00:01:25.460startupcfo.com. Yep, .ca. .ca. Yeah. You don't have the .com? I don't have the .com. Weird,
00:01:31.380but you have at startupcfo. Are you still on Twitter? No, you changed that. No, I handed it
00:01:35.460off. There's a new, like a successor. Her name's Vanessa. She runs Cruise Consulting in San
00:01:40.200Francisco. Okay. She runs the books. You've passed the baton. Passed the baton, yeah. Okay. And she
00:01:44.260runs the books for like 400 SaaS startups, literally. I think everybody listening is
00:01:49.460probably excited to know. So Vanessa at Cruz, K-R-U-Z-E Consulting. Wow. She's going to get
00:01:56.680an influx of news. That's like the biggest, like people are like, who do I use for bookkeeping as
00:02:00.720a SaaS? Cause there's all these like nuances, state taxes now is a big thing. That's right.
00:02:05.580Yeah. Though they've made, they've figured it out and there's a real, they've got a bunch of
00:02:08.760automation and they're only doing SaaS startups. I'm excited about that. Cool. So she's the new
00:02:13.060startup CFO. But like, what was your fascination on sharing that content originally? Like,
00:02:18.060Yeah. First of all, I love to write. And I find the process of writing clarifies my thoughts on a topic. So I actually learned and kind of crystallized my own thinking through doing it. And then, you know, this is before every VC kind of blogs now and shares thought leadership, and it's part of their funnel for bringing in deal flow. But this was sort of before that. And so...
00:02:42.460Do you remember when your first post went out?
00:06:29.720So the other thing I find fascinating is, you know, you've just seen the evolution of metrics in regards to like the concept of expansion revenue and SMB.
00:06:40.380I mean, that's, you know, FreshBooks, you know, they're I think for a long time, they're very much on the S side of the SMB.
00:06:48.060What have you seen in regards to the evolution of SaaS, you know, over the last 10 years, you know, either in the go to markets, the pricing strategies?
00:06:57.720like what's got tons so much um kind of sort of seeing freemium come and go like yeah for now
00:07:06.220it's product-led growth yeah now it's like if you stay long enough you find like oh they finally
00:07:11.320have a name that's gonna stick for this thing that's right yeah um so saw lots of you think
00:07:17.080freemium's coming back not necessarily i think um in certain instances it makes sense you know
00:07:53.880Yeah. Then through good onboarding, great product, there's enough that upgrade. And there's such a compelling reason to upgrade that the revenue stream works. And I think it's a marketing decision, not a financial decision. It's really about top of funnel distribution. I think recently Vidyard, Michael it. Yep. That's I mean, that's a big bet. I haven't seen many companies at their scale, you know, decide to go freemium.
00:08:30.040But I actually think that move is a reflection of changes in the market that are one of the reasons why at SurePath we focus exclusively on SMB software.
00:08:41.320You know, and maybe we'll talk about that.
00:14:34.280And the private equity folks have just gotten religion that, you know, unit economics are actually more important than bottom line profitability.
00:14:43.580And therefore, there are large companies to be built.
00:14:46.360And in the SMB context specifically, where those markets are large and fragmented, and it's sort of mathematically impossible to win a market, especially if it's a horizontal thing, then they can consolidate, they can use their M&A capabilities to roll up markets, they can do all the things.
00:15:03.980Okay, so that's where they're saying, hey, there's potentially a thing in, you know, one of my coaching clients just exited a PE firm in the kind of like ERP for SMB on the lawn care space.
00:15:15.780And so what you're saying is it's hard to get scale horizontally, but if individually these companies in different segments have a customer base, then there's kind of efficiencies that we can roll them like five or six or seven of these together, consolidate some of the cost, and then we'll have a bigger platform.
00:15:39.240And it seems like, I mean, private equity has always been, it's always been known as, like, buy it, sell to the next guy.
00:15:45.500Is that still present in the SaaS private equity space?
00:15:48.900Like, does everybody eventually end up selling to Avista?
00:17:40.480What, like, what, for an SMB or mid-market, you know,
00:17:44.440the clients you serve, what are the new things
00:17:47.040that people may not be aware of in regards to
00:17:49.240how they can get to scale and get some liquidity
00:17:51.700and, you know, kind of get an outcome?
00:17:55.300Well, I think strategy begins kind of with an end state and working backwards.
00:18:01.200And so a lot of the conversations I have with founders, first of all, and to be clear, I get involved midstream, not at the early stage, right?
