Martin: The first time we meet with the owners, we go, we talk to them, the business sounds attractive, we start asking them about financial information and they don’t seem to know, right? So they tell us they have $25 million in sales, about $5 million in EBITDA, right? So $5 million sounds sort of like on the upper range of what we were looking for and we were very confident we could do that deal, so we went to grab lunch with them, they probed us with questions before they would give us the financial information, why were we interested in the business, who were investors, what we were gonna do with the business if we acquired it, and towards the end of the meeting, they hand Adrián, my business partner, a manila envelope with the financial information inside, right? And I just see Adrián open it, stare at it, act a little surprised and sort of like close it and then I’m pretty anxious, like what’s going on, right? So I was thinking maybe they were selling a lot less than we were expecting, but we actually walked out of the restaurant and turns out they had given us the information wrong. Their EBITDA was not $5 million, it was $10 million, it was a substantially larger company than we were looking for, right?

(intro)

From SMEVentures, it’s The Search Fund Podcast, a show about hungry entrepreneurs who, instead of starting a business, decide to buy one. These are their stories of success, failure, and the lessons they’ve learned.

Jake: This is Jake Nicholson of SMEVentures and, on today’s show, we’re joined by Martin Urrutia, one of the entrepreneurs behind Auronix, a messaging and communication platform in Mexico.

Martin grew up in Mexico in a family that ran a 130-year-old family business. And if you know anything about family businesses, particularly those with long histories and legacies, you’ll understand the pull they can have on future generations in that family. But, increasingly, all over the world, we’re seeing the younger generation decide to venture out on their own. Sometimes they wanna travel, start a tech business, or work for a big-name company. In Martin’s case, he ultimately decided to buy a company of his own in Mexico.

Now, Mexico is a fairly established search fund market with a few success stories and a couple of institutional search fund investors but it’s still not the US which is flush with search fund entrepreneurs and investors, plus it’s a developing market, which introduces complications not found in more developed markets. Add to this some big competitors in the industry, including the likes of Twilio, and a global pandemic, and Martin is a couple years into a very challenging but hopefully very rewarding journey as CEO.

(interview)

Jake: Martin, thank you so much for joining. Excited to hear your story and so are the listeners from around the world.

Martin: Thank you for having me, Jake, and excited to share what I’ve learned through this journey. 

Jake: Cool. Let’s start at the beginning. Where did you grow up?

Martin: So, I am originally from Mexico City, spent most of my life here, have left for long periods of time since I was 18, I went to college in the US, worked in consulting so I got to live in the US, South America for a little bit and then I went to business school in the US, but I was mostly raised in Mexico City. 

Jake: And what were you like as a kid? Were you academically talented? Were you into other activities? What was your childhood like?

Martin: My childhood, I think I was pretty social, pretty into sports. I think I did reasonably well academically but nothing outstanding but mostly enjoyed, you know, being with friends and playing sports throughout my childhood.

Jake: And were your parents entrepreneurs? Did you have an entrepreneurial family or is your path fairly new to your family?

Martin: No, it’s actually fairly new. Not at all. My dad, he works in the family business. The family business has been around for 130 years, they’re in the textile business so sort of like going and doing my own path was something quite new.

Jake: So we’ll come back to that. I’m always intrigued by people who come from family businesses and decide to do something else so let’s revisit that. So you come to the US for university, I assume that was already something fairly unique in your family?

Martin: Yeah, well, my dad went to business school in the US and I went to an American school so I was very familiarized with the idea of studying abroad and going out there and trying to get an education in the US and coming back. So it wasn’t something as exotic as it would be in most places and I’d say about half my friends ended up going to the US for university.

Jake: So you started at NYU and then, after about a year, went to University of Miami. Can you talk us through that story? Why the change and what was your thought process there?

