The Ultimate SaaS Financial Guide with Mark MacLeod @ SurePath Capital

If you buy shares in Shopify and you just decide, you know what, I made the wrong decision. You can just go on the market and sell them. If you buy a company or you invest in a startup, you can't undo that decision.

Mark, thanks, Dan, for coming on the show.

Thanks for having me.

Appreciate you, man. So for the those that may not know your story, ex CFO at Shopify Tungle Montreal.

Back in the day, that's when I.

Think we first met. So Shopify, obviously. That's a crazy ride. Had Toby on here. That was, I mean, just one of the most fascinating conversation because we are both technical. So it was kind of neat to look at business through that lens. Then FreshBooks, CFO of FreshBooks. And now SurePath Capital, which is your boutique M and A firm.

Is that the way you describe it? Yeah. Investment bank, Non sketchy Investment bank.

Non sketchy Investment bank. I like that because we'll talk about what makes investment bank sketchy. Because a lot of founders don't know that there's this whole, like, financing side of things or exiting process. But you've been known, like, I think I first discovered you through your blog. How many articles have you written?

No clue. I mean, I started blogging in 2007.

Startup cfo.com. yep.ca.ca yeah. You don't have the dot com.

I don't have the dot com.

Weird. But you have at startup cfo. Are you still on Twitter? No.

You just. I handed it off. There's a new, like a successor. Her name's Vanessa. She runs Cruise Consulting in San Francisco.

Okay.

She runs the book. Pass the baton. And she runs the books for like 400 SaaS. Startups, literally.

I think everybody listening is probably excited to know. So Vanessa at Cruz Kruze Consulting. Wow. She's gonna get an influx of. That's like the biggest. Like, people are like, who do I use for bookkeeping as a SaaS? Because there's all these, like, nuances. State taxes now is a big thing.

That's right. Yeah. Though they've made. They've figured it out and there's a real. They've got a bunch of automation and they're only doing SaaS. Startups.

I'm excited about that.

Cool. So she's the new startup cfo.

But, like, what was your fascination on sharing that content originally?

Like, yeah, 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 do you remember when your first post went out?

March 2007.

Wow.

Yeah.

Okay.

That was like on WordPress. I was like. Or not. Not WordPress. Blogger. Yeah, blogger. It's like super old school. Yeah. But, yeah, there were very few folks writing about startup finance and none from an operating standpoint. And, you know, I was in SaaS from the inception of SAS before it was even called SAS. Yeah, it was like ESP or something, whatever it was. And so, yeah, I was just kind of crystallizing my own thoughts on the topic, so I found it super useful.

And you've put out a ton of content.

Yeah, I've slowed down a bit recently, but certainly in the CFO days, especially when I was doing multiple companies at a time.

And that's why I was wondering. Cause, like, were you doing Shopify and other companies?

I was.

That's what it was. And then eventually you went on full time. That's why I wasn't sure if you were.

No, what happened is I helped raise real ventures and.

Fun fact, you were my investor. Yeah. Yeah.

And then you left. I was sad. Sorry, man.

I was like, hey, Mark, I don't like this at all. Yeah.

So I was with Shopify through a really important period. They first reached out to me again. Toby, Same thing. Read my blog, reached out and he was like, hey, we're kind of growing, like crazy.

What level were they at either years in business?

GMB 2009, 2010.

Okay.

And so still pretty early.

Yeah.

Profitable. It was real company.

Yeah.

Had only raised angel capital, but it was really working. And he reached out to me. He's like, you know, we're not sure what metrics to track. We track some and we don't know if these are good results or bad results. Would you come and spend a day with us? I did. The output of that day was an Excel spreadsheet of what they should track and the benchmarks.

Okay.

And to their credit, and this just sort of.

Because even as a marketplace, they were early to that.

Yeah.

Like, marketplaces were still, like, not a. There wasn't a lot of data. I mean, really. I think it was Alistair's book on the metrics, Lean metrics, that really kind of crystallized some of this stuff.

Yeah. You know, all before that.

Yeah. That's crazy.

Yeah. And so to their credit, they went from not knowing what to track to hiring a hacker out of Amsterdam to build this amazing data warehouse that could have been its own startup. They could have been like the metrics backend for every SaaS startup out there.

Everything fed into the data warehouse.

Yeah, yeah. So they were amazing. Including. They built this thing. It was like a visualization of the world and you could see like real time transactions. Yeah, it's really.

You see, I've seen the more modern.

Version they still showed on like Black Friday. Yeah, Black Friday started as internal technology. So I did that day with them and then became involved as a part time cfo assisting them in raising the Series A and the Series B which ended up being an insider round because everything was working so well. As a.

As an aside, when you say inside around existing investors just topped up.

Yeah, we were, I remember being in the board meeting where we said we were going to go raise a Series B and they were just like, hey, give us some time. And they basically came back and like.

Please don't let us cake.

It was like an offer we couldn't refuse. And so an interesting aside. You think of Bessemer Ventures like one of the most storied venture firms ever. Shopify is still their largest cash on cash return.

No doubt.

And that is because they double down. As an aside, they've just done the exact same thing in toast.

No way.

