Business Lessons

October always seems to be a month of reflection for me for a couple of key reasons.

Firstly on a deeply personal level October is the month my mum was born. Unfortunately she left us all too soon over 8 years ago but October is a month full of amazing memories.

Secondly, October is the month Cadimage was formed and so I also think back to a major part of my life and career.

A year ago I wrote a series of posts on the Cadimage Story.

Today I’ve decided to post a few of the lessons I learnt during my time.

I’ve created a page so you can keep track as I post them.

Check back soon for my first post.

2016 – Business Exit

In late 2014 I had started some high-level discussions with Central Innovation (the Australian ArchiCAD Distributors) about a potential sale of Cadimage. As with the Cadconsult story, the timing wasn’t really right and so these discussions didn’t go very far.

In early 2016 I got contacted to see if there might be potential to reopen the conversation. At one level we were definitely interested but on the other hand business going well and we had some other changes in the pipeline that needed our focus. We didn’t want to be consumed with negotiations that ultimately went nowhere so we proposed a price and said that they’d need to confirm they could make an acquisition at that price (so long as it stacked up of course). Quite quickly they came back and agreed that if everything showed value to that level that they would be able to execute.

We then got dug in and thrashed out a Heads of Agreement and started providing the detail required.

All told it was a little over 5 months from initial interest to the signing of the Sale and Purchase Agreement (and about 25 other documents). We had very organised records which enabled due diligence to be performed to a high level in a very short space of time. Their accountant set aside 2 days to sit with me to do a review of our accounts and test a number of processes, review audit trails behind transactions etc. In less then 3 hours we had completed everything to a level beyond his expectations. Xero was an enormous asset but also because it was integrated with our [in house developed] CRM linking the entire trail from GRAPHISOFT to customer.

All parties wanted to make the transaction happen though that isn’t to say it was always an easy process with a number of intense conversations and negotiations. As with our earlier experiences acquiring businesses, I need to constantly ask myself and my directors ‘does this feel right’ and this proved a useful benchmark when all the final ins and outs around the price and process were being figured out.

We worked hard (and our lawyers and accountants even harder) to make it happen by the 1st July, but in the end, we would have had to push too hard, so we moved settlement to August 1st.

In the end this timing was perfect as it allowed me to signoff during our nationwide ArchiCAD 20 Launch. We hadn’t done a launch since the GFC, however, we had finally managed to get a New Zealand Building as the ArchiCAD signature building

It was a fitting culmination of my 20 years at Cadimage to sign off with ArchiCAD 20.

2015 – Real ArchiCAD Subscription

Following the success of our Psuedo ArchiCAD Subscription I kept the pressure on GRAPHISOFT to develop and actual Subscription License. The success of our experiment helped convince GRAPHISOFT of the need along with my persistence.

During the first half of the 2015 we worked together to design the mechanics of how a Subscription license would need to work – paying particular attention to how to ensure continuity for the customer even in the event of a payment failure. GRAPHISOFT developed the back-office functionality to renew a Software based license that could be delivered automatically while we developed the marketing, sales and legal side of things.

In the first instance my sole requirement was to have a monthly licence that was purchasable online and would automatically renew until the customer cancelled. We didn’t quite achieve a full automatic solution as the initial license purchase needed to be handled manually (meaning out of office hour purchases were handled the next business day – which wasn’t a major issue)

In August we were starting to see the pieces come together so I adapted our Cadimage Tools Subscription Website to allow for New Zealand ArchiCAD Subscriptions along with all the features for adding licenses, cancelling, payments, renewal payments and all the transactional email. 

As a nice aside, as mentioned earlier Xero provided much of the inspiration that pushed me towards offering Subscription. With our ArchiCAD Subscription System all online sales and renewals automatically created invoices in our Xero system.

Once everything was in place, we demoed the system to GRAPHISOFT Management before getting the green light to launch – the results of our earlier pseudo subscription were a critical part of helping both show the benefits/opportunities and quell the concerns. We got our first sale the day we launched – 1st October 2014. In less than 12months we had surpassed $1million ARR, on top of the existing Perpetual + Subscription business.

