SaaS Acquisition Stories w/ Akeel Jabber - Investment Director at Horizen Capital (Round 2)

Foreign.

I'm here with Akhil Jabbar from Horizon Ventures. I'm super excited for this. We, we haven't caught up in a while, man. How you been?

I've been good man. It's a pleasure to be on. Great to chat with you again. Glad we can catch up you as well.

Well, so for people that may not know Horizon, do you want to give just a brief background around what you guys do? Just maybe the 60 second quick pitch?

Yeah, sounds good. So Horizon capital, we invest B2B SaaS companies, we do acquisitions, we do investments of all sizes, generally somewhere between 500k to 5 million in ARR B2B only. And our portfolio now we have about 5 companies active and slowly doing deals as they come through.

Nice. Well progress man. Like it. So I guess my next question would be, you know, you look at a lot of deals per month, I'm guessing. And so you know, as you look at these potential startup acquisitions, how do you evaluate startups that you're going to acquire?

Yeah, sure. So we start with you know, high level filter. So this is our first, you know, criteria. We look at what are the companies doing between like I said 500k to 5 million in ARR. We'll look at growth. So potentially zero. Look at flat line up to 30% growth. So we don't like these super high growth companies and we're not competing with VC money or capital investments. We like profitable or at least break even. So we don't want anything that's burning. If you're burning capital, we're not going to invest in you. And then the other criteria is looking at monthly churn of less than 3% and LTV of at least 1500. So that's the first step. If we're, if we're happy with that, then we go into the next stage which is all right now we look at whether we think when we look at this company, can we make a significant impact to actually grow this company, you know, like apply our playbook and make a difference and you know, make it worthwhile of an investment. So we'll look at things like your website, you know, analytics and their competitors, look at their sales and kind of marketing process and then assess kind of quick wins. What are some quick wins we can do and improve within like the first three months, the first six months. If we feel we can add value, we'll, we build a plan, we'll go deeper into an audit and then we'll deep dive into like different fundamentals. So like your customers, your competition, the different sales channels, your marketing channels. Kind of break it down and see what's, what's working, what isn't. And then you know, management, let's look at the management, the market, the money. So the actual financials of it, the product, the projection partners, like, you know, who are the different partners? Do you have affiliates, you have resellers? The actual technology, the transaction terms, what is the actual, like what are they looking for? Is it, you know, worth kind of what we think it is and then what is the risks around all this? So we'll take all these different factors, we'll put it, plug it into a, like a scorecard and then that'll kind of give us an idea of like, all right, is this, you know, what are some red flags here? What are some areas we need to improve and what we think based off that, like what do we think it's worth at this point and whether we want to move forward.

Nice. That's quite a detailed answer. I guess one side question I have based on that is what are some big red flags? And this kind of ties into my next question of with US going into 2022, a lot of founders are looking to sell their businesses. I'd love to hear just your top two tips for founders looking to position their companies for an acquisition and maybe red flags that you come.

Okay, so I'll start with red flags, I guess red flags market. So this is like a declining market. And even their company, right, they like declining. I mean that'll be a thing. Was like, all right, something's going on here. These founders are smart. Like they've built this thing to a solid place for a reason. They know what they're doing. But something's going on here. So we'll kind of red flag that and see what's happening there. And then from partners and customer concentration. So we don't like or even in the marketing channel. So three things. Like those things are pretty intertied where if like 30% of your traffic comes from one keyword. If 30% of your customer represents like, you know, 30% of your. So one customer represents 30% of your revenue. Or you know, a lot of these things where like there's a lot of risk on one small thing that could go wrong.

Yeah, you lose, you lose one of those. You lose like 30% of the revenue.

