Niche Acquirer: Michael Girdley on Dura's hyper-niche strategy with Tobias on The Acquirers Podcast

When you're ready, sir, I'll get it. I'll get started. Hi, I'm Tobias Carlisle. This is the Acquirers Podcast. My special guest today is Michael Girdley of Dura Software. It's a hyper-niche software acquisition business. It's absolutely fascinating. I'll be discussing it with Michael right after this.

Tobias Carlisle is the founder and principal of Acquirers Fund. For regulatory reasons, he will not discuss any of the Acquirers Fund's on this podcast. All opinions expressed by podcast participants are solely their own. And do not reflect the opinions of Acquire Funds or affiliates. For more information, visit acquiresfunds.com. I, I have a weird background that I went to school on the East Coast, so I hung out with a bunch of people from New Jersey, so I'm very direct. And then I went to the Bay Area where like nobody's direct.

Yeah.

Uh, and so like then I, I hung out and worked with a bunch of Berkeley hippies for like 5 years and then came back to San Antonio where people are neither hippies nor direct. So it's like —like a crazy place.

What's the personality in San Antonio?

It's very much—I don't know if you've spent time in Houston—it's very much kind of a Houston, down-to-earth, very nice, kind people, but very much determined in terms of how they approach life. The other thing that's weird about San Antonio, we have almost 70% of the population is Hispanic. So it's like a huge Mexican-American influence. So a lot of the things that are kind of natural in terms of like the Hispanic sense of humor and stuff like that. When I lived in the Bay Area, people don't joke around like the Mexican Americans do. And I would talk to a Chinese American person and they'd be like, "That's not funny." I'm like, "Well, the Mexicans thought it was hilarious." So we have that, which is kind of an interesting impact on the culture as well. But it's a great place. I personally love living out in the boondocks in terms of talking to people from LA and New York and stuff. It's much more fun to be A big fish in a small pond.

So what were you doing in the Bay Area?

So I started working for other people. So I started as an engineer and then really realized that I was never going to be a great engineer and I also liked people too much. What sort of engineering? Software engineering? Software engineering. I've almost always been a software guy except for a few detours. But I ended up working for a couple of different companies. One, RSA, you might have heard of it, a big security company. Company. Now it's mostly a security conference with a company attached to it. But back when they were in the patent trolling business, I worked for them.

That was my first job.

They may still make the fobs. So the fobs are actually the company— they came from the company that bought RSA. So RSA itself was this amazing business that there's a thing called the RSA algorithm, which came out of these 3 MIT professors. And they had a patent on this thing. They went and got everybody to use that for SSL and all the underlying security for the internet. It's asymmetric encryption. Basically, what they were able to do is just extort out of corporate America hundreds of millions of dollars a year until the patent ran out. The company that bought the patent troll company was a company called SecureID, which did the fobs. Then they took the RSA name. Yeah, that was my first exposure to unfair games and Businesses I wish I owned.

So you were a software engineer there or you were a product guy there?

Initially a software guy in terms of engineering. I started— we were selling products specifically towards developers. So I started in a role that was engineering, working with other companies' developers. So almost a solutions engineering role. And then I moved into a marketing role there and then I ended up leaving that company to go work at a middleware company called BEA, which is now part of Oracle, and I was the product product called WebLogic.

When were you at BEA?

'98 through— '99 through 2003. Because there was BEA—

I had some friends who worked at Plumtree who got taken over by BEA. And one of them is Jay, who's the president of the big Australian Software engineer. It's just the big software firm, it's just slipping my mind.

They make Jira and, uh, you know who I'm talking about? Oh, Jira, like J-R-A?

Atlassian is who you're talking about? Yeah, he's, yeah, he's, he's Atlassian. He came through Plumtree and BEA, worked with a few friends of mine, Prasannas Rakantha, who went to work for Peter Thiel in his macro hedge fund for a while. Yeah, I don't know if you crossed over with those guys or not.

No, they may have. I think Um, you know, Plumtree was probably one of the acquisitions after I had left, or towards the end of when I was there. Um, yeah, my last role there was like a strategy role, which like most strategy roles, I had a hard time figuring out what to do with the strategy person because the CEO wants to be in charge of strategy. So in retrospect, whenever I hear somebody say like, I'm gonna take a strategy role, I'm like, don't do it, bad idea. It's a great way to get fired unless you're just going to repeat what the CEO tells you. Don't do it.

How did you switch over to the investment side?

That first phase was working for other people in my career. The second phase was working, being a CEO. I realized that where I want to live is kind of at the intersection of ops and asset allocation. I don't really want to do either. I don't find either one by itself very interesting. The way I started to get into that was around 2012, I started to do angel investing. That was really to where— I've never had any interest in public equities. I know other people really like public markets. I find them incredibly boring. But private equities are much more interesting. So I started doing angel investing, specifically giving $10,000 and $25,000 checks to dudes and ladies with laptops and PowerPoints. Anything interesting come out of that? Yeah, I ended up investing in a handful of companies. No unicorns out of the bunch. But invested in a company here locally that's hired like 60 people over the last 5 years. So that's pretty exciting. Then I've had some duds. I had one company that gave me back half my money. I was pretty excited about that. I think I was the only investor when they called and they're like, "I have great news. The company sold for pennies on the dollar. You're going to get half your money back." I was like, "Yes! Yes! This is a huge win." Even the company's a win.

Yeah, any— even crystallizing the tax loss is a win.