Yeah. Just led a $400 million insider. Right.

I mean it always made sense once I understood the idea of like Parada for angel investors. Like if you look at your deals and it's like these ones are doing well, why would you go find other ones and have this same. That's right. I get portfolio approach and you know, you have investors and LPs that you know, assume you're going to do a.

Certain strategy but got to double down on the winners.

One of the winners. Right.

Because most don't win.

So 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. I mean that's, you know, with FreshBooks, you know, they're, I think for a long time they're very much on the S side of the SMB. Still. Yeah, still. What have you seen in regards to the evolution of SaaS over the last 10 years? You know, either in the go to markets, the pricing strategies, like what's got tons.

So much kind of started seeing freemium come and go.

Like yeah, now it's product LED growth.

Yeah, now it's like product LED growth.

If you Stay long enough, you find like, oh, they finally have a name that's gonna stick for this thing.

That's right.

Yeah.

So saw lots of.

Do you think freemium's coming back?

Not necessarily. I think in certain instances it makes sense. You know, I think where it failed is there was. In there was. If you look at the conditions for success in freemium, one, you need to have a very large inbound funnel. Two, you know, the incremental cost of serving a new user needs to be near zero. Super low.

Yeah, right.

And third, there has to be just a huge differentiation between the free and the premium such that your user, if you have this massive funnel, it's nominally expensive to serve them. Yeah. Then through good onboarding, great products, there's enough that upgrade and there's such a compelling reason to upgrade that the revenue stream works.

And I think, and it's a marketing decision, not a financial decision, it's really about top of funnel distribution. I think recently Vidyard Michael, it.

That's.

I mean that's a big bet. I haven't seen many companies at their scale, you know, decide to go freemium.

Yeah, that's right. A huge. I mean I would imagine the kind of immediate churn was non trivial for them. Yeah. So you gotta cross the desert on that move. That's for sure. But I actually think that's a. 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. You know, and maybe we'll talk about it.

I didn't know that. It's SMB 100%.

That's all we do.

No mid market.

Well, at the m. Okay, we do.

Got it.

Yeah.

So what kind of ACVs you just stay anything under 100k kind of deal.

Yeah. We find generally if you're getting north of kind of 50k a year even you're starting to. You're starting to move a little out of our sweet spot. Yeah, definitely north of 100k. ACV, that's. That's closer to enterprise. Got it. Like the commonality with all of our companies is they, if they've gotten to a scale, then they have lots of customers small or mid size and therefore are data driven, funnel led companies versus, you know, if you think about enterprise sales, if you sell to Fortune 500, guess what, you've got a TAM of 500 companies. Right. So it's more hero based, more sales based. You know, it's all the end of quarter.

More of the data driven.

Yeah.

What are Some of the clients you've worked with, Tons.

So we raised 115 million for a company called Venice Solutions. That's a mid market kind of corporate performance management thing.

And is it both sides buy and sell?

We're mostly sell side sell side, mostly sell.

So you help people exit or raise.

Capital, raise capital and often pursue both simultaneously, which is the thing I hope we'll talk about. Just because they're raising, continuing to raise additional capital is like a double edged sword and it can be really easy to do in this environment where there's so much capital and then as founders you could end up screwing yourself when it comes to long term exits to.

The true cost of capital.

That's right. So we did that. Raised 60 million for TaxJar. Awesome company serving e commerce merchants.

Nice work, Mark. Yeah, this is awesome. So how do you explain what you do? The boutique M and a bank, like for a founder, what's your definition?

Yeah, so if you think about startup life, it boils down to kind of a few big moments where having the right advice, insights, network expertise could be literally game changing. Yeah.

Jeff Bezos calls these type one decisions.

Right? Yeah, there you go. And there's a few of them right in the life of a startup from the decision to raise capital to maybe a strategic investor to ultimately exit. And so what we do, if you think about the early stage investment decision, it's sort of fundamentally a leap of faith. Dan's onto something. Like screw it, I'm just gonna bet on Dan, he'll figure it out.

It's literally that there's literally.

Yeah, yeah.

People think there's more. Yeah, it's.

But at the growth stage, every die will be, every I will be dotted, every T will be crossed. It's a very considered decision.

And growth stage being B, like a B round plus typically.

So there's sort of two flavors. One is if, if you're on the venture treadmill, you've already raised your seed in your A, it's sort of like B and up. And then another thing that we find again in the SMB world where SMB markets are sort of large and evergreen, they've been around forever. Like a full half of our clients sort of skip venture capital and go directly to private equity.

Yeah, we're seeing a lot more of that I feel.

Yeah, yeah. And it's actually better aligned for founders because it's not benign. But like unlike VC where like a venture capitalist would prefer that you go into a brick wall at 100 miles an hour trying to create an outlier versus having have a safe win. So you're not aligned. Right. The PE folks only play sort of 10 million revenue and above cash flow. Yeah. And so it may or may not be profitable, but if it's burning, it's nominal burn unit economics are everything. It's just a repeatable sausage machine. It like it just works.

And it seems like a lot more of these platform plays where they buy a company as a platform and then kind of roll up other companies in their space.

