Bootstrapping a Language Product Company Using Services from London, Then Taking it Public and Scaling It to $450M: SDL CEO Mark Lancaster (Part 5)

Sramana: The other side of that coin is that the UK does not have a lot of technology companies. VCs who want to invest in the UK are looking for strong companies and don’t have as many opportunities.

Mark Lancaster: At that particular time, the company was all services and was just starting to develop the product.

Sramana: How did you negotiate valuation if the company was primarily services and the product side of the business was just starting?

Mark Lancaster: I think the value they saw in us was our services business. The VCs got a very good deal because it was done on a service valuation. We also picked a very good VC who has been very supportive. I am generally not a fan of VCs because I think they can be very destructive. Typically entrepreneurs are not just money people. There is a lot more to their background. They are driven by different things. You only go with VCs that you can relate to and trust. We were very lucky with who we picked. We have had support.

Sramana: We encourage entrepreneurs to use services to bootstrap. This is a common strategy that a lot of entrepreneurs have used successfully. I think it is important for entrepreneurs to understand how to calculate valuation in that situation. How much credit can you get for the services business? I would imagine the product gets valued like any other product business.

Mark Lancaster: I have been in this office for 13 years and we have made upwards of 30 acquisitions, so I have a bit of experience on the valuation side. The only truth I can tell you about valuations is that they are completely random. You can use discounted cash flow, you can use multi-year revenue, multiples of profit, or any other metric. All of that depends on how hot the market is and what the buyer is willing to pay. They will pay what they see the value to be at that point and time. Generally, they look at what has been done with companies of a similar nature. In the UK, they will always look at a PE ration. In the US, they will look at some form of multiples, such as multiples of sales.

Sramana: What did you get on your services valuation? Did you get a 2x on that?

Mark Lancaster: I honestly can’t remember, but I probably did not do a good job. We did not have preferences in our stock, we just had the common stock, whatever the valuation was likely was in that range. The numbers were small then.

Sramana: A product company that goes into a market that does not have a lot going on will find an $8 million valuation a good deal. You likely got a $10 million or so valuation overall, but I may be off. Activity level in a smaller geography like London, especially in 1996, was likely pretty low.

Mark Lancaster: I was happy with our overall valuation, and the product has some play there.

This segment is part 5 in the series : Bootstrapping a Language Product Company Using Services from London, Then Taking it Public and Scaling It to $450M: SDL CEO Mark Lancaster
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