Totally, totally the case. So I was, you know, they were like, why are you so excited? I was like, well, your other investors will be after they get some more bumps and bruises. So, um, but yeah, a handful, you know, the, the company, uh, that I'm very proud of, this one locally that does the, uh, they basically do telemetry systems for vending machines. Really very boring business, but it turns out most vending machines were built before the '80s and they have no ability to take credit cards, or you don't even know what's going on in them. They've built a whole business around that and turned it into micro-markets and all this stuff. So yeah, they're called Parallel Systems. They're here in San Antonio. Totally fun little business.

So how do you transition from part-time angel investor to—

is it Dura Software? Mm-hmm. So Dura is what we're working on now. I co-founded that with a couple of guys who are former Rackers. One's the CFO and one's the CEO. It kind of puts me in the right role for me, which is board chairman, which is, you know, I want to live in the asset allocation world a little bit, and I want to live a little bit in the ops world. So, you know, what, what I think I do pretty well is, is finding kind of the right opportunities around that, and then convening really the right team. So, you know, my, my co-founder Paul also invested in the business, and he is the CEO. And I think You know, what I saw with Dura is there was this whole asset class of these little software businesses that by themselves were amazing businesses, but nobody was really set up to exploit them. And so we went with this idea of going and acquiring and building a big business out of all these little tiny software companies. So what is it—

is it Constellation-like? Is it acquisition level, or is it more expansion capital? Or where do you sort of fit into the ecosystem?

Yeah, we— a good way to think about us is we do what Constellation does, but where they do a couple things different than us. So first of all, Constellation is very upfront about saying they're in the vertical market software business. So we're not stupid enough to try to compete with, with Mark Leonard and those guys. Their cost of capital is much better than ours will ever be. But we saw that there's this other category of software that is more horizontally focused. We call it hyper-niche software. And that's branding. So we do what we do. But basically, we go for these very niche use cases that Google, Microsoft, Facebook, they're never going to want to be in that business because it's maybe a $10 million TAM. So, you know, for example, our very first acquisition of a hyper-niche product was this— was this piece of software that's used to manage very large fleet of very large fleets of multi-user, multi-purpose single-user devices. So like kiosk and digital signs. So like, if you're going to have 50,000 of these things, we went and bought this company, does a few million a year in revenue, uh, and, and brought them into the fold and deployed our operating model there. So we're, we're, we're more of a horizontal play, whereas Constellation and other folks that are other software accumulators, they focus on vertical.

So you guys are operating these businesses businesses when you acquire them.

Yeah, and that's where I think we're able to unlock the value. Um, so, you know, over the past 20 years, it's gotten really easy to build a software business from a technology standpoint. AWS, all the tool sets, all the libraries, they make it really easy to do that. But what hasn't gotten any easier is those technologists who build those businesses. It hasn't gotten any easier for them to operate them. Sales is even harder than it used to be. Uh, you know, it's not like you can just spam the world or buy display ads and hope your customers are going magically walk in. So the insight there is, you know, because we're operators and my co-founder Paul, he used to run all of Rackspace's support, like he understands how to run teams. So what we do is we bring these businesses in and they all need some work and we deploy kind of our operational excellence into them and then turn them into, you know, nice little businesses that we keep and grow forever.

So let's just talk about what's the difference between— you say, you describe it as hyper-niche. And you're prepared to look at the horizontal market. Folks who listen to this show will know that Constellation focuses on the VMS, the vertical. Can you just talk a little bit about the difference between vertical and horizontal? Yeah.

So vertical software is typically focused on a specific industry. Constellation, which is a great business, they have a whole B2G department, or B2G division, or they may have a healthcare division, which is just software that aims at healthcare type of that industry, right? So that could be anything from practice management software to, you know, benefits management, any of that kind of stuff. So they focus there, and, and that's fine. So, you know, our horizontal play realizes that in the vast world of software, there are a bunch of things that are horizontal across all these industries that aren't specific to one but have a common use case that you'll see across all of those. So accounting software or something like that. For example, or you can have, uh, yeah, like for a hyper-niche example, there would be like, let's say you have compliance software that automatically scans all your financial statements to make sure that you're compliant with stuff, right? That would be a very hyper-niche type use case. Or what I talked about before, everybody needs kiosks or these kind of large-scale digital signage deployments. So our, our product Moki, which is device management for those type of deployments, like, that is a very narrow kind of thing that spans across industry. So that's what a horizontal thing is. It goes across multiple industries.

Is that what Brent Beshore describes as the tastes like chicken layer of business?

Is that what you're trying to— for sure, yeah. But we're like interested in like the wishbone part that's like unique to a chicken, right? It's just like, okay, because then you don't ever have to worry about is Google going to come in and crush you, right? Because they're— we're not going to out-engineer them, and, and that's not really intentional. It anyway.

So when did you start up and what was the— what was this— what was the plan when you got going?

Yeah, so we started about 2 years ago now. So, you know, I think the original plan was let's create a set of incremental experiments that we're going to run in the market and really try to understand, like, is there something here? And I'm a huge believer whenever you are going to ask other people to eventually buy into what you're doing, the best thing you can do is put your own capital to work, or at at least at a meaningful level. So what Paul and I did, and we had gotten introduced by a great guy here in San Antonio, a man named Graham Weston, who's like the former chairman of Rackspace, kind of the godfather of the tech scene here, as big as it is. And he said, hey, Girdley, you need to meet this guy, Paul. And we went and had lunch, and I was like, hey, I'm working on a project. I think there's a business opportunity around these hyper-niche software companies. Do you wanna work on it with me? And so he and I just were like, okay, you have some money, I have some money. Let's go out and commit it and buy one and see if it works. And so we spent about 6 months trying to find one and ended up buying the first one called Moki.