Martin: Yeah, totally. So, when I was growing up, I always knew I wanted to be an entrepreneur, I always knew I wanted to go business school but I had no idea what I wanted to do in college, right? So rather than looking for specific majors, I said, what schools are exciting for me? I really liked NYU and I really liked the general studies program they had at NYU. The program was structured where throughout the first two years, you were studying a little bit of everything, right? Things from literature, art, English, philosophy, math, science so it seemed like a very exciting program. I did the first year in Florence in Italy where NYU has a campus and it was a fantastic background to do that. But as I went through this first year, I decided I wanted to do something more analytical, something more numerical, something more business oriented so I found a really cool program, an industrial engineering with a focus in management and technology at the University of Miami and that’s when I decided to transfer. I thought studying something more in line with what I wanted to do in the future was exciting so I decided to transfer to Miami and basically finish that program, which was actually something I really, really enjoyed, you know? I enjoy management, engineering, business, although I really enjoyed getting that sort of like holistic background with literature, philosophy, and arts, which you typically don’t get in your typical business or engineering program. 

Entrepreneurial beginnings

Jake: You mentioned even before you went to university, you knew you wanted to go to business school. What was behind that drive and that desire?

Martin: So, I guess the first thing is my dad went to business school, always spoke very highly about business school so I always saw his friends be very successful after business school and I always had the idea of wanting to do something on my own, right? Wanting to go out, start a business, build something myself, build something myself in Mexico where I could have a positive impact through economic value creation. So, that’s what I was excited for about business school, right? Sort of like I saw it as I would go university, work for a couple of years, go to business school, and all that was part of my preparation to eventually go out and start a business on my own.

Jake: Not only did you know you wanted to go to business school, you knew you wanted to start your own business from an early age.

Martin: Totally. There was always something exciting about wanting to create something from scratch, wanting to build something, being able to make the decisions and seeing how far you can take it.

Jake: Did you try anything entrepreneurial as a kid before you went to university, you know, lemonade stand or anything like that?

Martin: The typical when I was younger but nothing major, you know? Especially as I was growing up, it really became more clear that I wanted to do my own thing. It was always really evident for me that I didn’t wanna just take the leap, I wanted to like really prepare myself and be ready to take the leap whenever I was ready. It was sort of like this idea that, at one point, I would know everything I needed to know and be able to go out and start something but, very quickly, I started realizing that the only way you learn is by taking the leap and learn by falling down and learn by failing. So, after business school, I was debating whether I should go out, get more experience, get experience in sales, get experience in finance, and I said to myself, you know what, I could spend the rest of my life trying to get more experience, I think this is the perfect moment to pivot in my life and actually go out and start doing something where I’m actually operating the business.

Jake: So you got your bachelor’s and master’s in industrial engineering at University of Miami. What did you do right after that?

Martin: So, right before I was graduating from my master’s at the University of Miami, I was working as an intern in the wealth management division of UBS in Miami, right? So I was working with a group that was investing money for high net worth individuals. It was something I got during 2009, which is actually a pretty complicated time to get a job, and I was working in that job to build a resume, to gain more experience, but it was an industry I wasn’t particularly fond of. It was something that I didn’t really truly enjoy doing so the time I spent there, I learned a lot but I knew I wanted to go into something more business oriented. So I spent six to eight months after I graduated there deciding what to do with my life and I decided I wanted to go into management consulting for the next phase of my career.

Moving to management consulting

Jake: All right, let’s talk about that. Why did you think management consulting would be a good next step for you and did it end up panning out the way you expected? 

Martin: Yeah, management consulting was an extraordinary experience. What I was looking for at that point in my life was some highly dynamic environment where I could be exposed to very challenging problems and where I could be learning and preparing as much as possible, right? So management consulting gave me the opportunity to arrive at a pretty young age and be thrown in front of very complex problems with large clients and senior level executives so it was an amazing time in terms of being able to learn about all these management frameworks, all these management toolkits, develop these analytical skills to be able to eventually learn how to lead a company myself. So, it was something that I was very eager to do. I always knew it was something I was gonna do for two to three years. It was part of my preparation and it ended up being a fantastic experience overall.

Jake: Now, a lot of management consultants who later launch entrepreneurial careers describe, for lack of a better word, a bit of frustration during the consulting period that stems from giving advice to clients but not being able to own the outcome and build businesses. Did you feel that? And if so, at what point? And you stuck with it for three years, were you able to hang on patiently?

