In January 2022, Saudi Arabia-based fintech and foodtech startup Foodics announced it had acquired Jordan-based point of sale provider POSRocket. In this two-part series, POSRocket founder Zeid Husban explains how the acquisition came about and the lessons he learned as a result.
It has been nine months since the acquisition took place, which has given me enough time to reflect and look back at the whole journey.
I will share the story of the acquisition in full transparency with all my learnings hoping this could be related in any way to any of you so it could be of any benefit.
We were in a cash-burning business, which relies heavily on on-ground sales and support. This meant if we wanted to keep growing rapidly, we had to keep raising funds.
We were hit hard during the first few months of the pandemic, and we were raising our round of funding at the same time in February 2020. Investors were hesitant about the future of the business because the hospitality industry was one of the industries that was hit hard by the pandemic.
Luckily, we were able to close the round of funding but we did take a 20 per cent hit on the valuation. The investors also decided to put a list of conditions, and they also put KPIs for us to reach, and split the investment based on achieving those KPIs. We also had to meet certain conditions related to consolidating the corporate structure of the business. I talked to a law firm and they informed us that it would take two to three months to finalise.
Guess how much it took to finalise? 13 months! We got almost half of our investment for seven months and we had months when we couldn’t pay our salaries and I had to look for personal loans to cover our salaries and expenses.
We realised we are doing everything we could to finalise the structure issue but unfortunately these things take time; the company was growing slowly as we could not spend a lot on growth as we had to be careful with cash-burn and it was hurting the business, and for that reason the remainder of the funding was unlocked.
We then realised that I had to start raising funds again. This is when I started having those conversations with the team and Board of Directors (BOD), because you need a strategyto raise funding.
We all agreed that raising another round of investment from the region would not be the easiest task, because late-stage investors were either already invested in Foodics or not even interested in the business model. So we spoke to strategic investors and not typical VCs.
I created a list of strategic investors who could potentially lead a round of investment and I started reaching out to them. Even Foodics was on the list, but I never approached them, because I did not want to be in the weaker position. Luckily one of those strategic investors was interested and wanted to invest a significant amount. This was in April 2021, and since they were a strategic investor we decided that they will invest a smaller ticket. I agreed to honour them with the same terms we gave our previous investors in the last round (Sep 2020) due to taking into consideration the valuation was hit by the pandemic (very nice of me).
We worked on a round extension of an additional $700,000, and they agreed first to invest $350,000 in April 2021 with the option to invest an additional $350,000 or more at the same valuation in a year’s time. I would have been crazy if I agreed, it was a clear “no” and we agreed to only stick to the $350,000 in April 2021.
Let me explain why it was a clear “no”. If I had agreed for them to invest any amount in a year’s time (meaning April 2022 at the same valuation), it meant that I would have anchored a very low valuation. Plus, my investors in the next funding round would have needed the same terms they got, which means although the company had great growth in 18 months, I would have had to raise at the same valuation. After I rejected their offer we agreed to give them the right of first refusal (ROFR) option to invest in the future round to own up to 10 per cent of the company, and they also requested to have a board seat.
This was a very difficult ask because I had investors with much higher stakes with board seats, so we agreed to give them an observer seat on the board. Since they are a strategic investor you always have to be careful about their incentives and interests. Usually, if they are planning to acquire the company then it might be in their interest to keep the valuation down. Also, you have to be careful that they will have access to all the information about the business, so to protect the company I asked this investor if they ever “plan” to invest in a competitor or build a similar product to ours, they have to let us know so we could remove them from the board observer seat. That makes sense, right? This investor took it in a negative way and felt as if they were not welcomed in the company, (which was definitely not the case) and decided to pull out from the deal although we had finalised all the legal documents. I still have the deepest respect for their CEO, but this is business and everyone one of us wants what’s best for them.
I don’t know if it was fortunate or unfortunate that they decided not to continue with the deal and pulled out at the last second, because during the same time I was talking to strategic Saudi investors and I managed to raise $350,000 from them as I was planning to expand to Saudi Arabia.
In June 2021, I received a call from Ahmad AlZaini ,the co-founder & CEO of Foodics, at 11pm. I was a bit confused as to why my competitor was calling me on Tuesday at night out of the blue.
To give a bit of context, I had sent Ahmad a message on LinkedIn a long time ago and told him to stay in touch since we are in the same field and we exchanged numbers and we met once in Saudi but never talked since then.
Ahmad explained on the call they had raised a $20 million Series B round and they wanted to increase their total addressable market (TAM) by getting into retail, he mentioned joining forces and for Foodics to focus on F&B and Rocket to focus on retail. I would be lying if this scenario had never crossed my mind. I was amazed that this thought was turning into reality. I thanked Ahmad for his call and told him that I was always happy to discuss win-win scenarios, and to arrange another call to discuss this further. He then booked a virtual meeting two days after our first call.
I then of course informed our BOD but did not inform the team, I did not want to distract the team. I wanted them to stay focused on the business as these topics can definitely be a distraction. I had the call with Ahmad and Foodics’ CFO Abdullah Tahboub. They clearly expressed their intention to acquire the company but they wanted to acquire 51 per cent of POS Rocket and leave 49 per cent to us. They tried to convince me that I would still have control.