That's exactly right. We sold a company joist into up a platform that Providence Equity was doing called Ever Commerce and they've had huge success with that.

So Vista, I feel is the, you know, the OG of this space.

That's right. By the way, Vista has literally never lost money on an investment.

I know Robert is. I've got a man crush on him.

Yeah.

I've watched every video on YouTube he's ever done. Yeah, yeah. Vista is fascinating for anybody in this space, as you know, they're fascinating. But when did the rest of the private equity world jump? Like as I. There's a few Georgian partners I think is in this space. It seems like it's. They used to do just like retail roll ups, dentist office. When did they decide to get into this SaaS? What did they see that? Did they just run out of opportunities, you think? Or just saw the economics and they're like, whoa, this is.

Yeah, they were originally focused on bottom line profitability. And that is typically not strategic for SaaS. Right. What you want to do is acquire as many. You want your individual unit economics to be profitable.

Yeah.

And if they are, you want to get as many of those profitable annuities.

As possible because it's a future. It's discounted cash flow into the future.

That's right. And so at a certain point the line will cross and your company will become profitable. But that's why.

And it's a decision you can make at any point if you wanted to cut costs.

Correct. And that's why if you look at Salesforce or the OG SaaS public company, they were massive before they became profitable. That was a strategic decision. And so the private equity folks sort of of avoided SaaS because it didn't fit their playbook of, you know, taking a controlling stake in a company and then putting a bunch of debt on the balance sheet and using the free cash flow to pay off the debt. Cause it wasn't generating free cash flow. Yeah. But you know, what's happened is like on premise software is still like if there Was a pie chart on premise is still most.

Is it really?

Yeah, especially in the enterprise.

Most people listening to this have no clue what on prem is.

Right.

Which just.

Right.

I spent a lot of time in cold server rooms. There you go.

So especially in the enterprise space.

Yeah.

But the trend is very clear. Right. It's moving towards SaaS and what the private equity folks have just gotten religion that, you know, unit economics are actually more important than bottom line profitability. And, and therefore there are large companies to be built and 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.

Yeah.

Then they can consolidate. They can use their M and A capabilities to roll up markets. They can do all.

Okay, so that's where they're saying, hey, there's potentially a thing in, you know, lawn. One of my coaching clients just exited a PE firm in the kind of like ERP for SMB on the lawn care space.

Right.

And they, they. So, 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, 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. And it seems like, I mean private equity has always been, it's always been known as like buy it, sell to the next guy. Is that still present in the SaaS private equity space? Like does everybody eventually end up selling to Avista eventually?

I mean, you know, 96% of funded companies exit by way of acquisition.

4. 96%.

4% by IPO.

Wow.

Do you know.

So the other data point I've always, I call this like the, the true entrepreneur, all star like thing. If you're still CEO of the company you founded, when you go public.

Right.

That's like rare.

Super rare.

That's like the ultimate to me. If you've been able to grow as a human. Because that's a different level of skill set all the way on that.

Right.

That's, that's where. Okay, so you're saying 4% go IPO, 96% exit through.

And so on a probability basis, what's going to happen? So these PE investors are called sponsors. And so you'll get a sponsor, they're going to help you grow to a certain level and then flip it to the next sponsor. And their whole pitch to you as a founder is you know, like two bites at the apple.

Yeah.

Like you're going to have an exit.

Today, get you some liquidity risk. You're going to roll in usually 40%, keep on the next. Yeah.

And then we're going to do all the things that we do, like our playbook, either from operational excellence to acquisitions, whatever, to create a company that is larger than you would have created on a standalone basis. And then we're going to exit that and you know, you can either leave the bus at that point or you can keep going, but either way, kind of two bites at the apple and I've seen it work. It does.

I mean it seems a less risky proposition than the kind of like drive into the wall at 100 miles an hour.

100%.

So from your perspective when you're working with founders, you mentioned cost of capital and like getting on this like fundraising train. What are the new ways to think about fundraising? Is it to stay bootstrap as you can and then maybe do some debt financing? Like there's all these new alternative debt financing classes for an SMB or mid market, you know, the clients you serve. What are the new things that people may not be aware of in regards to how they can get to scale and get some liquidity and you know, kind of get an outcome?

Well, I think strategy begins kind of with an end state and working backwards. And 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.

But a lot of the.

If you can talk to them early, knowing where.

Right.

You're helping them out, what could they do differently?

I would say postpone raising institutional capital until.

Because pretty much other than co founders, early investors, they're the highest dilution.

Highest dilution. Yeah. And it's. You're sort of signing up for a one way journey and you often don't know enough to know whether you want to be on that journey.

Yeah.

And then you often end up going on that journey from like not the biggest position of strength.

Yeah.

Right. And so if you can claw, fight, bootstrap, whatever, like get it going. Get it going, just anything and everything.

Yeah.

To get it to a point where you are in a position of strength and you can dictate terms, then you're going to suffer way less dilution. Right. And you know, I look at, you know, many of the companies we exit, you know, the founders own between 5 and 10%. Yeah. So it's still worth something. Yeah.

But you know, it's not it's not like, like crazy. I call it multi generational wealth creation.

Right? Yeah. So it's definitely not that.

