You know that thing that you deal with on a daily basis at work that drives you absolutely nuts and you wonder why hasn’t anyone found a solution for this already?
Meet John Gabbert, Founder & CEO of PitchBook. He was irked by a daily work problem and became a solution solver back in 2007. Despite sad times for financial services, John decided to leave his job, and start a new data analytics platform built for the financial markets.
The problem: The private capital markets – specifically private equity – lacked the transparency needed for investors to make informed, data-driven business decisions.
The solution: An innovative research and analytics platform that would revolutionize the private markets by providing the most comprehensive data on the private capital markets all in one place – the PitchBook Platform.
10 years and a $225M acquisition later it is safe to say John made the right move to invest in this everyday work problem. Really makes you think…
SIC recently sat down with John to discuss the founding journey of PitchBook.
CL: John, when I first read your story I was enamored to realize that Pitchbook, which is now ubiquitous with the PE and VC markets almost didn't make it at all. You have quite the background working in financial services and really it was that work that led you to discover the idea for PitchBook. Can you tell us a bit about your journey to founding this exciting company back in 2007?
JG: From a founding perspective, PitchBook was built to meet a market need. I am not the type of entrepreneur to say I am going to start a company without knowing exactlywhat the idea is and what we’re solving for. I like to think I’m a little more pragmatic. I knew I was going to build a product that would meet the needs of professionals operating in the private capital markets. I had been doing investing research and building products for this industry for nine years at my previous job. I knew there was a market for more comprehensive PE, VC and M&A data and I wanted to build the tools to bring that to life.
From a cash perspective, PitchBook didn’t start generating revenue until 2009, two years after the company was founded. The years between 2007 and when PitchBook actually started generating revenue were extremely challenging – keep in mind, we were selling a private market data platform to investors and bankers in the thick of the financial crisis. You know, I think a majority of early-stage companies go through those moments of having close calls. You are taking on a lot of risk accepting financing, a lot of risk in your tech design, and a big dose of market risk as well. So that is some context for you on the challenges we faced in the early days as we were getting the product off the ground.
CL: For those who are not familiar can you define PitchBooks as a business and what value you provide to your end customer?
JG: In general we are a private markets data platform. We research the heck out of private companies with our main focus on the PE, VC and M&A markets. Our mission is to provide high-quality information and hard-to-find details on the private capital markets, including valuations, cap table information and deal terms, in addition to the most detailed information on private company financings that no one else has. Our customers include more than 2,000 institutional firms that need to make decisions about investments and they need the analytics to do so.
CL: In one of your blog post you mentioned that VC and PE valuations are bloated right now and that there is a responsibility to keep these valuations in check. How do you see PitchBook’s role in managing valuation hype in the private markets?
JG: You know, I don’t think it’s our role to help control valuations one way or another. The core of what we do is provide insights to help investors make better investment decisions. What we try to provide is clarity. As you know, it’s a cycle. Limited partners have capital that they need to invest in funds and general partners invest that capital into companies and look for liquidity events to return that capital to limited partners and keep the whole cycle turning.
I think if we look at how many venture-backed companies there are right now, which is about 30,000 at the moment, and then you look at how many exits there are today especially in the public markets there just isn’t a huge appetite. So we are focused on keeping the cycle turning by providing the needed market intelligence to enable investors to make informed decisions.
CL: When you were first building PitchBook you were living away from your family for 20 months sleeping on a friends couch. What was that experience like and what challenges were you facing?
JG: That was a really low point in this whole journey. I was living away from my family, including my two young kids. That was an unfortunate thing to have to be away that long and miss that time. I know I can’t get that time back. I was fortunate to have good friends that I lived with that really helped me out and looked out for me. At the end of the day we all do what we need to in life and hopefully in the long run it pays off.
To that point about things working out in the long run I think it comes down to how bad do you really want it to work out. If you are trying to start a company you might have to sacrifice more than you may like to. That may mean you are working later than you want or are forced to travel more than you want to or, in my case, living away from your family, but in this life there is no free lunch. You have to go get it and make the sacrifices to make it happen.
CL: I typically speak with seed and series A Fintech startups that are still in the early days. If you could go back to your first days of founding PitchBook, what is one thing you wish someone would have told you to help you get through the journey?
