SaaS Acquisition Stories w/ Greg Lazarus - Managing Director at Polychrome Capital

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I am here with Greg Lazarus from Polychrome Capital. Greg, thanks so much for your time. How you doing?

Doing so well, Andrew. Thanks so much for having me. This is great.

Yeah, it's good to catch up. So for those that may not know much about Polychrome, do you want to give just a two minute overview of what you guys do?

Sure, yeah. First of all, big fans of Microacquire. Great work with what you guys are.

Up to and I love that company too. I know a guy that works there. If you need an.

It's pretty cool.

Yeah. If you need an intro, let me know.

Awesome. Well again, yeah, it's great. It's great to be here. My name is Greg Lazarus. I'm a partner at Polychrome and Polychrome is a PU firm focused on acquiring 50% or greater equity positions in B2B software companies. That's our primary focus and that's what we do pretty much every day.

Nice. Are you comfortable expanding on what makes you guys unique in the market?

Yeah, definitely. That's pretty much what we talk about all day. When we think about the market, we think about when we built Polychrome, we built it as a bootstrap PE fund firm. And when doing that you have to think about what is your advantage in the market, what do you offer and when you're bootstrapped, cash isn't what you're offering. We have cash and we have ways to get it. We can talk more about that as well. But really what we offer and our expertise on a day to day is our operational backgrounds from startups and building very, very successful companies.

And so, and let's double click on that just because I want to bring this to the forefront because I love the model. But before Polychrome, what were you doing?

Yeah, so before Polychrome I was a chief revenue officer at a company called Returnly which was acquired by a firm. Prior to that I built sales. I was on the team that built sales at Optimizely for four and a half years. My partner Alex Boswell was eight years at Twilio, pre and post IPO and finance and operations. And then Matt Althouser was the CRO and CEO at Amplitude analytics for three and a half years. That went public a few months ago and then he was the first non technical hire at Optimizely. Now we also have an go ahead.

So you guys are just go to market badasses?

We're go to market folks. That's what we do. We take companies that are really early stage and we grow them to some sort of exit.

Nice. I love that. So I guess my, my next question would be, did you want to add anything to that?

No, no, that's, that's, that's our, that's pretty much Polychrome. We have an amazing person on our team, Ilya. He runs marketing for us across the portfolio as well.

And just to kind of like summarize for listeners, what Polychrome does, to my understanding is you, when you acquire either, you know, a majority stake or the entire company, what you really do is you really help on the go to market side and really help grow the company. So a founder could come to you and do say, you know, a majority purchase and they keep a part of the equity and they can potentially benefit, you know, a second bite of the apple, as they call it, as you guys, you know, build out the go to market strategy and, you know, scale the company much farther than they could have on their own. Is that kind of accurate?

Yeah, that's, that's pretty much it. I'll add, I'll add a little bit more to that. So we are open to full buyouts, we're open to partial buyouts. Our core structure though is typically keeping the founder in place and we are typically partnering with technical founders who don't have the go to market expertise or who just don't want to sell or go to market is what's keeping the company from taking that next step in their growth trajectory. And so what we've done and our typical structure is we'll do cash, let's say for 25% of the business and then we've earned another 25% of the company through getting to a certain revenue milestone. So I'm joining the team in sales. So is Matt Alex's operations in finance and marketing or Ilya's marketing? And we're really partnering with the founders every day to grow their businesses and grow the company to an agreed upon milestone.

So you increase the value of their equity. So it's win, win, win, win.

It's a win, win, win, win. And like I think you mentioned this before, but it's really allowing the founder who's been growing this company for a few years on their own or with a small team to take some cash off the table and then also stay on for a larger exit down the line as well.

I love this model so much because the other route is the technical founder raises venture capital, then they have to go and find a good head of marketing, head of sales. They have to go and find those people and the team you've put Together, I don't think. You know, a seed round or a series A would.

Yeah, you can't afford that. Yeah, you're gonna have to raise multiple rounds. You're gonna have to hire your first few salespeople. And all salespeople interview well. You're gonna have to go through maybe a few in order to get the right person.

And you have skin in the game too. That's what I love more. It's like you, you're, you know, literally saying, we're confident enough that we can grow this company that will structure something that basically, if we win, you win too. I love it.

Yeah, we're like, we're, we're in the trenches with the founder every day.

I love it. I guess my next question would be, you know, what kind of startups are you looking to acquire right now? Like, what's your, you know, criteria?

