Lessons from a Thousand CEOs
September 14, 2021 | Issue #41
Big Deal Small Business: Lessons from a Thousand CEOs
September 14, 2021 | Issue #41
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As I transition out of my full-time job and into full-time search, I’ve been thinking seriously about developing a proprietary search funnel like many traditional searchers.
I’ve been exploring the topic and my friend Spencer Butcher came to mind as the ideal person to write a guest post about it — his job for the past few years has involved managing proprietary search for PE firms in the SaaS space.
He’s a fellow searcher as well, and is planning to be more active on SMBTwit soon, so throw him a follow on Twitter.
Without further ado, passing the mic over to Spencer.
Lessons from a Thousand CEOs
If you look at the funnel above and think, wow, that’s inefficient, you’d be right. Welcome to the world of proprietary SaaS deal flow!
I’ve spent the past six and a half years at a buy-side deal generation firm focused solely on software deal sourcing and execution.
We work with a range of buyers like family offices, growth equity firms, and search funds, but a typical engagement was with a PE-backed strategic on a long term agreement.
In addition to deal sourcing, we usually act as our clients’ M&A advisors as well, taking the lead on due diligence, negotiations, and ultimately getting the deal closed.
A few notes on the above pipeline:
I couldn’t get a precise answer on how many emails I sent that resulted in the 1,634 calls. Roughly speaking, I’d assume a 25% email to call conversion, which means I reached out to 6,500+ companies over the past ~6.5 years. That’s ~1,000 companies per year, though my outreach was lighter early on and has paced between 1,200 - 1,500 companies in recent years.
Indications of interest (IOIs) are a non-binding term sheet that often includes a valuation range rather than a point valuation. When working directly with a seller, we sometimes skip the IOI step and move straight to LOI.
Letter of intent (LOI) is a binding term sheet with a precise valuation and includes exclusivity.
The stat I’m most proud of in this funnel is the LOI close rate of nearly 80%. Unlike some PE firms which have close rates less than 50%, we do a ton of work pre-LOI which results in a high close rate. We don’t re-trade or change terms post-LOI , which I believe is the right way to do business and behave in the world. Note, the LOI close rate should improve to 89% when a deal currently under LOI closes in October :)
I learned a lot about business and life in these conversations and thought I’d take an opportunity to share some of that here.
But before I discuss what I learned, I thought it may be helpful to bust a few myths about proprietary deals.
Myths
Myth: Off market = cheap.
Reality: Not even close! Most of the proprietary SaaS deals I helped buyers find went for “market” multiples.
The advantage is developing a relationship with the seller and working together to construct a deal that makes sense for both parties. It’s really hard to do this in an auction process.
Myth: Proprietary search is not JUST a volume game.
Reality: Both shotgun and rifle shot approaches can work in proprietary sourcing. The largest deal I closed was the result of targeted, succinct outreach across multiple channels (LinkedIn + email).
My opinion today is that the best approach is a combination of both shotgun (consistent newsletter) and rifle shot (tailored cold email).
Now that we have those out of the way, here are some things I learned that I hope can help you along the way.
Lessons Learned
1. Persistence pays. Too many people send one email and move on. “They didn’t respond so they must not be interested.” That’s a bad assumption when you’re emailing the leader of a company.
The most interesting companies I talked to responded to the fourth or fifth emails I sent.
2. Strategic rationale matters. I used to preach speed to close and majority cash deals. While those are important, people want to understand why they should talk to you before they understand the terms of your offer.
Articulate this in the first few sentences, concisely. But please don’t write a half page on who you are in the intro email!
3. Do your homework. Starting a call with “tell me about your business” is a fast way to ruin a conversation. You’ve done the hard work to get them on a call, now show the seller you won’t waste their time.
Something like, “I reached about because [I noticed you on Capterra’s list of X, see you’re based in Y.] I see you have [35] people on LinkedIn, were founded over [10] years ago and it doesn’t look like you’ve raised capital before. What I couldn’t confirm is [your business model] so maybe we could start with what a typical [customer / deal] looks like for you.”
Showing up prepared sets you up to be able to ask the important questions.
4. Develop a scorecard. If you try to bid on everything, you’ll accomplish nothing. Clearly define your ideal acquisition criteria in a scorecard then rank the deal against your predefined KPIs.
These could include things like gross and net retention, the typical product buyer (i.e. VP of sales (notoriously high turnover), chief risk officer, etc.) and architecture (single tenant, multi tenant).
As the writer of this newsletter previously highlighted, no deal will fit every KPI but if all you’ve done to define an interesting deal is set a minimum SDE or EBITDA metric, there’s more work to do.
5. When in doubt, bid. Too many buyers overthink deal dynamics early in the process. Valuation expectations, competitive dynamics, etc. If the profile fits your criteria, make your bid and dig deeper when it makes sense.
What’s Next
I’m hopping into search myself! I’m currently transitioning out of my day job and will be focusing on finding a SaaS business to acquire.
I’m focusing on $1 - $3mm ARR businesses with great retention rates based in North America.
I’ll be doing some consulting on the side to stay sharp on deals so if you have an idea or want to talk software M&A, I’d love to connect.
Conclusion
Hope you enjoyed today’s guest post! If you’d like to connect with Spencer, just hit reply to this email and I’ll connect you. You can also find him on Twitter where he will be more active very soon as he transitions into search.
Thanks for reading as always, my email & DMs are always open for feedback or discussion.
Thanks,
Guesswork Investing
P.S. I’d always appreciate introductions to potential acquisition targets or brokers (primarily targeting $750K-$1.5M+ of SDE or EBITDA, ideally located in the Northeast, West Coast, or Colorado).