Martin: No, I did totally feel the frustration. I think during my first year, everything was new, everything was exciting. You are immersed in these projects where you’re solving something very strategic for a company so my first year was just fantastic, you know? During the second year is when I started having a little bit more frustration of not actually being able to see through your recommendations, you were not being able to implement them, to execute them, to see the results of the hard work you were putting in, right? So, there was that frustration that started growing over time. Nonetheless, I did have a really good time and it was a really good learning experience in being able to immerse myself in all sorts of different problems, right? Things related to organizational strategy, things related to government, logistics, things related to customer experience, right? So, being able to learn about such a diverse range of management challenges was something that I greatly enjoyed, but at the same time, there was a frustration of not being able to actually take ownership of your solution, implement that solution, and see the results that it would yield. And it’s something that’s proven to be really challenging, right? When you’re a consultant, I think there’s sometimes this arrogance around like the solution seems so obvious and sometimes they’re so easy to put on a slide, but when you’re on the other side and you have to implement those solutions along with having to hit a number and operate a business, you really truly understand the challenge of implementing and solving these strategic challenges that you actually have to execute.

Return to his entrepreneurial roots: Business School & Search Funds

Jake: Yeah, so you’re there for a few years, you figure that’s enough, time to go to business school and launch my entrepreneurial career. Is that about right?

Martin: Totally. So, I actually went to business school with the idea of coming back to Mexico and launching a fintech startup in the peer-to-peer payment space. During my time in consulting, I spent a good amount of time in the intersection of financial services and technology and I grew really fond of it, I really liked it, and I saw a huge opportunity to do financial related technologies in Mexico, right? So I went to business school and spent the better part of my first year trying to understand what the opportunities looked like in Mexico, how the fintech space behaving in Silicon Valley and how could I bring something like that to Mexico and implement it, right? So I was very excited to come back to Mexico and do my own thing and I actually spent my summer between my first and second year at the MBA working at a company that was doing the most similar thing I could think of to what I wanted to do and it was a fantastic experience because I realized that the idea that I had in mind, peer-to-peer payments, in Mexico was a terrible idea, right? I thought the opportunity that I actually thought was there was actually quite challenging. Peer-to-peer payments is a business model that requires huge scale, security, infrastructure. It requires dealing with large banks and telcos, which are quite monopolized industries in Mexico, so it was a really good moment to sort of like throw myself into a very similar startup and see the challenges and see that it was something that I should not invest my time in. So, I realized that right after the summer of my first year, went back to business school the second year and had this moment of like, “Oh my god, I planned coming to business school planning to launch a peer-to-peer payment startup and now I’m going back to the drawing board and what do I do now?” So it was a very interesting moment of reflection, introspection, and what’s next for me when I graduate from business school a year from now.

Jake: Yeah, so you were — to catch up our listeners, you were at Stanford Graduate School of Business and everyone knows Stanford as the birthplace of a lot of these famous tech companies. It’s right in Silicon Valley, you know, the global epicenter of VC, but it’s also sort of the mecca of the search fund world and is this where you first came across the idea of a search fund?

Martin: Yes. I had heard about search funds anecdotally. I knew a little bit about search funds but I had never really considered search funds, right? I was very focused on entrepreneurship and fintech, and coming back the second year and sort of like trying to reflect about what I wanted to do with my life, I took some time to think, right? And what did I conclude that I wanted to do, right? I knew I wanted to come back home to Mexico, I knew I wanted to run a company and be the person who made the decisions, I know I wanted something at least somewhat tech related, I know I wanted to be in an exciting and growing industry and a couple other things I had on my list that were important for me. And it was during a trip with a good buddy who was already determined to do a search fund that I actually started inquiring a little bit about the model and what I found in the search fund model that I really, really liked is mainly two things. The first one is not having to have an idea or a problem I wanted to solve. I felt the search fund gave me the opportunity to spend two to three years looking for the best company I could buy out there. So, it fulfilled sort of like my idea of being able to run a company, be able to make decisions, be able to see how far I could take a company but not having to start it from scratch so that was something that was very exciting at that time. And the second thing I really liked about search funds is the entire sort of like search fund ecosystem that exists around you, right? On the one side, you have the group of investors who are always available to help, who function as mentors, who function as investors, who are extremely experienced and accessible and, in some sense, increase your likelihood of success. But it’s not only the investors, it’s also sort of like the camaraderie there is around search funds, right? People who are six months ahead of you, two years ahead of you, ten years ahead of you in the search fund ecosystem, I think there’s a really nice community of people being able to help so that’s how I started discovering search funds, started inquiring with this good buddy of mine who was about to start a search fund in Colombia once we graduated, and started very rapidly getting excited about the industry and the space.

