🏴☠️ ⚡️ Issue #13: B2B Lead Gen SaaS (for Portfolio Synergy) & The ExO Biz Canvas
Welcome! This newsletter is dedicated to acquiring and operating Micro SaaS firms. Join us every other Saturday morning for deal analysis, operating frameworks / templates, and other musings...
Fam, I apologize for the two-day delay in getting this issue out the door.
With that said, I’m excited for this one, as we introduce a new strategic vantage point when considering and executing acquisitions among a broader portfolio. It turns out, many Micro SaaS firms contain ancillary assets (like data sets, APIs, etc.) that can be more valuable than the core business assets (products and customers). In addition, the game of acquiring and operating Micro SaaS firms changes as the portfolio grows and the levers for value creation become more dynamic.
Let’s jump in:
🎯 ACQUIRE — a B2B Lead Gen SaaS that could supercharge a broader portfolio
⚙️ OPERATE — one of my fav evolutions of the ‘Business Model Canvas’ to identify and establish big points of operating leverage based on modern methods and tooling
🤔 MUSINGS — Our culture is about results
🎯 ACQUIRE
// STRATEGY CONCEPT
Before diving into the tear down below, it’s important we introduce a new concept.
In the most general terms, private equity buyouts are motivated by the potential returns. Returns are of course a function of the firm’s thesis (sweet spot), the execution of a value creation plan, and the entry / exit price.
Once a portfolio is established (aka multiple companies owned by the same group), new strategic motives enter the picture. One flavor of this is treating the portfolio like it’s own ecosystem, where you start to consider investments and activities for the impact they can create upon the portfolio vs the traditional returns that specific investment might generate.
These are the kind of scenarios / questions that come up:
If all of our portfolio companies need an XYZ, why not acquire an XYZ?
If we acquire XYZ, how much could we grow XYZ’s revenues once we’ve got our entire portfolio using it? (PLUS! This dollar now stays within our portfolio ecosystem vs going to an outsider)
Now that our entire portfolio is using XYZ (in addition to their other customers), how can we make use of all this data to be smarter / faster in the domain XYZ caters to?
Hopefully the above gets the point across. If you’d like to dive deeper, ‘the Keiretsu Effect’ is a great place to start:
“Working closely together can bring many benefits. Companies in the keiretsu can leverage each other’s expertise to become stronger and better; information shared among customers, suppliers, and employees within the keiretsu can lead to increased efficiency. As a result of this information-sharing, investment decisions can be made faster, and suppliers, employees, and customers know the purposes and goals of those investments.”
// DEAL TEAR DOWN
PUBLIC FIRM PROFILE
“SaaS with $107,000 in TTM revenue and $16,000 in revenue last month that provides B2B lead generation for large and small companies across DACH, EU, UK and USA. Our software has lots of functions and features, like website visitor recognition, company database, contact finder, ChatGPT based chatbot, integration with various CRM and marketing software.”
ASKING PRICE: $456k
TTM REVENUE: $107k
FOUNDED: 2019
REVENUE MULTIPLE: 4.3x
TTM PROFIT: ~$24k
TEAM SIZE: 7
PRODUCT STACK:
YoY GROWTH: 70%
SV SCORECARD AVERAGE
💥 2.83 / 4
STRENGTHS
GROWTH — 70% YoY growth is 99th percentile for SaaS doing $0 to $25k MRR. This is obviously very appealing from our perspective, though it does throw off some yellow flags re:
The seller’s motive (why sell something that is ripping?)
The stability of retention across cohorts (i.e. if churn is growig linearly with growth, the growth is way less exciting…).
These items are a good start for our list of due diligence priorities.
USAGE BASED PRICING — This firm’s value proposition is to convert website visitors into a structured list of actionable leads, enriched with whatever data points they can provide. This sets up well for a pricing scheme that is mainly rooted in the number of enriched leads provided. For instance, $100 / month for access (1x user or 1x website) + $1 a lead. Additionally, there’s a straight forward opportunity to charge for integrations, given the leads become infinitely more valuable once they’re piped into a CRM (like Hubspot) or an outbound tool (like Groove). Some interesting options and levers to pull, which we love.
UNCOMMON / ANCILLARY BUSINESS ASSETS — The majority of Micro SaaS acquisitions are asset deals and the most conventional core business assets in our context are the product (codebase), the customers (contracts) and maybe the freelancer / contractor or vendor relationships (contracts). This deal brings a range of VERY interesting, less conventional assets into the picture…
PROPRIETARY DATA SET — of 14M businesses with firmographics, contact info, etc. We could grow the business itself with this data (aka profile high probability accounts based on their characteristics, target with ads or outbound email) and / or use it for any business we want to grow, etc. This essentially offsets the need and spend for zoominfo or clearbit, etc.
ML-BASED FEEDBACK LOOPS — Typically, there is a human feedback loop with led gen tools, where you approve / disapprove the lead, this input feeds the algo, and the tool course corrects accordingly when serving future leads. Simply put, more of the good stuff and less of the bad over time. Again, this is proprietary and has applications galore across any company we own and operate.
