Achieving the Exit with Steve Papa & Endeca

Shareholder Representative Services’ latest Q&A features Steve Papa.  Papa led Endeca, the Cambridge, Mass.-based provider of unstructured data management, web commerce and business intelligence software, to an acquisition by Oracle in December 2011. He emphasizes the “relentless pursuit of credibility” to best position a startup for hiring, customer acquisition, and ultimately, achieving the exit.

Q: What did you see as the market opportunity that led to Endeca’s founding in the late 1990s?

In ’99 we saw the emergence of many e-commerce services, and we observed that the way access to information was provided to people was inherently flawed. It was difficult for everyday people to understand the complex information being presented by Amazon, eBay and leading media sites. For the promises of e-commerce and the Internet to be fulfilled, access to information needed to be much easier. We saw an opportunity to help build infrastructures to enable pioneers to use guided navigation, where someone can interact with complex information with technology as the guide, instead of putting the burden on the user. That’s what we saw, and that’s what we built.

Q: How much did your prior experience working for Venrock shape your views on raising private capital?

Even before working for Venrock, I was predisposed to think positively about raising private capital. Venrock gave me exposure in how to think about the process of raising private capital. As a result, our initial money from Venrock was used to fund basic research, which is highly unusual. But it was 2000–anything went before everything collapsed.

We closed our second round with Ampersand Ventures the first week after 9/11. Ampersand, to their credit, stuck to their word and closed the deal. One partner, who was leading the transaction, drove from Minneapolis to Boston because the planes weren’t flying. He rented a car and drove across the country just to get the deal done. When other firms were walking away from deals, Ampersand lived up to their commitment.

Q: What impact did the dot-com collapse have on your business?

No one bought any software for quite some time, so there weren’t new projects to pursue. We had to find the few companies that had really high pain points that weren’t being addressed by the myriad software solutions that they had bought over the past few years. In 2001, it was the first time there was a year-over-year decline in IT spending in the history of IT. That meant all the new stuff got cut out. That’s what we were dealing with in trying to get customer number two.

Q: What did you do from a sales standpoint to acquire customer number two?

We put up a free web site. In order to attract Tower Records, we built a better version of Tower Records Online, and they eventually became interested in buying our software. People weren’t going to take a risk on the belief that our software was going to improve their site. We literally had to build the better web site, run it, and have customers comment on how it was better. That step was critical. We showed that we could increase online revenue on the order of 30% by deploying our software, and part of the customer relationship we had developed was the sharing of metrics. Once we had those metrics and were credible, even if someone didn’t have the budget for a new project, it was hard for them to turn down an opportunity to grow their revenue by 30%.

Q: There are different schools of thought on how quickly software should be brought to market. How many bugs should be worked out ahead of time versus getting it in front of customers and innovating with those customers?

I think it’s about being smart about choosing the right first customers. Our first customer only needed certain functionality. That was a huge simplifier. Also, we were able to operate the software for our first customer. Cloud computing is great for that. If you have your experts running it who can change the source code, that’s very different from handing someone a product that they have to maintain on their own. If you choose your customers well and go to market properly, that’s how you’re going to get your fastest time-to-market.

Q: What was your strategy for recruiting a strong management team and sales force?

My framework for building the company was the relentless pursuit of credibility. It’s managing that credibility that makes it easier to bring the next set of individuals into the organization. We worked with our investors and members of our board to help us recruit excellent individuals to join our executive team. Early on, the key was getting the right people and marketing the company using that credibility. Eventually, it’s the customers who are the ultimate source of credibility. Getting Wal-Mart as an early customer was critical. When we could show that we could power Wal-Mart, it was clear to everyone else that we could handle their scale and challenges.

Q: How did you decide on the best exit opportunity?

It was really simple because of the volatility in the macro economy. We had a buyer who saw the strategic value of Endeca, appreciated the cumulative investment in our intellectual property, and understood how they could create additional value for our customers. The alternative was going public, and it was indeterminate when we could do that given the dislocation in the capital markets. With the volatility in the market, there was no point in selecting a banker. When we saw what was happening in the IPO market in August, it did not seem prudent to take that risk.

Q: How did you manage the M&A process?

We had an excellent in-house team, and Mark Bettencourt from Goodwin Procter led our outside counsel team. I led the negotiation on deal terms and our corporate counsel, John Kelleher, worked with our outside counsel to negotiate the terms of the merger agreement. Dan Demmer, our President and CFO, had ownership of the diligence process. So, we each played a different role.

I would say that I was very fortunate that during the heat of negotiations, we were very compatible in working together. One of the lessons I learned from this process was that I should have been more involved in selecting the lead external counsel. I got lucky because our counsel was a perfect fit, but I would recommend to any CEO to participate in that process. When the time comes to have that type of partnership, you need it to be a strong one.

Q: Can you share any big-picture lessons with other management teams in similar businesses?

Be really thoughtful about how you assemble your board and the different roles they play. Build a team that is committed for the long term. It’s impossible to know what lies ahead. With disruptions to the economy, it takes several years to accomplish the goals that you originally set out to accomplish. Make sure that there is a deep and broad enough core team to shoulder the load during tough times, because there will be tough times.

Have a good understanding of the exit process. Essentially, conduct an annual fire drill. If you got the M&A call, would you know what to do, do you have all the business processes and all the people in place to pull off a successful transaction? It’s a very worthwhile exercise. Consider whether your development processes are at the point where you can do source code scanning at a sufficient level of granularity to support the requirements of an acquirer.


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