What’s the point of having wisdom if you don’t share it?

Tech entrepreneur and Flying Kiwi Selwyn Pellett has exited five businesses – the most recent and largest was the merger of telematics companies Coretex and Eroad in 2021. 

The deal, which required both Commerce Commission and Overseas Investment Office approval, saw Eroad announce it was acquiring 100 percent of its competitor for $157.7 million upfront in cash and shares, with a further $30.6 million in cash and shares payable later subject to Coretex achieving certain performance milestones. The Eroad 2023 annual report shows that contingent payment was finally agreed in late 2022 at a reduced $14.5 million in cash and 1.833 million shares.

Pellett remains on Eroad’s board (though stood down as an executive director) and is a shareholder, participating in a $50 million discounted capital raise last year for the company, which followed a rejected takeover offer from overseas bidder Volaris.

For the first time in years Pellett is not a CEO, but doesn’t want that “scar tissue”, as he calls it, to go to waste. He’s always been passionate about building a high-wage, high-growth economy in New Zealand and has long advocated for a strong local tech sector.

“If I had a member of my family who wanted to take over a business or something I would have handed it on to them, but having acquired this knowledge – and it is hard earned with lots of sleepless nights and plane trips and mortgaging the house and all of those things – having learnt that, it feels an absolute waste to not pass it on,” says Pellett.

He and Bob Pinchin, his business partner in marketing and communications company Swaytech, have set up Bailey Ventures with three distinct services: resolve, raise and release. 

The first involves helping founders identify and resolve internal issues, such as shareholder misalignment, while it will also help founders through all stages of a capital round to attract the right investors and minimise the time management spend on it. 

The third involves helping founder shareholders release both their human and financial capital for new ventures or investments. 

Bailey Ventures will also act as a search fund (a new concept in New Zealand but common overseas) where it and other high-net-worth investors back an experienced CEO to take over an established business. The CEO eventually earns their way to an ownership stake in the business. 

As NBR reported last October, Luke Taylor launched the country’s first search fund, Acheron Capital, in 2021 and it has now bought Wellington cybersecurity business Scientific Software & Systems from its founder Bill Tonkin. Taylor is running the company. 

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Time is up

Pellett’s career includes running major technology companies in New Zealand, Australia and Singapore of various sizes and he returned home in 2001 to become a tech entrepreneur.

His first exit was for a company, Spectral Technologies, to Gallagher Group while it was still very early stage. “We probably only recovered cents in the dollar on our time,” he says.

His next exit was of network security solutions provider Endace, which he co-founded and then listed on the AIM market in the UK – a first for a Kiwi company. 

Pellett says Endace was a staged exit. He listed it and got some money out, sold some more shares and got money out, and then eventually sold the company in 2013 for $156 million to Nasdaq-listed Emulex (three years later it underwent a management buyout back into Kiwi ownership).

You know as a founder or CEO when your time is up, he says.

“Even in the middle of that [with Endace] I said ‘I’m the wrong guy to run this company’. I started employing people that I thought could do a better job than me and knew more people in the industry and were prepared to travel even more than me.”

Pellett warns it can take years to get out, so founders need to start planning early.

“By the time you want to do this it is probably already on the late side. You realise you’re running out of age, or enthusiasm or marriage – you’re going to run out of something on that journey – and it is at least one or two years to get out and that’s on a good day.”

An example was his fleet management technology company Imarda, which he founded and in which he had the largest shareholding. He had also founded another company, Prolificx which had been sold to Imarda.

He decided he wanted to get out and in 2015 merged Imarda with International Telematics Holdings. The merged entity became Coretex.

“That was my first attempt to get out and hand over to the CEO of International Telematics. Well, that didn’t work out. Then after running Coretex we hired a new CEO and went through a one-year process with them and that didn’t work out. Eventually selling to Eroad was my exit from being a CEO.”

When a founder wants to sell they have to persuade the board and other shareholders to go with them, he says.

“It can be quite a selfish act for a shareholding CEO to say they want out and that is not fair if they just want to get out, as they can and should change the CEO. But if the rest of the company feels it is time to cash up and supports that, then it is a sell situation.”

To get the best offer, founders need to create competitive tension, says Pellett. The company also needs profile and to have “cleaned up its act”. 

“You’re going to be probed, prodded and poked all over the company so all of your legals, all of your contracts, all of your finances, everything has to be up to scratch and easily accessible, ideally in a dataroom so people can just start doing their DD [due diligence].”

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The Eroad approach

Pellett originally approached then-Eroad CEO Steve Newman, and nothing eventuated until the listed company later came back seeking a deal.

Coretex had previously had another bid on the table, which fell over due to Covid, where the board and senior shareholders had established what they thought was the company’s value.

