Episode Transcript
Hello, it's Andrew from XO capital. And today I will start off by saying, this is not a solicitation for investment. All we are doing here is documenting a journey on a prospective raise and the timing of all these things may not be in real time. So some of these things may have. Already happened. And some of which are still a perspective. So the only reason I'm doing this is because frankly not enough content is out there on tactically. How do you raise a fund? I've tried and failed in the past. There's a different post on our blog about that, but this time around feels different.
And I put together a special sort of investor subset list where I can more freely communicate. What's going on there. And if you'd like to be on that list, let me know.
So of course. Because I'm a glutton for punishment a week after we buy growth bar, our biggest acquisition to date, I decided we should try and raise a little fun and a fun here is a misnomer. The term that's in using real estate for this type of thing is a fundless sponsor. So there's actually no fund here at a fund.
There's a sort of like master entity. And then there's a, a subsidiary that like you raise the money into it and the structures can be a little bit complicated. And this isn't that. So for this flip fund concept, All we're trying to do is raise half a million to a million into a single company.
A single multi-member LLC. So there's no limited partner agreement. There's none of that bullshit, frankly. It's expensive to set up, even though all of these lawyers are just copying the same damn documents they did for the last fund, because they all are. Basically the same thing. We're going to keep this stupid, simple. This is going to be a multi-member LLC. We will be in there alongside of our investors and we will have a schedule.
Of the membership in it interests the, the member units that we are well, that, that different people own. So if you, if we're raising a million and you put it in a hundred grand, You are, you have roughly 10% of the membership units in the LLC. So. Just to note the, if you were to do like a C Corp, something that has actual shares, then, then that's why we're not saying shares. LLC is just have member units.
Which are You know, on paper, the same thing. But technically slightly different. So this is going to be an all-out wind sprint. So again, we were trying to raise half a million to a million into a single LLC. We're going to buy one company with that, LLC. We're going to try and double it. And the plan is to exit in 12 to 24 months. Hence the term flip fund.
Again, the reason this came about is last time we tried to raise into our LLC that holds or at least controls all of our acquisitions to date. So we've done 10 we've sold four. So we currently have six ish plus or minus a few that we've built or, or just like tiny little things that we've acquired just as internal tools.
So we tried to raise money into that thing. And this was during the same time that these same investors I was speaking with were putting money into angel list at just the most batshit crazy. Valuations I've ever seen. Right? Like there was, there was truly a, an outrageous multiple being placed on anything software related during 20 20, 20, 21, it was just bonkers out there. But our little thing, nobody wanted to give us a reasonable multiple. And when you're hiring dilute of capital to go and.
Acquire companies. If you look at the cap table of us just doing a million dollar raise, then another million dollar raise at another million dollar raise. And that capital is dilutive. We were actually going to go out to acquire businesses with that capital. And if you just trace that logic through, we were going to be basically not owning very much of the company anymore, and that just wasn't tenable for.
A number of reasons, but mostly it's just not that interesting for us. If we only own, you know, 10, 20% of XO. So this flip fund concept is pretty cool because we can set it aside. So this will be a standalone LLC. We can sort of eat the costs of our shared services team. So Xcel has a few developers, right? Shared customer support.
You know, we have some freelancers and contractors that do other things for multiple at the portfolio companies. Roughly XL right now by itself runs at a zero. So there's really no profit and there's not much loss plus or minus a few thousand here or there on any given month. But roughly, as of now, especially with this growth by acquisition, we will kind of be at a zero there.
So I don't think that this, this type of flip fund would be possible if we didn't have our shared services, that we're just going to sort of subsidize to make this first few, this, this deal work in the first few of these types of flip funds work, or these, this flip from fund concept work again, let's say we bought something for a million bucks.
It's making maybe three, 400,000 may be 500,000. If we get a really good deal a year. And that's frankly, just not that much money once you put, like, once you load it with costs and you load it with like even just one operator and one developer might eat a significant if not all of that potential profit. So again, we're going to be using our team to execute on this. And again, the only way we're really going to be able to make the math work is because we're actually subsidizing all of the work.
And we also decided, you know, A lot of people ask Andrew, like how many hours are you going to put into this thing? Or how many hours or how you guys going to do billing? We're not going to do any of that shit. I'm not going to waste any time on doing that stuff. So if you go and you look on our pitch deck, I put this in the FAQ's.