I believe this great result was a case of good timing and a strong history. Over almost 25 years since the first Archicad was sold in New Zealand we had worked hard to build a strong and loyal customer base. The subscription success was a result of this work. ArchiCAD was well recognised in the market and with the monthly subscription we were able to hit a price point ($295) that opened up ArchiCAD to virtually anyone. Many people had never taken the leap to purchase ArchiCAD as it was simply unaffordable – Subscription changed that.

2013 Pseudo ArchiCAD Subscription

ArchiCAD has always been a perpetual licensed piece of software. Over the years there have been a few different license types that allowed us to sell, for example, 200 hours pay per use or a one-month rental license and such like where customers had short term overload. However, there was no real Subscription based product.

The benefit of the recurring revenue generated by ARCHICADselect was great for our business, but I really felt with the way software was going that we needed to be able to offer an actual Subscription based ArchiCAD.

I raised the idea with GRAPHISOFT and explained why I felt it was important and that it should be investigated further.

However, I’m not really one to sit around so I kept thinking about Subscription and how I could achieve essentially a Subscription product with the licenses I could currently sell. Repeatedly selling a one-month rental license could kind of work, but with the way that the licenses were supplied and updated meant there could be problems with this approach. We therefore settled on selling a 12-month license based on 12 monthly payments. We had to take a bit of a risk as we had to pay GRAPHISOFT for the licence upfront but based on our payment terms we would have 1-2 months of payments already received so our exposure was reduced. The terms of the purchase were based on 12 payments, so while it was paid monthly it couldn’t be cancelled during the 12-month period. 

Ultimately, we wanted a web based low/no touch system but that would come later. We sold these pseudo subscriptions and set up payments via direct debit.

In the first year we sold over 100 of these licenses. In many cases companies found it an easy way to commit to another seat of ArchiCAD. After the initial 12 months many customers purchased a further 12 months, others decided to commit to a full perpetual license and others discontinued as projects were finished or staff had left.

Of the 100 licenses only one turned into a bad debt.

The results of what was essentially an experiment were extremely promising. Full license sales had continued well and the new offering helped ‘lower the bar’ for others to jump on the ArchiCAD wagon.

2013 – Switching Tools to Subscription

I was a very early user and early investor in Xero and while it took a long time for Xero to gain real traction, their early growth was still exceptional and really showed the advantages of a subscription-based license model that created a great recurring revenue stream. The ‘disadvantage’ for a business like Xero was the cash required to fuel the business while the revenue stream grew.

With our Cadimage Tools we had adopted – like ArchiCAD – a perpetual + upgrade license model. The trouble was that every year we had to ‘sell’ the upgrade and while this generally created a nice bump in revenue it was a lot of hard work. We had to spend considerable time making our Tools work in the latest version, even before we could consider adding new features. Customers at times became upset that they had to pay, in a sense, just for a compatible update (this is one of the downsides of being an addon developer)

On top of this while we had made tough calls and discontinued Tools that had only achieved low sales volumes, we still had around 8 Tools that we were selling.

Since going global in 2004 we’d tried a number of ways of selling our Tools, either individually or in Bundles or Suites all to limited success.

Coupled with my excitement around subscription models in 2013 we decided to switch to a Subscription model. We took a very simplistic approach and brought in a couple of elements from ARCHICADselect.

We created 3 Subscriptions:

  • One with Two Tools 
  • One with Seven Tools
  • One with Seven Tools and Support

There was some thinking behind the approach. Many customers had 2-4 Tools so we priced the second Plan aggressively ($49 versus $29 from memory) and also, when there are three plans people mostly adopt the middle plan. The reason for the third plan was twofold: firstly, it meant we could have three plans with the middle one being the one most would [hopefully] adopt. And secondly, it clearly implied that there was no support unless you paid for. This was more a perception then reality – we still helped all customers – but it enabled us to position the level and response time of support in a way that worked better for our business.

Having decided on the plans we needed to decide on our approach. Again, we decided that we couldn’t do this by hedging our bets we needed to be all in. We therefore introduced Subscription as the only way of purchasing new Tools licenses and perpetual licenses were discontinued except for customers who already owned them.

With the next ArchiCAD Upgrade we indicated it would be the last Perpetual Upgrade and showed how the subscription-based offer was more cost effective – which in most cases it was. Based on the starting point and the end point there were some cases which were not as cost effective (eg someone with 3 Tools) but we countered this by indicating that they would get access to an additional 4 Tools for the price.