What makes it hyper-niche?

Yeah, so we define that as a whole set of characteristics there. So first of all, it's mission-critical, meaning that we don't want to buy anything that's going to go away during a recession. So second of all, we focus only on B2B software. So we're not interested in B2C. It's not that those aren't good businesses, but we're just— I find them very boring. So maybe, maybe, maybe I'd be a better capital allocator if I wasn't so emotional about certain things. But I just— I'm not interested in working on boring stuff. Second of all, it's, it's a very narrow use case, right, that we see that it spans multiple industries. It's not something that's going away. Uh, and then lastly, it fits a certain size. So, you know, we're not interested in buying into $500 million TAMs, uh, total addressable markets. Like, we are totally happy with being the number one software vendor in an $8 million TAM, right? And there's some logic to that because $8 million TAMs aren't interesting to PE, they aren't interesting to VCs, and they sure as heck aren't interested to the big boys.

And how are you determining that the TAM is only $8 million? Is it literally like a geographical location, or is it—

how does it work? Sometimes it's really easy. You can do things like, we've looked at software that specifically only sells to education departments at US states. You can figure that out pretty, pretty easily. You know, one of the, the second acquisition we did is actually back-office email automation software for maritime shippers, and specifically maritime shippers that ship bulk stuff, not container shippers. So like, it's pretty easy to figure out the TAM when you know there's only 85 customers in the whole world and the potential spend for each one is, is whatever, right? Just that's multiplication. Even I could do that.

So how do you undertake that first acquisition? How did you look for it? How did you validate it, assess it when you got it? Can you just walk through that process?

Yeah. Well, what we did early on was Pretty straightforward. We did list building. So I hired some dudes on Upwork to build a list of companies. Anybody that's built a sales machine, you know, that's pretty standard. Got a list of about 5,000 companies and we just started going through them one at a time, doing emails and saying, "Hey, I looked at your company. It looks interesting. Are you interested in selling?" And I would do probably 50 to 75 of those a day. And then based on that, we would just kind of run people through a sales funnel. So an inverse of what any acquirer does. So use some email automation stuff to do those emails. Those would turn into introductory calls. And those early introductory calls are really interesting because at the time we're trying to figure out what the market is. And those early calls I think are really interesting because, you know, after the fifth one where I ended up talking to a seller and I discovered there's this vein of people who will sell but only for a crazy "Price? Well, I'm not interested in buying anything for a crazy price." So then we start to move people after those introductory calls through the rest of the process.

Well, let's talk about a crazy price. How do you know it's a crazy price and a good price? How do you make that assessment?

Yeah. Well, I think just like any other investor or capital allocator, you want to have a margin of safety. But at a very basic level, you can put together a discounted cash flow model on these businesses. They're pretty easy to model out. We know how to do that just because we've spent a lot of time in business and also dealing with these types of software companies now. But based on that, it's not very exciting for me to go pay 20 times EBITDA for something that's not growing quickly. 5%, I can get that other places if I really want to put the S&P. So what's a good price? I think like most acquirers, we're looking to see a reasonable IRR. Somewhere, you know, somewhere above that 20 to 25% return rate. And that gives us a margin of safety. Um, you know, part of the reason we, we keep that number pretty high, like most private equity does, uh, is because I want to have the opportunity to be 100% wrong and still turn out okay. So if your worst case is that you end up in teens or 10 or 12% IRR, well, that's okay, right? You, and you, you at least aren't gonna your risk of ruin is minimized.

So in the first acquisition, you built this list, you were contacting 50 to 75 folks a day. You find there's a very large number probably who don't want to sell. That's the biggest number. Then there's a very large number who will sell on very generous terms to them. And then you find some folks who are prepared to enter into a transaction. How do you whittle that down and get to the point that you find this is the one we want to really run the test case on?

Yeah, well, we did go through our very first one. We ended up signing an LOI on it and to get to that LOI. So basically the process is you have the initial calls with folks and then that initial call for us was really about just trying to get them to invest the time to give us the information that they need to tell us so we can value the business and make them an offer. And I know you'll be shocked by this, but there is an inverse relationship to the size of the business and how decent their financials are. It's also an inverse relationship to how good of an investment it ends up being based on how bad the stuff is prepared. So there's a number of times— The better the preparation, the better the investment.

Almost always, you know, it's that way.

So if you see a beautiful, you know, sim from a broker like and who's running a great process, like that's probably going to be a, you know, it's probably going to— you're going to pay for that, you know, one way or another. And we're happy to get our hands dirty and do the work. So, you know, what we've tried to do is we distill everything down to just a core set of information that we need to see. and use that to try to come up with an approximation of what the business would look like when we have it. So, um, you know, kind of the foundations of that are the financials, as much as they have them, whether that's cash or accrual, uh, a customer list, usually anonymized. Um, so we don't ask people to give us the names of their actual customers, but we're interested year by year revenue breakdown of these folks.

Roughly how much each customer is generating, how concentrated they are, how reliable they are. Their biggest customer and so on.