00:18:07.700But if you can talk to them early, knowing where you're helping them out, what could they do differently?
00:18:14.280I would say postpone raising institutional capital.
00:18:20.400yeah until because pretty much other than co-founders early investors they're the highest
00:18:25.480dilution highest dilution yeah and it's you're sort of signing up for a one-way journey yeah
00:18:30.700and you often don't know enough to know whether you want to be on that journey yeah and then you
00:18:35.100often end up going on that journey from like not the biggest position of strength yeah right and
00:18:42.000so if you can claw fight bootstrap whatever like get it going get it going just anything and
00:18:48.980everything to get it to a point where you are in a position of strength and you
00:18:53.480can dictate terms then you're gonna suffer way less dilution right and you
00:18:59.360know I look at you know many of the companies we exit you know the founders
00:19:04.140own between five and ten percent yeah so it's still worth something yeah but you
00:19:10.640know it's not it's not like like crazy I call it multi-generational wealth
00:19:15.620creation right yeah so it's definitely not that not that so you know if i look at shopify as
00:19:22.080obviously a great case study you know by the time it raised uh its first round of capital from
00:19:29.280bessemer and first mark it was working uh we didn't need their money they were begging were
00:19:36.560they the ones i heard they were sending like gold-plated old cash register machines trying
00:19:41.940to get Harley and Toby, like there was the,
00:20:58.020Yeah, they're saying you've raised money, the VC did some, you know,
00:21:01.520and there's capital there for us to kind of...
00:21:03.700Yeah, and they get their warrants and all that crazy stuff.
00:21:05.700But that, I mean, the newer stuff, like the lighter is interesting because it's, you know, I think they're considered revenue based financing, RBF.
00:21:21.180I mean, it can be up to 30% annualized depending on the terms.
00:21:25.340Is there any that people should stay away from or any terms that you're hearing that are just when in future rounds, you're like, I can't believe you took that on.
00:21:32.980should people be asking to beg borrow and steal from their friends and family which i think is
00:21:36.680like i mean if i had this going and i didn't have the capital i would be like hey brother you should
00:21:42.200go get a line of credit right because i mean i'd rather give you yeah 10 you know i i so because
00:21:49.760they're pretty stable businesses i mean that's what i love about well so this is an important
00:21:52.780point i think in general it's like two things first of all i'd say whether you borrow from
00:21:56.020your friends or family is totally a personal decision can you live with them losing their
00:22:00.960money fair enough that's that's that's that yeah um but i think broadly the decision to bring on
00:22:06.460debt like if you need money to take on experiments where the outcome is very unknown use equity
00:22:16.060yeah equity meaning venture so people understand equity sell shares in your company sell shares
00:22:22.040in your capital yeah it's not um if you are taking on money to execute programs with a high
00:22:27.860You have repeatable scalability, yeah.
00:23:26.600And so there's a lot of really sketchy, non-value add investment bankers out there.
00:23:30.900But again, going back to what I was saying earlier, like there are a few moments where having the right advisor is literally game changing and that's all we do.
00:23:38.680And so, you know, what I tell founders is a few things like one is like there's so much written about raising capital and yet many folks struggle with that.
00:23:52.440there's almost nothing written about how to sell your business it's this total black box yeah and
00:23:57.800it's super emotional you're gonna ride the highs and the lows and it's personal you're maybe picking
00:24:03.640out the ferrari you're gonna buy like the yacht like whatever right it's hard you've got a mclaren
00:24:09.160so you get it it's hard to not think of the future life and you're starting like you haven't even
00:24:16.680exited you haven't even found a potential like there's no letter of intent it's really it's it's
00:24:20.840it's a tough one. I totally get it. And so, so that's a thing. It's human nature, unavoidable.
00:24:25.720And then you're negotiating against your future employer. So weird. Right. But the biggest thing
00:24:30.760is like, if an investment bank does nothing other than create the perception of competition,
00:24:36.480whether there is competition or not, they will enforce better pricing, better behavior from the
00:24:42.560buyer. Right. Because if the buyer thinks they've just got an exclusive conversation with you,
00:24:46.340yeah they've got all the leverage and there's tons of precedent for buyers to kind of you know
00:24:53.440give you a letter of intent on one level and then once you've signed the letter of intent
00:24:57.800you're off the market they find oh there's these issues you know we'll still do the deal but we
00:25:02.280got to drop it whereas we force all the diligence to happen up front so it's down to like there's
00:25:08.880going to be no skeletons in the closet so it's just confirmatory during the you know the exclusive
00:25:13.680Because I will say, I just want to, because a lot of people listening may have never understood that there's people that help you sell your companies or raise capital.