LLM-INTEGRATED FEATURES — I have a ton of respect for this group actioning GPT3.5’s API and baking it into the product for a very straight forward application. This is also a testament to the SaaS API capabilities and interoperability across the board, which speaks to the competence of the engineering.
RISK FACTORS
COMPETITIVE AS SH*T — The lead generation tools market is HIGHLY saturated with some of the biggest players in the SaaS game, though the category is dynamic and growing. Tons of players are pointing AI and machine learning at improving sales processes and predicting outcomes to generate better results. On the other side of the coin, data privacy compliance is a thorny bush that gets pokier ever year. Here’s a quick run down of the legacy incumbents / big fish in the pond:
HubSpot: Provides an all-in-one platform with strengths in content marketing, SEO, email marketing, and CRM.
Marketo (Adobe): Known for advanced analytics, superb email and campaign management, and Salesforce integration.
Salesforce Pardot: Popular for B2B marketing with robust email marketing, lead nurturing, and ROI reporting.
Zoho: Offers comprehensive features and is affordable, making it popular among small to mid-sized businesses.
LinkedIn Lead Gen Forms: Effective for B2B lead generation, collecting quality leads with pre-filled forms.
REVENUE TO SUPPORT DEBT SERVICE / TRANSFORMATION — At ~$100k ARR and an asking price of $450k, an LBO is essentially off the table. Per our typical deal terms (15% Equity + 10% Sellers note + 75% debt), the annual debt service of ~$55k is more than half of the total revenues. This leaves us ~$45k to operate the business and generate some kind of profit, though as mentioned, this deal would likely be motivated by the value it creates among and beyond the portfolio vs the returns and cash flow the asset itself generates. A deal here requires more cash / equity.
QUICK WINS & OPPORTUNITIES
IMPLEMENT ACROSS THE PORTFOLIO — Hopefully this one is obvious by now. We are in the B2B SaaS business, and every company we own or are affiliated with could make use of this tool and the ancillary assets.
TARGET MICRO SAAS OPERATOR NICHE — Following on the above, Skaling Ventures is part of a broader community of Micro SaaS acquirers and operators, which sets up well for a target, niche, growth campaign out of the gate. Might even include a friends and family discount 😉…
POSITION FOR STRATEGIC EXIT — Given the competitive landscape is riddled with strategics, we could use feature and market share gap analysis to inform a product and growth roadmap that turns this SaaS into a no brainer acquisition for the likes of Hubspot or Marketo, etc.
MARKET COMPS
Micro SaaS with ARR: $100k to $150k
Comparable Asking Price is ~$800k — 👍👍 this firm is at $450k
Comparable Revenue Multiple is ~6x — 👍👍 this firm is at 4.3x
Comparable TTM Profit Margin is 72% — 👎👎👎 this firm is at 22%
Comparable Growth Rate is 55% — 👍 this firm is at 70%
RETURN SCENARIOS
A few things to note:
Given the lower ARR, relative to the deals we typically look at, we’d bring much more cash / equity to this deal. This keeps the Debt Service Coverage Ratio (DSCR) at a place the banks can get comfortable with, and ensures the monthly loan repayments don’t totally choke the business.
In addition, we’re only looking at one core scenario, per the emphasis on externalities it provides across a portfolio, though the returns are quite compelling.
ASSUMPTIONS -
RETURNS -
⚙️ OPERATE
RESOURCE - The ExO Business Canvas
APPLICATION(S) -
“Some years ago, Alex Osterwalder with 100+ collaborators created the Business Model Canvas to provide leaders, innovators and entrepreneurs with a simple tool to design a sustainable business model for their organizations. Recently, Salim Ismail and Francisco Palao led a process with 100+ innovators around the world to design the ExO Canvas, a tool to easily build Exponential Organizations. The combination of both tools, the Business Model Canvas and the ExO Canvas, is a powerful way to design exponential business models.
Reading advice: Designing an exponential business model is key to creating an organization with impact (or output) disproportionately large, at least 10x larger compared to peers, through the use of new organizational techniques that leverage exponential technologies. If you’re just learning about this type of organization, reading this article sequentially will give you all the details you need to get started.” (Click here for the full article)
🧐 Musings
“Focus on results not activities”
“Outcomes over inputs”
As you know by now, I am enamored by the unique potential of operating models that a Micro SaaS context provides (lean, remote teams).
As a company’s headcount grows, every head makes the pillars of performance (Communication, Common Knowledge, and Decision Making) exponentially more challenging (Suggested reading: Taking the Mystery out of Scaling a Company - Ben Horowitz).
The thought of being able to tie every single activity to an OKR is energizing. This level of transparency lends well to repeatability. And a formulaic playbook with documented guidance on high probability OKRs and the exact activities required to achieve these outcomes is the holy grail in our line of work.
Repeatability is the most difficult thing in any domain when playing at an elite level of performance.
With the above said, I neglected that the greatest business leaders of all time share a similar emphasis on results. Focusing too much on the inputs and activities distracts from results, and even worse, can choke the creativity and autonomy of each team member.
So I’ve landed here:
“Our culture is based on results. Please document your inputs / activities (aka ‘show your work’) such that we can analyze, iterate and fine-tune the path to our objectives over time.”
Go get ‘em this week.
🔥🔥