SaaS Acquisitions w/ Andrew Pierno founder at XOXO Capital

Foreign.

I'm here with Andrew from XOXO Capital. Thanks so much for joining me.

Thanks Andrew. Happy to be here.

So to start things off, why don't you just share like a quick background? I know we were talking like a bunch before we started recording, so I already know it. But your background, how'd you get into private equity and what does XO XO Capital do?

So Exo, we buy small, ideally profitable SaaS businesses. But my background and how I got into this. After school I started a small dog walking app. This was like in 2012 before building like Uber for X was super cool. I studied Econ and our developer that I outsourced the product to was just like so, so bad that I got convinced that I could do it because he was such an idiot. And so I taught myself how to code. We released that product, got a few thousand users. Because back in the day you released a mobile app. I mean you had a lot of experience building mobile apps at your last company, but the growth on those things at the beginning was just crazy.

Yeah, that was like Internet and I remember those days. You could literally release anything within the app Store and you'd get traction. Like a website in like 2002.

That's right. Yeah. So we got a couple thousand users. That business didn't end up working out and nothing too interesting there. But I ended up started. I started working for a small venture studio in Santa Monica here and ended up becoming head of engineering there. We had basically half the business doing pure venture and the other half we got a few million dollars to do three companies. So like each company had a million, we lost a million doing a consumer application. We just could never figure it out. Ever since then I've just been hesitant to dip my toe in the water of consumer ever since. So I've been kind of doing B2B stuff.

Consumer's hard. I feel like there's no. It's so binary. It's either super, super successful or just it does not work at all.

Yeah, this is a fun story because this guy's kind of well known, the Levels IO guy. He did, he has Nomad List, right. And a few other properties. But we were trying to do a kind of Nomad List thing and like this one guy was just crushing all of us. You know what I mean? We had like a full team, we had like funding and every day he just like showed up and beat us. It was, it was humiliating. But like a really valuable learning lesson. Lesson like key just, you know, the execution and community building side cannot always be overcome by, like, just injecting money into a company.

Yeah. I think that there's a lot of industries that, that is very common with, and I think that's, that's a good sort of piece of advice for entrepreneurs is, you know, you kind of see a competitor raise a large round of funding, but, you know, execution is everything and it doesn't matter much funding. I think I tweeted something like this, like, you know, regardless of press or funding, you know, you can still compete against, like, companies, even if they seem like they're just absolutely crushing it.

Yep. And there's a little bit of network effects there too. Like, beware, beware of trying to take down somebody else's community. Right. If that community really is strong, that's. That's a moat. That's like a real moat. And I'll get into this in a second. Like, I have a bunch of thoughts around moats because the last company I was at was a computer vision startup and AI. And so, you know, the, the common phrasing around that was like, oh, data is a moat. Data is a moat. And like, I think in a lot of cases, data for an AI company is actually not a moat. But I think in many cases a community, really strong community, is a moat, even if it's quite small. Nice.

Why would you say data is not a moat.

Unless it's extremely hard to get? Your competitors can get it the same way you did.

That's a very succinct answer. I would definitely agree with that. So tell me a little bit more about what you're doing today. So you're acquiring, I assume, not consumer applications, acquiring mostly B2B SaaS or.

Yeah, straight B2B stuff. So just quick filling the gaps at the Venture Studio, one of our portfolio companies started kind of winning. And a lot of the thinking and happenings at the Venture Studio kind of shape my vision of what XO could be or why. Micro acquisitions are interesting. And one of our portfolio companies looked like it was going to be kind of the winner, so we ended up, like, raising 8 million for it, spent 8 million. And in like, late last year, we decided to sell that company. So that's going through that process now. And that's when I started thinking about setting up a studio of my own. And so for us at the beginning, we thought we would narrowly look at no code tools, for example. And I mean, the prices that we're dealing with are actually quite small. And so we were going to have to find an area where there just wasn't as much competition for buyers if you have a really hot SaaS product. I mean, it's really true. Today I was looking at whatever one company and they were at 250 million valuation, but they might only bring in 2 or 3 million in revenue a year. Acquiring that kind of a business is obviously way out of reach for us. But there's a very big difference between buying like capabilities as an organization. Like, let's say your acquisition strategy as an individual company is to like. Either you're either buying cash flow or you're buying capabilities. Obviously, acquisitions come with additional capabilities either way. But for us, we started narrowly looking at no code tools and very quickly realized there's just not that many available tools in our price range that we could acquire. And so we widened that a bit and became like, much, much more opportunistic, perhaps overly so. We bought three within two months of each other, and each of them was in a different programming language. So we have. We have four partners, three of them code. One of them does not. He's in kind of private equity on the real estate side, though, so he keeps our financials. True. But the core engineering work is on the three of us for the most part. And the tricky part is if the company you acquired doesn't have enough cash flow to buy really, really good developers in a language that you're not an expert in, you get into this squeeze spot where you're plumbing for kind of crap developers on upwork at the lowest possible price, trying to eke out features or fix bugs. And it just has been, you know, we're kind of out of the romance period, where we were like, oh, we love this idea of acquiring cash flow. Right. It's going to be great. And now we're kind of like in the weeds of executing on this. And it's tough, man. It's tough.