Exactly like, oh, how do you scrambling how to figure that out? Right? Yeah, get that back. Yeah. And then tips kind of, you know, for founders look going into the next year, I guess, you know, first thing, if you're looking to sell, like, clean up your financials and reporting. Like, if you have clean, reliable, well presented data. I think that's just like confidence to any buyer. Like, okay, this guy knows what's up. He knows, you know, he has his stuff in order. He has nothing to hide. I think that's the image it shows. And then, you know, before going into like a sale, like, kind of figure out your priorities. Like, do you want to get as much guaranteed payment upfront for your company or is this, like, all right, this is the total potential consideration important to you? Other questions we get are like, is the legacy of your business important for you? Is the future of your staff important to you? Do you care if they stay or they're gone? Are they going to move on with you? Do you still want to work with the company post transaction? Or are you looking just like, you know, get this off your plate, move on and retire and, you know, live on, live in Cabo and then where.

I just got back from.

Exactly.

You don't want to live in Cabo.

Or maybe you do like a couple of weeks. Yeah. And then being clear with yourself on what your priorities priorities are to help you target, you know, who you want to approach and pitch, be more consistent. So I think it just, you know, have, have your number in mind, I think. Let's be clear with yourselves. Like, if I like that set point, like if I sell at this number or I don't sell at all, like, just think through, through that situation. I think, you know, you've been through that. I was like, yeah, you know, you're kind of close. Like, this is a number, I might take it. But then there's one's like, you know, this is a great deal. I'm taking this. I don't care. This is way better than I thought. Right. So if not, it's like, okay, be willing to walk away and just like continue running your business. Right?

Yeah, I like that a lot. Especially just the. I think so many founders underestimate just the importance of a clean three year pnl. That just gives you like a good, healthy financial snapshot of the business. Because it shows they have, you know, their books in order too. You know, they've prepared in advance and all that can really, you know, give good signals to buyers that, like, they're serious about doing an acquisition rather than just like, here's kind of like my stripe stuff. You figure it out. So the more they can make your lives easier, the higher their chances of being acquired.

I wonder from your perspective on micro Acquired. Do you see that? The ones who come in prepared with everything, the process just moves a lot quicker, I'm guessing, than the ones.

Oh yeah. Oh yeah. If you have a data room set up, you have a clean P and L, you have metrics attached or connected, it just makes a buyer's decision that much easier. But more importantly, it signals to buyers that you understand, you know, the acquisition process, you're looking to sell the business. And just the difference between having all that and then compared that to, let's say an equal startup without those, you know, things, unless that other startup is growing like four times faster, you know, buyers are going to gravitate towards the one where that, you know, there's clear signals that this is a serious seller and, you know, they're looking to do a deal and they know what buyers are looking for to make that decision.

Exactly.

So absolutely. So my next question would just be your favorite acquisition story. It's going to be, you know, partial buyout. It could be a full buyout. It could be one you've heard about.

I heard about. I don't, I mean, maybe I don't follow other people's stories as deeply, but I'm sure there's a ton of those cool ones, but maybe too. So $99 social was my first kind of bigger six figure, seven figure acquisition. When you talk about risk, people looking at that P and L, when it comes to investing, there's just risk. Understanding your risk from a micro and macro level and then emotions and being able to tie that together. And I think people think if I want to start a micro PE firm, you have to get right in and buy this big company. I think is like, build yourself up slowly. Just start investing. Understand if you know what you're doing. Unless you're like really, really good at marrying those two together. And I think it just takes time and experience. So Nine Eye Social was the first kind of bigger one that, you know, over many different investors, that one came out, you know, bought that one, was able to like double it within like five months. Yeah. So that one, you know, did really well. And then. So that. Yeah. And then, you know, kind of started building up from there. Right from there we went to bigger deals and that's kind of where we got today. So I think you have to start, you know, really big, start small, like starting the stock market, starting real estate, whatever. But like that emotional, like understanding risk and then how to manage it with your emotions, I think is probably more important.

Nice. That's great advice. I love, I always Recommend, you know, for those, you know, looking to get into acquisitions, like starting small and learning, like even just going through the motions. Even if it's a very small, it's called like a 20k deal, treat it like a larger deal. So when you do get to that.

Point, my first deal was 2014, I think it was like a 50k like content site and that's where it really started. I was like, oh, this is actually real, you can actually make money online and then it moves up from there.

Yeah. And you just learn as you go and then the next thing you know you're just. The only difference is you're adding zero.

At the end of the deal basically. Yeah. More or less.