When I thought about it, more than 80 per cent of our customers were in the F&B industry and if we were to focus on the retail sector, while Foodics owned 51 per cent, it meant that our “incentives will NOT be aligned”. I would be working hard on increasing our 49 per cent share and they would be working hard on increasing their 51 per cent. We had a passion for F&B not retail so it would have been VERY difficult to pull off.
Always have incentives aligned in any merger and acquisition (M&A) deal. The last thing you want is two companies working in different directions and strategies. I told Ahmad and Abdullah that it is either a 100 per cent acquisition or this whole thing will not work, they agreed instantly and then I learned they started with a 51 per cent offer so that they did not intimidate me from the first meeting, which was smart.
At the same time I was talking to Foodics, another company based in Africa reached out to us. This company wanted to expand to the Middle East and was interested in Egypt as a market, so its offer was also on the negotiation table. Talking about being lucky? I truly believe something in life, if you always have clean intentions then good things come your way and God’s hidden hands will amaze you.
We now had two offers on the table for full acquisition, and I had three options to choose from:
1- Foodics’ offer was majority share swap and minority cash.
2- The other company offered a 100 per cent all cash deal but with 40 per cent less valuation than Foodics’ offer.
3- Continue the business as we had a runway of six to eight months and raise another round of funding.
I decided to go with the first option for the following reasons:
Rocket & Foodics shared exactly the same vision, mission and purpose, we were doing the same thing, we had a similar DNA.
I met with the wider executive team at Foodics and I felt there was chemistry with all of them (which is very important) because part of the deal was for me to work with them.
I wanted to get out of my comfort zone, I have been in Jordan all my life, I know the ecosystem inside out, I wanted to be thrown into a new country, new company, new team and new environment and learn new things about myself and build a new network in Saudi Arabia.
Foodics’ plan was to raise more than $100 million in its Series C round. We agreed that we wouldl both focus on F&B and drop retail, to grow 10x faster together. I truly felt my mission is not over yet with this company, I wanted to continue working in this great industry.
I felt strongly about completing instead of competing. We were in Jordan, Kuwait and Egypt and were market leaders in those countries while Foodics was in Saudi and the UAE.
Foodics’ vision is to go public in the next two to three years, this is something I was never exposed to in my professional career, I was excited to join a company on the road to IPO to learn.
I discussed these options with the board and they were very supportive and kept telling me: “you will decide this is your company”, and honestly this is one of the most important things that any founder should strive for, your shareholders and BOD will either make or break your company. I was lucky to have a very forward thinking and supportive BOD, they were very involved in the business as we used to meet unofficially multiple times a month, and they always gave advice and never forced any decision. They made me feel that I was in control while giving very valuable input, so we all agreed that this is the route that I wanted and started the negotiations with Foodics.
It was a great experience as I was the only person negotiating from Rocket’s side, I wanted to hear from them first. They sent an initial offer, which of course was a low offer.Luckily, we are in the same business, so for us to reach a valuation that we would be converting shares into Foodics’ currency, I shifted the conversation on having the same framework in calculating the valuation. This is a very sensitive area, they were our biggest competitors and I was very worried about exposing any numbers to them.
I then decided to start, and I shared our monthly recurring revenue (MRR), sent a counter offer and explained to them why I thought we were worth this much. They then shared their MRR, and we used the same multiples but they managed to get a premium because they had higher average revenue per user (ARPU) and lower churn being in Saudi Arabia, and they were in the payment business, which made sense, so they took additional multiples.
We finally agreed on the valuations and the size of the deal. Were we done? Of course not! A few of our shareholders decided they wanted to cash-out 100 per cent, so the minority cash proceeds offered by Foodics would not have been enough for them to cash-out fully and pay other investors pro-rata.
Foodics also offered a different class of shares to our investors who were converting which was problematic to venture capital firms, so things started to get out of control a bit here. I then called Ahmad and told him the situation. If we wanted this deal to go through, it would be best if Foodics gave the option to buy everyone out while I stayed with employee stock ownership plan (ESOP).
Ahmad’s response: “Done, let’s buy them out”. I was thinking, Foodics only raised $20 million in its Series B, I was not sure it had enough cash to buy out all our investors. When I told him this, he said: “Give me one hour”.
One hour later, Ahmad called me and said “Done. We managed to raise a quick convertible round from our current investors and we are willing to buy your shareholders out”.
I was amazed and went back to our board and told them the situation. They were aligned and this is where we wanted to formalise things so I could inform all my shareholders and the team, we then asked Foodics to send us a term-sheet.
The term-sheet was signed, the majority of our shareholders cashed out at a discount of the original valuation since there was no risk on them, and a few shareholders decided they wanted to continue the mission with Foodics. I personally cashed out a portion of my shares and converted the rest into Foodics’ shares. All our shareholders made good returns on their investment and this was my duty to them. I would like to thank everyone of them who believed in the team and our mission and for their endless support during the journey and most importantly the BOD, who were very supportive during the entire process, when we used to meet twice a week to ensure a smooth transaction and to also keep me sane.
All ESOP holders had acceleration on their stocks and the option to cash-out up to 50 per cent of their shares. Anyone left in the company cashed out 100 per cent of their ESOP which was a great achievement for all our “Astronauts”.
The whole process from the first phone call till signing the final agreement took us six months.
This article was originally published on Medium. It has been reproduced on Wamda with some minor edits.