Episode Transcript
Hello, this is Andrew from XO capital. And today I'm going into the flip fund logs part two. So in about two weeks, we've gotten nearly half a million of soft commits. And I wanted to talk about having. How having an audience is insanely powerful because it's a pretty much the most obvious thing on the planet, but it's new for me.
I recently started, well, I guess in the past two years, like actually thinking about an audience and grew my Twitter following from like one or 2000. God knows how many bots were a part of that one or 2000 to about 10,000, which still God knows how many bots are part of that 10,000. LinkedIn feels a little more trustworthy, although God knows how many fake accounts are on, on that platform too. So whatever 10,000 on Twitter, 10,000 on, on LinkedIn, and about 800 on this email list.
Twitter, you know, who knows what's going to happen there? LinkedIn, I actually get more engagement there, like actual engagement, real engagement, people that are interested, people that would invest, et cetera. Than I do on Twitter. This is the same for when I'm, you know, marketing or doing some of these annoying giveaways for like a Supercenter or one of the other XO.
Portfolio companies, but having your own email list, it's probably the most beautiful thing on earth. I mean, this is a direct line to people that are interested in this kind of thing. And so first thank you for listening slash watching. But second, thanks for following us for the past three years. I mean, most of the people that have soft, committed so far are just people that have been reading or watching this stuff.
And they know us. And so it, it actually cuts down on a lot of questions they have about who we are, what we're doing, how we operate all of those sort of boiler plate, 30 minute conversations that I'm probably still going to have to have. But the initial soft commit was really a lot of folks just coming back and saying, here's a number I feel comfortable with.
And I haven't had to take that many meetings yet. Of course. Again, these are just soft commits. I'm certain that over the next couple of weeks, before we actually close and people start writing. Writing checks that they want to hop on a call with me, which is absolutely fine, but this is a markedly different feeling.
And the hell of a start compared to last time when we tried to raise and it just didn't work. But I think we had to go through that initial pain to figure out this flip fund model. I mean, last time when we tried to raise it was, it was really around. We were trying to. Actually sell shares into the entity that owns all the portfolio companies. So that is just for us.
A simple LLC. And we have all of the portfolio companies. I mean, there's now like a growth bar. We've put into its own company and you know, there's other stuff, whatever, but pretty much all the shares are in this one entity. And we were trying to raise money into that, which I think for a lot of people now would be like pretty interesting, but we're not going to do that anymore.
The. The real reason is. Last time we got, and this was again, during the midst of the total chaos, that was 20, 21, 20 22, where valuations, like I put some money into some things on Angelist occasionally and those valuations were just made absolutely no sense to anyone, myself included. I'm sure the founders themselves were just like looking at these numbers, like, oh my gosh, you know, we've we've we finally made it and.
You know, TBD on how that turns out. I think that that will shake out very favorable for companies like ours that have a bit more of a war chest and can go and scoop up distressed venture companies because. All of that venture. All of those venture dollars. Once, once they run out, I think they're going to find themselves in no man's land or facing down rounds, et cetera. And a lot of them are just going to be write offs and, you know, for a lot of these venture backed companies, frankly,
The VCs because they operate on power laws. That's where most of their returns come from. They don't care about somebody that's making a few hundred thousand dollars a year or even a few million dollars a year. If they stopped growing. You know, 10, 20, 30% month over month. They are just never going to be that company in the portfolio that returns the entire fond. Right.
That is going to be one or two of those, stratospheric, hockey stick type growth companies. And for the rest of them, frankly. It's just a bit of a headache. The founders, sometimes themselves don't want to continue with it because they like don't want to build some kind of. You know what we would consider a very great business, but for them they want to go on the venture track. And so if they're building like a cashflow type business, sometimes those founders.
I would rather just exit and move on to try and take another big swing at some unicorn type company. And frankly, the VCs would love to encourage that behavior too, because that's the kind of outcomes they need to make their business model work. And you know, I'm not anti VC at all or anything like that.
I just think that the. Dominant conversation on tech crunch or any kind of startup-y thing or Y Combinator, et cetera. It's all actually slanted towards the VC business VC as a business model, and actually has nothing to do with like what might be the optimal outcome for a young, initial founder, trying to.
I, you know, build some, some, some CA like a cash position or build some kind of equity and something real, like, I think very strongly that for somebody's first company, them pocketing. 1,000,005 million, 10 million in the bank in their twenties is the most magical way to then go and try and take many, many more larger bets in the future.
And the, there just really aren't that many avenues for people trying to do that. And there's certainly not enough. Dialogue going around to even let founders know that that's a thing that you can go do, right? It, it, it feels at times that most of the conversation around is around this, this kind of binary outcome. Either you.
Become a billion dollar company or you die. And we are over the next 10, 20 years going to make a shit ton of money in that no man's land or that gray area. So anyways, getting back to the flip fund, some pretty interesting questions have come up that I thought I would just kind of walk through.