We're going to take a hundred percent of the cashflow and use it to grow the business as we see fit. And if you're not cool with that, then don't invest. Again, Let's say we buy something for half a million bucks. It's making maybe 200,000 a year. I'm not going to do time-tracking for sub 10 K of costs. It's just not worth it. That's just like, not where I want to be spending the time. I want to be able to use that money, to hire a freelancer, to write a hundred blog posts over the next year. Like all kinds of stuff like that. And if we're having to do time tracking, I think that that's just a really inefficient use of our time.
And frankly, like who gives a shit? It's like less than 10 grand. You're not going to make your gains on trickling in. You know, $600 a month at a time on, on an acquisition like that. That's just not where the money is. The money will be. If we can get some kind of multiple expansion.
When we sell it and 12 to 24 months, and if we're able to double it, that's where the real dollars will be. Frankly, again, if you look at our P and L that's where we've made the most cash is once we sell the thing, cash flowing, the thing. It just takes forever. It takes years and years and years. And again, that was one of the major objections. When we tried to raise money. Last time is in a sort of permanent capital model. You just don't know when you're going to get your money back.
And these private investments are liquid. So we would have to find somebody that wants to buy you out, or we would have to go and buy you out. And, and it's all doable. Plenty of people do it. There's obviously a market there, but I'm looking at this from what's my network. What can I actually accomplish?
And I think this is a structure that I can actually make work. So we are, as of growth bars, acquisition, more or less fully allocated, we will be putting 10 to 20% of the capital into this prospective flip fund. However we cannot go and do another. Large acquisition or, you know, half a million to a million dollar acquisition. We just don't have any cash left. I also, I forget if I've posted this before, but instead of the June stats breaking them out by company, I just through our P and L in here. So if you're curious, you can check that out.
You can see how we're kind of running at a loss. Some of the payments from the work cloud acquisition are coming in in sort of weird times. I think it's a three month schedule over the next 12 or 18 months. Something like that. I'd have to. Double check, but it's a little lumpy. And of course, one of the interesting things about buying growth bar and a business of this size is you start to get into a little bit more of the complexity. So for all of our other acquisitions today, screenshot sheet bests work, cloud analytics called DM.
All of those were really, really simple. Like even I could have done like all the financials for it. Like it just wasn't that complicated. And what we're starting to see with growth buyers that. With size comes a little bit more complexity. So for example, growth bio, when you sign up, they will make you put in your credit card. A lot of companies do that.
I think in the past, this used to mean that the customer or the visitor was a high intent user. I don't think it means that anymore. I think it just is a way to remove spam because for whatever reason, People sign up with like eight different Gmail accounts, just so they can use the tool for an extra week for free, in some limited fashion. I think all in they're probably saving like less than a dollar. So I don't, I don't know why people do this, but it seems to happen on growth bar. It happens with super sand.
It happens across our whole portfolio. But we're going to be removing it and start measuring and see what works. But the point I was saying about complexity is that when these credit card trials people will put in a garbage credit card or a temporary card or. Like we have in mercury with a card with daily limits, which you can set to like a dollar. So basically all the transactions fail.
But it's a valid credit card. So or what I started doing personally, when I encounter these things is you sign up and then you cancel immediately because I don't want to forget. And then, you know, when the free trial and it's like, it's just, it's just canceled. So I don't think this credit card tollbooth means what it used to mean. So we're going to try and remove it and measure stuff and see what happens there. I know in the past this company has had growth buyers had issues with people signing up.
With a bunch of different fake email accounts. And, you know, it's a huge problem. There's probably an interesting product there that a lot of people would be happy to pay to use. But again, the point I was trying to make with Stripe is that there's actually $28,000 just sitting in Stripe because they hold it because of all the chargebacks.
So somebody signs up the payment fails for whatever reason they canceled the card, or there's a low limit like we do in mercury. And we are actually paying close to a thousand dollars a month just in Stripe fees, just for these failed. Transactions just for these failed initial free trial transactions. And so we're going to get rid of that and see what happens there. So let the experimentation began. If you are interested in learning more about the flip fund, you can just hit me up on LinkedIn Twitter.
Reply to the email, whatever. See you around!
