The Exchanges

Q And then what did you do in the first year?

A Well, they had a weird, um, now these guys are really, really smart, but, and I'll tell you an interesting story in a second, which I don't think I've ever told you. Um, they're really smart guys, but they did a really dumb thing. They had a business set up as a software as a service business, but they sold the product as if it was a one-time sale. And so they had an ongoing relationship with the customer who would log in and, you know, forever, but only get paid once. And so we converted the business From a one-time payment to a subscription, and that added two million dollars of revenue overnight. So it went from five million to seven million, and as all that revenue was profit, the business went from losing a million to making a million. I will tell you that, um, the funny thing was, uh, the two years they worked for me afterwards, they were really building another business on the side. And, um, uh, and I didn't like paying them a lot of money to build another business. So to shut me up, they offered me 10% in their new venture, which was a protein bar company. Don't ask me why. Uh, they were bodybuilders. And I was like, I, the, the world does not need another protein bar company that they later sold it for a billion dollars.

AI assessment note: “we converted the business From a one-time payment to a subscription”

Q That's a round of applause moment. I mean, holy crap. Um, I mean, I imagine for anyone thinking about, uh, buying tuck-ins for their own business, they're going, how do I find a deal like that? So, I mean, give how, I mean, is it luck? Can you program that?

A I guess it was partial luck. I mean, we got a call from a VC thinking that we'd be a good tuck-in for that one. So we knew they would be for sale and we figured, well, why not take a look at it? Because we were now pretty profitable business, you know, and Uh, we thought we could afford, you know, we could, you know, finance it, and, and in fact, when we first looked at it, and based on the numbers they sh, they shared, they were doing well, you know, they were doing twelve million of revenue, making a couple million, and we felt we could take out three million dollars of cost, so we were, we had a term sheet to finance, you know, all nineteen million of the purchase price, uh, but every time we turned around, instead of doing two and a half million, or three million a quarter, they were one and a half, Million or quarter. And every month we waited, the revenue just kept falling and falling and falling. And I mean, it was just one of these things where we just, if, if, if you hang around the hoop long enough, you'll pick up a trash basket.

AI assessment note: “I guess it was partial luck. I mean, we got a call from a VC”

Q So we could measure the success of our, how much were you doing in monthly PPC you were managing?

A 300 K a month, you know, and, um, so over, you know, three, four million a year, and, um, and so it was, it was the biggest source of our revenue, and so we had to really carefully see, we spend a dollar, we get back blank dollars, we had to really watch that. They changed the business to a gap basis right away, where you don't see the day-to-day revenue, um, and gap basically, Underestimates your revenue if you're growing, but overestimates your revenue if you're shrinking because GAAP gap is an historical average over your last 12 months. And so the drop in revenue, they didn't know was happening because they weren't looking at the cash sales. They were looking at the GAAP gap revenue. And so we'd show up at these board meetings and I'm still on the board and they would show the GAAP gap revenue and I'd be like, I can't make heads or tails of this. I mean, can someone show me the cash revenue? And they're like, oh, We're professional now. We don't do things on a cash basis. We do them on a gap basis. And then one day I show up at a board meeting.

AI assessment note: “300 K a month, you know, and, um, so over, you know, three, four million”

Q I recommend Flippa because they have the largest list of buyers for these sorts of digital assets, which almost always guarantees a bidding war. I tell my founder friends all the time to try Flippa's valuation calculator Did you have an in with the VCs that bought it for forty-five million where you, they were happy to take the loss and let you take it even though you, you win?

A Um, well, we, um, my co-investor co-invested with one of those VCs in another deal, so we had a, we had a, an initial entree into that conversation. Um, they were for sale for two years. They didn't contact us. Uh, you know, they viewed us as the small guy nipping at their heels and not able to afford them. Um, and their business was doing better before they, you know, at the beginning of their sales process, but it started to really struggle in the last year. Um, and, uh, they kept thinking it was going to turn around, turn around, turn around, and it didn't, and And so we did a deal literally in three weeks because they weren't going to meet payroll. They were burning cash fast and not willing to do anything about it. And they kept hoping for some big deal to close and it didn't, and they needed to get something done. And the VCs had, um, had guaranteed a two million dollar emergency line of credit that was due in, you know, at the same time, and they didn't want to make good on it. So We were able to basically buy it by taking over that two million dollar line of credit, and then pay the investment banker fees and lawyer fees that they couldn't afford to pay because there was no cash changing hands.

