Turning $50K into $6M With An Online Business?!

Why would somebody sell you a website for 50k that you guys are now making millions on?

It's easy. I mean, he was a developer. He did not get any traction with the business. He built it. He was really struggling marketing it, getting customers. We convinced him that we could do that better than he could. We use something called the Entrepreneurial operating system EOS to sort of structure the business. It's a great way to go from vision to quarterly goals to weekly goals, to how you run a meeting.

How many websites do you think are out there like this with, like, great developers that like to build something but have no idea how to make money on them?

Tens of thousands, perhaps.

So to talk to you guys about how to buy websites, the right way to do this trade, I thought I'd get a guy that was smarter than me on it. He also was CEO of Auto Anything, which is a really cool turnaround story. Maybe if you guys want to hear it, we'll tell you that story later. Drop it in the comments. He also had another company that he built, sold it, and then kind of is like an E. Com expert turnaround guy for private equity firms. How did you find this website? What is it? What does it do?

Okay, the website's called Post Pilot. It is a platform for e commerce brands to send direct mail. Makes direct mail as easy as email.

Yeah, it's pretty sick, actually. If you look at it, you can see here it's post. Get how clever the naming is on this one. Postcards that are sent via direct mail. What's kind of interesting about this, I think, is when I look at this website, I never would have thought, oh, it'd be sexy to own a postcard mailing business. Does anybody even open their mail anymore? And then I like, dug in a layer. So that's what the business does. But tell me why you bought it. Because I think you saw.

I saw the light. Yeah, it was inside. Baseball stuff. I mean, I've been running E commerce brands for probably 20 years, and I always use direct mail as kind of my secret sauce. It's a great way to target previous buyers who aren't subscribed to your email list. And it's a bigger group than you think. It was always a pain, though. You'd have to kind of download a list and go find a printer and send out the cards. And I just wanted it to be easy. I looked at like, Klaviyo and mailchimp. I'm like, why can't direct mail just be like that? So it started with that thesis That E Commerce needed that additional marketing channel. And so then I started thinking, okay, it's easier to buy versus build, and began sniffing around for developers who had built, like, apps that kind of did. That kind of did what I want. Got me sort of 80% of the way there. Put offers on a handful, and we ended up with post pilot.

When most people do deals, they go out to a marketplace when they're new at this game and they just like, look at what deal might look interesting. One that has like a good. You know, it's cheaper. The multiple's interesting. You know, they kind of like the asset class or they like the sector it's in. But the pros do something different. Instead of going spray and pray or shotgun approach, they go sniper specific. So you basically had the idea of this should exist. I want to find somebody who has already developed this thing.

Yeah, this was sniper specific. But I would say I've had my fair share of the other thing is, like, where you just see a good deal and you jump on it. And I think I, in many ways, I kind of learned my lesson and was a little bit more proactive on what I wanted this time.

You probably had 60k, because we're sitting in your nice house here and it doesn't look like we're struggling. But did you do all the money up front yourself? Did you give them cash? Were there terms on it? For people that have never bought a business, 60k might seem like a lot of money. Although obviously, given what you've made on it, it's not a bad deal. How'd you structure the deal and did you just give them cash? Did you keep it on? What did you think?

One of the two or three things I remember from business school is you always want to cultivate your batna, so like, your best alternative to a negotiated agreement. So that's why we went after three or four of these apps at the same time and kind of had offer letters out to each one. And we were trying to see, you know, which one we could get the best deal on. We knew we wanted the technology to plug into Shopify and then send a postcard. And so there were probably three or four that did that. The deal we struck with this one was 50k up front. The individual who had built the platform is now our cto. So he rolled equity. He said, you know, I'm gonna roll X percent into the future business. And then we were sort of off to the races. I think if you brought him here now, he's like, yeah, it was a Great deal, you know, because I was able to preserve equity in this, and it's way bigger than I ever thought it could be.

Now, Drew is obviously really smart. How smart? This is where Drew went to school. But if there's a couple terms you guys don't know, like Batna, this is what it means, or roll in equity. Now, Drew, this is. This is also sketchy because anytime I'm holding the camera, we're in trouble. Tell them what it means to roll in equity.