Jake: Let me test this point a little bit more. Again, you come into the MBA thinking you’re gonna start a tech business. You’re in Silicon Valley, a lot of your classmates are probably going to either start their own tech businesses or take senior roles at high growth tech companies, probably a lot, you know, in the US and Silicon Valley itself, but you decide you wanna go to Mexico and buy a small business. Why did you think that that was a more attractive or appropriate option for you than the high growth tech route?

Martin: I did consider the high growth tech route but, for me, there’s something about venture capital that I wasn’t a huge fan on and that’s sort of like the “Go big or go home” mentality. What I was seeing in Silicon Valley, what I was seeing that was starting to happen in Mexico with the high growth, high tech route is that it’s sort of like you bet everything, right? You go, you raise some money, you go and invest very rapidly in growth and you either end up with a billion-dollar company or you go bust, right? So that’s something that wasn’t as attractive or appealing for me. I was looking more for a company where you can have sustainable growth, where the risk-reward equation was better suited to what I was looking for. So, in some sense, I think it’s been the right decision coming back home, looking at all these exciting businesses. I didn’t go for a search fund where we started looking at traditional manufacturing companies. I always knew I liked something tech enabled and we spent a lot of time looking at companies that were tech enabled in some sense. So, I wasn’t truly excited by sort of like the building a VC-backed firm, I was more excited about building a company that could have sustainable growth. 

Searching in Mexico: Polo Capital Partners

Jake: And let’s talk about your decision to do it in Mexico. You probably had the option to do it in the US as well. You had experienced in the US, you’re fluent in the language and the culture, the search fund is more established in the US, there had been some Mexican search funds before you but some additional challenges possibly, some additional opportunities as well. Talk me through your thought process there.

Martin: So, for me, coming back to Mexico was important in a personal and a professional sense, right? On the personal sense, I feel Mexico is a country where I’ve gotten a lot from Mexico, I’m very proud to be from Mexico and being able to have a positive impact in Mexico was something that was important for me. I know I’m not running a social business or anything of that matter but, still, being able to buy and grow a company, create employment, attract investment from foreign investors is something that I’m really relatively proud of. But at the same time, professionally, Mexico also made a lot of sense. It’s a market I know very well, it’s a market where I have a large network, and those kinds of things tend to be very helpful when you’re searching for a company to buy or you are seeking to grow a company, right? So, being able to be local, know the market dynamics, know local investors, know local businessmen has been very, very helpful throughout the process and I wanted to put myself in that position where I had all the possible tail winds behind me.

Jake: How much of your search capital came from the US versus Mexico?

Martin: So, our search capital was about 60 percent US, 40 percent Mexico, but, nowadays, with the company, the amount of foreign capital just dwarfs local capital. I think about 90 percent of the capital we have is mostly US but foreign, in general. We have investors from South America and Europe as well.

Jake: So you launched Polo Capital Partners in 2016 and about — that’s your search fund, and about three years later, you buy Auronix. Three years is longer than an average search fund. Did you find challenges sourcing quality opportunities?

Martin: No, I don’t think we had challenges sourcing quality opportunity. So I graduated from Stanford in the summer of 2016 but we didn’t really fully start with our search until March of 2017. I really wanted to do a partnered search so I came back to Mexico having graduated from business school, partnered with a good buddy who I’ve worked with previously and he was at that time working at Bain, was committed to Bain until December of that year. So, throughout those couple of months, we were writing our sim, writing our materials, doing our presentation and fundraising to be able to start March 1, 2017.

The acquisition: Auronix

Jake: And you buy Auronix. Tell me about what is the company, what does it do or what did it do when you acquired it, and how did you find it?

