Damir Sabol: Today, it is crucial for success to give key employees a stake in the company

You can retain top employees by creating a top-notch product, but it is crucial to give them a stake in the company, as this allows that product to conquer the global market, described today based on his own experience serial entrepreneur Damir Sabol during the conference ‘Taxes and Finance in the IT Sector’ organized by Mazars. Sabol sold his company Photomath to American Google last year, benefiting numerous employees who had a stake in the company. To implement the ESOP program at Photomath, he opened a company in the USA, but ESOP can now be implemented more favorably in Croatia, and Sabol believes that IT companies should do this.

That his entrepreneurial journey from starting Iskon and the first exit, through founding Microblink and Photomath, and ultimately selling Photomath to Google was easy – it was not, Sabol admitted during the panel discussion.

– I started with Iskon after college, there were critical moments when the company could either fail or survive. The first investment was a loan for which I personally guaranteed. I had crazy faith that it would be okay, and it was, but if it hadn’t been, I would still be in debt today – Sabol recalled his beginnings, concluding that when you are in the right place at the right time and have a quality product, anything is possible.

Difficult to achieve product/market fit

However, the excessive focus of companies on their own product without the ability to commercialize it is a problem that the investment company Upliift, which invests in B2B software companies, often encounters, noted Darko Mucić, director of mergers and acquisitions at Upliift during the discussion.

– We want to help such companies turn their product into something that will be recognized in the market and will attract new customers – Mucić explained.

Sabol agreed, adding that our companies struggle to achieve that product/market fit, and that is something they need to learn.

That companies often neglect how to commercialize the product (in which they have invested a lot of time and money) during product development was confirmed during the panel by Josip Lasić, a member of the Management Board and CFO of the Končar Group. Končar, in addition to its traditional business, has turned to digitalization in recent years. Today, digital solutions and platforms are one of the four pillars of their business, and they see the future in this.

– There is not enough talk about how dynamic and growing the Croatian economy actually is. We were part of the Balkans, today we are part of the global scene, and we have many successful examples. These are the things we need to talk about – emphasized Lasić, who advised IT professionals to be bold and open to new ideas.

From a few to a hundred employees

Another typical problem in IT companies, Mucić added, is a heavy reliance on the founder and/or a few key people, so the potential departure of key individuals can disrupt the company’s operations.

– As investors who invest in smaller software companies with up to 30 million euros in revenue, most of which are in Croatia, we look at those that are in a mature phase of business, over 10 years in the market, have their own product and customers, and have passed the initial risk phase. Therefore, we strive to help companies overcome some problems that arose in the early stages when they had a few employees, and now they have reached 50 or at most 100. To enable their growth, it is necessary to introduce a completely different type of corporate culture. That is why it is important to create a team of people responsible for the business, so that it does not depend on one person – Mucić said.

Lasić, on the other hand, is concerned that after the acquisition of some companies, the founding team that ‘raised’ the company from the very beginning may disband, so at Končar they pay special attention not to disrupt that dynamic.

One example of IT companies that have opened new markets from a small company thanks to partnerships, without entering into classic acquisitions, is the Osijek-based Mono. As explained at the panel by Denis Sušac, co-founder and director of Mono, they ensured growth and stability thanks to last year’s partnership with the German group Possehl. They did not want to sell the company, but their goal was to find a minority investor who would open some new markets for them, which they ultimately succeeded in.

– We started 21 years ago when the business environment was different and when the internet was just beginning. We financed ourselves from our own resources, and terms like venture capital were completely unknown to us at that time. In the first ten years, we reached a number of about thirty people, and from 2017 to 2020, when all IT companies began to grow, we recorded explosive growth. We were considering whether to tie ourselves to someone, and last year we formed a partnership with Possehl – Sušac recounted.

Regarding attracting investments, Sabol shared his personal experience based on Photomath, from which he concluded that ‘American investors give money for you to be successful, while European investors give you money when you are successful.’

Higher risk, higher investor demands

However, before an investor makes a decision to invest in a company, in addition to all financial indicators, they also ask themselves how many years it will take for that investment to pay off, explained Kristijan Cinotti, a partner at Mazars Croatia during the conference.

– To understand investors, it is important to understand that they invest capital in a business that generates returns, but that capital has a cost. Any euro of investment always costs something. The economic value created is the difference between the return and the cost of capital that always exists – Cinotti noted.

Also, the required return for investors varies at each stage of a company’s development. At the beginning, the risk is high, so investors seek a return of 30 to 60 percent (for example, in startups). In the growth phase, a return of 15 to 30 percent is expected, and in the maturity phase, stabilization occurs and returns are not as high.

– If someone wants to buy you, the scalability of the company is also important. The industry in which the company operates is important, as well as its size. The larger the EBITDA, the more an investor is willing to invest, as it indicates stability. On the other hand, the more indebted the company is, the higher the risk, and a higher premium is sought. It is also important to consider the people, the founders, and a very good indicator during due diligence is employee turnover – concluded Cinotti.