At the beginning of the month we decided to go out and try to raise $1M in equity into XO Capital. We failed.

I'm being a little flippant. I pulled our fundraise. The truth is I just didn't get the terms I expected, and we made a conscious decision to go after deals we can push through the SBA. In theory we should be able to borrow up to $5M from the SBA to finance our acquisitions. Yes, the process will be painful and they're all personally guaranteed loans, but we're okay with that, so long as we get to keep the upside.

We've tried two paths. One is a fundless sponsor model and one is a straight equity raise. Let's go through both and get into the weeds.

Fundless Sponsor

About 3 months ago we played with the idea of raising money in some fashion, whether that was through equity or debt. In real estate there's this concept of a fundless  sponsor. Broadly it means there's no fund, there's just a single deal, and the GP takes some carry on the deal in exchange for executing on the acquisition. We thought we'd try to take that model and apply it here. I think it didn't work for a few reasons:

1. The things we're buying are just too small. These peanut sized deals are hard for professional investors to get excited about.
2. In real estate, after you buy a buildling, you kind of hand it off and are not operating the building yourself. There's another company that does that and it's just an expense item. For us, that's not a thing (I wish it was!). We operate them. So when investors asked us how long we'd be spending on a weekly basis on their investment, I didn't have a good answer. And timetracking is kind of a dumb/annoying way to do it.

The deal we were shopping around for this fundless sponsor model has turned out well so far; we ended up buying it with our own cash and it's growing!

So after a number of conversations with potential investors, the feedback we recieved was that people wanted access to our entire portfolio, not just one deal.  We heard this enough that we decided to kill the fundless sponsor path and try it.

Raising Equity

Now raising equity for a startup is a super normal thing. Raising equity into a private equity fund outside of the partners is not. I should have seen the writing on the wall before we even went out to market with our pitch but alas I'm hard headed.

The problem with these kinds of things is that everyone is pattern matching. And everyone you're speaking to usually has to sell the same shit (potentially) to people above them. I.E. investment funds also have investors who sometimes are funds themselves ... and so on.

We combined all of our portfolio companies into a single C-corp and went out to market trying to raise $1M at around a $6M valuation. Valuation is a weird concept for what we do. It's not really a function of MRR given that with the fundraise we'd just go out and buy more MRR. Hard to value. (Read 'not normal'). So when you're talking to an angel investor, they look at this thing we do and think, "huh, this is weird." Cool perhaps, but weird. When you talk to VC funds, they're not sure they can invest in what we do. It's not a fund, but it's like not not a fund... Some of them passed, others said no in one of the many ways VCs say no.

On the bright side there were a few people that said yes, just not enough at the right valuation. Frankly I think we could have gotten to a million, but again, the terms weren't exactly what we were looking for. In a perfect world, the three of us just keep owning 100% of XO and compound slowly and responsibly. We can be as patient as markets are fickle.

What's Next

Raising money to me is one of those things that you can kind of get a feel for when it's the right timing. And It just wasn't the right timing. There are other more interesting and favorable options for us right now including an SBA loan. That's our current target. We're going to buy something for right around $1M and use an SBA loan to finance it. That will bring our MRR up to a more interesting level and we can starting doing some more meaningful things with the cashflow like hiring dedicated staff to the acquisition target.

I'm still a little pissed off because I look at Angel List every day and for every investor that gave me shit about valuation, I know they're staring at the same shit I am (meaning astronomical valuations from some companies with nearly zero revenue). And sometimes they invest!

After the SBA deal we might be at close to ~$50k MRR. From there I think we can grow to $60-70k MRR and buy the rest of the way to $84k MRR. That's $1M ARR. $84k MRR is a magic number. A number that opens doors. Which doors? We shall see.

For those of you on this list, don't worry, your $ will be returned from Angel List, and I'll follow up with each of you personally.

Have a great weekend,

Andrew