If you've been missing my dulcet tones check out my most recent interview with Jaryd Krause from Buying Online Businesses
If you're just here for the numbers, here they are :
We're 2 years into this. Acquisitions feel normal. Growth by acquisition feels normal. Jumping into diligence on a new product takes us a week or two at most if people are available. It is slow. I thought we'd be larger by now. I know why we're not but still, 2 years is a sufficient amount of time to figure most things out that don't have any technical risk
The problem now is that we've been playing the game on the small scale. Scale is probably the most overrated term in startup land. For us it just means (for now), how are we going to go from $27k to $50k this year without increasing headcount.
So what are the options for doubling in 2023?
Acquire / Start A Service Business
We could of course acquire a services business (or start one) and try our hands at that to make the MRR number larger but the margins on service businesses are generally lower. The point of doubling for us is to get out of this phase where we're still putting money into the business every so often because we have a burn rate. Paying off Inlytics last month helped, we own the portfolio 100% now, but we're still burning a few thousand a month. Paying rent to AWS / GCP is expensive. In some ways all software is just an arbitrage between what AWS can charge and what you can charge based on the compute you are renting. Kind of a weird way to think about it. Not that dissimilar from buying a house with an interest rate and being able to rent the house out for more than what you're paying for. Same goes for service businesses, you pay people to do work, you charge a customer more than you pay the people doing the work. Of course there are more costs than just headcount, you have to find the customer, keep them happy, prove the work you're doing is accretive, etc.
Danny is experimenting with a service business idea. I don't know if it's a long term strategy, but it could quickly get to $10k or $20k MRR and maybe 50% margins and that would be meaningful to us.
Acquire a few more micro SaaS
This is probably the biggest alpha opportunity on the planet. you buy something basically done and grow it. Our biggest wins (on a percentage basis) are from buying tiny ass things that grow over time:
- cold dm
- screenshot api
Maybe it was dumb luck that 2/3 of those were the very first acquisitions we ever did. But colddm.me was relatively recent, and has so far played out lovely. I've said it a few times now but if we had to pick just one vertical to play in, it would be sales tools all day.
Buying small in some ways is nice. Small # of customers, small product = small problems. But it can also feel like death by a thousand cuts. And it's a grind finding deals, meeting with the founders, and using our ouija board to see if it will be successful. It's also a grind operating them. Unexpected bugs, scaling issues, customer support.
Acquire a larger SaaS
We haven't really done this. Our biggest purchase to date has been Inlytics for multi 6 figures and so far it hasn't been much of a win. It hasn't been a loss, we're on track to be fully paid back in 3 years, but it certainly has not grown like we had hoped. The team has been working hard on a redesign which we will launch soon so we're optimistic we can grow this thing but it's been a slog. Paying a market rate makes it really difficult to win.
We have been trying to acquire a low multi 7 figure deal for about 6 months now. The SBA won't touch it for various reasons. We're working through how a seller financed deal would work in this situation, but either way we're going to have to write a large check and pay a market rate. That has historically been a recipe for a mediocre return and a 3 year payback period (cash on cash). That's amazing in real estate, but not so great for us.
A larger SaaS is lovely because we had to kiss a lot of frogs to do the 7 deals we've done to date. But, a larger SaaS would be a lot of concentrated risk. If that deal doesn't go well, that could significantly slow down our ability to buy things for the next year or two as we build up more cash to deploy.
A fun but dangerous idea is to buy the bigger saas and focus on building new things that won't cost us anything to build because your's truly will be writing the code. I'm not in love with this idea. We have the muscle for it though and if that's what it takes to get us to the promised land of profitability then so be it. Hopefully it won't take more than 1 or 2 base hits to work (and perhaps 5-8 attempts). Worst case (1 out of 8) that's a 12.5% hit rate. Incredible really, but painfully slow with just me building out initial products to see what gets traction. I have mixed feelings about this. It is just too at-odds with the scope of XO being a micro private equity company. Although it is just the 3 of us that own it, so we can sort of do whatever we want. But it's also in theory just as profitable to build one thing as it is to have a portfolio of several.
The strange thing is that if you build a saas company that does $1k MRR, that goes for ~$50k+ now. For us to build a small tool and get it to $1k MRR isn't that challenging. I should say, it may not be $50k worth of challenging. If again I'm building an initial MVP, that's $0 cost and then we have a heck of a marketing budget.
There's certainly no free lunch here. Buying small gives us a lot of swings at bat. I used to be in love with the concept of power laws and couldn't tell if we would avoid them with our portfolio. I think now that even though our revenue is split relatively evenly (except for the new one we picked up), we are still subject to power laws. I have no doubt that over time, we're going to have winners and losers and our portfolio will get lumpy. If that's the natural tendency of things then we should be making many small bets, selling off the underperformers and doubling down on the winners.
A Note On A Novel Structure:
Not a lawyer, this isn't legal advice, but I was talking with my accountant and he had a really interesting idea for structuring a company like XO:
- Top level hold co - LLC but elect s-corp status. Takes management fees from porftolio companies.
- Each acquisition is put into a new c-corp so you qualify for QSBS. The money for the acquisition comes from you personally bc I don't think another company can qualify for QSBS. If you sell after 5 years it's tax free up to $10M. insane. The c-corp pays the hold co management fees.
That's it! We're thinking through experimenting with this approach for a larger acquisition since some of these smaller ones just aren't material enough to warrant the complexity. If you don't know what QSBS is, it's a lovely lovely thing.
- We are now the proud 100% owners of all of our portfolio companies with zero debt
- screenshot api database got deleted and we lost ~9 hours of data :/
Yes, there's sort of an other projects section
- Mikey (CEO of cold email studio) created a new service sort of within Cold Email Studio focused on content marketing. It's going well and is ~ $8k of CES's MRR.
Cold Email Studio
- $25k MRR
- 8 customers
Super Send - New!
- $5,150 MRR
- 103 customers
- I foolishly built this from scratch - regrets!
- Been a very challenging project technically. Heavy customer support needs. More regrets lol. Hopefully churn will stabilize this month and the product will harden. My god this has been a challenging one though.
Good luck out there this week!