Behind the scenes of Nubank's first acquisition

10 lessons for entrepreneurs that are worth millions

The year is 2019. In a room well lit by the large windows that observe the comings and goings of Avenida Rebouças, David Velez celebrates with top management the incredible growth of Nubank. A year earlier, the company had reached the mark of 6 million customers. Now the celebration would be almost four times bigger: 20 million customers. 

The glass refracts the sun's rays and casts an almost divine aura over David. He and his disciples can achieve anything. They can raise as much money as they want, at whatever valuation comes to mind. They can dominate the world. Or at least that's how the moment makes them feel.

But what brought Nubank here is not what will take it there. Especially because Brazil is a very unique corner of this little sphere in which we live. As much as the feeling is "if I can make it there, I'll make it anywhere", it won't be as easy to paint the blue planet purple as spreading Sinatra's voice on the radio. 

There's a need for a plan, a well-thought-out strategy, to continue expanding. What is the thesis? Horizontal expansion? Let's do everything the banks do, but much better, as we've done so far! Or geographic expansion? Let's just repeat the formula in other countries, all crazy about a modern bank, with a wonderful UX and without revolving branch doors! It is clear! That's the plan. Let's start by invading our hermanos land. Ah, ah, Argentina is ours! Then we enter the other Latin American countries. In 10 years, Nubank will be a global bank. The biggest and best in the world!

Not Invented Here

Oh, "there's one more thing. We do everything in-house. We create our own technology. We have our own, original culture. It's always Day One here! We are obsessed with the customer."

Some of these thoughts were naturally rooted in the management team due to the success that this strategy had in taking Nubank there. When you see your company and your team as so superior, it's difficult to imagine joining forces with other companies to grow. 

So even though Nubank had the potential to access infinite money with valuations at ridiculously higher multiples than its competitors, the idea of ​​growing through mergers and acquisitions faced resistance throughout the company.

Buying a business like Easynvest, a movement of Horizontal Expansion into a new segment, but which would bring a whole new stack of technologies and products, would require a herculean effort of internal convincing. 

The alternative was to think about an organic growth strategy. Setting up a team and an operation in Argentina seemed to make more sense than any acquisition. And so it would be done.

Meanwhile in an American Auditorium

At that same time, the Gartner conference was taking place. Gartner is a renowned institution that defines which suppliers have the best credentials to make CIOs comfortable in hiring them. For Marcelo Park, co-founder and CEO of Plataformatec, a technology consultancy specialized in making teams more productive by implementing agile methodology, it was mandatory to be at that event. 

But that international trip had a bitter taste than in other years. The kind that the entrepreneur begins to feel when running the company is no longer as fun and exciting as it used to be.

After celebrating 10 years of success and growth, Ptec was facing a crisis. Not in the financial aspect. Common monthly revenue of more than one and a half million reais and a headcount of 80 people, the partners didn't have much to complain about. But that was precisely where the problem lay. Within a decade, the interests of a team of six partners begin to diverge. Young people who were previously single and childless are starting to create families. The demanding life of a consulting company is no longer so exciting. 

Plus, maintaining growth was about to get more challenging. The company dominated the Ruby on Rails services market. Agile's bread and butter was already becoming the territory of giants like Accenture. International expansion to the US was going well, thanks to the mastery of the Elixir language, which the company itself created. But in these foreign lands, new animals began to roam, including professional hiring platforms like Toptal, among others. Park felt that the company's existence was at risk. But even though leading her wasn't so good anymore, his energy didn't drop. 

There he was exploring opportunities in American territory, when he was approached by an old acquaintance. The CEO of an IT consultancy company much larger than his was intriguingly warm, offering to arrange a conversation when they were back in Brazil. 

"Keep your friends close and your enemies even closer" crossed Park's mind. And he responded warmly, forcing himself to believe that the intention was for a win-win partnership.