Absolutely. Yeah. And there's— you'll see a lot of these folks that are out there who try to pitch themselves as product companies, and they're really just a consultancy with, with, like, I've seen it before where it's like 60% of revenue is these two customers, and we have 45 more customers that comprise the other 40%. Like, that's not a business, that's a consultancy. So anyway, so we get that, those three things. We get the, the P&L as best they have it. Sometimes it's bank statements. Secondarily is the customer list. Ideally, I'd anonymized, broken down by year in terms of revenue. And then the last thing that gives you a picture for the business is what is the employee— who are the employees, anonymized, and how much are they making, right? And that gives you a feeling for how the business is run. And most of these little software businesses, you're looking for rules of thumb around things like customer concentration, revenue per employee. You know, a lot of times you see these businesses that should be profitable, but the reason they're not is because they have twice as many people as they should, right? They— that's not a business, that's a charity. So we talked about that as a possibility too. And then you use that— that's the stuff you can really use to figure out how the model of the business will work out inside of, you know, our operating model. And so that's what we did with Moki. Like, we figure out an operating model, put together a financial model, and then use that to come back and say, okay, here's what we can pay for the business to— and, and you present an LOI to them at that point.

And how many acquisitions have you undertaken over the last 2 years?

We have 3 that have closed and we have 2 that are preparing to close. And so the rough numbers are—

say you start out with a list of 5,000. Have you worked your way through the entire list to this point?

Our list has actually gotten really big. It's one of the things that I'm, I'm actually super optimistic about this space. Right. So we talked about this idea that very, very few people have the structure like we do to do these acquisitions. Most people don't want to be in $3 and $5 million a year software businesses. Most people don't have the execution ability, and we could talk about that. That's kind of one of the big barriers to entry here. The number of people that talk about doing acquisitions that actually do them is hugely different. And then it turns out the third thing is the number of, uh, the number of these software companies is much bigger than anybody really imagines. Um, so one, one of the databases that we use, uh, has over 100,000, 100,000 software companies globally that are under $5 million in revenue. So we've kind of just barely scratched the surface. But nobody really cares about them, which we do.

Let's talk about the execute. What's the execution differentiator between you and some of the folks who are just talking about it? Yeah.

Oh, in terms of getting deals done?

Or just to follow on from your thought a little bit earlier.

Oh, that there's a huge gap between the number of people who talk about doing acquisitions and the ones that actually do it? Yeah, look, it's kind of one of those things where like, when I talk to people, they're like, okay, have you done any deals? And yeah, we've done 3, we've got 2 more in progress. Like, they're actually kind of shocked because so many people just talk. But look, I think it's a combination of— it's a unique combination of things. Like, you have to be very comfortable with making an uncertain bet on an acquisition. I mean, this is— these are big checks we're writing, $2, $5, $7 million checks, right? Some of it's our own money. You have to be very comfortable be comfortable with that, but at the same time you have to be grounded enough to be able to operate these things well. And we bring in a whole operational model that we've created and standardized across this specific type of stuff. But psychologically, asking why most people talk about stuff and never do it, I don't really know why, 'cause that just seems so— oh, my camera turned off. I'm back, I think. Okay, cool. Yeah, yeah, yeah. Well, actually, I went through this whole process to get a fancy DSLR hooked up. The problem is it shuts off every 30 minutes, so I don't look as good as you, but I'm trying. Yeah, so psychologically, I just don't, that just seems so weird to me. I don't know why people talk about doing stuff and talk it to death. I much more prefer going, you know, so.

So you guys, you have this huge list, you validate it down, you undertake the, first acquisition and then presumably hadn't built this operating standardized checklist or operating standard that you were trying to get. This is sort of all learned from the acquisition of this first company?

Yeah. So some of it is from the acquisition. So I'd say the software-specific stuff is there. One of the things I brought is kind of what we talked about with Brent's idea of everybody has the same kind of 10 problems. So I did bring an operating model that that is standardized that we use for everything around hiring, culture measurement, employee measurement, how we run team meetings, how we do strategy. All of that stuff is an operating model that I learned in my small business days that we've brought in and we use, and we basically, it allows us to just treat every single little software business, even though it has its own CEO who is running it very entrepreneurially, we give them the playbook that they have to run, so all they do is they're not worried about how they're going to measure, you know, customer satisfaction. They're worried about how they're going to make their customers happy, right, which are two different things. So we give them a playbook, and that's kind of that niche that we fit in. We're an accumulator of these software assets with a bit of standardization in terms of the centralizing of stuff, but at the same time, we're very entrepreneurial that each business has its own head, but we give them kind of the playbook that they need to run.

And so once you acquire them, you said they're running on— they're giving you bank statements in the acquisition, but presumably you're running— you then make them hook up to QuickBooks or something like that so you can monitor that all remotely, or how does that work? Is it as standardized as that?

Yeah. So what we do is our finance and accounting is centralized. So that's part of the power of our operating model, which is unlike a fund. We're a centralized operating company. So there's a lot of advantages to doing that way. So we're a C-Corp. So what we can do is we can take some of those general-purpose things like finance, HR, accounting, facilities, and we put that all into a centralized thing that lives in the third co-founder's office, the, the CFO. And so he is the one running all of that finance and accounting for the individual businesses because we don't want the CEOs to be spending their time worrying about that. So, so that's how we transition them oftentimes from having accounting that's how much is in my checkbook accounting to like how do we have audited professional P&L statements that are trackable on a quarterly, if not monthly basis.