JG: Good question. One thing I would say is despite having to lean on many shoulders and maybe cry on many shoulders throughout this process, I’ve never really had a true mentor. Regardless, I think mentors are great for helping maneuver the startup process.
One thing that would have made a huge difference early on, I wish I was better educated, specifically in terms of negotiating deals. As an entrepreneur you only get to see a handful of term sheets so it is hard to know how to negotiate for the best deal. It also wasn’t the best time for negotiating so being better informed on that would have helped.
CL: Sounds like you needed PitchBook back then. If only you had it so you could build it?
JG: If only I had it! That’s very true. We actually do work with a lot of startups now helping them to raise capital. It’s a special package of PitchBook for them to get valuation data, and terms and conditions of recent deals to help them make that fundraising journey a bit easier for them.
CL: I am interested to hear from you how so many VCs decided not to invest in PitchBook and are likely now users of the service. What do you think held VCs back from investing in you during the early days?
JG: I think the biggest reason was timing, the markets just sucked at that time. We were looking to provide a product to investment banks in 2008 and 2009 when they weren’t spending any money because of everything happening with Lehman Brothers and Bear Stearns
Obviously, we knew it was a longer term play, but it was hard to get investments in those days. In addition to a challenging market, I probably undersold PitchBook a bit as well. At that time I was trying to raise around $3M in total capital. I think if I had pitched for a $20M raise VC investors would have been more interested.
Since we started PitchBook, we’ve focused on being a very capital efficient, high-growth tech company. So the $3 million dollar price tag just didn’t feel like a big enough opportunity to the VCs we were pitching. The flipside of that is those that did invest in us early on saw 50X returns on their money.
CL: For those who don’t know when you secured your first round of funding from MorningStar, for $1.2M you were on the brink of running out of funds. Why then did you only accept half of the $3M investment being offered?
JG: We accepted $1.2M because they were the very last investors. We had about 17 angels already invested. MorningStar was the very last investor. But to your point, it was mid-2009 and we had just hit our low point on cash with only $22K left in our bank account. At the same time, we felt like we were finally getting traction and starting to generate cash that would get us to the other side of the tunnel. Taking $3M when we were actually only looking for $500K just felt like too much dilution. MorningStar wanted to invest $3Mand we wanted $500K so we ended up negotiating down to $1.2M.
A lot of people raise as much as they can. I think in some cases it’s more of an ego thing than a practical business thing. Anyone can go spend $20M, but from a business perspective you have to ask yourself if that is prudent. You really shouldn’t be cavalier with other people’s money. It’s a big deal to accept money from an investor or family member – I take that responsibility very seriously.
That’s why we have built being scrappy and efficient into our company DNA. Our focus has always been on doing what is best for the customers. Keeping that focus is what has driven our success. If you actually look back at our business plan from the very first days of PitchBook we are doing exactly what we said we would do. And we actually did it all for almost exactly the amount we said we would. I think we spent $100K less than we said it would cost to build this business.
CL: One thing you emphasize is the importance of maintaining the fundamentals of a business as you grow and scale from the early days. As you scaled PitchBook from one guy on a couch to now 600, how have you maintained a startup culture of innovation and growth?
JG: First and foremost it’s about the people and the team. We look for good, smart people that have a desire to grow, learn and be collaborative. I know I am dropping a bunch of quasi-buzz words, but essentially we hire people based more on their potential rather than their resume credentials. I think that’s how we bake that hungriness for success into our culture.
From the very beginning our first core value has always been that the customers are king and I do believe that in the B2B space there is no one that has better customer service than us. And the second thing we always focus on is making it fun along the way by providing opportunities for our people to grow and collaborate. And you know it’s a work in progress every single day to get the culture piece right.
CL: Building on that last point, as you have become a 600 person organization, how have you managed growth versus profitability, and how do you value these metrics as a startup founder that almost ran out of capital?
JG: I think we have an obligation to build value as a company, which in a market like ours is built by focusing on growth versus maximizing profitability but it’s a balancing act. We have been cash flow positive for about six years now, however our main focus has been on growth.
We have averaged 80% growth in the last five years. The rough rule of thumb that people talk about is this rule of 40, which says that either your growth rate and/or your combination of growth rate and EBITDA margin is at least 40%. Once the growth rate goes beneath40% then you need to think about finding ways to be more profitable. If you apply that, our growth rate last year was 60%, this year it will be in the high 50% and we are still generating positive cash flows so, for the time being, we are definitely focused more on growth.
