don’t believe in the 2% structure.  The point is I will take your money when I deliver something to you.  For every company that we invest in, we charge a monthly fee to investors.  So the services we render to entrepreneurs are partially funded by our investors.  But investors are compensated through the warrant [essentially, a piece of paper enabling someone to buy stock in a company at a specific price] the entrepreneurs gave to 1CT, so there’s an ecosystem.

(Q):  Your investors only pay you when you’re successful at recruiting companies to invest in?

(A):  Yes; I deliver value, you pay me.  Our approach is transparent, project by project.  At the end we get the carried interest.  We invest a bit in the fund as well, so we behave as if it was our own money, even though it’s not.

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First impressions; the deal flow in Denmark; the vision

(Q):  During the 3 year track-building period, you only made money when there was a successful exit, so how did you live?  How did you support the structure?

(A):  You have to pay the bills, like students who work the night-shift. We did some consultancy work on a couple of M&A transactions.  We’ve also built a strategic relationship with Symbion, with whom we won the tender for the Gazelle growth program – which is also a secret sauce component as well now because it really is a platform beyond belief.  I think it’s becoming a state of the art program for growth companies.  That has really been a game changer for us.

(Q):  In terms of recruiting companies?

(A):  In the structured understanding of what are the steps in becoming a successful growth company.  It’s an extremely valuable tool box.  The deal flow is extremely valuable as well because all of a sudden you find yourself in a different league.  We’re no longer running around at the bottom of the barrel trying to catch what’s down there.  It’s a complete revamp in terms of the size of companies we serve and in terms of how we serve them with those valuable insights.  We earned our rights to play, and we’re now associated with significant partners such as Vækstfonden and Symbion.

That’s not to say we won’t talk to companies that are earlier in the lifecycle, but we are interested in dealing with companies where the horse is proven but there’s a still a need to improve the strategy and complete the team.

(Q):  Are you only focused on technology, on specific industries?

(A):  We are old enterprise software people.  ‘Old’ because it was the big thing in the 90’s, but enterprises still need technology and software.  What we’re increasingly seeing as the source of value is software-as-a-service business models, which is therefore a source of exit attraction.  Doesn’t mean we won’t look at other things, but the boundary is we won’t go anywhere we don’t have real expertise to pull in.  So for example, biotech and hardcore nanotech are not for us.  Neither is pure service.

(Q):  What do you look for in the first meeting? How do you get a first impression?

(A):  First of all we have a web-based meeting.  We use collaboration tools a lot.  If that goes well, there’s a face to face meeting.  And if that goes well, we go through the process I described.  We use a dating-rating structure, where we score things over 20 different criteria.  From boilerplate items like product potential to whether they understand that they need our help, or are they mentally elsewhere – because that happens all the time, which is OK, we just need to understand because we don’t want to waste time dancing with the wrong girls.  Is the potential right in terms of the horse, is the mind-set right in terms of the jockey, and is the strategy they have – or the strategy we think they can pursue – right to enable an exit in 2-3 years.  Those are the fundamentals that we quickly need to understand.  Of course the bottom line is do we think we can make 3 – 5 X value creation.  The product might be right, the team with the right attitude, but it might be too early, or there might not be enough IP protection or there might be too many competitors or we may not have the expertise required.  We consider everything and weigh it into a general score.

(Q):  You’re based in the UK, there are also 1CT people in the US, so where is the deal flow coming from?

(A):  I can tell you that out of the first 5 investments, 2 will most likely come from the UK.

(Q):  What are the differences?  Is it the same here?

(A):  We are actively seeking deal flow here in Denmark because we have a strong network.  We’re not seeking profile or deal flow elsewhere but can’t help looking at what’s brought to us.

(Q):  Why aren’t you seeking deal flow elsewhere?

(A):  Because we have bandwidth issues as well.  We have to limit what we look at if we want to do it well.

(Q):  Has the deal flow slowed down here in Denmark?

(A):  Not at all, it’s better.  I thought you were going to ask me ‘why haven’t you made any investments yet?’ – some people have asked us that.  If I compare Q1 to Q3 this year, the sentiment in the market has changed so fundamentally.  The perception that you can get money from a business angel who’s done well in the real estate market or from institutional investors has now become: ‘this is difficult!’.  Which means that being a new player is a fantastic opportunity.  We’ve seen prices come down, the level of reality has improved, you don’t have to pull down people from the sky.  We brought bad news to some people, in some cases saying ‘this is worth a third of what you’re asking’.  We decided to, “hurry up slowly” and do the right thing.  We’re seeing tremendous deal flow now and we’re very close to the first investments.  It’s been an interesting time to restrain ourselves, we’ve had the money since April and we’ve been like the kid in the candy store with a fiver in the pocket.  Especially since our cash flow will come from our investments but we’ve held back which has been a good strategy.

(Q):  What’s the vision?

(A):  The vision is by 2010 to be completely aligned behind the idea of serving the gorillas.  But it’s a journey, we started as an early stage consultancy in 2004, to the M&A work to make money, to forming an investment company which is now. 

So people ask us, who the hell are you?  Aren’t you venture capitalists with a different spin?  Yes, we’re venture capitalist because we run a risk investing money in companies so we can’t escape that label.  But we do it with a exit plan from day one, which is much more intensive and based on a plan we want to pull through.  The next question is if you’re so exit oriented aren’t you just corporate finance guys with a twist?  Well, you can say that, but we actually work for 2-3 years, getting it right, being hard at work.  Well, aren’t you management consultants?  Yes, we do come in and make a difference as someone coming in with a consulting framework but we’re part of the team, we’re entrepreneurs, we don’t steal your watch to tell you the time.
 We can actually do things that the entrepreneurs couldn’t do on their own.  And the final thing here is matchmakers, because we are that too, finding the best possible experts.

Private equity for growth companies, that’s what this is.  We call it growthequity(TM).