🏴☠️ ⚡️ Graphic Design SaaS with $800k Revenue…likely a Tech-enabled Service(Deal Tear Down)
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TABLE OF CONTENTS:
FIRM PROFILE
INDUSTRY OUTLOOK
STRENGTHS
RISK FACTORS
QUICK WINS & OPPORTUNITIES
MARKET COMPS
CONCLUDING THOUGHTS
🎯 DEAL TEAR DOWN
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FIRM PROFILE
Graphic Design SaaS with $800K Revenue…likely a Tech-enabled Service
A profitable SaaS business providing bespoke graphic design and creative (think: website banners, ads, email templates, etc.) with $800k in TTM revenue and $300k in TTM profit. The platform [though this is likely an on-demand team of human designers powered by SaaS and generative AI tooling, otherwise known as tech-enabled services] is distinguished by fast turnaround times and high-quality design output. It competes in the multi-billion dollar global graphic design market and is most comparable to firms like Design Pickle and Penji. With a low customer acquisitißon cost, high customer lifetime value, and an 85% retention rate, the company is poised for expansion through vertical diversification and enhanced marketing efforts. Founded in February 2020 and currently employing between 21 to 100 people, it operates on a recurring revenue model with subscription fees ranging from $449 to $2,395+ per month, plus pay-as-you-go options. The sale is motivated by the founders' desire for capital and expertise to scale beyond its current achievements, offering a solid foundation for potential buyers to achieve exponential growth.
ASKING PRICE: $2.5M
TTM REVENUE: $800k
REVENUE MULTIPLE: 3.13x
TTM PROFIT: $300k
INCOME MULTIPLE: 8.33x
TTM GROWTH: 30%
RULE OF X: .98
PRODUCT STACK: ReactJS, PHP, PostgreSQL, Redis, RabbitMQ, NGIX, TypeScript, DigitalOcean, CloudFlare
TEAM SIZE: 21-100
FOUNDED: 2020
SV SCORECARD AVERAGE
💥 2.6 / 4
INDUSTRY OUTLOOK
MARKET SIZE & GROWTH: The global graphic design market was valued at $45.0 billion in 2023, showcasing its substantial economic importance. In the United States alone, the market is valued at $13.3 billion. The industry is projected to grow to $78.25 billion by 2030, with a compound annual growth rate (CAGR) of 4.5% from 2024 to 2030. This growth is indicative of the expanding demand for graphic design services across various sectors, fueled by digital transformation and the burgeoning e-commerce industry, especially in the Asia-Pacific region, which is home to several of the world's largest and fastest-growing e-commerce markets, including China, India, and Indonesia. (Source)
TRENDS & INDUSTRY DRIVERS:
Automation and AI Integration: Recent advancements have seen the launch of AI-powered design tools, such as Adobe's Generative Fill in Photoshop and Canva's Magic Studio, which are transforming design workflows and making content creation more accessible.
Increasing Importance of Visual Content: The human brain processes visual information up to 60,000 times faster than text, emphasizing the critical role of design in communication and marketing efforts.
Digital Marketing and Brand Differentiation: A significant portion of organizations invest in design to stand out from the competition; design-driven companies are 69% more likely to exceed their business goals.
FUTURE OUTLOOK:
E-commerce and Digital Platforms: The ongoing digital transformation and the growth of e-commerce are expected to continue driving demand for graphic design services.
Expansion into New Markets and Verticals: As businesses seek to differentiate themselves in an increasingly competitive market, the demand for unique and innovative design solutions is expected to rise.
Technological Advancements: The integration of artificial intelligence and machine learning into design tools will likely open new avenues for creativity and efficiency in design processes.
STRENGTHS
Very Solid Customer Lifetime Values (LTV) & Unit Economics: A $4k LTV is very solid relative to most SaaS firms catering to small and midsized businesses (SMBs). This is a testament to the existing monetization strategy and, more importantly, provides a comfortable cushion for acquiring new users. Put simply, you can spend up to $3.99k to acquire a customer and preserve positive unit economics. Furthermore, they’ve managed to achieve a customer acquisition to lifetime value ratio (aka CAC:LTV) of 1:10, which is WILD, though we have reason to believe this is not a pure-play SaaS business model. Instead of a SaaS product, customers interact with an external, on-demand creative team that is powered by SaaS and generative AI tooling. This means the margins embedded in the lifetime values are much less interesting. Put simply, a 1:10 ratio is insane, under the assumption the majority of customer lifetime value contributes to profit margin. All to say, this firm’s CAC:LTV should be discounted big time in your mind, and this is a false strength.
Healthy Profit Margin: This sets up well for a leveraged buyout, where the lenders feel comfortable that you can pay them back. Furthermore, this is probably the best an Operator / Founder can do in a tech-enabled services environment, so their processes and procedures are likely dialed. This translates to quick ramp time for a new owner and new talent, etc.