When you're a seller in a deal and you roll equity, it means, like, I don't want the entire proceeds of the deal in cash. I will take some in cash, and then the rest, I'm going to roll equity into the future entity. In other words, I'm going to own a share of the future entity. And you would do that because you believe the acquirer is going to grow it bigger or better than you've been able to do to that point. You just go to the Shopify app store and you can. You can look for apps that have, you know, one or two reviews, and it means they don't really have a lot of traction. That's probably where I'd start.

So how do you decide what's a good website or not to buy generally? Now, I know for this one you had a thesis, but you've done this a ton of times, so you have a framework for deciding, hey, this one starts to pass muster. What do you think?

I mean, this one was an exception because it didn't get any traction. But in general, I'd advise that you want one with customers, you want one with cash flow and revenue, because it's just a lot easier to sort of make it grow quicker. I think we were starting from zero, but you want to find the person who's just kind of jogging along and. And see if you can make him run faster.

Now, you specialize in turnarounds, which is basically where you take a company that's not doing that great and probably not profitable and maybe not going to survive. And you say, well, with my ability to take this company to the next level, this company is going to be profitable. I'm going to turn it around from not good to good. You don't always think that we should do that for every website. Neither do I. Why do you think you're so skilled at that? Or, like, what are the things that lead to being good at turnarounds?

I backed into it. You know, I think it's sort of like anybody loves a deal. And so I found that the first companies that I acquired were in trouble. They were in, you know, a multi year decline in revenue. And so I think I got good at figuring out how to turn them around, how to cut costs and then ultimately grow them again. But I'm not sure I would advise that for everybody.

Why?

Because I think they're, they're good for an investor. Value funds outperform growth funds. Right. And there's a reason for that. It's because you are going from sometimes zero to whatever. But they're good as an investor, not good as an operator. What I mean by that is the typical value investor buys a portfolio of value deals. And just like any portfolio, they need one to go from zero to eight times their return. All the rest will probably do two times their return. But they make money off the one that just took off. And I think if you're the operator, all your eggs are in one basket. And so you're lucky if you're on that 8x return. But more often you're in the, you know, the 2 or 3x return.

I think it's interesting to think about buying a website for 50k. But the more interesting part is $500 in revenue ish to millions. You have a couple different strategies for growing profits in businesses like this. Where do you start again?

I like to buy something that has some revenue. I mean, $500 wasn't enough to build on. But in general, I talk a lot about three revenue multipliers. There's really only three ways to grow the top line of a business. Number one, acquire more customers. Number two, increase the average spend per customer. And then number three is frequency of purchase, like the number of times each customer comes back. And the beauty of these is that you don't have to like kill it on any one of them. But if you increase each by 30%, you've doubled the business. So I find most business owners go right to acquisition. They try to acquire new customers. But the problem with that is it's very expensive and usually you're sitting on extra revenue if you increase retention and if you increase the average order size. So upselling, cross selling, bringing customers back to buy again. That's where I like to start.

So give me an example of what that would look like for post pilot. So let's say I'm, I don't know some of these case studies that you guys have Bulletproof or Ezra Firestone's company and I'm bulletproof and they're gonna order like one set of postcards we sent out to Customers who have abandoned carts or something, let's say, what else would you upsell them? Or how do you create that three part framework around that product?

For my software business, yeah. The easiest way to increase in software that average order size is called arpu, which is average revenue per user. Easiest way is increase prices. I mean, Vista Capital has made a multibillion dollar private equity fund with really just that one tactic initially where they buy a company and double the price. So that's one of the first rules of thumb, is like, can you increase prices? I think entrepreneurs in general undersell themselves and undervalue their offering. So increasing prices would be, would be big. And then increasing the features that you offer to encourage somebody to like go up to a higher level. For us, you might start with postcards, but we just added some prospecting features. If you want the prospecting features, it might be an additional charge. So those are ways to get the average order size up on retention. In software, that's called churn. You want to prevent the churn. And that's just delivering a great customer experience. It's often figuring out when the customers are about to defect and then being proactive about going out to them and asking why. So for most software businesses, it's like the last login time you look at, like the last time they logged into your app. If that starts getting really long, 30 days, 60 days, 90 days, you want to be more proactive and go to that customer and try to keep them engaged. And then customer acquisition is customer acquisition. I mean, it's just throwing money at Facebook, at Google, at postcards to try to acquire more brands and get them to come in and buy.

