🥳 Issue #4: Behavior Therapist SaaS + A Generative AI Workhorse
Hope 2023 is off to the races. Quick sneak peek of the issue below. Let’s dive in…
🎯 ACQUIRE — “A 2yr old SaaS business in the behavior therapy niche generating $26k MRR at a 91% profit margin”
⚙️ OPERATE — A free generate AI plug-in for google sheets that can help with anything from classifying customer support tickets to scrubbing prospect lists and writing emails
🧐 MUSINGS - Measuring plateaus in personal performance
🎯 ACQUIRE
// DEAL TEAR DOWN
FIRM PROFILE (Public Listing)
“This listing is for a SaaS business created in September 2020 in the health & [wellness] niche. The SaaS tool, written in React and Google Firebase, assists [behavioral therapist professionals by streamlining a critical documentation workflow]. The business has experienced strong year-over-year growth in subscribers and requires minimal time to maintain.”
Asking Price: $1.6M
TTM Revenue: $312k
Founded: 2020
Revenue Multiple: 5.12x
TTM Profit: $280.8k
Team Size: 1 FTE
Product Stack: React, Google FireBase
Growth: 94% YoY
SV SCORECARD AVERAGE
💥 2.9 / 4
STRENGTHS
Industry Outlook is 👌 — According to Ibis World (a very well-known provider of industry reports), the Industry Gross Product for Behavioral Therapists in the US is currently valued at $4.8B with a projected CAGR (aka average YoY growth) of 4.39% through ‘26. For a more directionally specific/accurate take on the addressable market (ie the # of prospective customers / accounts), Ibis estimates there are 92k establishments (employing ~141k) with a projected CAGR of 4.18% through ‘26.
Industry tailwinds are a critical ingredient in the venture capital recipe (making and taking new markets), though in Micro, we are mainly validating the acquisition target plays in a category that is stable or on pace with the broader macroeconomy. In this case, the industry outlook is very positive relative to US GDP growth, which came in at 2.9% in Q322…
Usage-based Pricing — This is a huge assumption, but 🤞 that the ‘critical documentation workflow’ is an output required for every therapist’s session with a client. 🤞🤞 that this output is a requirement for the service provider’s compensation, as insurance companies are notorious for burdensome documentation as part of the payment process. If we’re right, the product is tied directly to revenue, though low in the broader cost structure (relative to other operational expenses), which sets up for a very strong value proposition and a pricing model that scales linearly with value (⬆ notes = ⬆ $$). Go baby go.
RISK FACTORS
Churn — At ~15% user churn we are well beyond the bottom quartile (>8.2% churn) for SaaS generating $25k to $100k MRR. In Micro, we are buying product market fit (PMF). Full stop. This level of churn brings product efficacy into question and is a deal breaker unless there is an obvious explanation when you peel the onion back. For instance, the majority of churn is coming from a specific segment (eg pricing plan) and we could course correct accordingly without losing any key revenue. .
Technology Paradigm Shift — More on this in the Operate section below, and at the risk of sounding like everyone else on the internet, ChatGPT has brought the power of generative AI front and center, demonstrating this is a proper paradigm shift. If you haven’t played with it yet, I’d stop reading this and head here. In the context of the deal at hand, this is a technology that could gobble up customers and revenue in a matter of weeks. A Catastrophic outcome as an investor operator. This said, on the other side of the coin, GPT3 could be used to further bolster the product and build defensibility.
Operating Model — 1 FTE running at a profit margin of ~91% is wildly impressive though the ‘too good to be true’ flag is flying. This is almost certainly a misrepresentation of the business from the perspective of a 2nd owner, as the cost to replace the Founder’s contributions would quickly erode the profit margin. For example, if the Founder is supporting development and servicing customers, you can add a quick $50k - $100k in overhead out of the gate with net margin now hovering around 60% (which is still 🤘).