Not that.

So, you know, if I look at Shopify as obviously a great case study, you know, by the time it raised its first round of capital from Bessemer and firstmark, it was working. We didn't need their money.

We.

They were begging.

Were they the ones? I heard they were sending like gold plated old cash register machines trying to get Harley and Toby. Like there was literally the chase was on.

Oh yeah, for sure. You know, there was a bunch of investors around the table.

They were like, please let me in.

But when they saw, when they looked underneath the hood and saw the metrics, they were just like, we, we need to invest in this company.

I love watching early on. Oh, what's that guy that screams at people?

The finance guy? Yeah, yeah. Mad money or something.

Mad money. I just love it. It's like crazy. It's like he's like leg legit. It's, it's, it's impressive and it's, I mean it's just, it's a fun one for Canadians. Just because it's such a, it's just a cool example and just world class, like excellence. Like.

Yeah, I was only in the office like maybe two days a week or whatever, but there was a period there where the office I sat in was right next to Harley's and he would just work it all day. It's just like phone call after phone call, just hustling.

Yeah.

Like huge.

Doing Harley.

Yeah. He is like a force of nature.

So postpone capital raising as much as you can. But then is there some new options that you think that are interesting for?

Look at there are, you know, there's new alternative lenders like lighter capital, SaaS capital that come to mind who. Unlike a Silicon Valley bank. Like a Silicon Valley bank, really.

They've been around forever doing this growth stuff and they seem to tag along to the vc.

That's it. They're underwriting the vc?

Yeah. They're saying you've raised money. The VC did some, you know, and there's capital there for us to kind of. Yeah. And they get their warrants and all that crazy stuff. But 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.

Yep.

So they're tagging along to your, your profitability or your, you know, to. And then the payback terms. Now it's still expensive capital. I mean, that's me up to 30% annualized, depending on the terms. And is 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. Should people be asking to beg, borrow and steal from their friends and family? Which I think is like, I mean if I had this going and I didn't have the capital, I would be like, hey brother, you should go get a line of credit.

Right.

Because I mean I'd rather give you 10%. You know, I. So because they're pretty stable businesses. I mean that's what I love about.

Well, so this is an important point. I think in general it's like two things. First of all, I'd say whether you borrow from your friends or family is totally a personal decision. Can you live with them losing their money? Fair enough. That's, that's, that's that.

Yeah.

But I think broadly the decision to bring on debt, like if you need money to take on experiments where the outcome is very unknown, use equity. Yeah.

Equity meaning venture. So people understands equity. Sell shares in your company, sell shares.

In your venture capital. Yeah. It's not debt if you are taking on money to execute programs with a.

High degree of scalability.

Yeah, Debt is perfect for that.

That's a really clear thinking. Who is this Scott? Do you listen to Scott and Car Swisher Recode Scott? He calls it blue, blue flame thinking.

Okay.

So that was a very blue flame thinking approach to if it's repeatable, scalable use debt. If it's experimental in growth, even expansion. Look at, look at equity.

That's right.

That's a cool way of thinking about it. And then in regards to a process, when people think of M and A banks, you know, a lot of founders are like, I'll just do it myself versus working with you. What's your argument for, you know, what's the right size of business? Should they approach somebody like yourself to get involved? What's the value add that you bring to the table?

Yeah. So that comes up a bunch I think. You know, first of all, most investment banks have a well deserved bad reputation. Yeah.

And it's like most industries like real estate agents or. Yeah, just.

And so there's a lot of really sketchy non value add investment bankers out there. But 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.

Yeah.

And so you know what I tell founders is a few things. One is there's so much written about raising capital, and yet many folks struggle with that. There's almost nothing written about how to sell your business. It's this total black box, and it's super emotional. You're gonna ride the highs and the lows, and it's personal. You're maybe picking out the Ferrari. You're gonna buy, like, the Yacht, like, whatever. Right.

It's hard. You got a McLaren.

You got it.

It's hard to not think of the future life. And you're starting like, you haven't even exited. You haven't even found a potential. Like, there's no letter of intent. It's really. It's a tough one. I don't get it.

And so. So that's a thing. It's human nature, unavoidable. And then you're negotiating against your future employer. So weird, right? But the biggest thing is, like, if an investment bank does nothing other than create the perception of competition, whether there is competition or not perception, they will enforce better pricing, better behavior from the buyer. Right. Because if the buyer thinks they've just got an exclusive conversation with you.

Yeah.

They've got all the leverage. And there's tons of precedent for buyers to kind of, you know, give you a letter of intent at one level. And then once you've signed the letter of intent, they drop the market. They find, oh, there's these issues. You know, we'll still do the deal, but we got to drop it. Whereas we force all the diligence to happen up front. So it's down to, like, there's going to be no skeletons in the closet. So it's just confirmatory during the, you know, the exclusive.

Because I will say I just want. Cause a lot of people listening may have never understood that there's people that help you sell your companies or raise capital. But. And unfortunately, at the buying companies, there's literally titles called corporate development, business development. It's their job to waste your time as a founder.

That's right. Right.