It wasn’t an easy process, but I believe it was the right thing to do. Because we knew we would need to educate customers and that there would be resistance we took a completely fresh look at how to price to make it ‘feel’ right and to keep it simple. Having 7 Tools with a monthly price tag of $9 each could have been another approach, but different tools offered different value. $49 for the lot just made everything straight forward.

2012 – Acquisitions and Divestments

Having got a taste for acquisition and bedding in the new business, come mid-2012 we started looking at further opportunities and identified a couple of potential companies to acquire.

With the Cadconsult merger Cadimage had seen its business expand into the Mechanical CAD Business as Andrew was the New Zealand dealer for Solid Edge. We were still carrying on the development of Cadimage Tools, so we decided to look at options to compliment these two businesses.

In the Mechanical Engineering Space, we acquired an Australia business and invested heavily to try to replicate some of the success we had with ArchiCAD. However, after trying several things and spending a not insignificant amount of money we decided we needed to divest so we managed to split the business and divest it in a couple of pieces.

The second acquisition was, thankfully, more successful.

Encina was a UK based ArchiCAD developer established by Ralph Wessel. Ralph was previously a customer of ours with Walker Co in New Zealand. Some of the first visualisation projects I did was with Ralph for the Force Entertainment Centre in Auckland, and then an Office Development in the Auckland Viaduct, which was our first animation produced at TV quality.

Ralph is an architect and developer having studied both at Auckland University. He was also one of the developers we used on the Lockwood Project.

Ralph and his family moved to the UK in 2001 and established Encina a few years later. 

I had kept in contact with Ralph over the years, mostly catching up at the ArchiCAD University help in Nottingham. Encina was undertaking development projects for ArchiCAD customers (mostly via GRAPHISOFT UK) and had a couple of ArchiCAD Tools that they sold online.

I visited Ralph around September 2012 and began discussions and following concluding the purchase of Encina we established Cadimage UK in early 2013. 

People have asked why we bought two businesses especially when one of the acquisitions didn’t work out and needed to be divested again. In the first instance we pursued two opportunities on the basis that we might be successful with one. In our case both were successful and maybe we should have been more thorough in our due diligence and might have been able to foresee what might happen. But that is only easy to say in hindsight and when we were in the middle of the situation, I believe I would make similar decisions again.

Do I see having to divest the business within 24 months a failure? On one hand we lost a lot of money, but we attempted something, it didn’t come off, so we exited quickly. And again, I learnt a lot throughout the process. Some businesses would have kept trying to make it work for another 6 months and then another. I think being decisive about stopping something that doesn’t work is as important (or more) then starting something.

2011 – Acquisition of CADConsult

By mid-2011 while business was just beginning to get back on track following the GFC we began to think more about the future and where we saw Cadimage going.

Back in the previous year Lance Wiggs had joined Cadimage as an external director. Lance offered a someone controversial viewpoint at times, but in the very first instance he helped us become far more regular at “working on the business not in the business”

We established monthly board meetings and covered a lot of day-to-day and more forward-looking topics before finishing with a nice lunch.

At some point we started exploring the idea of growth by acquisition and we quickly focused on our South Island reseller Andrew Ecker and Cadconsult. This was an obvious ‘target’ of me as it would allow us to offer a consistent brand, presence and service across New Zealand and thinking even further ahead I believed it would be advantageous in the event we came to sell the business to have it ‘all under one roof’ so to speak.

Previously, sometime before the GFC, I had broached the subject with Andrew and we had some initial discussions. We (mainly me) got the wrong end of the stick so things went nowhere at that time.

Therefore, in August 2011 we tried it again, and this time we had both the experience and the independent viewpoint provided by Lance. We both talked about things from our perspective and then started thrashing out how things might look and work if we merged. Over a number of meetings, we got into financials and with Lance’s help took a very straight forward approach about what value we had and therefore what percentage of Cadimage Cadconsult was worth in order to issues shares to that level in exchange for the Cadconsult business.

Ultimately and this was critical it came down to how we felt about things and did it feel “right” for everyone. By this point arguing if it should be 20 or 21% became meaningless as we all felt comfortable and at a point where we just wanted to get on and make it happens .The numbers had been an important part of the overall process but the general discussions and feelings are what made us all know it would be successful. When the sum of the parts is greater the exact value of the parts becomes less important.