Yeah, that can be super common on the smaller end because you essentially sometimes have to recap the company because like you said, there's not enough profit to reinvest towards fixing things like bugs or really anything. How would you, like, what advice would you give to, like, maybe newer buyers coming to the market? They're just looking at like a first purchase. You've gone through a few so far. What are some major, like, learning lessons you wish you knew maybe like three months ago.

So I think the trajectory that we're trying to get each calling them company is a little bit grandiose. Right. They're like, I don't know, products really. I mean, they're real companies. We Try and get them to an engineering place where like a. Can. Could this scale, like, could we get 10 times more users? If that answer is no, then there's like bug fixing, right? Maybe some re engineering work that you have to do. Once the engineering work is like complete in the sense that like it's on a good path, right, you have like incremental features. Once it's on like the incremental feature path with, let's say one developer that knows the code base, then you can like start thinking about real proper growth. So I would say that like, and right now we're in the throes of engineering work on all three and like none of them are ready for like the growth phase. And so I would recommend if you buy, if you're looking at buying, buy one, make sure like the engineering is super tight. Like go through the full cycle with just one company before adding like the complexity of a whole nother code base. And by that I just mean get through the engineering, get it like, you know, production ready. Because a lot of the products that you're going to be buying, even though they're not marketed as such, like, they are distressed properties in the sense that there's like a ton of weird assumptions that team or individual made that are not native to you and have to be like, documented, right? Like, let's say they have a funky deployment process, for example. Like some. Somebody's got to go and figure that out, right? And for them it was very native. Maybe that's just the way they do it. But for you, you're looking at it, you're like, who the hell does this this way, right? Like, nobody does it this way. So yeah, I would say, number one, get one company go through like the full cycle of getting the code base where you, where you need it to be in order to scale and get it on some kind of growth trajectory. And particularly if you're a developer, like that second part, pull that forward as quickly as possible because like the default for developers is to build stuff. And you know, in my view, like, this product LED growth thing is just like utter. Can we curse on this thing?

Yeah, you can say, fuck yeah, I don't care, dude.

Yeah, I didn't know, I didn't know. But yeah, like, product LED growth is bullshit, right? Like, oh, these like, you know, something that takes off exponentially because like, the product is just so good, is just such. It's like candy for developers, right? Like, oh, I could just build this thing and it'll take off.

Yeah, I, I agree with You, I call that the vending machine where like a lot of entrepreneurs just think, like, I'm going to build this piece of software and then people are just going to come in and put money into it and then it's going to be magical. But like, in reality, you know, typically you're gonna have to talk to customers, you're gonna have to run an actual sales process most of the time depending on the customer you're signed to. So I know you're saying, but when it happens, it's epic. But it's a lot harder than I think a lot of companies make it seem.

Yeah, I just classify that as a lottery ticket and that's not the game I'm playing. So if you want to be like in the lottery ticket game, don't buy little software companies like, go invest, go be an angel investor. Right? That's that game. We want to actively try not to be subject to power loss. That's like a key objective of mine. I don't know if it's true. Right. Like in any portfolio you're going to have winners and losers. But that's what I'm trying for, I'd say another note on somebody that's trying to buy their first one. So a, like, you're probably going to fuck up. Like, you're probably going to be wrong.

Right.

