Notion Capital first invested in Brightpearl, the retail operating system, in 2012. Ten years later, in early 2022, the company was acquired by Sage for $360m.
Derek O’Carroll joined as CEO in 2016 and led the business through a total transformation, from a declining $6m ARR, to fast growth $30m ARR business in just five years. In this article Derek shares his company building and “exiteering” journey with Notion Capital’s Stephen Millard.
Stopping the rot
I joined Brightpearl with the intention of creating value for all stakeholders. But, realistically, we didn't put much effort, time or thinking into that in the first few years, because the priority was first to create a valuable asset.
That meant addressing the decline. Brightpearl was a $6 million business when I joined, but it was on its way to being a $4 million business. All the typical Bessemer SaaS metrics were red, and cash was tight, with just four months of runway.
We put together a plan to win over the board and then aligned them to refinance the business, restructuring the capital to ensure equity was distributed amongst employees as well as investors. That was critical - I needed the employees to be excited. We revalued the business in the first year in a significant down round.
Then we went into execution mode.
A new market focus and a SaaS utility pricing model
The time to value for us and our customers was too long, so we needed a new market focus and a new monetisation strategy. We kicked off a major overhaul of our pricing, moving from a nickel and dime pricing structure to a scalable SaaS utility model.
The reason why that was important was that first of all it translated to a real-world price increase of 4x. But, more importantly, it ensured we acquired new customers more suited to our proposition, with a foundation for those customers to pay more as they were more successful. A key value metric for any SaaS business - with or without an eye on a potential exit - is dollar retained revenue (DRR), or net retention - which basically translates into existing customers paying more year over year as they grow on your platform.
Everyone said, "You’re mad, with this price increase you're going to lose all your customers!" But it worked well. Small customers for whom the product was just wrong, left the platform, and joined more suitable solutions. But the customers who were growing, understood how to use the platform, and worked with us on a partnership basis stayed. As we focused more of our attention on them and as they started to grow and be more successful, the pricing grew with them. Importantly, we weren't a tax on their growth, because the more they grew, the less they paid per unit of growth.
That was probably the boldest and most impactful lever that we had in the early days of the project. It was a big undertaking, as it took three years to roll out, but it was material to our success and crowned the product market fit phase.
Don’t sell tomorrow’s churn
One of our non-executive directors was Fergus Gloster. Fergus was a founding member of Salesforce in EMEA and is incredibly knowledgeable on what a good healthy SaaS business looks like. He is a true operator and made a huge difference to me and the company.
My background is in cyber security and early-stage tech, while Fergus added a huge amount of scale up SaaS know how. One of his mantras, which we follow religiously to this day, is: "never sell tomorrow's churn." That is so important, because it allowed Brightpearl to have the confidence to find customers that would get the most value from the platform, and as importantly, to tell some customers that the platform wasn't right for them.
His input stays with us today, if you interview a customer who's deployed on Brightpearl and you ask them, "why'd you buy Brightpearl?" The number one thing they all say is, "they took the time to understand my business." It's a simple statement, but it was all linked back to that principle of “never sell tomorrow's churn.” That was a key foundational milestone that we put in place with Fergus’ help.
So, we started seeing growth, attracting the right type of customers. We then had to face the challenge of scaling up, which was the third milestone.
"Brightpearl is a great case study in how a company with a new executive team and the backing of a capable board, can change the trajectory from failure to success, through implementing basic B2B SaaS principles and executing on these principles relentlessly. Derek built and led a team that corrected a lot of errors around GTM (contract length, pricing, ICP definition etc.), ensuring that the company started to acquire and retain quality revenue over a protracted period of time. This after all is the essence of a recurring SaaS model." - Fergus Gloster.
Developing new customer acquisition channels and hiring a chairman
The company had been dependent upon inbound lead generation - SEO and PPC - and we needed to remove that dependency. We went out to raise money to invest in outbound and channel sales leads to drive the next phase of growth. We raised $15 million, bringing in a fund called Scipio that allowed us to scale our sales and partnership teams to drive growth.
From a governance perspective, the other material change that we made at that time was hiring a Board Chairman. Investors are great, but if you have only VCs on your board it's difficult to manage them and the business, while remaining independent and productive. Bringing on a chairman was incredibly important. Also, we wanted to find someone who was tech savvy, who understood SaaS, and ideally was an operator from the retail world.