Yeah, it's a good question, so.

Or I guess I could frame it like a different way. What would be if you had to like make up a startup that's just like a perfect fit, like you can make up the name what it does. Size.

No, I mean, listen, like, I totally understand the question. I'm not in the business of building startups. I'm in the business of helping startups that I've already have some product market fit. So the first way you framed the question was easy for me. We're really laser focused on the open source community and we'll talk a little bit about that today. I think open source software is something that we're really passionate about and open source developer tools is something that we're really passionate about. When you think about open source, it is literally a technical founder who built a product for free that has some traction, probably on GitHub, and if they want to monetize it, they need to take that next level. So it fits our model really, really well. And we really like developer tools a lot. And so we want to be at the point of building the software. We focus a lot on tools that are used every day that have a lot of traction, that just need to monetize.

Nice. And then in terms of size, what's the smallest acquisition you'd look at and then what's like the largest? I know that's kind of a hard question to answer without the nuts and bolts, but like, what's like the largest you'd look at and what's the smallest you'd look at in terms of revenue?

In terms of revenue, I think we would honestly go anywhere from $50,000 even a year in revenue. That's pretty small obviously, but definitely open to those conversations and probably all the way up to 2, $3 million in revenue. So it's definitely at the very early stages of a company.

Nice. And so we have your criteria. Open source dev tools. How do you evaluate startups as they come on? Let's say I'm a founder, I have a open source developer tool I've created. I think you're a good partner for a potential acquisition. How do you evaluate these startups to ensure they're a good fit for Polychrome?

Yeah, we've actually built an internal scoring system. What we look at is first some of the basics that I would say most people look at and most people measure their business by on a month to month or day to day basis. So first and foremost is what is the industry? Second is what is the team that they have in place. And then some of the key metrics like year over year growth, number of customers, ebitda. We really are like profitable bootstrap companies is really what our focus is. Who are your top paying customers? Will people spend money on your technologies? Really important to us. An example could that shows us that go to market or direct sales we can be useful. A lot of these metrics we care about because we want to know that we can be useful because we're tag team, we're teaming up with the founder. Churn is super important for us. We're go to market folks mainly on the sales side by trade. So we want to know that the product is sticky and folks are sticking around and those are just to name a few. Those don't make us very unique about. I would say what makes us unique when we're evaluating a company is we actually use a framework. We didn't invent it. Brian Belfor came up with it and it's actually called Market product, model, channel fit. And this is something that we use when evaluating companies and it's something that we do when we build strategy for all of our companies on the go to market side. So what this is is we put together this framework again called Market product, model, channel fit. And we take a look at the current market that the company serves and we think about does this market need to change in order to reach the next milestone or get to the next level? So who's our target market, who's our customer? And building out a profile there. Does the product need to change? Do we need to build anything? If we come on board, do we need to build any new features and functionality in order to service that new market or that current market. And then model, what is the current pricing model and packaging, does that need to change in order to close more deals or increase the average deal size in that market? And then channel is, what are, how are we getting our meetings today? How are we getting our leads today? What are three different channels that we want to test in order to get more meetings and increase revenue? So is it outbound sales, is it SEO, is it content? And we come up with that strategy and we put that together before any agreement is in place, we present it to the CEO or the co founder, make sure that we're aligned. And we want to really just again, make sure that we can help the founder and make sure that we have belief in ourselves and our ability and what we need to do in order to grow the company. Because again, we're taking a big risk as well by joining the company.

I love it. Again, I'm gonna stop just hyping you up. But like, you know, it's. It's a win for the founder, it's a win for your firm, but it's also win for the market too, because you're potentially bringing products that, you know, could be of huge value to enterprise businesses, but it's not positioned correctly. It's not, I don't know, SOC2 compliance, all that fun stuff that you kind of get to when you get upwards in your sales motion. So I love it, man. I guess my next question would be, you know, as a lot of founders look to sell their business over the next couple years and as you know, given you've looked at a lot of different businesses, what are like two tips you would give a founder looking to sell their company to just increase the odds of successfully getting acquired?

Yeah, I think it's a great question. And again, obviously we talk to a lot of companies, and I talk to a lot of founders as well who are looking to sell their companies. And we say a lot of the same things actually that you say honestly and some of the content that you write. So like, the first thing that I always think about is like, focus on what the customer needs and what your customers are asking for. Like their customers are telling you what to build. And what that actually does is it helps you with your net revenue retention because you're building products that your customers want. And if you're building products that your customers want, they're not going to leave you and they're actually going to end up spending more money with you over time. And if you have strong net revenue Retention, the value of your business is going to increase dramatically. To focus there, I would say I have two more. Is that okay?

