🏴‍☠️ ⚡️ Issue #17 - Deal Tear Down: Interior Design AI (Generative Image) SaaS at $240k ARR

Welcome! This newsletter is dedicated to acquiring and operating Micro SaaS firms. Join us every Saturday morning for Deal Tear Downs, Operating Concepts and more!

Kjael

Sep 09, 2023

Part 1 — 🎯 DEAL TEARDOWN - Interior Design AI (Generative Image) SaaS at $240k ARR

Part 2 — ⚙️ OPERATING CONCEPT - “The 4 Growth Frameworks You Need to Build a $100M Product”

Part 3 — 🛠️ OKR TEARDOWN - Launch our 1st Ambassador UGC campaign

Part 4 — 🏆 PORTFOLIO PERFORMANCE - Sprint #5 (8/21 - 10/6)

🎯 DEAL TEAR DOWN

📺 WATCH:

📻 LISTEN:

FIRM PROFILE

Interior Design AI (Generative Image) SaaS at $240k ARR

“Profitable SaaS AI app with $240,721 in TTM revenue and $168,000 in TTM profit that allows home enthusiasts, interior designers, architects, and real estate agents to redesign rooms in seconds. All they need to do is upload a picture of a room, select the room type, select what room themes they want to generate, and within seconds, they get their redesigned rooms.”

ASKING PRICE: $720k
TTM REVENUE: $240k
REVENUE MULTIPLE: 3x
TTM PROFIT: $168k
TEAM SIZE: 2
PRODUCT STACK: React, Next.js, Postgres, Python, Flask, Computer vision AI Models
ANNUAL GROWTH RATE: 10%
FOUNDED: 2023

SV SCORECARD AVERAGE

💥 2.72 / 4

INDUSTRY OUTLOOK

Market Size and Growth: The interior design sector has witnessed steady growth over the past few years. As of the last available data, the global market size for interior design services was estimated to be around $150 billion. The sector has been growing at an average annual rate of 4.5%, driven by increasing urbanization, rising disposable incomes, and a growing emphasis on aesthetic appeal in both residential and commercial spaces.

Trends and Industry Drivers:

Sustainable Design: With increasing awareness about environmental sustainability, there's a rising demand for eco-friendly materials and energy-efficient designs. Green and sustainable designs are no longer a niche but a significant trend shaping the industry.
Technology Integration: The use of advanced software for 3D visualization, virtual reality (VR), and augmented reality (AR) is transforming client presentations and project visualizations. These technologies allow clients to experience spaces before they are built, leading to more informed decisions.
Open Floor Plans: Especially in residential designs, open floor plans that merge the living, dining, and kitchen areas are becoming increasingly popular, driven by a desire for more communal living spaces.
Biophilic Design: Incorporating natural elements into interior spaces, such as plants, natural lighting, and organic materials, is gaining traction. This design approach not only enhances aesthetics but also promotes well-being.

Future Outlook:

Remote Work Influence: With the rise of remote work due to the pandemic, there's an expected surge in demand for home office designs. Spaces that are functional, ergonomic, and conducive to productivity will be highly sought after.
Growth in Developing Markets: As urbanization continues in developing countries, there will be a significant demand for interior design services, especially in the residential sector.
Personalization: Customized and personalized interior designs, which reflect the individual tastes and preferences of clients, will dominate the market. There will be a move away from one-size-fits-all solutions.

STRENGTHS

PROFIT MARGIN — A 69% profit margin suggests the cost to serve / support burden is minimal. In addition, the product stack is about as modern as it gets (the firm started 6mths ago) so there’s no reason to suspect any tech debt lurking in the shadows, which is a deferred cost and can inflate margin representations. Simply put, they’re proven this ship can run with a skeleton crew though they haven’t been at it long.

PLG + USAGE BASED PRICING — A dead simple product (e.g. upload a pic of a room + select themes / include a prompt = output / value) is a two sided coin. On the good side, simple sets up well for user-led adoption (aka product-led-growth), which in this case, is paired nicely with a recurring, usage based pricing model (e.g. $19 for 100 credits; $29 for 200 Credits).