Entering the Lion's den

If it was truly a partnership, it would make sense to involve Hugo Baraúna, his partner. Park called Hugo to the meeting with the "competitor", who had many banks as clients and could offer an interesting cross-sell. The quick discussion in which they outlined scenarios and understood that there was an interesting potential for partnership was interrupted by the elevator door opening. The CEO's warm smile anticipated the anticipation of the proposal they were about to receive. And it wasn't a simple partnership. Companies could indeed hug each other and work together, but it was a hug of Bear. The proposal was for an acquisition. Even though it was in a share exchange format, it was this is how Plataformatec’s partners would feel it. 

"I wasn't thinking about M&A, but maybe it's a good thing." Park said. Hugo agreed. The way out of that situation was an Exit. But the format was not ideal. Joining another consultancy meant entering a new phase of more of the same. The partners, especially the two of them, would have to continue in the operation. Was there a better option?

Entering sales mode

What is the first thing you do when you receive an acquisition proposal? Create competition, getting a few more.

[1st Lesson] What is the first thing you do when you receive an acquisition proposal? Create competition

"I've never sold a company," said Park. But making high-ticket sales was his thing. This would "just" be the biggest sale of his life. And for that, a different strategy was needed. They needed more “leads”. 

The proposal they had in hand was far from perfect. If they were to sell, they wanted a company where employees would enjoy working, with a compatible culture. Furthermore, they were not willing to continue operating the consultancy in particular if the company was no longer theirs.

"Let's sell it! But I don't want to join the new company." - concluded the partners.

While the competitor consultancy's "bear hug" proposal was based on Horizontal Expansion and Product Diversification theses, Ptec's deck needed other cards. The plan was to go after them.

Acqui-Hire

The thesis of access to talent does not promise the best valuation for the target company. Even if there is a huge shortage of people with skills that the company has in abundance, this type of movement is justified by cost lines and not revenue. 

A consultancy, however, lacks tangible assets that justify lasting value. Ultimately, the value is in the people. And revenue rarely has a high recurrence, which makes the risk of acquiring the business for revenue even higher.

Ptec had an abundance of a scarce resource, a competent and senior technology project team. Professionals of the type that, in 2019, companies competed for fiercely. The acqui-hire thesis was quite obvious to potential buyers. Implementing this idea would not be difficult. But in whose head? Where to look for companies that might have this interest?

In the company's customer base. That was the plan, visit key customers and make it appear that the company was being approached for an acquisition. A slightly risky plan, but the best one to quickly get other proposals.

[2nd Lesson] Nurture the relationships your company already has with customers and partners

Avoiding past mistakes

"We can't take our foot off the gas this time." In the past, when Plataformatec was approached by another potential buyer, the prospect of a possible acquisition distracted the partners from the operation, disrupting its growth trajectory. Now this couldn't happen again. Especially because the company had recently lost an important client, which contributed to the unease among the partners. They then made a pact to remain aggressive and keep M&A conversations strictly confidential. 

This is a valuable lesson learned. The risk inherent in any transaction is high. Taking it for granted and distracting yourself from the operation, damaging growth could even be fatal. Even in the best of cases, this distraction will still hinder the deal, as a potential buyer will look suspiciously at a worsening in sales and operations, increasing the risk of not closing the deal. The partners did well to avoid this mistake. In just a few months, amidst hot M&A talks, they closed another big contract!

[3rd Lesson] Never lose focus on the business and let the pace of the operation drop because you are negotiating an M&A.

Creating desire to purchase

Park once again proved to be good at sales. He leveraged the fact that he had a proposal to open several other doors. 

A former financial client quickly accepted his invitation to lunch. There were rumors that they were open to an acqui-hire strategy. The fintech CTO didn't waste much time and started a questionnaire that seemed like something out of a form he had received from the M&A area: 

-How many partners are you? How much revenue do you have?

Park played the game, said that he had a proposal and that he had considered talking to a few clients who had a cultural fit, and so it wasn't difficult to think of them. The flattered former client responded:

-What do you say we see if our head of M&A is in the office now?

Bingo!

In less than six weeks, the consultancy had another bidder. It was time for the third one.

[4th Lesson] Use a proposal to generate loss aversion in other potential buyers.

Purple's turn

The VP of Ptec's contracting area at Nubank was an acquaintance. A coffee with him was just a Whatsapp away. Strategically, Park made an appointment at the client's office, where he would meet many of his employees. After the eighth goodbye from members of the Plataformatec team allocated at Nubank, the bank executive said:

-Is your entire company located here? I could buy you guys right away!