Martin: So, I’ll start with how we found it first and then happy to share a little bit more about Auronix. So during our search fund, we did sort of like a proprietary industry focus search, right? We learned from our investors and other searchers that the best way to look for companies was not through brokers, was not through investment bankers but through actually trying to find companies that maybe were a little bit off the radar, right? So we ended up setting a pretty cool sourcing machinery where we hired a couple college interns, we had four college interns working for us and assigned them different industries. Their job was to find interesting companies in the industries we assigned them and they would have to come back to us every week with an Excel with the name of the company, the name of the CEO, the email of the CEO, and other different contact information. So, we ended up creating a process where we were shooting out emails to owners of companies every week and if they did not reply, it was sorta like a sequence of emails we were doing through HubSpot. With those who did reply, we ended up having a very brief, sort of like 30-minute call, where what we were trying to do is understand is this a willing seller, is this an attractive industry, and is this an attractive company that we should be looking into, right? And sort of like really sticking to our investment criteria and trying to filter out those opportunities that were serious and those companies that were attractive. So, we did this process for some time. Once we liked the company, then we totally changed our mindset from process to relationship building and actually going out, grabbing lunch with the owner, taking them for dinner, really trying to understand their story, really trying to learn about their business and if it’s something that was a good match for us. And the way we conducted this search is it was very, very focused on a couple industries but what my and my partner’s interest in fintech, we spent a good amount of time exploring businesses in the intersection of financial services and technology and one of the industries we spent the most time in is payment processing. I think we tried to acquire every possible payment processor in Mexico. We actually had two of them under LOI, both of them fell through. One was acquired by a strategic and the other one had a right of first refusal by one of the large banks in Mexico and they ended up acquiring when we tried to acquire, but something that was really helpful of this sort of like very industry focused, very proprietary process is we started discovering a couple industries that were a little bit off the radar, right? Something we noticed, for example, looking at all these payment processors is that all these companies were sending a bunch of SMS messages to notify customers of transactions, fraud alerts, and other types of notifications they were sending to the customers, right? And at first we thought like, “SMS? Who uses SMS these days? SMS is basically dead,” right? But we started scratching above the surface and we discovered this industry that’s become substantially more popular today but all these companies that were helping companies engage their customers and, at the time, it was mostly SMS, through messaging channels. And we started seeing that every company we spoke with was growing at 20 to 30 percent, had 20 to 30 percent EBITDA margins. So we started analyzing a little bit more and what we started seeing is that there was starting to be a huge shift in how customers engaged with companies, right? Customers no longer wanted to call a contact center, customers were texting, and they wanted to start engaging with companies via messaging, right? At the time, SMS and email were the predominant channels but what we were starting to see is that some exciting messaging channels were opening up to business-to-person communication, right? So WhatsApp was launching its enterprise messaging solution, Apple was launching Apple Business Chat, Google was launching two different messaging channels, RCS and Google Business Messages, so it started to seem like there was a huge trend going on where companies were gonna shift dramatically the way they engaged their customers from things like contact center and email to things more oriented towards messaging. So, we started calling up a couple companies, one that our interns really liked was Auronix, we actually put them in our email sequence, never heard back from them and then started reaching out to them proactively, right? Started reaching out to them via LinkedIn, started reaching out to them via phone, until we were able to sort of like meet one of the owners and sit down with them and then start understanding what the business does and then exploring it a little bit more seriously.

Jake: And was it a pretty typical search fund deal in terms of size and structure?