On the bad side, simple products are rarely sticky (aka hard to leave as a function of historical data, workflow configuration or integrations to other tools). There is also a likelihood users pay for whatever bucket of credits they need to execute a project, etc. and then churn out from the monthly subscription. The disclosed 1.6M user email list makes me think the majority indeed churned after a few uses.

In these scenarios, the business is mis-labeled as SaaS (ie recurring monthly or annual subscriptions to a web-hosted product) when it functions more on a purely transactional basis (aka pay to play). User retention and cohort analysis provide a lot of answers here. Say hello to diligence priority #☝️.

PROP DATA SET (LABELED IMAGES) — “Computer vision AI Models” is a very vague way to address this mission critical component of the product tech stack, though it’s understandable they wouldn’t disclose much detail here.

In this market, the majority of Micro SaaS products pitched as generative AI are very thin wrappers around the most prolific models (Dall-E, MidJourney, Stable Diffusion). Thus, the underlying model is where the value creation occurs and Micro SaaS products that hang their hat on what is essentially an easy to replicate interface / API won’t last long (think: a prompt with a chatbot on XYZ site that sends the exact prompt direct to ChatGPT and forwards the response back).

Assuming the majority of Micro SaaS players will rely on these pre-trained models in some capacity, novel value is a function of proprietary data sets and fine-tuning to generate unique and nuanced outputs. The seller boasts a dataset of millions of labelled images specific to the vertical, which is a proper differentiator.

RISK FACTORS

VALIDATION OF PRODUCT MARKET FIT (PMF) AND CLEAR ICP — As you all know, Micro SaaS / buyouts are distinct from venture. Our world revolves around acquiring proven PMF and scaling the business by implementing systems, data strategy, and growth loops. Stable retention across cohorts and ‘enduring profitability’ are the hallmarks we look for, which can’t exist for a business that’s only been alive ~6mths. Further, this firm is built around a straight up frontier and emerging technology. In sum, this is a venture play to the bone.

Lastly, the Ideal Customer Profile (ICP) is unclear. Is this a tool intended to augment the workflow of interior designers OR does this tool supplant the consumer’s need for an interior designer entirely? One business model is B2B (sell this to interior designers) the other is B2C (sell this to consumers who need an interior designer). Again, there is a LOT to validate here, which is an early stage / venture capital game that we do not play.

BIG TECH — As noted above, a lot of the generative AI game comes down to the data models are trained on. Another core component is the costly compute required to execute training. Nvidia’s stock price tells the story here. Capital intensive infrastructure is a barrier to entry for small players (who lack capital) that creates economies of scale for the incumbents. These are competitive dynamics Micro SaaS players should avoid. To put it simply, there’s nothing stoping Mid Journey from buying 10M labelled interior design images, training a model over the weekend, and eating this business in one bite.

QUICK WINS & OPPORTUNITIES

MONETIZE API — This firm presents a unique opportunity to monetize an API. As an example, we could charge relevant eCommerce businesses (ie online furniture stores) to incorporate the technology in their buyer experience - something like, “submit a picture of your room and visualize the chair you’re about to buy in a range of positions and colors, etc.”

This adds another dimension of unknowns related to the ICP, which we don’t like, though it’s a compelling opportunity for the business.

TECHNICAL INTEGRATIONS — One way to create ‘stickiness’ is by integrating a technology with deeply established tooling and workflow. It’s more difficult to remove something that’s connected to everything. A technical integration can also inform an entire go-to-market strategy. Interior designers and architects have a wide range of established tooling (Autodesk, Adobe, etc.), which creates interesting opportunities for this SaaS. As an example, you could prioritize a relevant integration with Autodesk, buy a list of Autodesk users, and execute a highly targeted user acquisition campaign (cold email and paid ads).

MARKET COMPS

Micro SaaS with ARR: $200k to $300k

RETURN SCENARIOS

Disclaimer: We utilized comparables and base rates to inform the metrics for churn, as we don’t know this metric with the information provided. As discussed above, there’s reason to believe churn is VERY high so the returns scenarios below are very likely overstated.

ASSUMPTIONS -