But the game was to play the difficult maiden. So he didn't even talk about the other proposal. 

Shortly afterwards, he sent another message asking if the M&A talk was serious.

-If you want it to be, I'll introduce you to the M&A area.

[5th ​​Lesson] Take advantage of opportunities at the right time. They don't last forever.

The gate key

An acqui-hire wasn't exactly what was on Nubank's strategic map, but the opportunity fit like a glove. In the midst of a strategic expansion discussion, with great resistance to inorganic growth and enormous difficulty in hiring good people to grow organically, the perfect storm was formed with strong winds to blow the sails of the Ptec acquisition.

Acquiring a relatively small consultancy, quickly strengthening Nubank's product and technology teams and unlocking a number of business opportunities could reverse resistance, giving a sweet taste of what a mergers and acquisitions strategy can bring to the company.

In addition to resolving this strategic knot, starting with a relatively simple acquisition experiment was a great dry run for bigger, riskier moves. An MVP of the inorganic growth strategy.

Using behavioral science in trading

The idea was implemented. Nubank wanted to do the deal. I mean, as I usually say, a company doesn't buy anyone, doesn't want or decide anything. Those who do this are the people who work there. And the group of those who wanted to make the deal happen would still have a lot of work to do to convince the others.

One day Park strategically opened his heart to a bank executive:

-I have no experience in M&A. It is a very large asymmetry of information in relation to my three interlocutors in different companies. What advice would you give me?

At the same time, he was using flattery to make the executive happy and like him, while telling him that there were other candidates on the table, creating FOMO (fear of missing out). Two powerful behavioral science tools, the first dubbed "Liking" and the second called loss aversion.

[6th Lesson] Use behavioral weapons for influence.

The executive's response was very useful for Park, but it also contained a good dose of stratagems:

-The other guys will say "let's quickly sign an MOU". This is to push you into an exclusivity condition. That's the problem. Be careful not to sign a very simple MOU.

The tip is extremely valuable. The first thing the buyer will want to push is an exclusivity agreement that guarantees that for a time the deal can only be done with him. This closes the door to conversations with other prospects, drastically reducing the target company’s bargaining power. Accepting an MOU (memorandum of understanding) with such a clause, but with superficial wording that does not address the main business conditions that are the subject of intense negotiations, can leave the company's partners in a delicate position. 

But the answer was very convenient for the bank. The thesis fit like a glove, but the deal was not obvious and needed to be justified internally. The M&A team needed time and could not take the risk of Ptec signing an exclusivity deal with another potential buyer first. 

[7th Lesson] Only sign an MOU with an exclusivity clause when the main negotiation aspects are well defined.

Justifying the deal

The acqui-hires benchmarks are quite biased. The practice is common in American bigtechs, where a team from a promising startup can generate many millions of value in a company where this represents a tiny increase in a revenue of multiple billions. It would be difficult for Nubank to swallow a very high valuation. And for areas like HR, deviating from the standard when hiring dozens of people was something complex that would require a lot of work.

The bank was making an effort on its side, but without making life easier for the consultancy partners. Each internal difficulty was translated into a condition for the business to happen. If things continued like this, it wouldn't be Nubank that they would marry.

And that's when they shined. They used their value selling expertise to help Nubank convince itself (meaning, those who wanted to convince others). They created business cases, considered variables such as opportunity costs and sculpted this rationale with very concrete mathematical tools. 

Park had an important card, the thesis of acquiring the business by a competitor. This thesis attributes an inherently greater value, as it is based on the acquisition of revenue, in addition to the potential for synergies and increased revenue. This was not the case with Nubank, which had no interest in offering technology consultancy. As much as the bank wanted to make the deal and was pressured by the aversion to losing to a competitor in the business, without a well-founded financial rationale they would not be able to get approval from the board.

- "It's not going to happen, it's too expensive." - The tension was on both sides. Now they both really wanted it, but for the founders it didn't make sense to hand over the business for the value of an annual bonus, and for the bank it didn't make sense to pay the premium to buy additional revenue, because that wasn't what they were buying.