AI assessment note: “my co-investor co-invested with one of those VCs in another deal”

Q We're going to go there. Uh, story gets, he has to, cause it's already on the next slide. Uh, so, but before we do that, any questions about just MNA strategy here in general? Um, just raise your hand if you've got one, how he bought these companies, anything. Alright, yeah, fire away. What's your name? Alex, fire away. Quasi distressed or healthy?

A Um, well, uh, the first one was growing. So when I would bought awareness, it had grown from one to three to five. So it was growing. Um, but they were more consumer than corporate and they were struggling growing in corporate. They were trying to sell the business as a B to B business. And when you read the book, it looked like it was a B to B business. But when you looked at the numbers, it was a B to C business. And the number of buyers for a B to C business is much lower than the number for a B to B business. And so it was distressed in that's in that it was badly packaged. They were hoping to get a B to B multiple, but you know, their book was overly ambitious for who they were. Um, and I had just looked at buying their competitor, Variato, which was, you know, 50 50 B to B, B to C. So I knew there was a B to B opportunity, a B to B market. And so, you know, relative to them, they were maybe on the consumer side, they was like two thirds, one third, uh, of the market. And on the B to B side, it was like 10 to one. And so I knew there was a gap in the B to B market that they could fill, um, that they were struggling to do. And as it turned out, they were consumer guys. They knew how to sell protein bars and to consumers. Uh, and so they were, uh, they had come up with a good technology. They just couldn't figure out how to grow it out of it, out of their original consumer m…

AI assessment note: “it was distressed in that's in that it was badly packaged”

Q Okay, walk me through that. You know, there's a lot of people that would argue it's actually smarter to buy companies than it is to start them from scratch. You're doing it. What'd you see in the tool that made you want to buy it in 2010?

A Uh, well, the technology I thought was really good. So on the, I was more at the time interested in the corporate space than the consumer space. My prior background was I had run a, and built a company that was focused on providing security to community banks. And the exclusive focus of, uh, of that was focused on external security, stopping the unknown bad guy from breaking into a bank's network. Uh, and there was very little done at the time on internal security. And while most of the problems that exist are created by external people, most of the problems that cause a lot of damage are done by internal people, if that makes any sense. And so I felt it was the next Uh, frontier.

AI assessment note: “well, the technology I thought was really good.”

Q Is this like in the office or it's on their computer or their phones or what?

A Correct. It's on the, it would be on their computers typically. And so I, as an employee have access to all sorts of, um, confidential data, like client lists as an example. And if I take that information that's on my laptop and I'm, and I'm home, And the employer has no visibility into what I'm doing with that information that in theory, when I go to find my next job, chances are I will pull off a client list and all the information about what they have, how much they pay, when they're up for renewal, uh, and that would be devastating to a company, uh, if their employees, when they left to go to a competitor, were, you know, were able to have easy access to.

AI assessment note: “It's on the, it would be on their computers typically.”

Q And so take us through the journey. You get a little bit of incremental revenue the first 12 months. Uh, what happened in 20, 2019, 20?

A Uh, well, uh, we bought a few businesses along the way. Uh, we kind of were leveraging profits, uh, both to pay dividends as well as to, um, as well as to use EBITDA for bank debt purposes to acquire a few companies. And so we bought, um, we were both in the, in the consumer business and the B to B business. We bought a consumer business and a B to B business, each for one for 3,000,001 for Three and a half million. Uh, anyway, uh, the business grew from seven million, well, I guess five to seven, and then, uh, and then, uh, and then to 20, you know, last year we did twenty million making six. Uh, and so that was big, it was a big year. Um, there was a lot of growth in our B to B business, uh, due to the COVID, um, effect. You know, we, uh, we focus on providing employers with Uh, PC activity, monitoring activity of their employees. So are, what time do they log in? What are they doing when they log in? You know, how do, how do I get comfortable that all the things that I used to see with my eyes when people came to the office and I no longer see how do I, how do I recreate that line of sight information I used to have? And, um, and so we had a, you know, the B to B business had a very big year last year. And, um, and so. It was a good time to sell, and so we did.