00:25:21.780But, and unfortunately, at the buying companies, there's literally titles called corporate development, business development.
00:25:29.360It's their job to waste your time as a founder.
00:25:54.700So the big buyers will do a thing called a market map.
00:25:57.120If they're thinking of, you know, having, they need a solution in a certain category, they will literally talk to every vendor in that category.
00:29:51.820um i think nine nine of my coaching clients have exited in the last 12 months and one of them said
00:29:56.560um about profitability because he came back and i was like hey you should unpack what you learned
00:30:02.420through this process for everybody and he said for every dollar of profit i saved i lost like
00:30:06.780six or seven dollars in outcome yeah because he was he was so worried about being hyper profitable
00:30:12.900because he came from a more traditional background it was like 50 60 net profit right wow yeah and
00:30:19.820And he said the sad part was after I exited, they made all these things like built out an outbound sales team, you know, improved our demand.
00:30:30.360Like all these things he knew he could have done that he didn't do.
00:31:04.800And make sure you're on the trajectory that's going to maximize your optionality.
00:31:08.880You know, maximize your appeal to investors if we're going to go down that path.
00:31:13.200maximize, you know, potential valuation to buyers, you know, or both. Right. Yeah. And
00:31:18.840for recurring revenue businesses, all else being equal, the single biggest driver evaluation is
00:31:24.680year on year revenue growth rate. Yeah. So I will say that buyers, um, don't love buying burn.
00:31:32.100Yeah. Especially public, you know, anything that can reduce earnings per share, they don't love.
00:31:36.700Yeah. Um, so there is a balancing act, but ideally like, so in that case, he shouldn't
00:31:42.760have had 60 profit he should have had 10 profit and grown that's the whole that's that's what
00:31:48.280he's like in hindsight it costs him a lot of money that's right and it and it and and to anybody else
00:31:55.340not knowing what you know and i know it sounds like the you know like be as profitable as you
00:32:00.120can be lean and mean and right um but not when there's a market but going back to the experience
00:32:05.500so because i just want to really demystify a little bit because it's um a lot of the people
00:32:11.480listening are bootstrap SaaS founders. They've not raised capital. If somebody engages you,
00:32:20.140and so there's come early, maybe 8 million AR or whatever, they're on their path.
00:32:25.840But what's the expectation if they say like, hey, we're interested, right?
00:32:32.120Because I feel like founders are interested in wanting to be wanted, but you don't want to work
00:32:38.880with somebody that's like kind of interested in exiting because then it's obviously a big waste
00:32:42.800of time so like what what if you help them through that process like what is that timeline look like
00:32:50.560realistically yeah you know if someone comes to us and like i want to sell my business now
00:32:56.380yeah if they don't have meaningful inbound interest we decline because oh if they're not
00:33:01.300organically getting their own inbound interest today if they want to sell today yeah if they
00:33:06.140come and say, I want to be in a position to sell 18 months from now, and we form conviction that
00:33:12.440there are buyers in that category, we'll absolutely engage. Perfect. That's a really good, yeah. Yeah.
00:33:16.820But if someone says, I want to sell my business today, then like, if you want to sell today and
00:33:22.500you don't have inbound buyers, you're not going to sell. Like, you know, like most buyers,
00:33:26.940especially sophisticated ones, don't really react to cold, you know, intros from banks.
00:33:33.460yeah this is why most investment banks suck for technology companies literally that's what they're
00:33:38.780doing they're putting their whatever prospectus yeah they got this you know confidential info
00:33:43.200memorandum if you printed it it's like a bible yeah and they just they're taking the approach
00:33:48.200that they took to like old school banks like if you're selling a small bank to a big bank it's a
00:33:52.900financial decision yeah if you're buying a software company it's a product it's a strategic decision
00:33:58.900Yeah. So you're not investing based on like an inbound from a bank. Yeah. Right. It's it's you actually have to. And that's, again, why we're specialized. And what we're trying to do is engineer inbound interest by having conversations that are not attached to a process. They precede a process. Right. So that's why we want to be involved early.