To come in to say they're interested and we want to just have meetings. And as a founder, you get all excited and you're like, oh, my gosh, big company X's, you know, Google, whoever. And if they're actually looking to acquire, they will literally term letter of intent. You don't know any better. And then through the process, they will just beat you down where it's 30, 40% below what they originally thought.

Correct. So the big buyers will do a thing called a market map. If they're thinking of having, they need a solution in a certain category. They will literally talk to every vendor in that category.

So market map. So even if they're not for sale, they'll talk to all the vendors.

That's right.

And their goal is to triangulate some data points, metrics.

Pick the best one.

Pick the best one. Okay. So they have, they have their own playbook. They execute against.

That's right. And so you know, every single CEO will get an outreach. You know, we're interested in, you know, exploring a strategic discussion with you. Every founder would be like, oh my God, they want to buy me, they're.

Going to buy one.

Right. If there's 20 players in the space, you've got a 5% chance you're going to get bought.

Yeah. So, and, and so people. So in regards to like how that process works with somebody like yourself, Mark, like what do you do? You know, because I've gone through, I kind of know, like unpack it for people in regards to like you know, initial conversation you put together X process takes y' know, like that whole what could somebody expect as an experience?

Yeah. So first of all, we're super specialized. We only do SMB software companies. Awesome. And we only do them at scale like 10 million revenue and above.

So 10 mil. ARR. Plus you're thinking you want liquidity in the future. Should they wait until they're ready to sell?

No, because good things don't just happen. Right. And really what we want is optionality and leverage.

Good things just don't happen. Yeah. That's a T shirt man.

That's good.

I like that. That's good.

People just show up one day.

No, but I love it because you're essentially making markets, you're creating market, you're creating competitive process.

So what we will do, we like to have long standing relationships with clients. Like if we're going to sell your company and take a piece of it. Yeah. We should behave like a shareholder and add value along the journey, not just in the last mile. Right. So we want to be involved earlier, informally or not. Like you don't even have to be a formal signed up client. It's just like understood. Like we have this great relationship with surepath. They bought all kinds of value and like when the time's right we're going to make one call. Like that's our strategy. Right. Is to eliminate competition and you know, on the buy side, because we only sell to SMB buyers, we're dealing with a very finite pool of, of you know, strategic Buyers. So, you know, we know them really well. You know, like the guy who runs our San Francisco office. Like his job is to know every exec that can sponsor an acquisition inside all the most active SMB buyers, you know, Intuit Square, GoDaddy, etc. Yeah. And not only know what they're thinking, but shape what they're thinking. So a big part if someone wants.

Shape what they're thinking.

Yeah, you know, like, you know, suggest ideas, themes, what we're seeing in the market, companies that they should talk to whether they're a client of ours or not. We do that all the time. So engage in this two way dialogue to, you know, really add value to their life.

Let them know where you guys are seeing the market going because you're also, because you have access to the clients now. I mean, from an outside perspective, it sounds like there could be a conflict of interest because if I'm selling, I'm selling one company.

Yeah.

You might be selling three or four to the same buyer.

Right.

How do you resolve that to a founder?

Well, I'd say our bread is buttered on the sell side. Right. We have done buy side work, but the vast majority of our practice is sell side. Okay. And it's a really small world.

You know, you can't, you can't, you.

Know, new clients want to speak to previous clients, so we have to crush it. And then, and also, by the way, our business model is totally driven by crushing it. Right. Yeah.

You know, your upside is on that percentage of.

That's right. We're incented to make the deal as big as possible. And I would also say like if we just caved, you know, to the demands of the buy side, they wouldn't respect us.

So I had a client, once they, they went through a process, I think nine, nine of my coaching clients have exited in the last 12 months. And one of them said about profitability because he came back and I was like, hey, you should unpack what you learned through this process for everybody. And he said for every dollar of profit I saved, I lost like six or seven dollars. And outcome. Yeah. Because he was, he was so worried about being hyper profitable because he came from a more traditional background. He was like 50, 60% net profit.

Right. Wow.

Yeah. And, and, and 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 gen. Like all these things he knew he could have done.

Yep.

That he didn't do. So they're getting all the upside.

Right.

And he could have got the upside if he started to. Is that the kind of stuff that you help companies understand early so that they can amplify the potential number 100%.

Right. So, you know, I've spent 14 years operating these kinds of companies, three years investing in them, and now five years doing this. And so I've sat on every side. And so this is also another reason why I like to get involved as early as possible so we can have that conversation. You know, look at your Runway. If you're still burning. Otherwise, look at your operating plan sort of regardless.

Yeah.

And make sure you're on the trajectory that's going to maximize your optionality, you know. You know, you're. Maximize your appeal to investors if we're going to go down that path, maximize, you know, potential valuation to buyers, you know, or both. Right.

Yeah.

And for recurring revenue businesses, all else being equal, the single biggest driver evaluation is year on year revenue growth rate. Yeah. So I will say that buyers don't love buying burn.

Yeah.

Especially public, you know, anything that can reduce earnings per share, they don't love. Yeah. So there is a balancing act. But ideally, like, so in that case, he shouldn't have had 60 profit, he should have had 10 profit and grown.

That's the whole.

That's.

