Podcast transcript
James Dihardjo
Charles, thank you for joining me all the way from London. I'm going to get you to do most of the talking. Why don't you start by telling us who are you?
Charles Tellier
Good morning, James. Delighted to be here with you and with MerchantSpring. So I'm Charles Tellier, CEO of D2E Labs. I started my career in investment banking a while ago, working for US banks in their consumer, retail and e-commerce practices.
I'm also a corporate executive. I run strategy M and A at one of the largest European grocers, and I'm also an entrepreneur. I know what it takes to start a business from scratch and we launched D2E Labs two years ago when my co-founders, had just launched Unibrand, one of the largest, FBA aggregators.
And in that position, the team saw the extreme fragmentation in the service delivery space. And I realized the merits of consolidation in the marketplace service space and in that context, we raised capital. We acquired the first platform called Market Defense a year ago. As a segue for this consolidation strategy.
James Dihardjo
Get it. Okay. Now obviously we're going to get into the nitty gritty about selling an agency and all that kind of stuff, but why don't you tell us more about what is D2E?
Charles Tellier
Sure. So D2E Labs is a Marketplace Services Consolidation Platform. Our goal is to consolidate service providers that serve brands across marketplaces and across geographies.
We do not prioritize tech content in that field. We differ a little bit from other consolidation platforms that we've seen, like Carbon6, Les, Essential. We prefer to focus on servicing models that use tech rather than sell tech. So agencies, drop shipping, any sort of business model at the intersect of those. We're based in London. But the group is present globally with the majority of our staff and activities in the US.
James Dihardjo
Interesting. So you mentioned there, you're kind of consolidating all these service providers, and I think the first time I met you I said, you're completely mad. But why did you pick e-commerce, marketplace agencies, like, of all the things you could pick, why that?
Charles Tellier
Well, it is a lot of nice people.
*Both laugh*
Charles Tellier
I guess we observed significant fragmentation in pricing, the scope of service, and generally, the range of clients that are addressed through the agency universe. So, it's also a function where you see a lot of entrepreneurial stories and often associated with a founder that has a background in some element of the e-commerce or Amazon ecosystem. So we thought it was a very interesting area where to conceptualize and execute a consolidation play.
We find that the service model for clients on Amazon and other marketplaces varies a lot also from one vertical to another. If you take the average order value, the cost of logistics, the bulkiness of item, the 1P versus 3P, the brand power that the control that it is required, the geographic elements, there is a lot of variety diversification in service that are provided. And we see the desire to have a lot of those under the same roof, if I may say, for, if we want to create that one go-to platform under the same roofs for services, for brands across verticals, functionalities, and geographies.
James Dihardjo
Get it. Okay. So that's the theory, right? But. Why don't you tell us about, you know, cutting through all the, the theory, tell us about a real life acquisition, you know?
Charles Tellier
Sure. Of Course.
James Dihardjo
You mentioned, but how are they doing now
Charles Tellier
I'll give you an illustration. So we acquired a Market Defense a little bit more than a year ago based in Seattle and Market Defense is specializing in the one vertical, that is the beauty space. And they developed a service and a range of functionalities that are particularly well-suited for clients in that space. In terms of the functional requirements, marketing brand control, and logistics.
And we think it's a very good example of what we want to achieve a certain platform that develop a specialty with a management that loves its sector. And love of course, what they do, we think, and that has the potential to go even broader than what they currently do. And that's what our platform is, is here to serve them for.
So you are asking, what have we done? We help the company essentially go deeper internationally. We stroke a partnership agreement in China. We are placing footholds in Europe, the UK, and France. We're now launching into Mexico, Mercado Libre. So we've been pretty active and really perceive ourselves as a support base, of course, for the management and the existing team, which in the particular example is great.
James Dihardjo
Interesting. So kind of think that's a good segue into the next question. So obviously you know, you've helped this Market Defense kind of go bigger and better and all that kind of stuff, which sounds great, but why, you know, obviously that's a reason to join you, but why, what's underneath that? Like why would an agency founder or owner sell?