Martin: So, it was a very typical search fund deal in some aspects, it was a very atypical search fund deal in many other aspects. In what sense was it a traditional search fund deal? It was a family business. It was literally run by the three siblings and their two parents. It was a B2B business with recurring revenues, low capital intensity, healthy cash flow generation. What it was not a traditional deal is that it was in a highly tech, highly disruptive industry. I think we are in the intersection of software and telecom which are two of the most disruptive industries out there. And, at the same time, it’s an industry that’s gained tremendous popularity over the past couple of years. Many of our competitors are raising very large venture rounds and we have sort of like unicorn competitors like Twilio who are extremely successful so I think that was the first thing that was not traditional. The other thing that was a little bit atypical about this company is that it was a little bit larger, right? And the funny story there is the first time we meet with the owners, we go, we talk to them, the business sounds attractive, we start asking them about financial information and they don’t seem to know, right? So they tell us they have $25 million in sales, about $5 million in EBITDA, right? So $5 million sounds sort of like on the upper range of what we were looking for and we were very confident we could do that deal, but they asked us sort of like what the next step was, we wanted to truly gauge if they were willing sellers so we offered to make them a pretty quick offering and see if they truly wanted to engage, so we went to grab lunch with them, they probed us with questions before they would give us the financial information, why were we interested in the business, who were investors, what we were gonna do with the business if we acquired it, and towards the end of the meeting, they hand Adrián, my business partner, a manila envelope with the financial information inside, right? And I just see Adrián open it, stare at it, act a little surprised and sort of like close it and then I’m pretty anxious, like what’s going on, right? So I was thinking maybe they were selling a lot less than we were expecting, but we actually walked out of the restaurant and turns out they had given us the information wrong. Their EBITDA was not $5 million, it was $10 million, it was a substantially larger company than we were looking for, right? So, typically, the problem is the opposite, right? The company has less EBITDA than they told you. Well, we were dealing with two times the amount of EBITDA. So, it was a substantially — we were looking to buy a company in the range of $10 to $25 million and with $10 million in EBITDA, it was gonna be a substantially larger deal so we had a lot of work ahead of ourselves.

Curveball: raising additional capital

Jake: And, presumably, among your search capital group, your search phase investors, there wasn’t enough capacity to acquire a $10 million EBITDA deal. Is that right? 

Martin: Yes, that was exactly what we assumed and, at the same time, the political and economic environment in Mexico wasn’t the most exciting so the Mexicans weren’t particularly excited to invest in Mexico at the time but what we saw and we were very confident is that we were looking at a business that was high potential industry that could very rapidly grow and we could acquire for a very reasonable valuation so we decided to go ahead and we decided that we were gonna go out and raise the money to acquire this business.

Jake: And how far into your search are you at this point?

Martin: By this point, we are on our 22nd month of search, right? So —

Jake: So near in the end. Do you still have cash?

Martin: We had some cash and we had enough cash to get us through the deal if we assume some due diligence expenses would have been put into the deal, right? So a bunch of the legal and fiscal due diligence costs would be assumed to be part of the transaction, right? However, we didn’t wanna take that risk and if, for example, the deal fell last minute, we didn’t wanna be liable for paying lawyers and paying other advisors. So, we actually decided to do something substantially less risky and our investors said they didn’t want to put that pressure on us in order to put us in a position where we wouldn’t feel obliged to close a deal just to not end up —

Jake: You didn’t have close on anything, right.

Martin: Exactly.

Jake: Okay, now you’re on the road looking for $100,000 to bridge your search until you can actually successfully close and you’re looking for a bunch of equity capital and, presumably, some debt to close on this fairly large acquisition.

Martin: Exactly, and the bridge capital for the search was actually quite easy. Our investors were extremely supportive. I think 95 percent of them participated with their pro rata and some of them even wanted to take a little more but the true challenge was raising the capital, both the debt and the equity for the deal. When we surveyed our investors, we estimated we were gonna be able to raise about 40 percent of what we needed, 40 to 50 percent of what we needed with our current investors to close the deal so we very rapidly and proactively started reaching out to other investors, right? And what really helped us there was our current investor base, those who were truly excited about the deal started introducing us to other investors within the community and sort of like in the peripheries of the search fund community, right? Family offices, high net worth individuals, and so forth. And, surprisingly, we were able to raise the gap we had in a matter of two or three months. We thought it was gonna be something that would take us a lot more than expected and as we were closing diligence, we thought original investors were gonna put 40 to 50 percent of the capital. In the end, they ended up putting like 60 percent so we, unfortunately, had to leave some people outside the deal because we were oversubscribed, because our investors, our original investors, got more and more excited about the deal as diligence went on.

Jake: And were the sellers aware of this process going on behind the scenes or, as far as they knew, you had the capital?