That's what he's like. In hindsight, it costs him a lot of money.

That's right.

And it. And it. And, and to anybody else not knowing what, you know, and I know it sounds like the, you know, like, be as profit as you can be. Lean and mean and.

Right.

But not when there's a market, but going back to the experience. So. Because I just want to really demystify a little bit because it's a lot of the people listening are bootstrap SaaS founders. They've not raised capital.

Yep.

You know, if somebody engages you and so there's, you know, come early, you know, maybe 10, you know, 8 million air or whatever, they're on their path. Yeah. But what's the expectation if they say, like, hey, we want to. We're interested. Right. Like, because there's, I feel like founders are interested in like wanting to be wanted.

Yeah.

But like, you don't want to work with somebody that's like, kind of interested in exiting because then it's obviously a big waste of time. So, like, what, what if you help them through that process? Like, what is that timeline look like realistically?

Yeah. You know, if someone comes to us and like, I want to sell my business now.

Yeah.

If they don't have meaningful inbound interest, we decline because.

Oh. If they're not organically getting their own inbound interest today.

If they want to sell today.

Yeah.

If they come and say, I want to be in a position to sell 18 months from now. Yeah. And we form conviction that there are buyers in that category, we'll absolutely engage.

Perfect. That's really good.

Yeah, yeah. But if someone says I want to sell my business today, then like if you want to sell today and you don't have inbound buyers, you're not going to sell. Like, you know, like most buyers, especially sophisticated ones, don't really react to cold, you know, intros from banks. Yeah. This is why most investment banks suck for technology companies.

Literally. That's what they're doing. They're putting their. Whatever. Prospectus.

Yeah. They got this, you know, confidential info memorandum. If you printed it, it's like a bible.

Yeah.

And they just, they're taking the approach that they took to like old school banks. Like if you're selling a small bank to a big bank, it's a financial decision. If you're buying a software company, it's a product, it's a strategic decision. Yeah. So you're not investing based on like an inbound from a bank.

Yeah.

Right.

It's prob.

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.

What in regards to like some of the metrics, you know, obviously year on year revenue growth, which is a great number because it's taken into consideration, you know, churn revenue. Churn. And you know, top of funnel growth. I mean it seems like there's a lot more around payments. I know that. I've noticed that much of my client base where if you can get involved in the payment pathway. That's interesting. What are some of the. Like. How about I ask you, if you had to Engineer the perfect B2B, what would the numbers look like in regards to expansion revenue.

So broadly before we layer into expansion, 3x LTV to CAC fully loaded basis.

Fully loaded meaning like all like lease cost for that.

Yeah. A personnel, not just your marketing programs, but your bodies. Right.

I have no clue how to truly.

Right. So that. That's a baseline. Yeah. You know, I think below that you're not that good a company.

Yeah.

Ideally it's four and above. I think if it's like six. You're not being aggressive enough. Yeah.

You should be spending more on.

Right. So. So that's a thing. You know, CAC payback should. You know, again, if you're going back to this notion of Forex LTV to CAC, your payback should be, you know, 25% of lifetime value. Yeah. So that's a thing. You know, if I think about baselines on like kind of churn, like on a logo or customer basis, I think if you're north of two and a half, 3% per month, it's a lot of gravity. It's hard to recover unless you have.

And that's the product that's got a 250amonth kind of.

Yeah, yeah. Price point, ideally. And this is where expansion comes into play. So ideally, get your pricing right. Yeah. Have for those customers that stay in an ideal world, they actually make up the lost revenue so that you're net.

That's an ideal world.

That's ideal. So it doesn't happen a ton. Yeah. And so I think even if you're. So if it's like 3% churn on a logo basis, one and a half on a revenue basis is actually considered really good. If it gets to zero or gets into negative, then, you know, you're printing money. Yeah. And this is actually where payments is pretty interesting. So I was involved in the project to launch payments at FreshBooks. It's now over half of their revenue.

Oh, they actually. I knew that Mike talked about it. So that's. That's part of the infrastructure.

There's a FreshBooks payments product.

And does that mean. Because first time I ever talked to Mike, he was talking about like, if I invoice to another FreshBooks customer and they pay me.

Yeah.

Is there a float component?

Yeah. Well, we're not. What we. They are not monetizing the float. It's just like, it's not a big deal.

But is it. Is it still not transacted on the. The rails of a bank account? Like it's. If I pay using my account and it just transfers like there's.

Most of it is credit card. Okay.

So there is a transaction to pull the money through the credit card.

That's right.

Got it.

And. But the interesting thing again in the SMB context, like, there's only so much a small business customer is willing to pay for software willingness to pay.

Yeah.

But what they pay to get paid comes out of like a different psychological bucket. And you put those two together and the blended ARPU is actually pretty interesting. Yeah. And then it adds more value, so it reduces churn. So it's like a virtuous.

Such a. It's such a. I remember the first time we were doing Flowtown Investors. So who's your customer? We said SMB and he just said there's a reason why they're in their small business. Like, they don't. There's certain caps to what they're willing to pay if they're truly a small business. So it's really looking at the transaction flow. And this is where payments is interesting because it can be quite meaningful. And I know, I heard the. So let's say the fees. Let's two and a half percent or whatever on a monthly basis, whatever your fees are, like the market values it at like 20 times like upside because it's just like locked and loaded. People pay it. So there's a high multiple on the, on the payment revenue.