Charles Tellier
Look it, I mean, it's a good question. And firstly, we've seen a cross range of professional services, and consolidation trajectories for the past century. It's nothing new. And usually, it entails a number of parameters. Firstly, it allows obviously the entrepreneur or the founder to realize the liquidity event. I mean, it concretely, it means cashing in. And especially those days, it's never necessarily bad.
There's also sometimes the feeling that the business might have reached a certain threshold and it's an opportunity to continue developing the client portfolio within a bigger platform. And especially, if the transaction structure includes a partial rollover, and such a bigger platform like ours can deliver synergies, and cross-selling opportunities, and be the less risky avenue for value creation for owners. So in general, why would founders sell? Well, it's an opportunity to de-risk. Make money, redistribute your own net worth as a founder, and certainly get exposure to a bigger platform with a pass to value creation, which is in our view more substantive and less risky.
James Dihardjo
Get it? Okay. Next question. You and I are seeing a lot of mergers and buying and selling, like between agencies, right? Or agencies selling to bigger agencies. But why should they sell to you, Charles? Like, you know, this is, give me the sales pitch. Like, why do you
Charles Tellier
We're the nicest guy in the room, James.
*Both laugh*
Charles Tellier
No, but like, we try to be very pragmatic and adapt to the founders' objectives and desires. There have been templates that were developed be it in the FBA rollout space or in a certain digital marketing consolidation place where a certain transaction structure should be a certain way and no others. We tend to be a little bit more well, much more flexible than that and provide a mix between cash upfront, earnout for exposure to the short term, development of the company, and certainly equity rollover for exposure over the longer term value creation through the company. So, it’s really this desire to adapt to the founder's need.
But secondly, I think, and it's the more important point, longer term, we are eager to scale talent and expertise through a broader organization and we think we have the range and the scope. Today we are in North America, Europe, and Asia. We have the range and the scope to provide that exposure and reach for talent that we would have the good fortune to be partnering with.
And generally speaking, we like to think we are, you know, good partners and well-equipped to support the next stage of growth for founder businesses. What is clear is We would never, never tell any founder what to do or the way to run their business. They have achieved a successful and fantastic trajectory. We are way, way too realistic regarding our capabilities to challenge that. But we want to be there as, as a partner for the next stage of development. We provide the merit of an existing platform of synergies and value contribution. And I think that's also a distinguishing factor versus other types of acquirers you can think of, which can be less flexible or certainly, more systematic in their approach to integration.
James Dihardjo
Got it. Okay. So, the translation is that you know, you have a great flexibility in kind of taking cash off the table, and you can, you're there for the long run, right? To help them really scale.
Charles Tellier
So I'm disappointed I need to be translated, James.
*Both laugh*
James Dihardjo
But let's say in all seriousness, like if I'm an agency listening to this, and you know, I'm liking what I'm hearing, what is it that you're really looking for to consider me as being acquired as an agency on to come onto your platform?
Charles Tellier
No, of course. We look at three broad parameters when we engage with potential partners. Firstly, the service model. What is it? What do people actually do? And is it adapted to a given vertical or completely sector agnostic? Is it replicable or extendable, across a brother range? And does it involve taking inventory? So that's really what I call the big picture around the service model.
The second dimension is the functionalities that are delivered across a variety of dimensions, that what is the tech content, and does it rely on internally? Or externally, SaaS. What are the geographies covered? And what are the general footprint and the team and partners associated for that.
And that's the third point, which is probably the most important one, which is what is the team who does what? And certainly engage with the leadership, their view about the business, what they have accomplished, so far, and what they wish to accomplish in the future. I think that this is a key part of the quality really of the discussion we have at the initial stage with the potential partners we engage with.
James Dihardjo
Get it. Okay. So just to recap, I'm not translating, just to recap. It's like you look at the service model, what actually gets delivered and the team, if anyone's willing to take that away. It's those three things. Now you mentioned geos there. I'm curious, like which part of the world or which geographies do you see the best agencies and why in your opinion?
Charles Tellier
It's a very interesting question. Having the good fortune of having a global footprint. I would say that rather than we are the best agencies because they're excellent agencies anywhere and we have discussions and engagement and dialogues and M and A executions with remarkable platforms and great portfolio of clients and talented teams, which is what I want to flag first.