We found Maurice Helfgott, who was instrumental in helping us build a truly added value board, that supported the management team and was operational and strategic. That was a key milestone for us because it freed the management to be able to focus on the right areas that would add value.
“The relationship between the Chair and the Chief Executive is one of support and challenge. In Derek, Brighpearl has a dynamic, motivated and experienced leader who works in partnership, takes feedback, adjusts to the situation as the facts change and led the company to a great outcome.
“It was a genuine pleasure to help all the stakeholders assess the strategic context, align around key decisions and achieve a great success.” – Maurice Helfgott.
Then COVID hit
Fast forward to 2020. Business is going well, chugging along at 30-35% growth year-on-year. All the metrics were green and improving. Then COVID happened. We’ve all lived through it, and it was a terrible thing for so many people and companies. But from a business perspective there were winners and losers, and we were one of the winners - selling a platform to allow retailers to grow across multiple channels, especially online, was a good market to be in and we saw the growth in the business increase from 35% to 70% in the year COVID broke out.
We didn’t let anyone go - and the team stuck with us because our culture, strategy and self-belief was strong. That really paid off during a challenging time.
Culture eats strategy for breakfast.
While we had a good strategy for growth we also knew that companies without strong cultures would run into issues. I am certain that bringing on Jacqui Coombs as our Chief of Staff in 2017 was critical on this topic. Jacqui worked closely with me and the management team to develop homegrown values to help people make decisions. People, especially in Europe, think of values as a bit woolly, while actually they are incredibly important for empowering people to make decisions, especially when they've got problems or they're in tricky ambiguous situations. If everyone has the same values, and they believe in them, they will make good decisions using those values as a guide. Establishing our values was a foundational milestone, and the impact got stronger every year, embedded into our culture and positively impacting on morale and performance.
Here’s an example of that - when I joined the business our Glassdoor score was about 2.2 out of 5. By the time we sold the business it was 4.6. And, well you can't really get much higher, five is perfect, so 4.6 was incredible. And I put that down to Jacqui, she was just phenomenal.
“We quickly recognised that to be successful, we had to lead with People First. After all, we would not have achieved this transformation without the skills, experience, commitment, and dedication of the whole team. Our team members wanted to have an impact, learn and grow, have a voice, feel connected and work in an inclusive, supportive and engaging environment. Our values guide us through our decision making and communication and offer stability - which is key during the times of rapid growth and expansion that also bring ambiguity and change - as well as opportunities. We celebrate when things go well, and acknowledge when they don't, and use those as learning opportunities to get better together.” - Jacqui Coombs.
At $10m ARR everything changes
In 2019 the business had reached a stage where we could justify bringing in a Chief Revenue Officer, because I was finding it quite exhausting running revenue and product and everything else. And I convinced an old colleague of mine, Nick Shaw, to join us. Nick’s addition to the team was transformational, because he was able to build on the foundations that we had put in place but scaled everything. He put incredible wind in our sails.
We were soon on our way to $30 million in ARR. We knew that the $10 million milestone had been important and when you get there you are part of a small club of about 20% of SaaS companies. Everyone thinks, "Oh, we've made it, we're on our way to $100m!" Well, you're not because the next breakpoint, statistically, is $30 million and to get there you need a highly repeatable playbook, which is what Nick delivered. We were very focused on getting to $30 million ARR and with Nick's help we made it. He was instrumental.
“Any success we had is down to the team: we found great people and gave them the skills and the support to succeed. It's as simple as that." Echoing Derek's advice on pricing we helped the teams see we were giving our customers huge value but not charging them for that value. So, a critical piece of work was giving everyone the confidence and skills to charge appropriately.
“My focus was on putting structures in place, with training, restrictions on discounting and compensation that was aligned with our strategy. I removed the roadblocks; the team did the rest.” - Nick Shaw.
Plotting the path to $100m ARR
With Nick on board, I was able to focus my time more strategically. Maurice and I had gone for a walk in Hyde Park in 2020 and I remember Maurice saying: "We're doing well, but we are at risk of winning the battle and losing the war." We were cash flow breakeven, growing at 60%, $18m in ARR, on track for $30m: all good. But when we looked at the amount of money the competition had put into their businesses, we knew we had to go to the market again and raise again. We went out looking for money and we had a choice of bringing in private equity funds, or strategic investors. I was a fan of bringing in strategic investors because of the nature of our business.