If you were going to, let's say re engage a customer, how would you recommend doing it?

Postcards.

Postcards.

He said it's a setup.

Well, take a seat, Drew. We're going to talk about that. One of the other acquisitions that you did and then turnarounds was auto anything, which I think when you guys bought it was doing about 100 million bucks but not entirely profitable. And then over the course of the next three years, you turned that around and then sold it for a pretty penny at the end of your turnaround, what does that look like? The second that you take over an acquisition of a website, what does a 30, 60, 90 day plan look like and how could somebody else repeat that out there?

So usually it's like the lowest hanging fruit possible, increasing prices we talked about. But that would be an example of like, could you just right out of the gates do things to increase the conversion rate, overhaul the retention program, or increase the prices and get more revenue.

We take over a business. It's the exact same thing. I put together a model to make sure, like, what I'm buying is what I'm buying. So are the numbers real? Do they have what they say that they have? That's base case. Then you put together another model which is like, all right, they actually have this thing. Now that they have this thing, what can I do to take it to the next level, Right? And then there's the final one, which is, okay, now I've created this thing. I have a model and projection for how big I can get it, what can I sell it for? And so kind of layering, like those three models together, I think is how you end up getting big exits. What do you think is the biggest mistake people make when they make an acquisition? Is it in due diligence? Which basically means, are they lying to you? Is this what you think it is? Is it in actually running the business? Is it in selling it? Is it in financing it?

Personally, the biggest mistake has probably been not going big enough. It's just as much work to turn around a 50k company as it is a $50 million company. It's literally, you do the same stuff. You do. You open Google Analytics, you work on the website, you try to speed it up. You know, you do conversion rate optimization. And why not do that for a much bigger. On a much bigger revenue base, you know, plus that I would say it costs the same in many ways to buy that small company as it does to buy a bigger company. There's like transaction fees and due diligence fees, and so why not kind of amortize that across a larger revenue base?

I think the same thing. I bought a lot of jobs and not realized it because I thought I was buying a company and it took a long time to realize, hey, the, you know, really appropriate PC terminology I use is high roi, low ass pain. And you really can't have that when you have a tiny business.

You want as much, you want cash flow, you want enough cash flow. And we didn't do this with post pilot because there was no cash flow. So it's one of those, like, do as I say, not as I do, but you want cash flow because you want to be able to go into that business and not have to roll up your sleeves and work. You don't want to create a job. You don't want to work 80 hours a week on that business. You want to have the cash Flow, where you can hire, recruit talent, and really play to your highest self, which is like, what are you personally the best at? Like, I know people who are really, really good at retention or email marketing. They should look for the business that sucks at email market, the SEO person who looks for the business that's just terrible at SEO. You want to be able to go into that business and play right to your strengths and not have to figure out HR problems or hiring or, you know, rebooting the website or whatever else is not related to that.

If retention is one of the main reasons that you buy a SaaS company, let's say, when is it too low, too high? How do you mitigate that?

It's often tough to fit. You got to make the call whether it's something that's like fundamentally wrong with the product. And I think the, the absolute sort of retention number is not as important as is there a cohort in there that is being retained? And I would kind of focus on that. First. I would talk to customers and find is there a group of customers that says they cannot live without that app? And if there are, then it's promising. You're like, okay, now the question is, can I grow that? Like, forget everybody else who's churning, maybe they're acquiring the wrong customer from the get go. But is this one segment that sticks around this best customer group enough to let go after?

I kind of twisted some arms so that I could actually invest in this company. But I want to drill down into why exactly this company. So interesting, besides the fact that we got these guys. So why don't we grill the founders? So tell me why people care about postcards versus posts on Instagram or email.

I think people undersell direct mail. I mean, it's a channel that's been around for almost 100 years. There's not a lot of competition in your inbox or your mailbox. Sorry. And it's sort of cheap to send, the price is capped, and the engagement metrics are like off the charts compared to email. A lot of people say, well, I just get junk mail. I throw it away anyway. But if you compare that to the vast amount of email you get and what you actually read, like, it's really easy to stand out in a mailbox versus in an inbox.