00:34:21.020what in regards to like some of the metrics you know obviously year on year revenue growth which
00:34:27.220is a great number because it's taken in consideration you know churn revenue churn and
00:34:31.660you know top of funnel growth i mean it seems like there's a lot more around payments i know
00:34:37.460that i've noticed that much my client base where if you can get involved in the payment pathway
00:34:43.060that's interesting um what are some of the like how about i ask you if you had to engineer the
00:34:50.440perfect b2b what would the numbers look like in regards to expansion revenue
00:34:59.160so broadly before we layer into expansion um
00:35:04.9203x ltv to cac fully loaded basis yeah fully loaded meaning like lease cost for that yeah
00:35:11.320personnel not just your marketing programs but your bodies right people have no clue how to truly
00:35:16.360right so like that's a baseline yeah you know i think below that you're not that good a company
00:35:21.400yeah ideally it's four and above i think if it's like six you're not being aggressive enough yeah
00:35:26.680right you should be spending more right so so that's a thing um you know cac payback should
00:35:32.760you know again if you're going back to this notion of 4x ltv to cac your payback should be
00:35:37.160you know 25 of lifetime value yeah uh so that's a thing you know if i think about
00:35:42.760out baselines on like kind of churn like on a logo or customer basis I think if you're north
00:35:50.020of two and a half three percent per month it's a lot of gravity it's hard to recover unless you
00:35:56.120have some sort of product that's got a 250 a month kind of yeah yeah ideally and this is where
00:36:03.480expansion comes into play so ideally get your pricing right get yeah have for those customers
00:37:34.680yeah and then it adds more value so it reduces churn so it's like a virtuous it's such a it's
00:37:39.320such a i remember the first time we were doing flow town um investors so who's your question
00:37:43.640we said smb and he just said there's a reason why they're in a they're a small business like they
00:37:47.720don't there's certain caps to what they're willing to pay if they're truly a small business so it's
00:37:54.720really looking at the transaction flow and this is where payments is interesting because it can
00:38:00.000be quite meaningful and i know i i heard the uh so let's say the fees let's two and a half percent
00:38:05.080or whatever on a monthly basis whatever your fees are like the market values it at like 20 times
00:38:09.760like upside because it's just like locked and loaded people pay it that's right so there's a
00:38:15.440high multiple on the on the payment revenue yep so if you can just look at shopify by the way
00:38:20.900you know you look at they take do they run the payments through shopify and again it's over half
00:38:25.200their revenue yeah it's uh what they call merchant solutions so if you can if if you have an smb
00:38:32.720product that's involved in a transaction invoicing collecting you want to front load that in your
00:38:39.200product roadmap absolutely absolutely it's just it's stickier a lot of money awesome good
00:38:46.880because they don't think the people you're building sass you're like yeah you know i'm
00:38:50.480just going to use stripe i'm just going to do this yeah i'm not going to be involved and you
00:38:53.920You should start with Stripe because you need a meaningful amount of GMB for the math to work, but it should be, you know, something where you can white label.
00:39:04.320And there's a bunch of different ones for white labeling.
00:40:21.860And so the way we run private equity, kind of, we call it like majority recaps, maybe selling greater than 50% of your company.
00:40:28.840So majority recap is when more than 50% of the equity.
00:40:31.560It's when the existing shareholder, you're doing a recapitalization of the company that is going to result in a change of control, where the new owner is going to own more than half.
00:43:32.360It takes, I mean, it's just, it's super cool because it's efficient, but for a founder that's put their blood, you know, it's their baby.
00:43:40.760So it's almost like you're creating the tools for the buyer to dissect.
00:43:45.760I mean, it's a little intense, but really that just allows people to quickly, like you said, synergy analysis, whatever.
00:43:53.880Because what I've always found interesting is every industry, raising capital, exiting companies, they have their lexicon, they have their process, their best practice.
00:44:02.360is and for founders never gone through it which most never have correct um it can be super scary
00:44:08.860right because like at every turn they're like is this right like am i supposed to give them all
00:44:14.540this information i don't know any better um and i mean in regards to the outcome like you helping
00:44:20.840clients get that that level of detail put out in the market create a competitive process you have
00:44:26.300the relationships with all the potential strategics um what do you think the upside difference you
00:44:31.260know, I don't know if there's any data around this M&A bank versus none. What is the average
00:44:35.860upside? Do you think that? Yeah, I think it's massive. It's hard to AB test, obviously. Fair
00:44:41.080enough. But it's massive on two dimensions. One, I think the outcome is significantly larger. But
00:44:46.600if you look at it on like a probability adjusted basis, like your probability of getting to any
00:44:51.000outcome by yourself is far lower than with. Wow. So you're saying that just on the probability of
00:44:57.740an outcome being achieved do you think for a lot of them it may not have happened is it because
00:45:02.840they're they weren't able to present it properly do you think it was the emotional component of
00:45:07.740the founder having to go through that maybe pulling back because it just got frustrating
00:45:10.920yeah it's you know it could even be like so for instance the the decision to buy a company like
00:45:18.160if you buy shares in shopify and you just decide you know what i made the wrong decision you can
00:45:23.240just go on the market and sell them. If you buy a company or you invest in a startup, you can't
00:45:29.100undo that decision. So what you're selling is trust every step of the way. And that comes down
00:45:34.560first and foremost to character of the management team, but it comes also based heavily on data.