Yeah. Right on. Well, I guess my last question would just be. So last year we had a record year in terms of just private equity activity, acquisitions, everything was just kind of on fire. What do you think we're going to see in this next year? Good times, maybe a return to normal, bad times, better times, something else. If you had to just predict where we're going to be at the end of the year, what do you think?

Yeah, what's happening? We're getting to post Covid. We got inflation rising, we have now the Ukraine, Russia, war in Europe. And what's happening is we're seeing the valuation in publicly traded SaaS companies starting to drop. So I think like midterm.

One thing I'll point out too, and you're really right about this and sorry to interrupt, I just had, I read this today. Public market SaaS companies were traditionally trading at 20x annual recurring revenue. Now they're on average trading at 8x. So they've gone from 20 to 8x in a period of. So things move fast in terms of like you know, see another quick spike up. But sorry, continue.

No, no. So I think midterm you'll also see even not just like buyers but VCs investors will also be more risk averse. So I wouldn't be surprised if some of those high growth cash burning startups rely on constantly new rounds to survive, will maybe soon struggle to find new investors. And either they're going to go bankrupt or they're going to have to find a buyer. So I think what we'll see going forward is more struggling SaaS companies and I think for you and for us that creates more opportunities to find these distressed SaaS businesses. But also I think the valuation of the SaaS is just going to be more reasonable. I think like you said, 2021 was just ludicrous. That all professionals, VCs and everybody kind of in the space was like, what's going on? But I think it'll come back. And I think another thing we'll mention is that maybe we're not used to hearing is there's going to be a switch of mentality into like, ARR. Growth will not be like the only sole purpose of the business and it won't be like the measure of success. There's other things, right? Like the impact of the business. And I think even investors will switch their focus on high growth, high risk, speculative play to like, hey, maybe let's find more of these stable, reliable investment SaaS, companies that are growing organically and profitably, which is why we're here and why we're in business. So I think there'll be more of us kind of popping up and like VCs moving into this space as well.

I agree with pretty much everything you're saying. It's a great answer. So I got three last questions for you and these are kind of the rapid fire ones. So if you could just look at one metric when you're looking to acquire a company, what would it be?

The one that scares me and also excites me is churn.

I knew you were gonna say that.

Yeah, you know it, right? Yeah, I don't say growth. It's churn for sure.

Churn. Okay. And then who's an entrepreneur that you look up to?

Is this. Is that specifically like SaaS or any.

It could be any entrepreneur. It could be any business person. Just.

Yeah, I think, you know, more. More like well rounded overall. Who I like to, you know, fall in the space. Probably like more like Tim Ferriss, you know, from all angles.

Yeah, good answer. Yeah, he's. Yeah, he's. He's definitely in like the top 10, I think, across everyone's list. Yeah. And then final question for those, like looking to, you know, learn about acquisitions or, you know, they want to enter entrepreneurship through acquisitions, what's like a podcast or like one book that you would just absolutely like recommend they check out besides your podcast?

I was going to say, you know, shameless. Plug.

No, no, no. Plug your podcast.

I'm kidding. SAS District School. Yeah. If you want to know what sas.

It'S a good podcast. SAS district. Definitely check it out.

Yeah, yeah, definitely. Book wise. I mean, I like good to Great. I think that one's good if you're. I think everybody has to read that book by Jim Collins.

Nice. Jim Collins, that's actually one of my favorite books. Is actually sitting right next to me.

Really? He's on my top 10 list. Entrepreneurs too. So he was close to Tim?

Yeah. He's got a couple other really, really good books to check out. I can't think of the top of my head but this has been great. Akhil, if people want to reach out to you, maybe they feel like a good your firm is a good fit for a potential acquisition. What's the best way to get a hold of you?

You can hit me up on LinkedIn or just check out our website horizencapital.com.

I'll put that in the show notes.

Yeah, all right, perfect. Yeah, just reach out and we'll see. We'll check it out, see if it's a good fit and give you, give you see if we can work together.

Akhil, so good catching up and appreciate your time.

No thank you. It was a pleasure Andrew.

Cheers.

Cheers.