Sramana Mitra: What does UI Path do?
Cem Sertoglu: They are the leading robotics process automation software company. They help large enterprises with complex legacy backend systems to automate a lot of the functions. These are usually systems that cannot integrate and talk to each other.
Good examples are functions like claims processing for insurance companies or compliance management and anti money laundering for financial services organizations. These are usually relegated to fairly repetitive manual clerical work force. They are not really making the best use of human capital where you can actually automate a lot of these functions at the input/ouput levels of the computer systems. It’s almost similar to recording an Excel macro.
A Turkish company in a similar vein is a company called Hazelcast. It’s one of the leading in-memory data grid products. It’s a part of the big data architecture. It’s a software product that allows processing of data when there is no time to read or write from a database. Hazelcast is an open core product. It’s one of the highest benchmarked products in the market.
The company is performing very strongly. When we met them, there were four Turkish engineers sitting in an office that was made of a shipping container in one of the techno parks. Today, the company is about a hundred employees with R&D office in Turkey and headquarters in Palo Alto with a client roster that includes Morgan Stanley, Citibank, and top insurance companies.
Sramana Mitra: This is very pertinent to ecosystems such as the one you’re operating in. We’re in 2017. Lots of stuff have already been built. There aren’t so many wide open opportunities to build these multi-billion dollar businesses out of one product area.
Some of these businesses need to be built in a very capital-efficient way with small amounts of capital – $1 million and then sold for $10 million to $15 million. They go to market through the acquiring company’s channel perhaps. They create the product and go to market through somebody else’s channel. It could even be smaller – $500,000 and sold for $5 million.
Is this something you’re open to?
Cem Sertoglu: You’re touching a very interesting point. I don’t think what you’re describing applies to our market. Typically, the local buyer universe for technology companies is quite small.
Sramana Mitra: I don’t think local buyers is how it’s going to play out. This will have to play out with the global buyers.
Cem Sertoglu: There, the problem is more of coverage and ability to execute on the corporate development front. We see small acquisitions or even acqui-hires. It would be very difficult for a Facebook or a Snapchat to come in and acquire a small Turkish company.
Sramana Mitra: I’m actually not talking about acqui-hire. I’m talking about identifying a product niche. Large companies can only do so much of their own R&D and coming up with new product ideas even if they’re extensions of their product portfolio.
Some of the early stage investors that we work with are starting to pay attention to these gaps. These are great opportunities to do these small-scale investments, develop the product, get a few customers, ensure that there is a reasonable TAM and then sell it to somebody else who’s going to take it to market.
Cem Sertoglu: I understand. It’s sensible for both acquirer and seller. I don’t think we’ve seen any examples of that. Acquisition is a bit of a scale game. For a company to make it to the radar of a global buyer, by the time it gets to the radar of a potential acquirer, they are substantial at that point. They have made a dent in the acquiring company’s line of business. They tend to be $100 million plus.
Sramana Mitra: I think you hit the nail on the head when you said it’s a corporate development issue. You have to play this proactively and get on the radar of the corporate development people. It can’t happen by chance.
Cem Sertoglu: I could name probably 20 to 30 companies today where it would make sense for a global player to come and buy.
Sramana Mitra: It would make sense. Building the full sales channel and trying to go the full distance is not going to be that easy. These ecosystems will need to learn how to walk before they can run.
Cem Sertoglu: That’s very true. On the other hand, with the amount of encouragement and the visibility of the tech playbook, you also find that the best entrepreneurs in the region are really ambitious. They probably wouldn’t take the $40 million small win. If they feel like the product is that good, they’d rather die trying rather than selling out early. That’s the behavior we’re seeing.
As investors, we are ROI-driven. If it makes sense for us to sell, we will sell. Of course we leave that position to the founders. We also see that some of our founders tend to be very tenacious and ambitious.
Sramana Mitra: It’s very nice speaking with you. I look forward to keeping in touch.