“We went into the conversation with Eroad saying this was the value or it wasn’t going to happen so let’s not waste each other’s time. We didn’t get that value, but it wasn’t too far from it.”

Before haggling on price, both executive teams established the synergies and what they were worth. 

Pellett says there were many synergies but any deal still needs a champion on both sides to get it over the line – in this case it was Newman and himself.

“People will go through the motions, they’ll do the DD, they’ll go da, de, da, but if there is no champion, if there is nobody who sees the vision of what these two companies would look like together, you’re probably wasting your time.”

Because both companies provided vehicle telematic solutions to customers in New Zealand, Australia and the US, the merger required Commerce Commission clearance.

It took from August until December to get approval and Pellett recalls the wait as the worst of times because both parties couldn’t discuss anything.

“We had the finance, we had the approval of the board, we had approval from shareholders but we didn’t have approval from the Commerce Commission so we were just sitting there in limbo unable to talk to each other, unable to make investment decisions.”

“The Commerce Commission needs to take a hard look at the conflict between potentially destroying value in companies and the consequence to the public of inadvertently creating monopolies or duopolies.”

Pellett says founders need to realise they’re unlikely to be able to just walk away after a sale as their institutional knowledge will be needed to help transition new owners. Given most deals also involve cash and shares, it makes sense to stick around at board level or as a consultant. 

The Bailey impetus

After the Eroad merger and Newman’s subsequent sudden resignation for personal reasons, Pellett says he realised how many founders and CEOs end up running companies from which they should have exited.

That led him to think releasing human capital from businesses was as important as releasing financial capital, and that a CEO may be a misfit in one company while perfect in another.

One of the primary motivations for setting up Bailey Ventures was to “provide an emergency number for a CEO”.

While there is a lot of advice out there for company founders, not all of it is good, he says.

“It doesn’t always come with scar tissue. There are a lot of professional advisors out there but how many of them have woken up in the middle of the night worried about how they are going to meet payroll tomorrow? There is real, practical advice you can give that if you haven’t done it, you wouldn’t know.”

He’s most enthusiastic about helping resolve company issues – the more complex the better – although he says many CEOs don’t have the necessary “teachable spirit”.

Success is a lousy teacher, with many founders who raised money in boom times at high valuations inexperienced at coping in a more constrained environment, he says.

He compares it to the property market where house buyers never thought prices could drop.

“That is true of the startup community now; they believe valuations can only go one way,” he says. “You have to survive to thrive and too many people take the survive bit out and just try to get more funding.”

Pinchin will focus on helping raise capital. During his time as Swaytech CEO, Pinchin says a number of companies wanted help with their pitch decks but when they looked under the hood, the right information was missing. 

A number of venture capitalists also told him it would be good if someone could help early-stage company founders be better prepared before approaching them. “A lot of young founders rock up in a pair of ripped jeans, their baseball cap on back to front, and a logo on their shirt,” he says, and want millions in funding for a very small stake in their venture.

Pinchin says they also had approaches for marketing help when it turned out the founders really just wanted to exit, but didn’t know how. 

The tighter environment for raising capital has been a wake-up call for many founders as up until 18 months ago there was a lot of money sloshing around, he says.

“If we had launched this three years ago it would have been a different situation whereas now VCs are doing a lot of follow-on investment but being very cautious in terms of investing in new ventures, so there is a much greater need for it.”

Bailey’s research over the past two months has shown that in some cases board members see their issues as just capital constraints whereas they are much bigger than that. Many didn’t meet Pellett and Pinchin’s standard for investment. 

Few wanted to revisit their original value proposition or do a competitive analysis identifying adjacent or potential competitors in an objective way to see if it was still a credible and investable business for investors, the pair say.

Lack of ambition was another issue they discovered. Many were happy to remain a sub-scale local business with no plan on how to achieve sales outside of New Zealand or pivot if they had to. 

The key finding from their research was there are many investable opportunities with the wrong/immature management teams in place, and investable management teams leading companies that didn’t deserve them based on the size of the opportunity in front of them.

Bailey will provide bridging finance to some companies running out of runway while getting them ready for VC investment and may also take a longer-term equity stake in others, particularly under the search fund concept.

“We’re not looking to launch a VC fund; it would be specifically around identifying these people. You bring in an entrepreneur to run the business and they get an equity stake from day one and then increase their equity through hitting certain milestones,” says Pinchin.

Pellett is hopeful some of his cashed-up fellow Flying Kiwis will want to invest, particularly if someone else has done due diligence and made recommendations on management. 

“The idea here is that if we do invest, we’re actually giving it a credibility stamp.”

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