You're probably going to buy the wrong thing. There's some gotcha that no matter how many of these interviews you read or watch or listen to, you're going to miss something. And so like, make that damage small, bring partners in so that damage gets halved or quartered or whatever and just go through the exercise because, like, you're going to be wrong. But I would say also too, before you buy something, one of the, one of the companies we bought, we just totally fucked up on diligence. And diligence is really hard. If you're buying like a pure software, like just a straight up SaaS product, you're looking at code through a screen share. Like very few people are just gonna give you access to their GitHub repo and say like, yeah, just go root around in there and let me know if you like it. Right. Like, no one's gonna do that. So you're looking at code through a screen share. They're showing you some like random files in like your third favorite programming language and you're like, ah, fuck. Like, are people paying for this? Yes, they are. Okay, well then I just assume that it works, right? And we bought one where the servers were and this again is like totally on us. We bought one where the servers were just crashing every like six hours. And it's in a programming language that only one of the three of us knows. And when that person gets busy, you're like, you're fucked. Right? Like now I'm trolling upwork, trying to qualify like, frankly, like kind of the bottom of the barrel of developers because that's all we can afford to pay. And our customers. If you called any one of the customers right now, they'd be like, yeah, I'm ready to churn, like tomorrow. I hate your product so much. We did that during the diligence process too. We talked to two people and they were like, yeah, we like it, we like what this could be, but we're looking at your competitors every day wishing that we could switch, but we just have so much shit in your system that it would be too difficult for us to switch right now. So maybe we'll take a look at it next year. Take a look at switching next year. And that's like, that's not the ideal place you want your customer base to be in when you like take the helms of something new. Because while you're getting your feet under you, you're going to, it's going to be painful in the short term. And that's been the case for us for now on one of them is, you know, shit's on fire, customers are churning. We don't have like an engineering people to execute against an engineering roadmap and haven't even started thinking about what, what growth would look like.

That's, that's, there's a lot of learnings there. I guess if you could go back this specific acquisition that you're talking about where the code base wasn't up to par, you know, customers probably had a little bit of information that you probably could have gathered. What would you do differently if you could go back, aside from, you know, avoiding acquisition altogether? What would you have done, if anything, to try to mitigate knowing what you know now?

So we're considering making this a rule. I don't know how hard it will be, but. So when I was at the venture studio, there was this like another kind of Goldilocks idea that like, oh, well, all of the portfolio companies are going to be on like the same templated code base and we're going to be able to share developer resources between them. And like every time company A builds a cool new feature or module, company B can leverage it and it just like it fucking never works out like that, like, of course it doesn't. But that idea is just so alluring. So I'm aware of that trap. But the rule we're considering making is just acquiring companies and like, maybe one or two different code bases. Because the thing that really fucked us is that we have one in, like, it was in php, which, like, I don't. You couldn't pay me to touch, so we rewrote that.

My last company was in php. The whole thing.

I'm sorry, like, just, you know, I wouldn't have been a developer like 20 years ago.

Like, we started in 2010.

And.

Yeah, so I. I can relate to those pains.

Not a bad choice. 2010 PHP was kind of cool. Cause, like, Facebook was still cool and Facebook was on php, right? Like, that wasn't.

It worked out, you know.

Yeah, yeah, there you go.

The servers did crash every six hours though, at one point in the early days, so I can relate, man.

Yeah. So that one we rewrote from scratch in Node, another one we have in Python, whatever. They're all in three different programming languages, which means I have to find three different developers. If we don't have time to go do it ourselves, which, like, of course we don't. The exercise for us is not about, like, can we do the work? Like, of course we can, or presumably, of course we can. It's really about, like, how do we leverage cash flow to get work done? And it's really difficult to do when you have to go find somebody on upwork that's like, oh, well, can you, you know, do this for a thousand bucks? And they're like, yeah, of course. I could do it for a thousand bucks. And six weeks later, like, the thing they wrote is worse than what you had before, which we've gone through several times now.

Ouch, man. I'm sorry.

But it's good. The marketing material for, for like, what's put out in public is obviously positive. Right? Like, you know, I think both of us have a vested interest in getting more people in the space. But like, the. The reality of some of this stuff is unsurprisingly, more nuanced.

I appreciate the candor in terms of, you know, when you buy a company, some things can go wrong. And it's not just you buy it and now you're rich and you're a CEO now. Like, you actually got to do stuff. Stuff's gonna break. Like, so I relate on that on a big level, I guess. My next question is, when you think about two years from now, where do you see things Going where's your goal if you have one?