QUICK WINS & OPPORTUNITIES
Bottom-up Sales — Most therapy practices are structured such that the ‘service provider’ is a 1099 contractor of the ‘practice’ vs a full-time employee (FTE). The practice sources clients, provides working space and other infrastructure, etc. and the service provider pays a fee or percentage of revenue in exchange.
These scenarios set up well for a bottom-up sales motion, which could look like this:
Enrich user profiles and identify the practice they are associated with via LinkedIn and other databases like Clearbit or Zoominfo
Get some programmatic outbound going, starting with the practices that have the highest number of service providers already using the product (eg Jan, Bill, Joe and Hillary all use THIS PRODUCT on a daily basis to achieve BENEFIT / OUTCOME)
Pitch the tool as another benefit they can offer all of their service providers, making the practice a more competitive option relative to others
Offer a bulk discount, if needed (eg 5 users = 10% off, 10 users =15% off, and so on)
Go hard at integrations — Adding integrations is a tried and true method for reducing churn (more on that here), which should play well in this context - integrating a workflow-specific point solution with the broader platforms most common amongst the customer base. This is also a great way to build relationships with strategic acquirers when that becomes relevant down the road.
MARKET COMPS
Micro SaaS with ARR: $300k to $350k
Asking Price: $880k — ⬇️ ⬇️
Revenue Multiple: 2.62x — ⬇️ ⬇️ ⬇️
TTM Profit Margin: 50.5% — ⬆️ ⬇️
Growth Rate: 70% — ↔️
RETURN SCENARIOS
**Disclaimer: the numbers below are pretty overstated, this is mainly a back-of-the-envelope exercise to size up potential based on a simple spectrum of core inputs. In the case below, it’s very unlikely one could maintain the current growth rate with passive participation. Put simply, there is very little chance an ‘acquire and hold’ will continue to throw up 60% growth YoY…
Lastly, growth is typically considered in units (eg new users / month) as it is VERY difficult to maintain growth as a percentage over time (ie 20% of 100 = 20, 20% of 1000 = 200), and more reasonable to consider maintaining a steady clip of new users MoM. Churn is almost always considered as a percentage of the whole and the below illustrates how truly valuable retention is relative to growth or anything else in the SaaS game. (Deep dive into this critical concept here)
Assumptions —
⚙️ OPERATE
RESOURCE:
Promptloop: “Use PromptLoop in Google Sheets to transform, extract, or summarize any text with a simple formula that works just like SUM or VLOOKUP and generates answers with powerful AI models.”
APPLICATION(S):
As I alluded to above, generative AI provides an insane amount of operating leverage for the common human. This tool plays nice with google sheets and can automate a very wide range of traditionally time intense activities like:
Analyze, categorize, etc. survey responses our service tickets
Clean up and organize prospect lists for outbound campaigns
Generate ad headlines, blog posts, etc. utilizing target keywords
🧐 Musings
How do you measure plateaus in personal performance?
Conventional wisdom related to New Year’s resolutions has changed a lot with all of the excellent research and content around habit loops and systems thinking. As one of my all-time favorite mantras goes, ‘we do not rise to our goals, we fall to our systems’.
I’ve worked for many years to intentionally install a daily punch list of habits, where I started small (breathwork every morning), stacked habits over time (breathwork + 10 pages), and so on. Most of my tactics for measuring improvement and setting goals are inspired by / modeled after fitness and nutrition (eg +10% improvement against my base rate in XYZ muscle group, X grams of protein daily to achieve these macros), though many walks of life are tough to quantify, let alone establish base rates.
Am I thriving more than ever?
Have I been stuck at a plateau for some time?
In Q1 of 2023, my hope is a perfect streak of daily habit execution. From there, I hope to intentionally layer on 1x new habit or behavior at a time. If I struggle, I can assume I’ve hit a plateau to then hypothesize on the culprits and experiment until I punch through. This sounds well and good, but then I hear a voice in the back of my head inspired by Bruce Lee and other philosophers that subtraction (vs addition) is the goal. Simplicity is mastery. Back to the drawing board…