Martin: Not at all, and actually that was very surprising. They never truly questioned if we had the capital or not, they always assumed we had the capital, they always knew there were risks because we were very candid with them that could kill the deal, right? Maybe something we uncovered during diligence or maybe a situation so they were always very cognizant of that but they never truly challenged if we had the capital or not, which was pretty surprising but it also speaks to the fact that they trusted what we were doing and they trusted that we were gonna be able to close the deal.

Emotional rollercoaster: The pressure to close

Jake: So you’re nearing the end of your search period, you’ve put this deal out to the investors, you’re raising a large chunk of cash to acquire the deal, an abnormally large chunk of cash for a search fund, and you’re in parallel conducting diligence and, as usually happens in the diligence process, you probably uncover a couple things, a couple blemishes on the company. Did you ever question at any point your objectivity given that you have limited timeline, you’ve put your neck out there for this deal to raise a large check, and it’s either you do this deal or you go find a job, which can put some pressure on a searcher? Did you ever feel that pressure or how did you and your partner manage that process?

Martin: We — you always feel a little bit of that pressure but it’s something that we always spoke very openly and objectively, right? We were always aware that failure was not failing to buy a company, failure was sort of like acquiring the wrong company, right? Doing the wrong deal, raising all this money from all these investors and buying the wrong company. So, we were always very cognizant of that and we always preferred sort of like shutting down the search fund and not having acquired a deal and doing right by our investors than actually convincing them to get into a company that we believed wasn’t the right company. And if the situation would have gone the other way where we uncovered some things during diligence that would have made it a bad deal, we were convinced that we had spent two and a half magnificent years exploring opportunities in Mexico, talking to business owners, and we were convinced that there were many things that we could do. We were already saying if this didn’t work out, we would probably start a company together in one of the industries we explored so it’s something that we weren’t truly concerned about. And during diligence, we always had a mindset of focusing first on the things that were likely to kill the deal, right? We had incidences when we ran into companies that had a big component of corruption or where there were important risks within the company. So, with Auronix and with every company we analyzed, that’s where we focused first on diligence, right? What are we most concerned about this business and is this something we can get comfortable with or should we just stop seeing this business and find the next one? 

Post-acquisition: Value creation and roadblocks

Jake: So you’re two years in now, about two years post acquisition, you’ve bought this company in a heavily and a highly contested industry, paid more than usual for the acquisition in search fund terms, and you haven’t operated a company in this industry before, I’m not sure about your partner, and then you have COVID. How’s it going — what levers have you tried to pull over the past couple of years to execute your value creation strategy and what challenges have kept you from doing that successfully?

Martin: Well, the challenge has been enormous, right? And I think that the first challenge we ran into is, and I think many searchers out there run into, is going into a family-run business where you have the family members or the CEO or the owner calling most of the shots. These companies are typically not professionalized. They lack processes, they typically lack a middle management structure, right? So the first challenge we ran into is we have these previous owners, they’re there for a transition but the company has multiple challenges, right? They’re doing cash-based accounting, there’s no systems, there’s no processes. So, the first challenge that — first major challenge that I think we’ve had to work with over the past two years is building a really solid team that can help us scale, right? A team of experts. For example, we brought in a chief revenue officer with experience in technology. We brought a CFO who’s taking a couple companies public. We promoted a CTO internally who’s got a great product vision. The company had never had an HR function so we bring people head to the company. And these people have, in turn, hired really good people below them and helped us build a better sales process, a better invoicing process, helped us build IFRS standard accounting so that’s been sort of like the biggest challenge and being able to recruit the right people I think has been the most important aspect to be able to achieve this. And I would say that the second most important challenge is Auronix basically has two major revenue lines. We have some legacy revenue lines but the largest one when we acquired was SMS, being able to send SMS messages and we always knew that SMS was an attractive market but SMS competition and prices were gonna commoditize, turns out it commoditized substantially faster than we thought, but there was a second revenue line which is more based on conversational messaging and chatbots, right? How companies can sell through channels like WhatsApp, provide customer service through channels like WhatsApp, and that revenue line was rapidly growing but it’s actually growing a lot more rapidly than we expected. So the big challenge has been sort of like defining a new strategy for the company, turning that strategy into different where we’re gonna play, how we’re gonna win, building capabilities, defining objectives aligned with that strategy, cascading those objectives to the entire organization and taking an organization that has predominantly sold SMS in the future and building the structure, capabilities, and processes to win in a faster growing and more exciting part of the market.