But in terms of the Geographic element, we like to think in terms of the complexities and the context and what it takes to execute successfully. Like in any field, of consumer goods and retail, Europe tends to be a little bit more complicated than North America. Complicated because of the regulatory environment. It's the legal framework around selective distribution MOPs, GDPR, you know, it's just a more complex, regulatory environment.
The regulation also relates to a mass owner approaching the market with changes regarding the stances that you on 1p for wholesalers, et cetera. So it's a more complex regulatory environment. It's also more fragmented as any consumer goods, categories. You think in terms of 20 countries, languages, and marketplaces, it affects the brand recognition that differs from one geography to another and your client acquisition as well where language and appetite for proximity drive growth in domestic platforms. So it means successful players in Europe tend to be super strong because the bar is higher for to execute a successful strategy. Given the sort of backdrop, I just described.
In the US the universe is much deeper with an incredible number of talent, founders and teams that can either embrace the market as a whole or that focus on an attractive niche that they completely master. I would say the service model tends to be a little bit more fragmented in the US with incredible businesses emerging from maybe a narrower part of the servicing chain, given the depths of the local market.
And we absolutely love the energy that we see and the passion we see and that we witness every day in the US and that often translates in amazing stories. You have other, of course, areas in Latin America that are growing with still a high level of fragmentation. In China, which is obviously an entirely different ecosystem with a range of local players, one of which we partnered with, but with very different local dynamics. So rather than where are the best agencies that would rather talk about what are the specs of the local market and what does it take to succeed on those?
James Dihardjo
I get it. You clearly should have been a diplomat, Charles.
*Both laugh*
James Dihardjo
But, zooming back in to go back to the kind of the deal and the M and A stuff, you know, is there a good time, bad time? You know, anecdotally, I think everyone thinks right now the market's not great, but what's your take on timing for selling?
Charles Tellier
Yeah, there is one contractive element on the timing issue which is the best time is often when everything is good. And we hear that a lot. Everything is good. Why would I sell? But, well, precisely because that's when you're going to realize that the best value given the ongoing environment in general. It's a triangulation between A, the objectives of the founder B, what is best for the business and C, the general operating environment. So, you need to factor in these three elements to come to the right conclusion.
James Dihardjo
Get it. Okay.
Charles Tellier
Does it mean, is now the good moment? Of course not. There is no general answer. Everyone has his own agenda, objectives, timeline in mind and which again, should reflect these three parameters.
James Dihardjo
Well, I guess it's always a good time to sell to D2E, right? So no, I'm assuming a lot of people who are listening to this, may not have ever done it. And a deal or a transaction of a business. So give us the high level. How does selling actually work?
Charles Tellier
Yeah, so you just said I was a diplomat on this one. I'm not going to be a diplomat. Everyone tells you it's fast and easy. He's wrong. It's not. We tend to make it as easy and fast as possible. But an M and A process, by definition, is always an important milestone in the life of the company and in the life of the founder. The way an M and A process works is fairly well structured.
There is an informal exchange driving to the signing of an NDA which drives to a more detailed exchange of information which itself drives to the submission of a term sheet, which if agreed will take roughly, between 40 and 60 days to be executed and to deliver a transaction with the cash in the founder's account.
So it's roughly all in from the moment we go from the initial exchange of information to the cash in the account stage. It's probably between six weeks and two months. But it is a fairly intense process and it also depends on the level of preparation that the company went through and where it stands in general in terms of its reporting quality of information, availability, and so on.
James Dihardjo
Okay. I'm going to ask a bonus question now just for the sake of the audience. Give us a little teaser as to what due diligence involves.
Charles Tellier
Oh, it's very simple. It's the review of the contracts one, client's staff and two, the review of the financials.
James Dihardjo
Get it very clear. Understood.
Charles Tellier
Below those probably simplicity characterizations, there is a bit of a ramification, but in terms of principles, it doesn't go beyond that. We tend to bring a financial advisor with us who essentially will ask financial questions and go through the financials. We tend to bring legal advisors that will help us, you know, go through essentially the contracts. Nothing unusual or, or exceptional on that front, but it's a fairly straightforward process from that standpoint.