AI assessment note: “we bought a few businesses along the way... grew from seven million... to 20”

Q Yeah. So is this, is what you'll do next? You'll go sort of run the same playbook. I mean, you basically, your cash exposure was about two, 2.7 million. It sounds like total when you guys bought the initial thing. And then the rest was creativity, good deal making, and a lot of patience. Is that what you'll do next?

A I hope so. Listen, every deal has its own, you know, has, it's, it's not always the same playbook for each deal, right? It depends on the market dynamics, the growth trajectory, the competitive, you know, you don't always control those things. Um, and so, uh, but I generally like acquiring, um, You know, there's always things you can fix in a business. Um, sometimes it's as basic as actually, actually make it a subscription business, you know, which wasn't too hard to do, but wasn't being done for some reason. You know, not, not, not every fix is that obvious and that easy. Um, but, um, uh, but, you know, we look for things that are doing well in spite of some You know, some mistakes, you know, founders are sometimes really smart at some things, but not so good at other things. And so we try to find things that they've done really well, but still see issues that they've, you know, you know, where they left me, you know, meat on the bone unwittingly, because they're just not experts in everything.

AI assessment note: “I hope so. Listen, every deal has its own, you know, has, it's,”

Q of actual revenue was, call it 20, twenty five million. I mean, this is extreme capital efficiency. What enables you to spot, like, these sorts of things where there's not a bunch of other competition? I imagine that people look at this and go, we could do, we should do the same thing, and then you can't buy it because there's so much competition. How did you find these gems?

A Well, you know, uh, one of the, the competitor that we bought, sometimes it's just being at the right place, right time, but the, the last competitor that we bought that pushed us over the edge to twenty million, I looked at buying a year before I bought awareness. And the, when I looked at buying it, I couldn't afford it. It was doing fifteen million of revenue, making six. Two VCs bought it for forty-five million, and they And the business went from doing fifteen million making six to doing seven million losing three, uh, when we bought it. So we, it's why we bought it for such a good deal. And, but when I saw them, I was like, this is back in 2008, 2009. I was like, wow, I don't know many internet security businesses that are growing 20%, doing fifteen million, making 40% EBITDA margins. Um, and when I saw awareness, it was You know, they were the Avis to the, you know, to that company's Hertz, if you will. And I was like, geez, I'll, you know, and so, uh, it was a two race, it was a two horse market at that time between the two of them, uh, where, uh, where the number one company was three times the size, but you could see how you could, you know, take up some of that market share. And, um, and, you know, I felt if we could just even grow into ten million, we'd go from, um, you know, making a million, uh, Uh, once we, you know, once we added the, you know, the, you know, th…

AI assessment note: “sometimes it's just being at the right place, right time”

Q How did you do that copy-wise, though? Was there any blowback? Did they go post negative reviews on G-II? How did you manage that?

A Um, well, you know, so software kind of gets, um, extinct, right? I mean, like, it, it, you have to keep up with it, and so if you wanted to keep up with it, then we were, like, if you want to, if you wanted to get the latest version that worked with, you know, worked with all the latest other software so that it was, is functioning, um, And, uh, but you know, we, we gave them notice, um, and it was, it was tricky for sure, uh, but honestly, like, We didn't get that much pushback, and most of that business was dealing with consumers, um, not, not, you know, it wasn't B to B. On the B to B side, which was a small piece of the business they had, uh, they were doing it on a subscription basis, but for consumers, they were doing it as a one-off basis.

AI assessment note: “honestly, like, We didn't get that much pushback”

Q Top three terms, if these guys are looking at raising debt, um, I'm talking traditional, so not, I'm not asking for a founder about that. So the way you raise debt, what are the top three terms they should all be negotiating?

A Well, it depends what kind of debt it is, right? I mean, so, um, you know, it's funny, someone mentioned Silicon Valley for obvious reasons. They, they were one of our banks, but they never lent us money. We, we flowed all our credit cards through them. And, ah, they would come to us all the time and ask if we wanted to borrow money from them. We'd say, sure. And, you know, we were the only company they had that was making money, and they'd say, but who's your named VC, and when was your last raise? I'm like, well, here's the thing. We don't need that because we make money, so we don't have to fund our losses with a VC.

AI assessment note: “They, they were one of our banks, but they never lent us money.”