Jumping to the Sale of Cadimage in 2016, I believe all parties in this original merger were happy with the overall outcome and saw the 2011 merger as an important milestone towards the sale.

2008 – Response to a Crisis

Following the 1998 Asian Financial Crisis the New Zealand economy and the 1building industry went from strength to strength. We saw our sales go the same way and for several years in succession we overachieved our annual GRAPHISOFT Sales Targets.

Even before Lehman Brothers the New Zealand economy was suffering as a result of many “mezzanine” finance lenders collapsing owing millions. In the end the GFC simply compounded the issues we were already facing in New Zealand.

As with the majority of bull runs, confidence (and risk taking) ran high, until suddenly it didn’t. We had customers caught our who had made significant purchases that they were suddenly unable to fund. Sales literally fell off a cliff.

We always measured license Sales according to whether they were to New Customers or Existing Customers. 2008 was a year of two-halves with our Existing Sales in the second half of 2008 dropping 86% relative to the first half. 

For a number of months, we held on, we focused on minimising costs, I took no salary, we ran our overdraft to the max and we managed to keep our head above water. In the end we had to tighten our belts and let a couple of the team go, it was a tough time.

That said, it could have been a lot worse, and we were fortunate for a few things, and introduced a number of initiatives that helped us through.

Firstly, ARCHICADselect had grown sufficiently to be providing very healthy revenue. While our customers make have stopped purchasing extra licenses the majority continued to pay the Select Fees. In times of crisis (and in general) cash is king and profit comes second. With that in mind we offered all our Select Customers the option to switch from paying monthly, to paying annually up-front and in return we’d give them a 10% discount. Around 30% of the customer base took up this option (mostly at the larger end of the scale) and this helped bolster our cash reserves.

We did endure a number of cancellations from Select with the bottom being about 16% down from our Peak in mid-July 2008. Interesting the bottom came around 2010/11 (it was very bumpy for a long time, with new customers offsetting cancelations) and it took until 2014 for us to have the same number of licences on Select as we did in 2008. 

Another initiative we brought in was a lower cost version of ArchiCAD called ArchiCADstart. Many firms were laying staff off, and this lower cost version allowed many ArchiCAD skilled people to purchase and set themselves up. We also allowed customers to sell licenses to staff they were letting go.

All through this period GRAPHISOFT continued to release new versions of ARCHICAD on an annual basis with ArchiCAD 13 coming right in the middle but delivering some amazing Teamworking capabilities.

With these Annual Releases we had also started offering Upgrade Training to ensure customers could get the most out of it. Over the years leading up to the GFC this training revenue had become reasonably lucrative. However, the GFC and some customers forced a bit of a rethink.

We had some customers who after the GFC had ‘forgotten’ they previously paid for Upgrade Training and took exception to our charging for this service. While we had all suffered, we reflected on this and with a new focus on cost cutting we came up with a small iteration to the ARCHICADselect Service.

We always did a nationwide launch to show-off the new version and to get in front of our customers – in the early days this was extremely important, but it was starting to lose its significance while at the same time being a reasonably costly exercise. We therefore reshaped things and decided the Upgrade Training would become free for Select customers and that we would use the Training as the way we got in front of customers instead of the separate nationwide launch. In addition, we added a number of locations and started doing the Training in 15 cities around New Zealand instead of the previous 4-5. 

Overall this further strengthened ARCHICADselect and while we lost the training revenue, we created an enormous amount of goodwill and also saved costs 

The period surrounding the GFC taught me more about managing a business than any other period in my career. It was immensely stressful but equally rewarding to manage our way through it. We tightened our focus and our spending and had a leaner ship for the future. We also reinvented parts of our business to better serve our customers.

This became very important as during due to the length of the previous boom, and the subsequent staff layoffs many of our customers had more licenses then they required, so while they started growing again, there was a significant lag before they grew enough to warrant investing in further licenses. They did slowly add back licenses to ARCHICADselect though, so we steadily saw revenue increase again.

In an extremely sad irony, it was another ‘crisis’ that was the catalyst for the building industry being kick started again and that was the devastating 2011/12 Christchurch earthquakes.

2006 – Management Buy-out

In 2005 Cadimage was on the hunt for a new person to lead out Business Development. Throughout our history to date we’d always focused on salespeople who were more technically minded as it was important, they would be capable of demoing ArchiCAD to prospective customers.