We had an accounting platform, which was an important part of our proposition, but when I looked at the amount of R&D we were investing it was tiny in comparison to the big players. We needed a new strategy to win in the world of accounting.
So, we approached Sage. We knew the cost of developing accounting solutions was huge and the cost of distribution was even bigger. But we believed that with a partnership with Sage and with access to their huge distribution channel we had a shot and as part of that round secured Sage as an investor.
Sometimes you just get lucky
As part of the fundraising round that brought in Sage we had appointed a financial advisor, a company called Pagemill Partners, led by Rory O’Sullivan. Rory and his team had done a good job and Maurice Helfgott, in his role as chairman, led the charge to keep our financial advisor on board. Rather than letting Pagemill go, we rolled over their incentive contract to be ready for the next round. That was a key moment that Maurice really led, it made total sense and is a great example of the added value of a Chairman.
That put us in a position where we could benefit by another key milestone that was, quite simply, luck. One of our UK competitors, Linnworks, went to market putting themselves up for sale in June 2021. We got wind of it because we could see all our customers were being interviewed about us and them. We were being interviewed by all these research firms. Linnworks ended up attracting multiple bids and we were watching this unfold from the sidelines.
One of those companies won the race to buy Linnworks. So that meant there were three companies who had spent on average half million dollars each researching the market. They had their theses confirmed, but also in all of the interviews they did, the number one competitor, the top of the market, and the one that got the best scores was Brightpearl.
Of course, the minute they didn't win Linnworks, three private equity firms came knocking on our door. Clearly, we would not engage them in discussions about selling the company without first consulting Sage. We explained the situation to Sage, who as an investor had the first right of refusal.
The work that we'd done to establish an independent and transparent board allowed us to say to Sage, "we've been approached, we have our bank rolled over, and we're going to set up a subcommittee to review any inbound offers." Shortly thereafter we had three offers on the table for a majority purchase from private equity buyers.
Surround yourself with experts at every stage - Pagemill Partners, our bankers, were exceptional
This is where the value of having an independent adviser in the form of the bank, Pagemill Partners, and in particular Rory, was so important. He and his team helped us run a transparent, extremely value-added process in which the offers were optimized. We took the offers to the board, saying we needed to take this seriously.
Sage had been watching us operating as a team for over a year, saw the competitive interest and decided to make a counter bid. They structured an offer which was great for all stakeholders - customers, employees and investors. We signed the deal in December 2021 and closed in January 2022. Now we are working to set up ourselves as the Ecommerce retail division of Sage and having a lot of fun.
“Derek, the Brightpearl board and management team had laid the foundations for a high growth, emerging category leader in digital retail operations and our role as adviser was to articulate the investment opportunity and manage a process to maximize value. Brightpearl met the criteria for a compelling PE investment - an outstanding team, clear vision, strong KPIs, multiple growth levers and a large market and we helped a small group of qualified bidders to validate these. When faced with such strong interest Sage were highly responsive, having confidence in Derek and the team's vision and ability to execute through the preceding year of collaboration. Successful M&A transactions are built’ on confidence, conviction and competition, and this deal had each of these in spades. - Rory O’Sullivan.
Too many people to thank
There are a lot of people who played a vital role. I can’t mention them all, but I’d like to call out a few more:
Lastly, a final shout out to Chris Tottman from Notion Capital, who was a great board member advisor and supporter throughout the journey. Looking back I wasn't aware how committed Notion was to supporting me and the company. Chris doggedly fought my corner and wrote cheques into every round. His direct support, as well as some big hugs, made a big difference to me. Chris truly plays a long game and he supported me personally and strategically throughout the journey.
“I have a lot of experience working with Founders stepping aside to hand over the reins to someone new, someone who has the hunger, the pedigree and who’s sweet spot is the next stage of a company's development. Often the complexity of the underlying problems and the opportunities being missed drive their reason to join. Derek was exceptional at Brightpearl; he loves a challenge, wraps his arms around it and owns the entire thing, which is what you get with very best startup CEO's.
“He created belief in a stellar near and long term future to take people, customers, partners and investors along with him on the ride, when often belief was in limited supply. He needed to do all this whilst constantly breaking and fixing things! That takes courage, not just experience, and Derek has huge amounts of both which is why he's the first name in my black book of go to CEO's.” – Chris Tottman.