And then the CEO is freed up, presumably they're primarily strategy and sales. Is that the sort of— is that where you're looking for the CEOs to go?

Yeah. So our model is actually— we look for a very specific type of person. So we look for a man or a woman that we call kind of a cusper. What it, what it turns out is a lot of those people have been very deep in being a specialist in a specific functional area inside of a corporation. So they may have been head of sales, or they may have been head of customer support, or ops, or any of those type things. But they are interested in getting to a general management and CEO type role. So we give them almost the my first CEO job, which is we're going to take away some of the stuff that's kind of boring, but we're going to let you really cut your teeth to expand. And our view is that, you know, people are making that transition. The thing you have to do is you have to go from being very deep in one functional area to being kind of deep in everything, right? You need to be able to talk about finance. You need to be able to talk about engineering. You need to be able to talk to engineers, even though you come from a sales role. And my business partner and I, Paul, we really enjoy coaching these people. So we want to develop them into really good CEOs. So that's part of the value prop for them is Okay, you're going to be entrepreneurial. You're going to have your P&L. You're going to own all these responsibilities. We're going to measure the heck out of you. We're going to give you training wheels, but this is your chance to grow from that functional area specialist into somebody that is a general-purpose CEO.

Do you have some sort of playbook for them, or is it a case-by-case basis where you guys look at this particular business has this particular opportunity and we want you to pursue that opportunity?

Yeah. So every acquisition will have an investing thesis for us. We'll ask ourselves, okay, what What changes do we want to make? Right? And it could be as simple as like, you know what you guys should consider doing? Marketing. Right? That's sometimes that is the— or we've bought one of the businesses we bought didn't even actually have an incentive plan for the sales reps. Like, have you ever heard of a sales rep never having a commission? Like, so guess what the sales reps did? They just were sitting around on their butt all day. Anyway, so after we bought that one, like the sales growth momentum per month, like tripled. Because it was like, hey, we're gonna align some incentives here. So anyway, to come back to your question, like, we try to give them that input and then make a clean transition to that CEO of the business and say, okay, now you own this, right? And we want to give you— here's what we think, but we want to give you the authority and the responsibility to make those changes to really run the business like you want to. And the way we'll make that transition super smooth is you know, we have 3 CEOs in the company right now that report to Paul, our CEO, and those folks will be involved almost always in the acquisition of the new business. So like, if we're going to give that to one of the CEOs as a second business, then, you know, they'll have an opportunity to be part of the identifying the problem before they're expected to solve it.

So they're not necessarily coming from inside the business when you acquire them. You're acquiring the business and sourcing the CEO to operate that business. Separately.

Right. Yeah. And so if we have— if we have— if we're buying a distressed or a business that we consider not performing as well as it could, our default model is that the CEOs of these companies or the ownership of the companies never come with. Right. And, and so though they like— they like that because we're unique, because the leadership isn't expected to stay on. And then we're the only buyer because of our permanent hold model that they can trust is going to take care of their legacy and their people right? So if PE buys you or strategics buy you, good chance your product's going to get killed in the next 2 years. That's just the way that works. So they like us for that reason. So we'll have our own thesis about the way the company should work. And by design, if somebody had their old way of doing it for the past 20 years, it's not going to work to bring them in and keep doing the same thing that we want to do differently.

What have you learned over the last few years of doing these acquisitions? What's the difference between the reality of it and the thesis of it before you started?

Yeah, man, lots of stuff. I think that early on, we were much more trusting of what people's documents said of them. I talked about this inverse relationship of how much you can trust financial statements and that sort of thing. That's a hard-learned lesson. And actually, our very first deal that we were about to do, We ended up pulling the plug on it because they were misrepresenting to us what reality was. The business wasn't actually flat. It was actually shrinking 20% a quarter. That kind of changed the entire universe of those things.

How did they present it as flat when it was actually shrinking?

Here's the funny thing. These folks are oftentimes selling because they're running their business poorly, and they don't know. They don't know they're lying to you about their small business. Right? Like, like, as you know, I think for folks that live in the public equity world, like, you're accustomed to this level of sophistication and audits and all that stuff. Like, it's important to remember, like, most small businesses are run by so-and-so with their checkbook, right? And a lot of these people are doing all kinds of crazy financial shenanigans, like factoring, and like, they have no clue. They have no clue. They're not lying to you. They're just— they truly believe they're doing much better than they are. Right.

And so they're not using anything like even just QuickBooks just to see, which you can track pretty easily. It's all automated in QuickBooks.

That's, you know, or if they are using QuickBooks, it's garbage in, garbage out. Stuff just radically, you know, radically mischaracterized. You know, the idea of revenue recognition, like no way. Good luck. Good luck with some of that stuff.

But they've grown these to reasonably sizable businesses because they're— I saw on your website, you're talking about $2 to $5 million in revenue. So that's a very successful small business.

Yeah, for sure. Yeah. And there is this idea that in growing a business, the CEOs have to change. And a lot of these CEOs and owners reach a point where they're just not comfortable. At the very first level, $0 to $1, you're kind of the doer and the seller. And then from $1 to $5 million or $1 to $1 million, you become a manager, and then above that you're a systems builder, and above that you're a business builder, above $10 million, and so on. A lot of these folks are never really comfortable making those transitions, and they just get stuck. And you'll see these businesses that say, at a million, we're supposed to start to deploy systems, and they never do. And the business is just kind of churning along. And software is kind of a rewarding thing, right? If you're selling something at 80 to 85% gross margins, that's recurring revenue, that's very sticky with your customers, that covers up like a lot of sins runs for these folks. So that's my explanation of why some of these businesses get bigger even though they're not really run super well. Software is a pretty good business to be in.