So we're in the process of raising a fund. Our first one. I've never raised a fund before. I've raised money before for individual companies, but raising money for a fund is a little bit different. It's cool. I don't know. Sadistically, I love raising money. I don't know why. I just like, I love, I love those meetings so much. So there's kind of really two big pieces of leverage that we have. As a capital company or any capital company has this. You can use debt and, or other people's money and you need some kind of leverage to move upstack and do kind of bigger deals. Because another, another piece of this equation is that if you buy a software company that makes $50,000 a year, mentally you have to have the headspace of, you know, net new one company. Right. If that same company is doing 10 times that amount of revenue, still relatively the same headspace, an order of magnitude more revenue off of that. So all that is to say we're looking at moving up stack and to do that we either have to use debt or other people's money because at a certain point, no matter what, the four partners will run out of cash. So in a couple years I think that we're going to be. And the way that this is shaping up is that we always try and go first. So we just did this with our own money to make the mistakes on our own dime. We'll probably do the fund in a debt free way and simultaneously we'll experiment with debt on our side. So the next two years look like some kind of debt acquisitions. Messing around with that, with just our own money, a fund and that will probably. And then executing is just going to be kind of heads down, really boring stuff like customer support requests, incremental bug features. And then truthfully, on our team, there's a weakness right now on the growth side. And actually I have a small marketing agency which is ironic for several reasons. But we don't have a playbook for growth. I think getting a playbook down for engineering is relatively straightforward for us because we're so dev heavy. But getting a playbook on growth, it looks either like us experimenting a bit more or bringing on a partner that has that growth experience. Nice.

I like your approach because you're essentially proving out your model before you go out and you ask for funding. You know, kind of, it reminds me of, you know, kind of like the advice for entrepreneurs when asking like how do I meet investors? And it's really like if you just build a good company, you focus on things like revenue, your customers, investors kind of, you know, will come to you. So if you can, you know, really prove out that playbook where you can acquire a company, grow it in X amount of time with kind of a systematic approach, I really, I've seen a few other people do that with some success. So I like that. I like how you're going at it on your own. First.

Yeah, there's two comments on that. One. At the scale that we're doing this at, there's kind of two ways to do it. One is, let's say the SureSwift model. They're kind of, you know, way upstream from us. Like anybody can go, well, not anybody, but you could go invest and get cash flow monthly. Right? You kind of get mailbox money. The way that they're doing it is that a higher, they're at, you know, like a higher price point than we are. So these companies that they have are kicking off a lot more cash and they're kind of doing a hold forever strategy. What we've realized, doing these small ones and just looking at our own cash flow over the past few months is that that model is not going to work for like a million dollar fund unless we buy one company for like, you know, $980,000. Like it's, it's probably not going to work. Meaning that this, if you're thinking about starting a fund in this space, take a look at the sure Swift model and if you can figure out how to make it work on a smaller scale, awesome. But I think for us, it looks like realistically we're going to be selling them in like two to three years. Meaning I wouldn't consider it flipping, but I think technically it is flipping. Right? You kind of, you buy the house, you remodel it, you maybe rent it out for a year or two and you resell it. We'll be kind of on that path for this first fund, frankly. Just because the deal sizes are much smaller.

Yeah, I think when the deal sizes are much smaller, the, the quickest path to ROI is usually through growth. Like it has to be, you know, because you don't have enough money to reinvest into the business to, you know, like, fix some of the issues that you were mentioning, like traditional private equity. You know, we'll buy a company with a certain amount of cash flow where they can hire someone to manage it. It's pretty hands off. It's kind of like buying the house and then they just rent it and they just hold it. But they don't fix too much up, depending on the firm. But yeah, when, you know, when people, when buyers are looking at smaller deals, I always recommend, you know, don't buy something that's like 20, 30, 40, $50,000. You know, if it's making 10, 20, like a revenue amount that small, unless you're confident you can like double it or triple it or ideally 10x it because it's going to, it's just going to be a slog, you know, trying to get a return out of that over three, four years. However, whatever multiple that you're paying, would you agree with that or is that, I don't know, what do you think of that?

What's the alternative? Buying something bigger?

Well, no, I guess it would be buy and hold. So, you know, let's say you buy a smaller asset. You're looking at, in this example we use, it's something that's $100,000. It's generating 20 to $30,000 a year in profit. I see a lot of buyers viewing these as like annuities where they just kind of buy it and it's really hands off and they don't really, there's, they're not going to encounter any issues. So you know, they view that cash flow as enough to kind of just support, you know, getting their investment back. But I guess the way I view those situations is like there's just not enough cash flow to really move the needle. So you know, you need to have some sort of like playbook to grow the business and then the other option is to not focus on growth. I don't know. Does that make sense?

Yeah, I think you're right. You're basically saying that like the, the option to do nothing will lead to an adverse outcome. Right. With these smaller deals, unless you can grow them, don't do it because it's not going to be the annuity that you think it's going to be.