Yeah, as many as you want. As many as you want to share.

Man, you said, you said too. So I want to make sure I'm following the rules here.

Only two, Greg. I said two.

I don't want to break the rules. So another important thing that I don't think a lot, enough founders and enough people do, just in general is build strong relationships and partnerships within your industry. So talk to people in your industry, talk to strategic buyers, build partnerships, build integrations with your strategic buyers, potentially meet people in pe, have conversations and just be out there. That always helps. And then what we see a lot are companies with single founders and that's fine. But if you want a high valuation, have a team hire. See if you can hire one or two more people to join your team. The value of your company is going to increase if you can put some people around you in place. Because when you get acquired a lot of time they're going to want more than just the product to give you a high valuation. They're going to want an engineer or somebody in sales or other people other than just the founder. And so we would say try to staff a little bit if you can.

Nice, good tips. Next question would be, what's, what's your favorite acquisition story? This could be maybe a company that you've acquired or one that is up in the pipeline. What's. What's kind of a story that stands out, man.

I'm obviously, I'm obviously very biased, but so Polychrome has two really great companies under our portfolio right now and we're going to actually try to add two more this year to have four total by the end of the year. The first company that we have is flagsmith, which is an open source feature Flag feature management platform.

I've been watching you grow, that I've been.

Yeah, that's great. It's doing like, it's doing super well.

Yep, I've been noticing.

Thank you. And then our second one is a super popular developer tool, open source as well, called Browserless IO. Both are phenomenal stories. Ben, CEO of flagsmith, he's out of London. Joel, CEO of Browser List, he's out of Washington state. So both are like really great. I'll say flagsmith right now only because flagsmith was our first partner that we brought into Polychrome and they're both equal. We love them both. Like Joel and Ben are amazing and the companies are amazing what they built. Ben was actually a founder of a company called Solid State Group. It was a development agency out of London. And they actually built flagsmith as a side project so they could use for their clients who were enterprises looking to get closer to continuous deployment. And so they built an open source alternative to like LaunchDarkly, which is the incumbent in the space. And they built flagsmith. Bullet Train was the first company and it was now it's called flagsmith. And we got introduced to Ben through a venture partner of ours and they were thinking about raising Venture actually and the partner there was like, hey, this is a great business. Maybe you guys should think about not going the venture route but thinking about partnering with go to market experts like these guys, Polychrome instead. And it's my favorite story because Ben took that leap of faith with us and we've been to London.

I remember seeing it like I saw your, your. Excuse me, your titles on LinkedIn. I felt like you joined, you literally joined the company.

We joined the company like Ben took a leap of faith in us and we met with Ben. We've met with Ben every day for the last year and a half, every morning to help grow this company. We've hired people into the business from all over the world. We've restructured the strategy of the company and really narrowed our focus and like now we work with some of the largest organizations in the world at flagsmith and grew the revenue. I don't know, it's something like a thousand x or something since we joined.

So thousand X, not bad, not too bad.

So it's been pretty fun.

Congrats on that. Next question. So this last year, 2021 was a record year for just private equity activity, mergers and acquisitions, everything was just off the charts. Any sort of trends that you would expect to see in this upcoming year?

Yeah, the market's pretty crazy right now. So I think outside of just what's going on in the market in venture and the uncertainties and is this good for mergers and acquisitions or is it not? What we talk a lot about at Polychrome is three really key trends in the market. We believe heavily in the future of open source software. Obviously I've said that a lot, but we're very biased. We talk a lot about open source and companies that are building open source alternatives to large SaaS players, we see that as like a big, big trend. Also open source because of data privacy laws and GDPR in Europe, Europe is an open source are very, very popular these days. So we're very bullish on the future of open Source the second that we think a lot about is where go to market is going. And this helps a lot with actually companies that are looking to get micro acquired as well is how are go to market motions and organizations being built and how are people buying and selling software? And the reality is more and more the bottoms up sales motion, the bottoms of buying process is becoming more popular and standard. So free trials, a single developer, developer or marketer comes in, tries it out, then the larger organization adopts it. So we see that as a, as a big trend. It's again it's easier to be micro acquired when that's the case because typically there's a self service option within your product and you don't need to do such heavy enterprise level sales as like a one or two person team. And then we see a huge like we're very bullish on the trend of developer tools. The way that we think here at Polychrome is and like the old age old analogy is we think about like the best way to make money in a gold rush is to sell the picks and shovels. So what we mean by this like is if software is eating the world, but we want to own the companies that make the forks and knives and so we really think developer tools, open source, bottoms up. We talk a lot about that in this new as trends in what's coming ahead.