So that's kind of interesting. So often you find these things, they've got to the peak of some phase but they just can't transition beyond that phase to whatever the next level is. And you guys have that because you've been at much, much bigger organizations. You know how to take them from from one phase to the next or get the person who can run it at that systems phase or the business builder phase? Right.

Well, in the playbook we make everybody use actually forces you to start to create systems. So we give them a system for hiring. We give them a system for how you're going to do your strategic planning, how you're going to do your quarterly goals. We give you a system that forces you to use those things. So even if people on our CEO level or the existing company don't have that, they really don't have any choice because we're just like, This is the way it's going to be.

That system, that would be a great book sometime that you could publish unless you want to keep that private for the firm.

No. It's on my website. You can go. It's girdley.com, is my website. I published the whole thing. It's actually— So the genesis of what I call the playbook was about 5 years ago, I made some really bad hires. I'm a member of a CEO group here called Vistage. I went to everybody in the group and I was like, "How do I not hire so terribly?" And everybody else goes, "We don't know. We hire terribly too." And I ended up talking to another business partner of mine and he's like, "You should check out this thing called TopGrading." And so I don't know if you're familiar with it, but it's changed— it's wonderful. It is a wonderful system for hiring. And so that started me on a quest to go out and say, like, why am I solving all of these problems that other people have solved? If there's a system out there for hiring, why don't I just go find the best of that thing and use it? If there's a system out there for strategic planning for SMBs, I can't be the only person that's ever had that. That. So I spent 2 years basically going through and identifying the best of breed of every single one of these systems and we've codified it in this thing called the playbook. And yeah, I published it on my website. It's just like different people's books and different people's systems.

Well, that's brilliant. I'll make sure I link to that in the show notes. That sounds very interesting. I'd love to have a look at that. Just taking a step back a little bit, what's your overall investment philosophy?

Yeah. Well, I think that I really like to play games that are unfair to to me. So I talked about being bored by public equities. There are so many people out there that I feel like are much smarter than me. And it's kind of like the same attitude I have towards chess. I really like chess. One of the things I like to do is watch chess videos on YouTube. But I'm never going to be amazing. I don't think I have the ability and a good enough memory to be a grandmaster or even a master.

Do you have an idea of what you're playing off at the at the moment?

I have no idea.

If you play on chess.com, it'll give you a rating.

I think the highest I've reached is 1600, 1700. Yeah, that's pretty strong.

That's strong-ish. That's about where I am.

Yeah. Look, kudos to you. So it's one of my limitations in life, actually. I'm a very future-oriented, high-level thinker, so I have a hard time remembering details. I'm terrible with people's names. So it's one of those things where I want to pick the games that I'm going to invest in where I can have an unfair thing. I'm also a really bad loser. I don't like to lose. So investing, I start to look for things like this opportunity where I can bring something unique, where we can be the only player for acquiring these types of software companies, and where I can bring the kind of investment I've made in learning how to do businesses well, and the network I have, and the reputation I have, and bring all those together to play a game that's really unfair. Because that's much more fun than playing something that is— I would say much more fair.

You don't want to compete on a level playing field, which is a little bit like swimming, which I saw you're a swimmer. I was a swimmer. What did you compete in?

Oh, yeah. I was a middle-distance swimmer. I have freestyle and breaststroke.

Yeah, I did the IM 200 and 400 and the freestyle as well, but not as well.

You know, that was an amazing experience for me. I was a college swimmer and I looked at the people who were really gifted and the fastest people on the team, and I was that guy who barely really walked onto the team. I, I'm 6'5", like blonde hair, like I look like, you know, Matt Biondi, whatever, right? At the time. Now, now I look like fat middle-aged man, but back at the time, like, I, I was the one that was really intimidating when we'd go to the, the college swim meets, but I was not very fast. And so I was— it was such a good, like, character builder to be a crappy athlete. Like, like, that's why I love, like, when I find people who've been like that not very gifted 11th man on the on the basketball team who the coach liked because he just worked his butt off. Those are great people to hire. And I feel like I had that kind of same buildup, which is I was an extremely good mediocre swimmer, but I got so much out of being not very good, if that makes sense.

Yeah. I competed in a few 1500s and had a lot more success in 1500s just because nobody wanted to do it, unfortunately. I had a couple of guys in Australia who had— I know, unfortunately at my university too, and they competed. Competed in, won gold medals over like 3 Olympics, so there was just no chance of even making the university team. Even in that event, very, very tough. So, are you still swimming? Destroys your shoulders when you're young, makes it hard when you're older.

Yeah. No, I actually have— it's one of my weird genetic oddities. I have hyperflexible shoulders, so I've never had shoulder problems. I do have some knee and ankle problems, but that's about it. I've actually— I find swimming now incredibly boring. I want to hang out with people. I think I might be somewhere on the spectrum, but I'm somewhere on the spectrum that I really like people. So I actually go to group fitness classes all the time. That's what I do because I just— I love going there and it's the same people and I love talking to them. It's the same reason I like going to an office and working with people. I like being around people under the right scenarios. So I don't swim anymore.