Jake: Are you loving it? I mean, you started a search fund because you had some goals in mind. Do you feel like you are working your way to achieving those goals? Is it what you expected it to be?

Martin: Absolutely. It’s been, without a doubt, the most rewarding professional experience I’ve ever had and I doubt anything will top it. I mean, from building a team to transforming a culture, the culture of a family business to a tech company, from going out, trying to build a better sales process, winning new customers, it’s something that I’ve tremendously enjoyed and I think we’re at a phase where these first two years have been about building a platform on which to grow. The amount of work has been insanely demanding. I’ve never actually worked so much in my life. I mean, the consulting hours were intense, but these are sort of like the hours plus the intensity was a roller coaster, is very intense and very demanding, but at the same time extremely rewarding and extremely fun. So it’s something that I’ve truly enjoyed and, for me, it’s something that I don’t see acquiring Auronix as something that we’re gonna sell two or three years down the road, right? Something Adrián and I always told our investors when we were fundraising is Auronix for us is sort of like a long-term personal project, it’s where we wanna spend sort of like the majority of our professional lives and, for me, Auronix is more a 10- to 20-year journey rather than something we’re gonna flip and sell in two to three years.

Jake: Great transition to my next question, which is where do you think you’re gonna be 20 years from now? Do you think you’ll be still operating something or do you think you’re gonna transition to the investor side or do something else? What do you think you’re gonna do?

Martin: Well, I would love to continue operating Auronix as long as possible. However, like we discussed, it’s one of the most disruptive and rapidly changing industries out there so I don’t know if we’re gonna be messaging 20 years from now. But if I were to like not be operating Auronix, I would love to do another operating experience and then transition, if things go well, to the investor side.

Launching a search fund outside of the US

Jake: There are searchers around the world listening to your story and many are in countries that are brand new to search funds. Mexico is not brand new to search fun, but it’s at least, you know, not the US. What would you like to share with these aspiring entrepreneurs that you perhaps wish you would have heard when you were weighing the pros and cons of launching a search fund?

Martin: I think what I would have loved to hear is the positive and the challenging aspects of searching and operating. It sounds very romantic going out there buying a company and operating a company and it is extremely rewarding but it’s also really, really challenging, right? Raising money, going out there, contacting businessmen, doing due diligence, many deals fall through, you acquire a company, not everything you thought about the company turns out to be true, you’re gonna have HR issues, you’re gonna have sales issues, you’re gonna have financial issues. So, it’s a journey that has multiple challenges. It’s a journey that is also extremely rewarding and extremely exciting. And what I would say is the search fund has many benefits and the beauty about the search fund is that it’s been done so many times and there’s such a fantastic network around the search fund ecosystem, from fellow searchers to investors to advisors to everything. There are best practices out there. There’s people who’ve gone through this before and there’s people who are gonna be fully invested in your success and making sure you conduct a good search and run a company successfully.

Jake: Fantastic. Thank you, Martin. Really, really fascinating to hear your story and appreciate your generosity and transparency with sharing your story. Best of luck in the coming years with Auronix. We look forward to hearing good stories coming out of it.

Martin: Thank you for having me, Jake. It was a pleasure talking to you.

(outro)

Jake: Martin’s words of advice ring true throughout the global community of searcher operators. The idea of buying and running a business sounds glamorous, and I’ve heard several searchers use this word, “glamorous,” but the reality is gritty and challenging and nebulous and unrecognized, and yet they love it, not because it’s glamorous, because it’s usually not, but because it’s intellectually stimulating, it tests the searcher’s limits. In a sense, it offers that entrepreneur the opportunity to reach their full potential, or close to it. And if you are a prospective searcher looking to set goals, then challenging yourself and reaching your potential can be pretty good and achievable goals for this journey.

Thanks so much for listening to this episode. If you enjoyed it, you can find more at the searchfundblog.com or wherever you listen to podcasts. I’m Jake Nicholson of SMEVentures and you’re listening to The Search Fund Podcast.