Profit Guide | Murad Hemmadi | March 21, 2017

The Toronto entrepreneur and his brother bagged two big-ticket exits with this smart, patient strategy

If you want to find out that you don’t know what you’re talking about, lose some money in a few deals,” instructs Michael Hyatt. The Toronto tech entrepreneur is a frequent angel investor, a backer of venture capital (VC) firms, and was one of the Dragons on the CBC web series Next Gen Den. Amongst all those opportunities for comeuppance, Hyatt claims he’s actually only lost money on one investment, involving a beverage company. “I thought I’d understand juice,” he says. “Of course, I went into retail and I lost my money right away.”

There’s one area in which it’s clear that Hyatt does know what he’s talking about: growing and exiting companies. In a deal announced last month, BlueCat Networks, a server and software firm he started with brother Richard, was acquired by U.S. private equity firm Madison Dearborn Partner for a reported $400 million. It’s the second big-ticket exit for the Hyatts, who also started risk management software-maker Dyadem International, which they sold in 2011.

The partnership between the two brothers has been a key part of their success. “My brother and I could say anything to each other and we’re still friends—we just get past it so easily,” says Michael Hyatt, who remains on BlueCat’s board. “So people underestimate the power of that resiliency.”

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Not every family venture goes so well, but some of his other strategies and tactics are more broadly applicable. Here are Hyatt’s tips for growing and selling a business.

1. Look for margin, not buzz

Risk management software and server technology aren’t the stuff Hollywood movies are made off, but they’re profitable niches. “They’re unsexy,” Hyatt acknowledges. “But where there’s mystery there’s margin.”

Neither market is easily understood or widely appealing, and that allows the brothers to carve out a profitable space for themselves. “BlueCat today has a very high gross margin,” Michael says. That’s despite the fact that the company first made its mark by undercutting existing products on the market, and has stuck to its value-for-money strategy since. “[And] we can constantly raise prices because the market has a certain amount of inelasticity—we don’t have hundreds of competitors.”

Jumping on the latest buzzy trend makes for a poor business foundation. “Not only do you have tremendous competition, but it’s a race to zero much of the time.”

2. Pick your moment

BlueCat was founded in 2002, shortly after the dotcom bubble burst. It was a tough time for any business connected with technology. “At the time a lot of people said, ‘The Internet’s over,’” Hyatt recalls. It wasn’t a completely outlandish idea—most of what people know as the web today, like billion-user social networks and cloud-based software platforms, didn’t exist at the time.

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But the brothers believed the Internet had staying power, and spotted an opportunity created by all the anti-web sentiment. “We tried to solve the big problem of the data centre, [which was that] everybody was being terminated and the resources were going away,” Hyatt explains. BlueCat’s plug-and-play servers filled the gap.

When everyone else is running away, it’s worth seeing if there’s opportunity in the spaces they’ve vacated. “It’s actually easier to start a business in a time of panic and to get something off the ground,” says Hyatt. “A lot of the big competitors aren’t worried about up-and-coming companies—they’re worried about just keeping it together.”

3. Hold off on fundraising

With tech stocks tanking, there wasn’t a lot of easy money available to startups in the sector when BlueCat got started. “A lot of VCs were going under or closing shop back then,” Hyatt recalls. That suited the brothers just fine. “[We] were a little allergic to giving up big chunks of our company early, because we knew that we would dilute disproportionately in the earliest of days.”

Too many would-be founders flit between venture capital firms toting a pitch deck but no working product or clients, Hyatt says. Entrepreneurs are expected to de-risk an investment for backers, and the best way to do that is by building up a customer base. That in turn fetches you a higher valuation on the business.

“We spent a lot of time and our own money and effort in just bootstrapping it, getting the product out and selling it to clients,” says Hyatt. (The Dyadem exit probably helped). BlueCat didn’t take on outside capital until revenues were around $5 million. “You could criticize me for growing a little slower, but we ended up owning in both our sales a majority of the company, which ended up being a tremendous outcome for us.”

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