I love that quote and I definitely agree during gold rush definitely sell the shovels. So I got three rapid fire questions. You ready for these? Yeah. All right. If you were starting from scratch in terms of acquisitions, what's like one book or podcast you'd recommend people check out.

In acquisitions? Oh man, it's a good question. I think some of my favorite business books just in general, I think a lot about 0 to 1. I think about Principles by Ray Dalio. I think about. Those are probably some of my. Those are my favorites. Just off the top of my head.

I want to know your favorite go to market book too.

Oh man. To be honest with you, I'm not a big business book reader. I read a lot of and I listened to a lot of biographies and trying to learn about people and what they built and how they like run teams and how they think. And I try to make it my own after after that. So currently right now I'm reading the Phil Jackson book about his leadership style and just like I'm a Chicago guy so the Bulls and whatnot. And so I love those stories like the Amazon story, Elon Musk's book. I love learning about how these people think and what makes them different. And then I try to take that and apply it to myself in day to Day.

Nice. One recommendation I'd have for you on that front would be Tony Hsieh's book unfortunately passed away, but Delivering Happiness is Zappo's story. They were in a commodity market and they just focus on. There's some really funny parts of the book. Fun fact about and I agree, like Shoe Dog by Phil Knight is such a good book, but there's a part in the Zappos book where someone was awarded. I don't know if like anyone should apply these sorts of things to their company, but someone won an award at Zappos for the longest customer support call.

I've heard that.

Yeah. And it was like, like 26 hours long. 26 hours. Like that's like a therapy session. But I don't, I don't know, maybe they had a lot of shoes to buy. But it just is a testament to how, you know, Tony Hsieh like you know, built a culture and really thought about how, you know, if we can just really deliver happiness to customers, we'll win in the market. And they did.

I totally agree.

So next question. If you could only look at one stat when acquiring a company, what would it be? I'm going to guess it's probably Churn.

Churn for sure. That's our North Star. I knew man, we care so deeply about Churn and honestly taking it back to you and Microacquired. A lot of these companies are very small and if you have a sticky product, the likelihood of building a successful company is so much greater. Like I've worked at a company with high Churn and it's so hard to build long lasting businesses when you, when you have a like holes in the.

Bucket bucket and then you're constantly fixing the holes rather than getting. Yep, agreed. The final question would just be who's. Who's like you kind of touched on this with some of your books but who's like an entrepreneur that you admire?

Who is an entrepreneur that I admire?

And you can't say Elon Musk.

No, I won't, I won't. You know what I'll say is it was actually the old CEO of Returnly. His name is Eduardo Villar. That wasn't really what probably most people thought I would say but I would say that I partnered with Eduardo at Returnley. I was one of the first employees there to help join him and build Go to market. Returnly was a self service, really shopify app. When I joined and it sold for $300 million. And Wardo built that company. He was a solo founder. He had three kids. Incredible smart. He was an actuarial science guy, and he built this amazing product. Super entrepreneurial, very scrappy, extremely smart, empathetic, hard worker, visionary. He sold three other companies before Returnly. He moved from Spain to Silicon Valley because he wanted that hustle and he moved his whole family here. So he's a great guy, a person I've always looked up to, and, um, definitely valued our time working together.

Nice. Good for him. Congrats on his success. Um, so that's all I got for you, Greg. Um, if people want to reach out to you directly, maybe they have a company that they think could be a good fit for Polychrome. What's. What's the best way to get ahold of you?

Yeah, you can LinkedIn connect with me. I'm very active. Uh, you can message me there. You can also just email greglychrome.com. that's. That's my email. I'm very responsive there as well.

Sounds good. We'll put those in the show notes. So if anyone's looking to reach out to Polychrome, you know where to go. Greg, thanks for your time.

Andrew, thanks so much for having. Yeah, thanks so much for having me. Appreciate it. This is great.

Yeah, cheers. Bye.

Cheers.