James Dihardjo
Got it. Okay. Still on the transaction stuff. So the big question is, so how much are you paying? You know, how big is your bag of money and what are the valuation drivers that you can share with us?
Charles Tellier
So that's where the diplomat comes back. Look, in terms of what are the valuation drivers, I think that's the key question. The first one is really the dynamic around the client portfolio. How big are the clients? Is a client pool growing? Are you losing? I like to think in terms of key metrics, everyone says they have key metrics on their own.
The ones we like to look at are typically the average revenue per client and the revenue term which, give an idea of the dynamic around the revenue buildup dynamic, around the platform. Then the cost base to address those clients. I mentioned the who does what, before it's really the, yeah, what are the cost entails to address a certain revenue pool and those two parameters mix into a third one, which is a financial profile and the valuation driver.
Well, yes. It's what sits at the bottom line at the EBITDA level. Typically, the higher the EBITDA, the higher the valuation. The next question is going to be what is the multiple here? It's so dependent, really on the parameters associated really to the platform itself, its size, that it's impossible to provide a narrower range.
I think that in general, it really boils down to the EBITDA profile, which may or may not be turned into seller discretionary earning, factoring in or not the compensation to the founder, to the owner. But in general, it's no different to what you see again in valuations, in consolidation trajectories, in professional services.
James Dihardjo
Yep. Yep. No, understood. So, Zooming out, zooming out just a little bit. Tell us about how, you know, agency M and A, tell us more about agency M and A versus, you know, Amazon Ecosystems, SaaS M and A. Like how is it differing?
Charles Tellier
So, it's a very good question. Look, in general, it's obviously a huge universe which drives appetite for bringing players together. That has been the case in FBA aggregation that has been the case in software. I think the big difference is that an FBA aggregator consolidates essentially brands and inventory. A SaaS software rollout would consolidate IP.
On our side, we consolidate, we bring together people, those people being founders, being leadership teams and being concretely brand managers or Service Managers that are involved in the day-to-day. And because we bring together people and the partnership level, the trust, the alignments across all, the category of people I mentioned is paramount.
And this is really at the heart of what we do. You mentioned why D2E labs. The really this notion of alignment and being a partner to help achieve management and the team's objectives is at the core. And at some, I think that's probably a bit distinguishing versus others, other rollout strategies. It does require a notion of alignment and trust. Because we are bringing together teams and talents which is a slightly different dimension to necessarily an FBA rollup or a SaaS rollup.
James Dihardjo
Yeah, no, I get it. That's clear. Now I just wanted to talk about value expansion, right? And, you know, the concept of rolling over the proceeds from the transaction. Maybe you want to explain in your mind what all that means and how you benefit from value expansion and should you roll over proceeds from like, explain what it means and then kind of answer the question.
Charles Tellier
Sure. Firstly, the priority is continuity. It's a tough job to expand and develop an agency. The last thing we want to do is to mess up with the good work that has been done by the team in place. But we do have an integration framework in place that is aimed at facilitating and supporting the development of the platform. The example of Market Defense and your first, partner agency.
We onboard all the financing. We mutualize professional services. We really make sure that the cost can be pooled and shared and spread over a wider pool of clients. And that's really what we think of when we talk about integration framework. Would the entity benefit from the systems we have in place? Technology? People? And would we benefit from the systems that the acquired entity has in place? And that takes me back to the scaling of talent and systems we want to bring from the target that we, We acquire. So what it concretely means is that unlocking synergies, cost synergies, cross-setting opportunities and certainly under a roof, brings together best practices and rolls them over a broader scope of revenue.
James Dihardjo
Get it? Okay. Circling back a bit back to the money, you know?
Charles Tellier
Yeah. You like that?
*Both laugh*
James Dihardjo
If I'm an agency now, like, how can I prepare to maximize my value? Like we'd understand the three pillars you look at, but what should I do to maximize how much you're going to pay me?
Charles Tellier
Sure. I think that there are two dimensions, a very concrete one and a more conceptual one. The very concrete one is to have files that are in place. I mentioned client contracts, financials, and HR. It's basically pure, you know, corporates, sort of hygiene, if I may say. Having the right docs in the right place saves considerable time. And drive also the formulation of reliable accounting and financials. That's the very concrete part.