00:45:39.700So let's just take a pro forma model. You know, you are a bootstrap business. You kind of whip
00:45:44.820something together. That portrayal of the business is going to be nothing like what we are going to
00:45:51.780build, right? And so our thing is going to convey trust by just showing you exactly how the business
00:45:57.400works. We have de-risked it. We have looked at all the cohorts, all the segmentation. There'll
00:46:01.980be no questions as to how to run that business. Whereas the bootstrapped, hey, my best effort,
00:46:09.040I kind of whipped something together is going to create all kinds of questions. And at a certain
00:46:13.020point, the investor or the buyer just be like, it's too much risk. I just can't get my arms
00:46:17.920around this right so that so that's a thing huge and then if they were able to do that which they
00:46:22.980don't have the expertise to do that getting an upside i mean just negotiating against your future
00:46:27.980employers weird as hell that's right and there's just lots of tactical little things like like lots
00:46:32.960of exits like they'll say this and it's like you know like right you know you can play the whisper
00:46:37.400and be like that's bullshit right that's not normal yeah if you're selling you've never done
00:46:41.440that you're like sometimes like a buyer will come in with a lowball offer and we'll tell them like
00:46:47.000we're not even putting this in front of our client like right basically we're offended yeah you know
00:46:51.220and yeah go away and i've never seen you upset you just say it you know like i'm upset yeah exactly
00:46:56.940um and you just can't do if you're negotiating with future employer you cannot do that right so
00:47:02.840there's those kinds of things even little tactical things like don't give the buyer your cap table
00:47:08.880until they've given you a preliminary number because if they have your cap table they can go
00:47:13.460they can reverse engineer and figure out what's the minimum number to get the investors over the
00:47:17.780hump. Like just a hundred little tactical things like that. Right. That's amazing. Um, as we wrap
00:47:23.580up, Mark, uh, I love to ask, you know, looking, you know, cause we've known each other for a long
00:47:28.320time. Um, looking at your journey, you know, sure path, even just your personal, you know,
00:47:34.660getting your fitness on and whatnot. Um, who have you had to become personally to be the person
00:47:40.620leading this company today and successfully building this, this brand? Awesome question.
00:47:46.920Okay. I would say, uh, the journey has been pretty natural, pretty authentic. Um, like I feel,
00:47:54.800so the beginning of my career was actually in public accounting and, uh, it's as boring as
00:48:01.160you could imagine it to be, but in any event, like I was not part of a big four. I was, uh,
00:48:06.820My original firm was, you know, nine partners, 90 staff dealing with owner managed businesses.
00:48:11.800I worked directly with the founder, this guy, Harry Nixon of Smith Nixon.
00:48:15.980He took me under my wing because he was Scottish and I was Scottish.
00:48:19.000And anyway, I learned from him kind of what an honor it is to be of service to entrepreneurs.
00:48:26.980And that has literally been the role through my entire career in different kind of forms, right?
00:48:34.020Like, if I thought of, like, when I was a venture capitalist, it wasn't about the money, especially because our checks were pretty small, because we're a seed stage fund.
00:48:41.880It was about being an advisor, mentor, helping hand, you know, at the service of CEOs.
00:48:48.640When I was a CFO, it was recognizing that startup success is highly correlated with the CEO success.
00:48:58.240And therefore, if the CEO is technical, as an example, a product person, how do I run kind of operations?
00:49:05.460How do I do a bunch of stuff outside of finance so that that person can do their thing?
00:49:10.360Or if that person's a rainmaker, again, how do I enable him or her to be out of the building and feel safe that I'm managing the shop, right?
00:49:19.160So it's all about bringing leverage to that founder.
00:49:22.060And, you know, I had opportunities to become CEO along the way.
00:49:25.900And I recognized from being at the right hand of CEOs, like, that's a really shitty job.