Yep.

So if you can just look at.

Shopify, by the way, you know, you look at.

They take. Do they run the payments through Shopify?

And again, it's over half of their revenue. Oh yeah. It's what they call merchant solutions.

So if you can. If you have an SMB product that's involved in a transaction, invoicing, collecting, you want to front load that in your product roadmap.

Absolutely, absolutely. It's just a lot of money. Awesome. Good.

Like, because they don't think people. You're building SaaS, you're like, you know, I'm just going to use stripe. I'm just going to do this.

Right.

I'm not going to be involved.

And you should start with stripe.

Yeah.

Because you need, you need a meaningful amount of GMB for the math to work. But it should be, you know, something where you can white label. So it's.

There's a bunch of different ones.

Yeah.

White labeling.

Yeah, that's. We actually, I really like WePay for SaaS. Businesses serving at SMB, like, they're really good for that.

Okay. So they like to white label that kind of infrastructure.

Yeah.

So again, I keep coming back to this because I really want to unpack it for people. So the experiences, they work with you and then you, you. So they have to have inbound. And then in regards to like, do you put together something? Do you like. And then is that shopped around? How does. And what's the timeline typically?

Yeah. So one thing I want to make clear. So a lot of this conversation sort of presumes that the buyer will be strategic, you know, like an Intuit or.

A Google or Something versus a financial buyer.

Yeah. But more and more of the buyers are financial. Yeah.

And those are two different people need to know. Strategic buyers versus a financial buyer.

Right. Yeah. So financial buyers are now a quarter of SaaS exits and growing.

Oh wow.

They are managing 2 trillion of capital.

Yeah.

And you know, if you think about the decision like for a financial to buy a company, it's not unlike an investment decision. They will just evaluate you on your own merits, like, you know, team vision, metrics, space. Like you'll just look at you in isolation and make a call. And so it happens pretty quickly. And so the way we run private equity kind of we call it like majority recaps, maybe selling greater than 50% of your company.

So majority recap is when.

Is 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.

Okay.

And that's like pretty standard for private equity. And that's like a bunch of what we do. Yeah. This goes back to two bites at the apple. Right. Where the existing shareholders are going to own a minority, but now they're going to work together to build this bigger pie. Right. So those things we run in a not dissimilar way to how we run fundraisings, full stop. You know, so it's, you'll come in, you don't have to have inbound interest already. I've been on the other side as an investor. I can look at a company, I'll know if it's fundable or not. We're going to work with them to create a full blown investor grade pro forma model, you know, a presentation, data rooms.

What's a data room? I know.

So there's, there's two. One is like a pre term sheet data room. So all the information that an investor would need to know in order to arrive at a decision. Yes, I want to invest in this company.

So just so founders know this is cool, is they're essentially in their software that enables this where you put everything into like this digital room.

Right.

So that as you bring somebody on that's interested, you don't have to like repeat the same stuff.

And it's just like we literally even have the CEOs screencast the pitch. So they're not giving the pitch 30 times.

Right.

And like everything's efficient and it's really.

To create a competitive process in a compressed amount of time.

Correct. Yeah. And then that way we can track engagement. We know who's who's watching. Yeah. And. And it also means, you know, again, we only work with growth stage companies. So those CEOs, they're busy. We don't want to waste their time. So the only investors or buyers that get in front of them are ones.

Is that unique to your approach that some don't? Because I feel like some clients I've worked with, they spent way too much time. Yeah. Meeting with people and I was like, yeah. Isn't that what the M and A guys are?

Yeah, that's our job. Yeah.

Yeah.

Anyone who gets in front of our client is qualified and, and informed.

Right.

And therefore, when they do speak to the CEO, they're not asking any of the preliminary stuff. Like they're deep in the weeds trying to get to a decision. Right. So that's a thing just having been.

Best degrade pro forma. Yeah. What does that mean?

It means like again, again we do SaaS business. It means like, like dissecting the buyers.

Trust that you put the numbers the way they would.

It's more like if you think about running a SaaS business, there's lots of little knobs and levers that you can twist and turn to optimize. We will have identified those. And so as an outsider, you can come in and look at those assumptions. They're very explicit. You can play with them. As a buyer, you can look at, well, I don't need that company to do paid acquisition because I have this massive channel. What are my savings? Right. So I can do my synergy analysis.

Yeah.

And I can literally, I can do all the what ifs. Like, it just is a fun. It's. I have dissected the business. Right. So like, it, it takes.

I mean, it's just, it's super cool because it's efficient. But it for a founder, that's put their blood, you know, it's their baby. So it's like you're creating the tools for the buyer to dissect. I mean, that's a little intense, but. But really that's. That just allows people to quickly. Like you said, synergy analysis, whatever. Because what I've always found interesting is every industry raising capital, exiting companies, they have their lexicon, they have their process, their best practices. And for founders, never gone through it, which most never have.

Correct.

It can be super scary.

Right.