Global and Diverse Client Base: They have customers from all industries and geographies, with no single customer contributing more than 5% of revenue. All to say, you have a very wide playing field for niching down to select categories or customer profiles - more on this in the Quick Wins & Opportunities section).
RISK FACTORS
Business Model (Tech-Enabled Creative Services): Given the headcount and certain comments in the description, this is definitely not a pure-play SaaS business model. Unlike traditional SaaS businesses, where you can scale revenue without scaling costs to establish a healthy and enduring gross margin (which translates to income and high multiples), tech-enabled services involve costs (like labor) that scale linearly with revenue, so say goodbye to the crazy margins and high multiples. We all must be very woke to the fact that every firm will try to include a SaaS and generative AI element in their story to juice the valuation. Tech-enabled services in SaaS (or Gen-AI) clothing are VERY COMMON today, so stay on your toes out there…
Highly Uncertain Competitive Environment: The graphic design sector is facing rapid developments and pressure from MASSIVE incumbents like Adobe, OpenAI (aka Microsoft), Google, Canva, and so on. These firms are integrating AI and bleeding-edge technologies EVERYWHERE, raising the bar for innovation, while undercutting traditional service models (speed, cost, and scalability). The tech titans and VC-backed players are everywhere. Not our jam.
Retention WELL BELOW True B2B SaaS: While the company's retention rate is admirable relative to the category, it falls WAY short of top quartile retention rates in true B2B SaaS firms generating comparable revenue and ARPU (think: 98% retention vs 85% retention, where you have to fully replenish your customer base every 7mths). As a function of the pricing / revenue model, the customer lifetime values are interesting, but this boat sinks if you don’t fill it with new passengers every 7mths, and that is a very challenging environment to build momentum.
QUICK WINS & OPPORTUNITIES
Triple Down on the Customer Segment with the Highest Retention: Many customers in creative services don’t have enduring needs; they need creative for a specific thing (new website, etc.), and they move on after they get it. These mechanics are common in business-to-consumer (B2C) categories. We want customers who have an enduring pain point or job-to-be-done, which translates to recurring subscriptions and customer retention. A quick analysis would hopefully identify the customer profiles that fit the bill. In accordance with the Pareto principle (aka power law), our job then is to reallocate ALL resources toward these customer profiles and let the rest churn. This 80/20 play (think: focus on the 20% of customers that generate 80% of the business results) is a foundational playbook for players like Vista, and it is SUPER effective.
Verticalize the Offering and Sequence Ideal Customer Profiles: Following on the above, ideally, the customer profiles fit into a neatly defined category. This firm could then recalibrate its entire go-to-market strategy (messaging, case studies, lead profiling, etc.) to acquire as much share as possible in this category before identifying the next lowest-hanging fruit to rinse and repeat accordingly. ‘Go small to go big,’ as the saying goes…
Partnerships and Integrations: Establishing strategic partnerships with complementary platforms or services should improve retention (aka stickiness) as well. In addition, integrations like this provide embedded distribution (think: we built a Canva plug-in so now we can list on Canva’s app marketplace and exploit the traffic and attention). Integrations with popular marketing, e-commerce, or content management platforms can make the service more indispensable to users by embedding it into their existing workflows.
MARKET COMPS
Micro SaaS with ARR: $700k to $900k
CONCLUDING THOUGHTS
Graphic design is a growing and mature category with TONS of tailwinds and state-of-the-art tech, though this translates to a very scary competitive landscape where Micro SaaS firms don’t survive long. Open.ai swallowed hundreds of firms whole when they released GPTs…
This firm’s unit economics and business metrics are compelling, though they are not applicable in the context of SaaS. This is a tech-enabled service business, which doesn’t provide the margins or revenue quality we look for. In essence, humans are tech-enabled to deliver services. Thus, you must hire to scale revenue, and it’s an endless fight for margin. We like products that essentially cost zero to deliver / fulfill. Perhaps the most important point is that this deal highlights a mission-critical diligence activity in our world - discerning and validating a firm’s true business model. Nowadays, everyone claims SaaS and every business website ends with .ai…If you pay a SaaS premium for a business model that is, in fact, not SaaS, it’s very hard to create an interesting return. You’ve lost before the game starts. Many a renowned investor are on the record stating their biggest losses were the result of confusing this for that…
Lastly, there’s a nice profit margin in play here, though if you take on debt to do the deal, the margin becomes less interesting (~15% range). Furthermore, a buy-and-hold strategy is out of the question with the current retention figures. This strategy would sustain 2yrs at the very most when all your customers churn, and you generate a ruthless loss for those involved.
We’re a pass on this deal. Back to the grind. For the love of the game. 🏴☠️ ⚡️