Peter Bauer | Crain's Boston

In this ongoing series, we ask executives, entrepreneurs and business leaders about mistakes that have shaped their business philosophy.

Peter Bauer

Background:  

Mimecast sells cybersecurity software subscriptions focused on email risk management. The company counts more than 21,800 customers in more than 100 countries.

The Mistake:

I had a software company in South Africa that I founded at quite a young age—I was, I think, 23—and the lesson I learned through that was pretty instrumental in how we built this business, Mimecast.

Essentially the story there was a friend of mine and I started a software development business back in 1997, called FAB Technology. We were helping companies build some of the very first web front-end business applications. This was in the whole dot-com boom; people were paying far more than companies were worth. Software companies were becoming pretty highly valued. We were approached pretty early on with acquisition offers for the company, and one of the companies that approached us was a public company in South Africa called Idion.

Here we were approached by this bigger company to acquire us, and it was very difficult to come up with a valuation for the company. So they gave us part of the money up front, but they put together a structure which was a 12-month earn-out. Essentially we would be paid a multiple of our profits after tax in their stock, with their stock fixed at a particular price around the acquisition.

We thought, well, however much money we can make within this 12 months we're going to be rewarded by being paid a multiple of that. The stock price of the company we had been acquired by went up about seven or eight times. We were going to be paid a multiple of eight times the profit, so we were essentially being offered 64 times the money. So we were very creative in thinking about how do we grow extremely fast and extremely profitably.

Halfway through the year we had made nothing and we [had] spent a lot of money, but we managed to turn the corner. We just worked night and day in those last six months and we had people just destroying themselves to get these projects delivered. Then we came out with these absolutely absurd incentives and rewards.

Then it was late 1999 and the world started to change. And what I realized over the next two years, as people left the company, was that we absolutely burned everybody out during that period. We had absolutely no resilience in the team and no appetite within the team to deal with the difficulties of the changed market. The dot-com bubble had burst. It wasn't easy anymore.

It felt like slow motion over an 18 month period, just to see all the key people check out and then leave the company. It was a very rough time. On reflection, we had just sprinted our guts out, and hadn't set up a sustainable, long-term successful business.

The mistake was agreeing to a business relationship that was so set up for short-term gain, and that cost us a long-term opportunity. We took a company with a lot of potential and a lot of energy and a lot of goodness in that market and we entered into a sale agreement that I think in the long term created zero value for the acquirer and really torpedoed that business' opportunity to survive the dot-com downturn.

Create conditions that lend themselves to endurance and persistence.

The Lesson:

I moved to the U.K. and was thinking about my next opportunity. My Mimecast co-founder had spent 10 years with his company and so everything we've done since has been very deliberate, with that mindset that it's a marathon, not a sprint. We funded it ourselves because we didn't want to be compelled to come up with short-term demonstrations of success to satisfy professional investors. So rather than having the kind of feast or famine cash flow, we have people pay us a small amount every month or every year to subscribe to the service.

I think the lesson is, if your aspiration is to build a very successful business and career, think about how to create conditions that lend themselves to endurance and persistence. I view business and company building as an endurance sport. You accumulate more and more opportunity and advantage the more you invest

I think that if the incentives are heavily stacked towards unsustainable, short-term outcomes, those cannot co-exist with long-term, sustainable objectives. A lot of startups get a lot of money early on and it's a mad scramble to burn through that money and grow super, super fast. And a lot of those companies you don't hear of a few years later.

Maybe the lesson is for acquirers as well. When you're acquiring a company, look at the incentives quite carefully. Because if they're perversely short-term, those extreme incentives drive short-termism and they don't encourage long-term thinking and long-term engagement of key people.

Follow Mimecast on Twitter at @Mimecast.

Photo courtesy of Mimecast.