Conference Notes

Rod Drury on Creating Product Businesses, Oct 18

Rod Drury, CEO of Aftermail (that sold to Quest Software in January 2006) was the guest speaker at the New Zealand Trade & Enterprise breakfast series in Christchurch this morning. He was invited to speak on his ideas about creating product businesses.

Rod’s History
Prior to Aftermail, Rod started his career with Arthur Young (prior to Ernst & Young days) in Auckland, because he was interested in information engineering (a concept which he’d learned about at University). Spent a year in audit, then talked his way into being a junior IT consultant. Rod found it really cool that you could model businesses using information engineering principles. After the E&Y merger, he able to apprentice within the IT group. Once of the early contracts was with Telecom for ICMS (integrated customer management system), which was good for learning about big IT development. He spent a year in Texas, which further solidified his big IT project learning.

One huge frustration was that business models were handed over to coding groups, for development using Smalltalk. The end result wasn’t all that great. And then … Visual Basic 1.0 came out, and Rod taught himself, and found that as a smart business person, he was able to write code to help with modelling a business. Then Microsoft Access came out, and this was even better. Access was great for small workgroup applications, but not for larger enterprise things. So Rod began developing a relationship with Microsoft, and was looking for a firm to join that was doing this as a business. Couldn’t find one. So started Glazier Systems (we’re the “Windows” people). Glazier was the first dedicated Microsoft shop, and would take all the new Microsoft technologies out to customers.

Then the web boom came along, and Glazier was able to build Web-based applications for delivery anywhere. Advantage Systems was interested in this area too, and so Rod and his crew sold Glazier to Advantage for $7.2 million. There were about 50 people. Rod became the CTO of Advantage, when Eric Watson was in the IT game. After his 12 month contract ran out, Rod left.

Started a mobile player for mobile directories, and learnt a lot about raising money, running a business, and more. About 2003, held onto the intellectual property, and decided to do something new.

The Aftermail Story
Rod’s new aim about 2003 was to create a global software company, with Rod being the CEO. The idea was very simple: a relational database for email. Email comes in, and is currently logged into people’s mailboxes. Rod and team wanted to model it properly into a relational database, and thus unlock all of the associated business value about customers and contracts.

One of Rod’s key learnings was that you need sales as well as technology. So formed the business with 5-6 partners, and self-funded through adding money onto the partner’s mortgages. They crafted an early adopter program, with a one-page agreement that removed the risk for Aftermail, and got a number of government departments to play. Wanted to build the business quickly, and get a trade sale ASAP. Invested any money coming back in, and within 6 months, were doing trips to the UK fairly regularly. Fairly shortly, had 130 customers in 9 different countries. Had to decide then whether to build a global sales team, or to take a trade sale. And thus Quest Software purchased Aftermail, and the rest is history.

Key takeaway: Entreprenuership isn’t a one-step wonder. It takes time to build up experience.

Q. How do you make your first sales overseas?
A. We did it ourselves. We looked at Australia, but failed miserably. Had lots of activity, but no action. So decided to go for the UK (NZ was known because of Lord of the Rings, etc). It was a bigger market. Thus put a distributor in Australia, and focused all efforts on the UK.

Q. And were you in the US as well?
A. No, we decided not to do the US. Decided not to start there. Knowing that a trade sale was the likely exit, then could leave the US as a big prize. And the Aftermail team had limited bandwidth too.

Q. For negotiations over the trade sale, did you have an expectation on value?
A. A trade sale can be a really good thing if it is part of a stepping stone. Wanted to build a world-class product, not necessarily to build a world-class company. Also wanted to build a capital war chest for the next thing. After a couple of years, had a good spread of different working and risk styles. For a whole bunch of reasons, it was a good time to do a transaction and clear things out. Rod drove the sale.

Step one: where is our acquirer going to come from? Most likely US. Thus went to a US trade conference, and looked for the biggest vendor. Saw that there was a good fit between Aftermail and Quest. Within about 3 live meetings, got through to the M&A people, and knew that Aftermail was in play. Rod said, “I’m coming up, can we meet up”. Went into it with a threshold amount … would the transaction number allow us to do the next big thing? Rod stayed on for 9 months to ensure the transaction worked, and then shifted on because he likes building new things.

Q. What’s next?
A. Talk about that another time.

Q. What does it take to build a world-class company?
A. Don’t know. Haven’t done it yet. But hopefully the next one will be. Knows more about what is involved.

Q. If you deliberately set out to build a world-class product rather than company, how do you motivate people?
A. Equity.

Q. Why not VC funding?
A. Because you can only sell the company once, and that’s what VC funding is. Did look at VCs, but the valuations are tough. The VC term sheet puts themselves in control of all of the next rounds. In hindsight, might have taken VC money earlier on which would have made things easier.

Q. Is product development and trade sale a good model for New Zealand?
A. Absolutely. We should be doing 10 trade sales a year. There should be a portfolio of companies that are working toward this.

There are many public companies that need to grow, and for most of them, about 50% of development comes from acquisition. You have to know who these players are, and how to get infront of them. The big companies grow by acquisition, not via R&D. The public companies are becoming big sales machines.

The next question becomes: how can you build something that acquirers will want to acquire? How do you get into the deal flow? Need a reasonably good product that a reasonably good public company would acquire for a reasonably good amount of money.

Q. Would you do a salary sacrifice again?
A. Don’t need to now, but yes. However, salary isn’t important, because the transaction at the end is the main focus.

Q. What’s next?
A. Doing 5 companies. Doing accounting software as a service; building the accounting system we’ve always wanted. Had a couple of people build all of the plumbing. Then hired a couple of designers … doing the user interviews, building prototypes, etc., rather than just doing a large specification. Everyone has equity, but Rod is clearly the major shareholder. Vision is to create a New Zealand acquisition engine, so as to provide an exit strategy for small New Zealand firms.

There’s some other things … planning software, sales tracking … that Rod has always wanted. So is paying for interaction design work, and then trying to link up some young people with the ideas. These ideas are not tied to a particular region, so can do it from anywhere. Can do the investment for $50-$100K, which allows a number of intelligent people to do some excellent things in 6 months or so.

Converting from Services to Products
Key themes:

  1. Exporting is the most noble thing you can do for your country. People should be encouraged to do this. Parliment needs to make it easier.
  2. We need to invest in businesses, not just in property. Property investment is fine in the short term, but we’re hollowing out our business future. Although it won’t happen, if we had capital gains tax on property, people would invest more in their businesses.
  3. We have really great services business, eg, fee-for-business. In Wellington, 99% of the IT industry is locked into $150K per person per year. Why are we doing these rather than products? Low cost, low risk, low investment. However … it’s appalling that we have great technology tools and are only contributingg $120K per IT worker to GDP. We should be using these skills to drive productivity via products.

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