The lifespan of a postcard, of something physical and tangible is 17 days versus seconds for an email. If you even open or read that email, most people these days just ignore, delete it without even opening it. Millennials in particular, they don't really like to engage with email today, but something in their mailbox that's so unique, it's so surprising, it's so unforgettable to them that it actually makes a big impression on those folks. And so they actually really like to engage with it because it's something novel and different. Not the text messages that they're getting bombarded with or the emails that they're just ignoring.

There's a lot of psychology behind that, like research that shows that people perceive mail as a gift. I mean, my kids will run to go get the mail, even though it's all junk mail. And you kind of still flip through everything to see if it's for you.

What type of companies should do direct mail campaigns?

So some of the best brands that we work with are in the consumable space. So think health and wellness supplements, think cosmetics, things where there's a natural kind of replenishment cycle. And you know that that customer should go on to they make a purchase of a 60 day supply of something. If they go 62, 65, 70 days without making that purchase, you got to hit them with a postcard and get them to come back and buy before they defect and are gone forever. We did a campaign for Beardbrand, like one of the OG men's grooming brands and they wanted to target people that hadn't bought for 180 days. So six months of people who were used to buying these men's grooming products and then just stopped for whatever reason and then they layered on people that were unsubscribed to email, so they didn't even have a way to reach these customers. And they got a 10x ROI on that campaign to folks that had gone six months without purchasing and weren't even subscribed to their email list. So those types of brands just consistently kill it with direct mail.

Does anybody else feel like they're messing up by not sending postcards? I guess we need to do this. So if you guys haven't noticed a couple things, namely, Drew is a nerd because he plays with Legos still and he doesn't get to defend himself either. We're just going to continue. But. But besides that, I think there's a little metaphor here for life because you guys are building this business in a really interesting way. You have headquarters located in South Carolina, we're in San Diego. You have a distributed leadership team. How do you manage remote a business that's doing millions of dollars without being there? What's the process for building get it?

It is tough to come up with these things up front. But I think in any organization we've run businesses that have, you know, a few people and a lot and larger organizations and to keep people all rowing in the same direction and focused on the same things and make, and making progress, not spreading yourself too thin. You have to do that work up front and define what's, what's important, what the business expects to accomplish over the course of that quarter, over that year and set expectations for the team and then hold them accountable.

I wouldn't underestimate recruiting a good CEO and completely jamming that person and hold it in like making it his or her job to do all that which has worked for us. His name's Don and he's awesome and he just call me. Yeah, he keeps the team like going in the right direction. I mean by far most of the people report up to Don.

Wow, interesting. Most of the people in your business report out to the coo. Not cmo, CRO obviously usually not the cfo, but that's the way that you.

Yeah, we've got a big customer success team, customer support team, we've got designers, we do a lot of the work for our customers. But those teams just by headcount are bigger teams and that reports up through Don.

So besides the CTO who you brought on, you know, with the business, what was your next hire? Was it the coo? Do you hire starting top heavy or starting like sort of lower level for these businesses?

Yeah, for, I mean for us it was the coo and it's because we did not want to do, we didn't want to get involved in the weeds and just kind of managing recruiting, getting that team performing. So bringing Don on enabled us to kind of focus on vision, marketing, big picture.

What's the number one reason DTC companies fail?

The number one reason any business fails is they run out of cash.

So what do you do?

Focus on, focus on profits, you know, and you got to think that's tied to the long term value of the business is just discounted cash flows.

What's the best way to grow your profits?

The best way in my opinion to grow profits is to focus on customer lifetime values, customer centric approach.

How do you maximize clv?

I think most people focus on volume of customers, but it's better in my opinion to focus on your best customers. So any business has an 80, 20 going on. You've got 80% of the profits come from 20% of the customers. Focus on them, build the business around them, market to them, improve your product offering for them.

How do you ID your whales in retail?

It's through RFM. RFM is a way to score your customers. It's like 100 years old. Recency is the how recently they purchased. Frequency is how many times they've purchased. And you take recency and frequency together and they predict M, which is the total amount they've spent.

Drew's given me so much homework now that I have to do because I feel like I'm doing none of those things, but that's exactly right. That's what you should do to run a website.

Why am I sitting down looking?

Because it's just. It's a cooler shot.