So what's the longer-term plan for Dura? You've acquired 3, you've got 2 more in the hopper, you're 2 years in. It sounds like you're speeding up a little bit. Is that the plan, just to keep on building and compounding over time?

Yeah. So we see ourselves as a compounder. I mean, that's the cool thing about what we're doing. These businesses are profitable when we have them. They're operating at some version of the Rule of 40. Are you familiar with that?

Yeah. It's the sales and the— yeah.

Yeah, NOI/EBITDA, which are pretty much the same in software businesses, plus the growth rate year over year in a very high-performing software company is over 40. So there are some, like a friend's startup is over 100. That's pretty cool. When he told me that, I was like, oh, it's pretty awesome. But yeah, so that's one of the measurements we use to measure the overall health of the business is, okay, is your growth rate plus your EBITDA somewhere in the vicinity of 40. So yeah, so, you know, the, the cool thing is because all these businesses also, we mandate that they're going to be profitable. Like, we were— we also do something crazy in tech, which is we just say we're not going to lose money. I know that's insane if you're a VC, it's like, well, but, but we make them— we make all these businesses run profitably. And so the idea being that, that free cash we can then use and reinvest and compound back into doing more acquisitions. So, you know, the long-term vision is to just keep doing what we're doing, right, growing a little bit organically, but then growing inorganically by redeploying our free cash, and basically just keep at the same pace we're doing. Let's do 3 to 4 acquisitions per year. Let's keep integrating those. Let's do them really well. Use the free cash to keep doing that. And you can see kind of the end goal. If you— after 10 years, you acquire $10 to $15 million a year in revenue, pretty soon you're a pretty big company. And you can see what happens with $150 million a year software companies and how the public market markets value those. So we're playing the long-term game here. Um, you know, we plan on staying, staying where we are for a long time, but the end goal is to build a really huge company, uh, by accumulating a lot of these little companies and then to list that at some stage. Uh, look, I, uh, you know, I've, I've spent time hanging out with VCs, and, and I'm a part-time partner at a venture capital fund. The one lesson I've learned there is predicting what the future is going to look like 10 years from now in terms of an exit is really hard to do. I just know that if we keep doing doing and executing the way we've been executing will be an extremely valuable thing to somebody, whether that's a public market or a private equity or heck, like at some point we just say, "Okay, we're not going to reinvest cash anymore," and start writing people checks. All those are options. The key thing really to focus on here is just how do we maximize and create value by building a great business. That's where we're really focused. Do you have any—

You're looking at the landscape. Landscape for these sort of businesses? Software as a service type businesses have got these extreme valuations on the public markets, and presumably that's filtered down into the private markets as well. Is that trajectory going to persist? Do you see it slowing down? How do you think about purchase multiples for these companies?

Yeah. Well, I think what's happened in the past 6 months that's been really interesting is we divide the market into 4 different segments. So there's high-growth growth, software businesses of this size, and those are the things that VCs want to give money to or PE wants to buy. We're not interested in paying 10 or 12 times trailing 12 months revenue. We don't do that. Then there's the next category that are just pretty darn good businesses. They're already running pretty well. The owners know what they're doing. They're maybe generating 20% to 25% EBITDA, growing 10% to 15% a year. Nice business. We don't play there as well. Those tend to sell for 3, 4, 5, 6 times ARR. And there are buyers that pay up for that stuff. We don't do that. Where we play is in the bottom half of the market. And there's two categories there. One is distressed. And distressed is obviously they got to sell for some reason. And then there's things that are just underperforming. They're maybe breakeven. They're not doing very well. And so the market, as we're seeing with these businesses, is actually nuanced depending upon what's happening at each stage. Stage. So VC has slowed down. So those guys are all slowing their growth rate, and so their multiples are coming down a bit. And then for the past 6 months, up until about a month and a half ago, we didn't see a distressed company for almost half a year. And then, and then, and then, well, COVID happened, and we started to see distressed stuff. And it was early on, it was like stuff selling it to airlines or restaurants, that kind of stuff. So, you know, it, it's hard to predict what's going to happen. But I think the point being that you ask kind of the macro level and how it's trickling down, I think the much bigger impact on each of these businesses is the psychology of what's happening in the economy as a whole is trickling up much faster than we're seeing any impact of what, you know, Zoom selling for 50 times trailing 12 months or whatever.

So just, just, sorry, say that last part again. What are you seeing in that last little part?

Yeah, I think that because these small businesses are so much closer to the ground level, we see the impact of the day-to-day being much more impactful than a trickle-down effect from the big markets. Does that make sense?

You're seeing that these are— the smaller businesses are much more impacted by— Totally. By the shutdown and by COVID.

For that, and then also the psychology. A lot of these folks, like, it's hard to value these little businesses. So it's one of the challenges we've tried to overcome is almost every single small software company owner has some friend who read some TechCrunch article that says that so-and-so businesses are trading for this. And I could just tell you, they're not. Like, they're not. You know, just because one broker does one deal at 8 times revenue doesn't mean your little software business that's not growing and it's not profitable deserves 8 times revenue. I'm sorry, it just doesn't work that way. So besides those things on the ground that you're seeing, there's also the psychology, which is which is a factor of these things being owner-operated, which is very different than the public markets.

So there's an education process, presumably, with these guys, or you can't get together? Bid and ask are just too far apart?