The neobank was a value-creation machine. For every direction in which they planned to expand there were millions to be made. But it also had a truckload of development hours. And the scarcest resource at that time was the development team. The opportunity cost of the lack of hands to build products and unlock these opportunities was the key to justifying a price that made sense for both parties.

[8th Lesson] Partner with your business counterpart in putting together a rationale for the deal.

Signature

The deal was closed in December 2019, Park, Hugo and the other partners were happy. But they could barely celebrate. The turn of the year mixed a feeling of relief with tension in the shoulders, as the next step would still be a very tense moment.

The Risks of Acqui-Hire

You can't tie people to chairs. So an acqui-hire carries an inherent risk of losing what the buyer paid for if people decide to leave the company. This is a key point for M&A transactions of this type. Good communication and employee motivation is crucial and a condition for unlocking the full value of the business.

The communication

The big day had arrived. It was time to tell employees that they would now wear a purple badge. The CEO called a meeting of all company employees. Every year in January, they would do one of these to plan the year, so there was no suspicion. They had to be careful about confidentiality, but what they were about to share was good news.

There was a catch: not everyone would be hired. As the rationale for the acquisition was based on accelerating product development, it did not make sense for the bank to absorb marketing, commercial and back-office personnel.

Around 20% of staff would be laid off. So it wasn't possible to just have one big celebration. A generous layoff package was prepared, but it wasn't enough to make the news good.

They started with the easy part. In a hall in the convention center of a modern hotel, Cristina Junqueira arrived to greet a few dozen of the new bank employees and make them feel at home. It was hot news, they would become part of an incredible, fast-growing company. The surprise was great and discretion was still required. Nubank knows how to use its name to circulate the press like no one else and this was news that could not be released ahead of time.

Now it was time for the unluckiest class. As he prepared to enter another hotel room in the capital of São Paulo, Park swallowed hard and prepared to face the most difficult moment of his life. He remembered the pain of every time he had to fire someone and the bad taste in his throat whenever someone good asked to leave. That moment hurt more and tasted much worse. About twenty times worse.

He took a deep breath, went in and delivered the news without delay. At these times, flourishing and beating around the bush only makes things more difficult and the best thing to do would be to get straight to the point. It was done. Those people were treated with the respect and gratitude they deserved for building the company that would now no longer exist in its independent form.

[9th Lesson] Take good care of confidentiality and communication as well as of your employees.

Customers

As Ptec had not taken its foot off the accelerator and the consultancy business would be discontinued, an important part of the communication was to inform clients that they would no longer have access to the company's services. In order not to leave anyone in the lurch with important projects, phase-out planning for client projects was carried out over the course of a few months. Therefore, the professionals allocated to each of these clients were de-allocated from the company and reallocated to Nubank.

Integration

Plataformatec professionals were integrated as part of the Nubank team in different product and development areas. They were entering an organization with a winning culture, very well liked by customers and employees. 

The overwhelming majority of them remaining in the new institution for years is proof of the success of the entire negotiation and planning strategy for this business. 

Happy ending

The gate was now open. Nubank had successfully completed an acquisition, the first of several. In the pipeline were Cognitech, whose acquisition was completed in July of the same year (2020), bringing more great people and proprietary technology that the bank already used, in-house.

In September, it concluded the acquisition of Easynvest, a different and courageous move, of Horizontal Expansion for the investment segment. The successfully integrated company also showed the importance of breaking resistance to "Not Invented Here" for the bank's growth. 

As for expansion plans for Argentina, well, those didn't work out. The office opened there in 2019 was closed and five years later they still haven't returned to their neighbor, prioritizing expansion to other Latin American countries, such as Mexico and Colombia. 

Maybe Plataformatec was a little lucky to be at the right time, in the right place. Given the incredible results of Nubank's expansion strategy, I would say they were lucky to have Ptec as an acquisition opportunity at that time to open the door. 

In both cases, this story shows the immense potential for creating value with a well-conducted M&A strategy with the appropriate timing. 

[10th Lesson] Things change, plans change. Flexibility on both sides can be the difference between failure and success in an M&A deal.