An in depth video interview with Hillary Stiff of Cheval Capital Inc. about Technology and Web Hosting acquisitions.
Ben: This is Ben Fisher. I’m with www.thehostingnews.com. I’m here at HostingCon 2014. We’re here today talking with Hillary Stiff from Cheval Capital. How are you doing Hillary?
Hillary: Hi Ben. It’s good to see you.
Ben: Definitely great to see you. You and I have been around the industry for a long time. Your story really hasn’t been told. You haven’t been able to talk to people who are up and coming in the industry. What we’ve got for you today is we’ve got a little bit of background on Cheval Capital and a little bit of what we’re calling, “Running your company as if…” How did you get into the industry? I think you started back in 1997 with Verio, right? How did you grow from there into the hosting industry where you are now where you’ve completed over 250 transactions to date just in the hosting or hosting related industry? Give us the scoop.
Hillary: First of all Ben, I think you may have called me a dinosaur in the hosting industry. That’s probably accurate. As you mentioned, we got started in 1997 with Verio. We were helping them on their east coast ISP acquisition. From that, it really morphed into doing essentially shared hosting at that time. There really weren’t dedicated hosters. We worked for Verio for probably 4 or 5 years doing consolidation for hosting ending with an 1999 acquisition of Digital Nation, which was a high water mark in the industry at that point. It went for $100 million and at that point it had about $10 million of revenue. Depending on how you evaluate it, it’s about 10 to 12 times revenue multiple. Things have certainly changed in the last 10 years.
Ben: Just a little bit. We don’t see those every day now.
Hillary: No. Once we finished helping them on their buy-side deals, we started working for Endurance. We helped them complete somewhere probably just south of 20 acquisitions. It was interesting, as we worked for companies working on buy-side programs, a lot of times they’re private equity backed. What happened is we find all these companies that were wonderful companies that didn’t fit the specific requirements of the group that we were working for. Probably about 10 years ago, I think it was at the time of the first HostingCon in Chicago, we came up with the idea, why don’t we take all these individual companies that we’re seeing that aren’t a particular fit for our buyer, why don’t we put them on a list and we’ll send them out. As I said, that was 10 years ago. Since that point I think we’ve now done about 260 hosting deals in the last too many years to count.
Ben: Being that you’ve been doing this in excess of 10 years, what is your take on the industry now?
Hillary: We love the people in the industry. As you mentioned, it’s interesting. I can’t think of another industry where you have so many people that started with an unorthodox business background, being that they weren’t in a management program, they didn’t start off as a salesperson for a company. A lot of them, as you mentioned, came out of their dorm room and maybe out of their basement and had a love of computers. They created a business out of that. It’s been tremendous to work with these people, these young entrepreneurs with so much energy. I think probably the major difference that we’ve seen is maturation of the industry during that time period. You can run a good company now and still have flat revenues. It’s just we’re in a different market.
Ben: Right. The market place has changed.
Hillary: Remember, it’s still an attractive business. Just because it doesn’t have the characteristics that it used to have 10 or 12 years ago, the cash flow from these businesses are tremendous and the opportunities to continue to sell them additional products to customers to help solve issues and help them grow and do their…whatever, if they’re selling pocketbooks or if it’s a restaurant or if it’s a hotel, there are still tremendous ways you can help that customer. It’s still a good business. The cash flow is tremendous. It has different characteristics than most.
Ben: I totally agree, 100%. What would you say was your most interesting deal?
Hillary: The big ones are always fun. Some of the big ones have a lot of drama. I think I mentioned to you before, we did Digital Nation deal at the end of the 90s. That was the first $100 million deal in the hosting space at that time. I think the revenues were over $10 million. It was over 10 times revenue multiple. Unfortunately, revenue multiples have certainly come down a bit since then. iPowerWeb with Endurance was a lot of fun. A lot of those companies are ones that we stalked for years before we got them done. It was very rewarding when they finally closed.
To be honest with you, sometimes the most rewarding are the ones that are adding the most value. It may be situations, you have a young entrepreneur that has really created a special company and when you see that they’re able to cash out for something that they’ve created which is really above the standard, that’s a great feeling. We’ve had situations where there’s been a death of, unfortunately, the hoster and the estate needs to sell a business. There are some that aren’t particularly remarkable. It goes on without the rest of the world even knowing it happened, but those can be very, very fulfilling.
Ben: Even if the end goal is not to sell. One of the things they can do is they can talk to you just to learn a little bit more to know how to better effectively run their businesses.
Hillary: We’ve been in the business, as you mentioned in the beginning, since the late 90s. There are so many hosters out there who we’ve never done a transaction with. We love to talk to them and keep up to date. We’ve been talking to them for 10-15 years. We are always happy to give back to the industry. It’s been such a terrific industry. We’ll always sit down with them and talk to them about what we see and worked before in terms of tracking metrics and what may be important for their business.
As you said before, this may be a, “I’m thinking about selling in 2 years,” question or it may be, “I just need to run this business a little bit more professionally than I have in the past,” and to kind of upgrade a decision making perspective and to really understand fundamentally what’s occurring with your business.
Ben: What are your top 5 tips for running a successful business and to prepare to run it as if?
Hillary: When you create these businesses you really want to think about what is this going to look like 5 or 10 years down the road. I need to do the right things today so that I can build the foundations of this business. It really is critical to think, “When I have 15 customers, maybe I can just keep them all in an Excel spreadsheet.” That’s not going to work when you have 15,000 customers.
You always need to think about where you’re driving this business and how to prepare for that. #1 on my list is think long term and think about this company being a large company.
I think #2 that we’ve already touched on and is a recap/summary is what you need to provide the customers. You need to provide products and services to the customers so they can grow. If you’re doing that correctly, then your business…it’ll take care of your business.
Point #3 is probably you need to get systems in place so you can track all the important aspects. That’s probably your revenue growth, that’s your EBITDA growth, that’s the customers you’re adding, the customers you’re turning, customers you’re losing.
#4 is probably, we see so much emphasis put on growth, which is true, perfect, and critical, but it’s a lot cheaper to keep a customer from going out the back door than it is to add a new customer. We really are hoping to see hosters put a lot of emphasis into understanding why they’re losing these customers and what they can do to keep the customers. I think this is, as we’ve also talked about…the world’s changing. You need to continue to evolve. We don’t necessarily have to have more money than anybody else. You just have to work smart and understand where the customers are going and continue to evolve your business so you can keep up with what your customers need.
As I said before, the fundamentals of this business are extremely attractive. If you follow those 5 tips, you’re going to have a nice business regardless if you’re keeping it forever or selling it next year.
Ben: Thanks so much for joining us today Hillary. This has been Hillary Stiff with Cheval Capital. Hillary, if you could tell us, how can people find you?
Hillary: We are at www.chevalcapital.com. Email, telephone, our website, Google, we’re out there.
Ben: This is Ben Fisher with The Hosting News. Everybody have a great day, thanks for watching!