The number one reason we don't end up doing a transaction is bid and ask are too far apart, for sure. And that's OK. I mean, if folks don't have to sell and they want to get a certain number— I have a friend running a SaaS business that's in this size that wants 5 times 2 times revenue. I don't think he deserves it, but, but he— yeah, you just got to make a market of one. Um, so yeah, I mean, we've, we've done some white papers and stuff to try to talk to people about, you know, how— what are the things that you should think about that are impacting negatively the value of your business? Um, you know, everything from the quality of revenue to geographic concentration. I mean, there's like 40 different things that can take your business from, say, trading at 2 times revenue or 3 times revenue down to trading at 1x revenue. Um, and, you know, because these people aren't necessarily in the day-to-day of valuing businesses all the time, they don't realize the impact of that on, on us, right? Um, so, you know, but yeah, in the end, like, it's, it's tough because we're trying to educate them from an adversarial place, right, which is as a buyer. So a lot of times you just got to move on until you find somebody that's the— in the right mindset to do transaction. So it's a messy market for sure.

I get the sense that it's an increasingly popular area to be an acquirer, that there are lots of search funds around and there are lots of smaller private equity firms around that are looking to do these small acquisitions. Do you see that competition or is it increasing or is it—

what do you see? The biggest transition that's happened is there's There's two. One is the number of tire kickers that have come out. I've just heard horror stories about these search funds who will put in a bid for something and they'll put in a bid at 3 times what we put in. And I'm just like, there's no way that underwrites. No way. And then 6 months later, that same seller will come back and be like, hey, you know, didn't work out with those two college kids.

Yeah, we're back on the market.

Um, but I think, you know, I think the second thing and why I'm very optimistic about this market is unlike VC, uh, when you buy a business and acquire it, you own it. You have to like— so yeah, you got— you just bought yourself a bunch of problems. Um, so, you know, it makes it very hard for this market to get super saturated quickly. And the other thing you're seeing is, uh, you know, a stratification and a niche-ification of the acquirers, right? So the stuff we like to buy is totally different than, say, what Tiny likes to buy. Like, we just, we don't compete with them 'cause, like, I think I've seen them in a deal once, just 'cause we like to do B2B software and he likes to do fire-and-forget type stuff. And our operating model is different than his operating model. Our financial backing is different than his. So, you know, then there's probably 5 or 6 other players that are kind of figuring out their own little niche, whether that's developer tools or it's, there's another one doing kind of e-commerce stuff. We don't like that stuff, so. That is also something that's been happening in the past few years, people niche-ifying for sure.

Are you comfortable talking about how you financed? It was your own money initially. Have you raised outside capital?

Yeah. Yeah, so we raised— we did the first acquisition with our own money. So put our own skin in the game, and then we used that to raise about $12 million from folks. We had an oversubscribed round last summer that we've then used to do that. These businesses are also— you can finance them with bank debt. So we're able to— we work with a local bank here that gives us nice terms. So we're actually able to lever them up to increase returns and kind of do that from a capital utilization standpoint.

So you're looking to conserve as much equity as you can in the acquisitions, put in some debt, the business. So it's like everyone is like a small leverage buyout. How do they expect to pay it back? Or you don't mind, they can carry the debt for as long as they want? How do you think about the financing?

Yeah. So that's part of the power of our model because we're a C corp. We're borrowing at the C corp level. So we get better borrowing because we can accumulate all the debt together. We can actually also add together the profits to enable us to borrow better. And we're at the level now where you kind of get get over that EBITDA hurdle where you can start to go to the big national banks and not just necessarily do the small business-type loans. So all that's been really good. So in terms of thinking about it, we borrow at the top level, but then we think about the leverage on a deal-by-deal basis. And we're typically doing an appropriate level of 2 to 3 turns of EBITDA in terms of borrowing, depending upon what makes sense for the business and their history and stuff things like that.

Do you expect to do more capital raisings on the equity side, or do you think it'll be self-financing at this stage?

Yeah, so the inflection point is coming up to where the self-financing happens in the next 9 months or so. Um, so some of it is just kind of watching and seeing what's happening. Um, you know, right now we have cash in the bank and we're still working to deploy it. Um, so yeah, we'll see what happens, but right now we're not fundraising. That's a nice place to be, particularly given where the market is. Uh, for sure. It also really helps with recruiting, uh, because a lot of times we're recruiting people who have been laid off from startups or high-risk ventures, and we're like, hey, like, we're profitable, and here's our bank account. And, uh, it, it gives us a set of people that are interested in working with us that have been burned by stuff falling apart and whatever. So, you know, it's, it's part of the crazy idea we have in tech to actually make profits. Who knew?

Any final thoughts, Michael? Anything that we haven't covered that you'd like to discuss?

No. I was actually kind of nervous about doing today. You're the first podcast I've been on where I've read your book. So I really enjoyed it. So— but yeah, it's turned out super well. Thanks for giving me an opportunity to talk about something I'm really proud of.

My absolute pleasure. It was absolutely fascinating. If folks want to— follow along with what you're doing or get in contact with you, how do they go about doing that?

Uh, definitely check me out on Twitter. Uh, it's @mgirdley, so M like Michael and Girdley my last name. Uh, I have really gotten into Twitter, especially more since COVID started, so I'd love to connect with folks there and hear what you think about what we're doing. And your website, Dura Software? Yeah, dura.software, uh, for the company. You can keep up with us there. Your personal blog for the system? Yeah, it's girdley.com, G-I-R-D-L-E-Y dot com. That's fantastic.

Michael Girdley, Dura Software, thank you very much.