Because like at every turn they're like, is this right? Like, am I supposed to give them all this information? I don't know any better. And I mean in regards to the outcome, like you helping clients get that that level of detail put out in the market create a competitive process. You have the relationships with all the potential strategics. What do you think the upside difference? You know, I don't know if there's any data around this M and a bank versus known none. What is the average upside? Do you think that.

Yeah, I think it's massive. It's hard to a B test obviously.

Fair enough, but.

But it's massive on two dimensions. One, I think the outcome is significantly larger. But if you look at it on like a probability adjusted basis, like your probability of getting to any outcome by yourself is far lower than with the. Wow.

So you're saying that just on the probability of an outcome being achieved, you think for a lot of them it may not have happened. Is it because they weren't able to present it properly? Do you think it was the emotional component of the founder having to go through that, maybe pulling back because it just got frustrating?

Yeah, it's, you know, it could even be like. So for instance, the, the decision to buy a company, like if you buy shares in Shopify and you just decide, you know what, I made the wrong decision, you can just go on the market and sell them. If you buy a company or you invest in a startup, you can't undo that decision. So what you're selling is trust every step of the way. And that comes down first and foremost to character of the management team. But it comes also based heavily on data. So let's just take a proforma model. You know, you are a bootstrap business. You kind of whip something together. That portrayal of the business is going to be nothing like what we are going to build. Right. And so our thing is going to convey trust by just showing you exactly how the business works. We have de risked it, we have looked at all the cohorts, all the segmentation. There will be no questions as to how to run that business. Whereas the bootstrapped, hey, my best effort, I kind of whipped something together. Is going to create all kinds of questions and at a certain point the investor or the buyer just be like, it's too much risk.

I just can't get my arms around this.

Right. So that's a thing huge.

And then if they were able to do that, which they don't have the expertise to do that, getting an upside, I mean just negotiating against your future employer is weird as hell.

That's right. And there's just lots of tactical little things like, like lots of exit.

Like they'll say this and it's like you Know like.

Right.

You know, you can play the whisper and be like, that's bullshit.

Right.

That's not normal.

Yeah.

If you're selling, you've never done that.

You're like, sometimes like a buyer will come in with a low ball offer and we'll tell them like we're not even putting this in front of our client. Like, basically we're offended. Yeah. You know, and go away.

And I've never seen you upset. You just say it. You're like, I'm upset.

Yeah, exactly. And you just can't do. If you're negotiating with future employer, you cannot do that.

Right.

So there's those kinds of things, even little tactical things like don't give the buyer your cap table until they've given you a preliminary number. Because if they have your cap table, they can reverse engineer and figure out what's the minimum number to get the investors over the hump. Like just 100 little tactical little things like that. Right.

That's amazing. As we wrap up, Mark, I love to ask, you know, looking, you know, because we've known each other for a long time, looking at your journey, you know, sure. Path, even just your personal, you know, getting your fitness on and whatnot, who have you had to become personally to be the person leading this company today and successfully building this, this brand?

Awesome question. Okay. I would say the journey's been pretty natural, pretty authentic. Like I feel so the beginning of my career was actually in public accounting. And it's as boring as you could imagine it to be. But in any event, like, I was not part of a big four. I was, my original firm was, you know, nine partners, 90 staff dealing with owner managed businesses. I worked directly with the founder, this guy, Harry Nixon of Smith Nixon. He took me under my wing because he was Scottish and I was Scottish. And anyway, I learned from him kind of what an honor it is to be of service to entrepreneurs. And that has literally been the role through my entire career in different kind of forms. Right. Like 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. It was about being an advisor, mentor, helping hand, you know, at the service of CEOs. When I was a CFO, it was recognizing that startup success is highly, highly correlated with the CEO success. And therefore how, if the CEO is technical, as an example, a product person, how do I run kind of operations, how do I do a bunch of stuff outside of finance so that that person can, you know, do their thing, or 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? So it's all about bringing leverage to that founder. And, you know, I had opportunities to become CEO along the way, and I recognized from being at the right hand of CEOs, like, that's a really shitty job. I don't want that job.

Forget it.

I want to be in support of them. And so it's the same thing now. Yes, I'm technically CEO of surepath, but whatever. We're a tiny company. It is, like, for me, it's actually about serving. Serving. It's, like, really core to who I am as a person, my values and my purpose. So it's just. It's supernatural. I kind of feel like I'm meant to do this.

Dude, it's neat that you share that, because now that you say it, it's an obvious through line.

Yeah.

That's really cool. Just in honor of the creators out there, I always try to share because, I mean, I'm an entrepreneur. I like to create. But I never forget that everything in this world is better because somebody decided to make it better. Like, and it could be as simple as, like, somebody helping you mow your lawn.

Yeah.

Wash your car. Like, somebody woke up and said, I think I can help somebody else get more leverage out of it. If you think about. I mean, if you just. Just distill entrepreneurship, it's about getting more time, being more efficient, more effective. And our world doesn't get better if entrepreneurs aren't out there creating.

That's right.

And I think that's just super cool.

Yeah.

So with that. Appreciate you, Mark. Awesome.

Thanks for having me.

Amazing talk.