By 2005 as the business was growing well and we’d invested our ARCHICADselect income into growing our technical team we decided the time was right to employ a top salesperson who could be supported by our technical team.

We also wanted to get someone who would commit to the team in the longer term – we’d gone through around 5 salespeople since I began – therefore when advertising we indicated there would be equity options for the right candidate.

As a result, we employed Tracey Gatland – who to this day remains involved with ArchiCAD and still hasn’t installed it on her laptop!

Around a year after employer her, Tracey started asking about the equity options. I had recently increased my shareholding and Murray and I put together plan for Tracey to purchase three share parcels over a period which would see her end up with a 25% shareholding.

Around the same time based on a series of events, Murray offered me the entire business at a particular price. Murray was basically fulltime with Buildmedia by that stage. The price Murray indicated he’d sell to me was (not too surprisingly) higher than the options we had offered Tracey.

I was very keen to take Murray up on the offer and took advice about how to finance it. The easiest way to finance it was to allow Tracey to buy 25% up front. I therefore gave Tracey two options, either she takes up the original options at the original price (spread over 2 years) or she cold jump in boots and all at 25% but based on the higher price Murray had offered me for the whole business.

Tracey jumped in and on 16th October 2006 (Cadimage 17th birthday) Tracey and I bought Murray and Tracey joined me as a director.

2005 – Pricing Effects

As you’ll have read, when we first launched ARCHICADselect we’d had around a 15% uptake. With every subsequent ArchiCAD release we tried various pricing strategies to enable our customers to join Select and over time we had started to build up a healthy number of customers and the beginning of a recurring revenue stream for the business.

Recurring revenue is great for business as it helps with planning and providing a foundation for the year ahead. When Cadimage was based purely on sales and services the volume of both could go up and down easily (and quickly). While still in its infancy ARCHICADselect was providing us a regular income which allowed us to plan and also to fund key services like Customer Support which had been difficult to finance when it was reliant purely on sales.

Anyway, we still weren’t getting the traction with ARCHICADselect that we would like and this was especially apparent with new Sales, where people simply wanted to buy ArchiCAD and couldn’t understand or see the benefit of joining select.

We had various new pricing strategies in place and even though the list price of ArchiCAD was still around $8,000 on average we were selling licenses around $6,000.

We had a visit from our GRAPHISOFT Sales Manager and through a conversation that started in Auckland and ended at a restaurant at Darling Harbour in Sydney we reworked our price list and renegotiated our Distributor contract.

By 2005/6 GRAPHISOFT had started to put a strong focus on SSA (Software Services Agreements – GRAPHISOFT’s name for ARCHICADselect) and were also starting to see the benefits of the recurring revenue stream it produced. It especially helped flatten the sales graph and meant upgrade revenue wasn’t he major focus it once was. 

What we agreed was to reinvent our price list that while not making ARCHICADselect compulsory made it a compelling offer.

The offer was if you purchase ArchiCAD and join ARCHICADselect you would get a 25% discount on your ArchiCAD purchase.

Considering ARCHICADselect was $1,500 you ended up paying $7,500 instead of $8,000 and you joined ARCHICADselect.

Not surprisingly our ARCHICADselect attachment rate jumped from around 15-20% up to around 99%. (Surprisingly it wasn’t 100% but some people just couldn’t be convinced)

From Cadimage point of view, considering our average licence price had been around $6,000 anyway we still made the same income on the sale and got the ARCHICADselect income. It, in hindsight, was a no brainer.

From an existing customer point of view we adjusted our Upgrade Pricing in a similar manner (though due to the lower price point we couldn’t make it quite so compelling) but when coupled with ArchiCAD 10 which was a monumental release we saw a great conversion of existing customers as well.

Around the world different subsidiaries and distributors have tried different strategies to varying levels of success. There has been a constant debate regarding making ARCHICADselect compulsory or not, I always preferred to give customers an option.

While the pricing we introduced changed the dial on our ARCHICADselect figures I still only see that is one key to the overall success we enjoyed with Select, the other and most critical was delivering value. Yes, the regular (by 2005 ArchiCAD moved to an annual release cycle) ArchiCAD Upgrades contributed a lot to the value of Select but all the services and benefits added significant value too. We’ll see in the next post how a financial crisis led to further value add for customers as well.