CL: One element that really intrigues me about PitchBook is this ability to deliver a high-quality product for various end customers with different needs. How have you managed to build a relatively complex set of data products while keeping a laser focus on quality?
JG: I would say this is something that we have baked into PitchBook from the beginning. We are a data company at our core. My background is on the research side. When you are an information research company it’s all about quality. In the private market no one touches us on the quality of data which is why people will pay a premium for it. It’s an institutional grade product at an institutional price point that has to be top quality.
CL: In addition to that, what big data technologies are you looking to invest in moving forward in order to continue to offer a truly differentiated offering?
JG: We have over 100 people on the software development side including a number of people on the data science side, which includes machine learning, and natural language processing. We track hundreds of thousands of companies but this year we are adding hundreds of thousands more.
The goal is to be able to efficiently track all companies and we are investing right now to enable ourselves to do that at scale. Our big data and machine learning initiatives will enable us to track millions of companies across the world.
CL: Moving to some recent PitchBook developments, what was the decision and experience like to officially sell your creation to MorningStar in the last quarter of 2016?
JG: It’s a good question I still ask myself that questions sometimes. One thing that comes to mind sometimes is if the business is continuing to grow 55% to 60%, why not grow another year before selling? I think the biggest thing for us what that we’ve been around for 10 years and we were starting to get real interests from other parties, including PE firms and other strategics and my feeling was we have built a really solid relationship with MorningStar and we have a great working relationship with them.
Despite being a much larger organization than us, culturally they have a similar style. All else equal, I would rather sign up for the next chapter of PitchBook with MorningStar versus some other scenarios and the reason why is they are letting us continue to operate in an independent way and everyone keeps their job.
We continue to do our own thing as an independent Delaware C corporation. In some ways I feel I get the best of both worlds. I love my job and what I’m doing and I have no plans to do anything else. And with the acquisition of PitchBook some of the challenges and risks of being fully independent were reduced. All in all it seemed like a prudent thing to do.
CL: What synergies do you see between MorningStar and PitchBook, and how do you expect to leverage these to grow the PitchBook brand?
JG: One thing is, I think we are in the same sandbox but in different corners of the sandbox. They serve a much different market than we do but the intersections of our business will help us facilitate further growth in the future.
MorningStar, also has the largest private independent research group so we are looking to leverage their research and public equity data. That’s a big area of need for our customers that we can improve on with their help. Those are the major ways we are collaborating to better both sides.
CL: Have you changed you management style at all post-acquisition since you are now owned by a larger public entity?
JG: Not at all. We won’t change a thing.
The Minute Rundown with John Gabbert
CL: If you could provide one piece of advice to someone considering starting up what would it be and why?
JG: Well I would probably just ask a question which is how bad do you really want to do it? The reality is that that is the biggest determining factor of whether it will work out or not because opportunities to do other things or make more money doing something else will arise. Sticking with the journey and making it work is about determination and commitment – you have to want it more than anything.
CL: What do you miss most about the early days of founding PitchBook?
JG: Probably just knowing everyone’s name. I am really bad at names.
CL: If you could model yourself after one founder who would it be and why?
JG: That’s a tough question but I do think there are a lot of great founders here in Seattle like Jeff Bezos and Howard Schultz that are so passionate about what they do and it helps that they are pretty damn good at what they do too.
No money in the bank, time lost with family and little investment interest. It doesn’t sound like the start to a happy ending, but John and his team stayed focused on the most important aspect of the business, the customer. By continuing to build a product that was truly needed by financial institutions and by focusing on the problem at hand with a tireless hunger, PitchBook grew into a powerful tool that now literally underlies most PE, VC and M&A investor’s daily decision making.
It’s the machine that keeps the data analytics to make informed investment decisions humming on a daily basis. It has become ubiquitous with the highest quality of data out there and is looked to as the needed resource to be smart on valuations, deal flow and what is going on in the private markets.
John Gabbert, a humble, focused and determined individual set out on a terribly challenging journey ten years ago. But he now can look back and see the 600 jobs he produced, the $225M company he built, and the tool that solved for hundreds of thousands of investment employees out there that daily struggle that they would otherwise face without John saying enough was enough.
Thank you, John for being a believer in and contributor to Simple.Innovative.Change. You certainly are creating a better way to do VC, PE and M&A.