There's a more, maybe conceptual part that relates to the general involvement of the founder and the way he sees the transition. It's a bit of a paradox, but sometimes it's important for a founder to take a step back not from operations at all, but from the association between his name and the franchise. Simply because you want the franchise to live and continue to flourish by itself. Regardless of the actual concrete involvement of the founder, which in lots of cases we hope will remain. So I know it's a bit theoretical, but the more we can put forward the name of the company, the better in that particular context, as opposed sometimes to the attachment of a particular company with a particular founder.
James Dihardjo
No, that makes complete sense sometimes a company's reputation is based on the founder. And I guess that's why D2E Labs is not called Charles's Labs. So,
Charles Tellier
You get a trophic platform in choice anyway.
James Dihardjo
So you mentioned there about, you know, the founder taking a step back from the brand, like, you know, so that the brand can stand up on its own, but then you did mention you would want a founder to kind of remain in operations. Now let's get a little bit deeper into that. Like, so what happens if a founder wants to stay, like, pretty involved? What does it look like?
Charles Tellier
I think on that front, you have a very simple question, which is, Is the founder indispensable to the business? Yes. No. And does the founder want to stay? Yes. No. And we are very open to the founder and anyone carrying the business to join us. And on the contrary, we want that. So obviously if a founder is indispensable for his business or her business, it's going to be very hard not to be involved going forward, unless you craft or imagine a transition period to make sure the onboarding can be done as, smoothly as possible.
But in general, to the very first point, we not only welcome, we like founders that see, merit in what we want to try to achieve that want to associate themselves with that. And if there is a preference for all cash front exit. No problem. But if there is a desire and a common ground and matching objectives to stay involved and certainly involve equity exposure, we're very much welcome that.
James Dihardjo
Get it. Alright, two more questions, Charles. And I know we're like really stretching the time here. So what is the deciding factor for a successful partnership? Like, we've discussed so many things, but what is like the, you know, the key thing?
Charles Tellier
I think a degree of Alignment. And what I mean by alignment, of course, financial alignment, but strategic alignment and really an align agreement of what we're trying to achieve before the transaction and after the transaction. That's really the first point. And the second one. Which is something we haven't really talked about. Some element of personal fit is paramount. We are spending, we would be spending time together. Even if we have working from Holden culture, you know, face-to-face matters, being working together matters. I think this the trust, the integrity, the being fair and generally nice in the context of fruitful and personal and professional partnership helps and is great in general.
James Dihardjo
Yeah, that's a very, very practical word. Very much makes sense. Final question, what is the future for agencies? You know, are we going to see more roll-ups? Are we going to see, you know, D2E Labs equivalents? Tell me.
Charles Tellier
I look, I don't have a crystal ball sadly, James. What’s the future? What I see is certainly a persistence of our model because clients need us. I think the question is who owns the clients at the end of the day? Who has the highest perceived value added and who highest trust level with a given client? And more often than not you realize that hey, the person that speaks every day, with a given client is sometimes more often than not the one that they trust the most. And that, in my view, legitimizes the agency model a hundred percent. And I've no doubt about that.
Regarding rollups, we are not a rollup. We are a consolidation platform. I don't like the systematic notion that this term entails, but will there be more? I don't know what I can tell you that, it's not easy, but it's a great industry. We meet a lot of great people all the time. So, I have no doubt about the appeal of what we're doing.
James Dihardjo
Cool. All right. Well, we've kind of maxed out our time, Charles, but it's always a pleasure and, yeah, I look forward to doing this again and seeing you in London and next time, I'm not, I'm not going to show you the questions because you're very polished.
*Both laugh*
Charles Tellier
But I wasn't seeing the question. What are you talking about? Thank you, James. It's always a pleasure to work with you and with the MerchantSpring team.
James Dihardjo
Yeah. Awesome. And if anyone wants to get in touch with Charles, just hit him up on LinkedIn or you can reach out to me and I can connect you.
Charles Tellier
Thank you.