And there's usually no team behind. They're just products like you said. So you're buying something without any employees, there's no one there to. You got to be willing to answer your support tickets, market the product, figure out how to fix these bugs. So I think that's one of the bigger mistakes I see a lot of first time buyers make is thinking, you know, they'll just buy something and then it's just like real estate. But the difference between SaaS and real estate is SAS can go to zero, like it can go to zero. But a house, unless it like, you know, catches on fire, it probably won't. So I guess when, when, if you had to give some advice to first time buyers looking at, you know, really just micro SaaS deals, maybe looking to do their first one, willing to make mistakes, do you think there's an opportunity to buy and hold, or do you think they should only purchase assets if they see an opportunity to grow those over time?

So it might be the case that. So candidly, we put one of our properties up for sale on microacquire partially to test liquidity as a seller. Right. Like, I don't know what this, like part of my concern is or just a kind of question mark that I need to think through is who buy if you're not buying and holding forever, who's upstream from you and at different levels, like there are different people that are upstream. If you buy something that's making 100,000 and you want to sell it, when it's, you know, you grow at 10x, right now it's making a million a year. Who are those buyers and who are these, these other players at like that version of that Same story at 2x3x5x20x? So I'm a little bit concerned about like the liquidity of these things. Obviously you're buying a company, like they're totally illiquid, right? I mean, but I want to be sensitive to people that are trying to buy something for the first time. Like, if you want to get into this and dip your feet in it, like, you know, I don't know, set aside some dollar amount that you feel comfortable just losing, understand that you're buying a job and go for it. Right. And I think it could be the case that we'll end up holding at least one of these three for way longer than I'm my best guess today. It could be our worst performer, right. Which like, is a textbook thing that you shouldn't do. But I think that we will be subject to all these same sort of like financial market mistakes that, you know, you're just kind of like Main street stock buyer is right? Like buy high, sell low type of stuff. But yeah, I mean, if you're looking to get into the space, there's nothing that's going to accelerate your learnings more than like putting your money where your mouth is and like messing up and seeing what Churn feels like. Not looks like, but like, feels like, yeah, waking up to Saturday morning when like the servers are on fire and you're like, oh, I was gonna go, I Don't know, to the beach or whatever. I'm in Santa Monica and having to deal with, like, support requests all day and, like, trying to contact the seller who is, like, you know, into heating now because you just bought his company and, like, is totally, totally unincentivized to help. Help with this fire. But, yeah, I would just say. I would say go for it. I don't know that all of these questions are knowable before you. Before you get into it. I mean, we're doing it now and we don't know even who we're going to sell these things to.

That's great advice. So I guess as you know, final questions. You know, any. Any books you'd recommend to, like, people looking to enter the space? Are there any that, you know, you first read and you were like, this is, you know, it's been super helpful.

I'm gonna have a bad list. Let me see what comes to mind. So there's been a few kind of cool ones that aren't gonna have a lot of effect on you, but I think they're, like, good readings and, like, tangential to the space. Richer, Wiser, Happier by William Green. That's a fun one. More Money than God is Cool. That's kind of a fun narrative history of hedge funds, which you think of hedge funds today as these old kind of stodgy institutions, but these were the cowboys. Not too long ago, much like venture capital. You think of like, oh, Andreessen. This is very institutionalized and formalized, but Obviously in the 90s, it wasn't that way. Right? These were the cowboys. And. And I feel like in a lot of ways, the space that we're operating in now feels like a kind of like, cowboyish scenario. Right? These are too small of deals and, like, a little too weird and not hedge fund native. I mean, private equity native. So more money than God. That's a good one. And then profit first. I read it because it's kind of like getting in the zeitgeist, but. And like, of course you should. You know, it's one of those books where you read the title and you think like, okay, yeah, do I really need to read this book? I kind of get it. It's like, profit first. Take your profit out of the company first. Okay. That's the whole book summary. But that's a nice one to know, right? Because we're, for us, we're operating each of these properties, like, revenue positive, even month over month as we're trying to grow. And if we're not, we're off by, like, the hundreds, low thousands. So, like, not by much, but it's a really key way to, like, you know, when you. If you're doing this as a capital company, like, you. Once you start buying these things, you have a clock that's ticking. Like, you have an IRR calculation that started for us last November. Right. And so it's extremely important to think about these kind of silly things, like, oh, yeah, we should set aside money for taxes. Oh, yeah, we should set aside money for, like, no, this is profit. Like, we cannot touch this. Those kinds of things are super important if you're trying to formalize this and do it professionally.

Nice. I haven't read any of those, so I'll definitely check them out. Andrew, if people want to learn more about you, where can they find you?

On Twitter at Andrew Pierno, P I E R N O.

All right, well, thanks so much for joining me on this podcast. Definitely appreciate it.

Likewise. Thanks, Andrew.

See ya.