After leading the digital KYC and ID verification company Appruve, Paul Damile recently exited the startup in a cash-and-stock deal to Smile ID, a major player in Africa’s digital compliance industry. Damile’s journey with Appruve exemplifies the classic startup experience: a captivating sprint from problem identification to a minimum viable product, followed by a demanding marathon of iteration, funding, and growth, culminating in a successful acquisition.
We recently sat down with Paul to discuss this milestone achievement and gain his insights on navigating the path to selling a startup.
- What motivated you to sell Appruve, and how did you ensure it aligned with your company’s long-term vision?
I always haven’t had the perspective that “your startup is your baby.” I care about what I build, but when starting a business, there are usually three ultimate goals: a. To build a cash flow or lifestyle business; b. To be acquired; or c. To IPO or list on the stock exchange.
So that’s how I’ve always perceived any business I’ve done, including Appruve. And so, for me, ultimately, with that in mind if you’re building a company, you’re positioning it for one of these things. For a long time, we’ve always positioned Appruve to be acquired so we’re happy we have achieved that goal, and it came in time.
- As a pioneer in your industry with a successful exit, what crucial steps did you take to prepare your company for acquisition?
Mergers and Acquisitions involve a lot of processes. It starts way before the actual event of acquisition happens. Luckily, we had already built a relationship with Smile at the beginning of our company. And so, we understood that preparing for an exit event means establishing a possible relationship with would-be acquirers. We built and developed the partnership to see how we could work together. This was one of the things we did to initiate the acquisition process eventually. The transaction itself took about a year to get done.
- The first process is for the founders to agree to be acquired and agree on the terms.
- Then discuss that with your investors and agree on the terms.
- Once you establish what you seek in a deal, the broader stakeholders will be engaged.
- Search for an acquisition lawyer with industry experience. It costs a lot of money. The acquisition lawyer helps with all the documentation.
Since we had the holding company in the US and operating companies across Africa, there was a lot of documentation on both ends. Once you hire the lawyers, the lawyers will take you through all the documentation necessary to meet regulatory compliance to meet the internal diligence processes. It was one of the most stressful times in my life because we did a lot of work, signing almost 100 documents to complete the acquisition. The process was a great learning process, and it was worth it.
- Can you share any specific challenges you encountered during the selling process, and how you overcame them?
In terms of challenges, as I alluded to, the biggest challenge in the beginning was the cost of the transaction. Quality transaction lawyers cost money. Sometimes, it can be more than $100,000.
I also made sure the transaction wasn’t complex. It was a new thing to me, and spending so much time reviewing almost 100 legal documents whilst keeping business operations going was a challenge, but we managed to overcome it.
Another challenge was our initial decision as founders to exit. When investors hear you are being acquired unless the exit value is like 100x of their investment, which wasn’t the case in our situation, there would be some reservations. So, in the beginning, there were some reservations, but we managed to convince them and get them to our side.
- What role did your team play in the successful M&A exit, and how did you ensure they remained motivated and focused during the transition?
This is an excellent question. One of the things that happens when you are in the process of selling or getting acquired is that there’s a tendency to lose focus. So, we prioritized getting the cofounders to own various functions of either running the company or running the acquisition process.
For instance, Kwame, our Head of Product, was responsible for liaising with the compliance team to make all the compliance documents available. Usually, during the acquisition phase, compliance is a big deal. Laud, the CTO, was responsible for managing infrastructure products and ensuring the business ran smoothly. While I did the potential acquirer seeking, initiating talks, etc. that is how we broke down the functions among ourselves.
- Did you encounter any cultural or regulatory hurdles while dealing with a foreign company, and how did you navigate them?
There were regulatory hurdles. As a business with a holding in San Francisco and a presence across the continent, we are regulated in all these markets and must meet regulatory requirements. So, for a very long time, we had planned to announce the deal when we had finished the due diligence with the US entity. We were done with the US entity’s acquisition process, but we couldn’t. We sent a notice to the Bank of Ghana. They had certain concerns, and so we needed to address them.
In terms of cultural differences, there weren’t many barriers. However, being a smaller startup, we faced some challenges. For instance, during our early days, we were invited to attend meetings in London, but trips were not in our budget. We had to prioritize and conserve our funds for more crucial expenses.
- What advice would you offer to other founders considering selling their company, especially when valuing their business?
After we announced our deal, I had a bunch of founders reach out to me who were either potentially going to acquire competitors or getting acquired. I first asked them if they had established a working relationship. If you haven’t established any working partnership or relationship, I wouldn’t advise you to rush in. In such situations, there might be a lot of misalignment.
So, if you can work together for 6 to 12 months, you get to understand the business, know the deal breakers, etc. This will give you more information. This will put you in a better position to negotiate, and then valuation comes in later. So first think about the working relationship. How are we going to make this possible? Once you have established that, over some time, there’s an opportunity to consider what the valuation will be based on, company performance, and other factors.
Source: Ghana Innovation Journal interview with Paul