And this is sort of me workshopping how best to answer these on, on, on a call. But I think some of these answers are pretty good. And then one I wanted to dig into. In a little bit more detailed. So how much has committed so far? That's pretty. It's a pretty obvious one. Nobody wants to go first.
But everybody wants to get on a train that's moving. And I think that part of the effectiveness of this race so far is just like how fast and how quickly initial people committed, which caused more people to see that there's other people involved and interested and. So now we're sitting at a pretty decent number that I think we could go do something. I would like it to be closer to a million, frankly, it's going to make a lot of the things that we'll get into a little bit later easier. But the ideal for us is to hire dedicated resources to the company and to do that.
You need cashflow and to get cashflow for in our case, we have to buy it. So there's a very big difference operationally between buying something at half a million versus a million. So at a million, let's say we buy something that's making. I don't know, I'm just making this up 300,000 or 400,000 a year. There's enough cashflow there to pay for at least one dedicated.
General manager or one dedicated CEO and potentially one offshore engineer. I think that that is the ultimate setup that we're trying to get to. It pulls the operations off of our shoulders, where we can start to think a little bit more about strategy and stuff like that. And somebody can be in charge of somebody else outside of our team can be directly responsible for and in charge of.
Growth product execution, et cetera. So is this blind? Yeah. Or opportunistic it is we, because we don't know how much we're going to raise. We have a couple targets that are around like a million 1.2 million up in that higher. The higher threshold of the range that we're trying to raise for. However, if we only raise 500,000, we obviously can't buy those businesses. So we'll have to go back to the drawing board. So it is blinded as opportunistic. Mostly because we don't know where we're gonna land with these numbers, but we are kind of circling some deals that look interesting and just kind of starting to have initial conversations with people.
Roughly between the 500,000 to a million dollar range, just to see kind of where we land so that we're not starting from scratch the day that this fund closes. So where's the LPA. Well, first, what is an LPA? So limited partners agreement. This is, this is a very normal doc in a fund. Even though I'm calling this or branding this a flip fund. It's not really a fond, right? This is a multi-member LLC. People pile their money together into the multi-member LLC that multi-member LLC is managed by. So it's a manager managed LLC.
We will be as XO, the fund managers are this the LLC manager. But everybody is coming in on the same exact terms. LLCs don't have proper shares. They have like member, membership units. When, they put money into the fund,
They will get membership units in proportion to the amount that they put in. So the entity structure, Delaware, LLC operating out of Texas, everyone's investing on the same terms. Now we start to get into some more fun stuff. So what happens if the sale doesn't occur in 12 to 24 months? Another corollary is what if this is going so well that we don't want to sell it. Right. We still think that there's money on the table. Another one is, is you know, what, if we sell earlier than 12 to 24 months, the best answer really is that if people want out early, we'll bring in new members or have existing members buy the shares.
For the same MRR or the same multiple applied to the current MRR. So it's not like you're going to get some kind of multiple expansion by holding the shares internally and selling them to another. Party that wants to come in and take your shares.
I think everybody should just be kind of in it for the ride. It's a short duration. I don't know if anybody else that's actually running something like this flip fund, which is kind of what also part of why I think that the initial. Conversations have been more interesting than the last time we raised. It's just really difficult to find.
Anybody that wants to commit to some kind of, not necessarily fund, but something like this that has a lifetime of 12 to 24 months. I just think that that's really hard to find. If you do find something that is like that, please let me know. I'd love to take a look at it and see what it is. So if everything goes well, will we hire a broker to sell it? Or will we sell it ourselves? So selling it ourselves has been so far the most cost effective. For sure. We tried in the past to work with a broker and not to say anything bad about who we worked with. I think they were overall great, but ultimately we closed the deal ourself.
And it was fine. It was totally fine. So. If we can get a better deal with a broker, we'll try it with a broker. If we can try and get a deal on our own, we'll try and get a deal on our own. Next one. How are we going to bill hours? The short answer is we're not, we'll get into this in a little bit.
A later question, but basically in 12 to 24 months, we're not going to be like mailing $8 checks to people that's just stupid. We're going to be reinvesting everything back into growth in the way that we see fit. And if you're not cool with that, then this is not the right thing for you. So people will have read only access to the bank account. So of course, we're going to be fully transparent on where these expenses and costs, et cetera are all going.
But. Yeah, we're not going to be like mailing people, mailing people money. That was actually one of the big objections during the the last time we tried to raise, as people wanted cash distribution and. I totally get it right. You want to pay somebody else money and then pay you a dividend for more than you could get it from holding like a Johnson and Johnson stock. Right.
I totally get it a hundred percent. Get it. It's very common in real estate. It's not common here. For these, the size of the acquisitions we're doing it's it's yes, we do have 80%, 90% gross margins. But net of people costs. For these small acquisitions under 20, 30,000 of MRR, especially if you're staffing dedicated resources to them, there's just not that much money to go around. So I think that would be a distraction and frankly, a waste of time, especially given the short time horizon of the.
Flip fund. So if there are cases where the business throws off more cashflow than we can put to work. Again, kind of same answer. Like I admire your optimism, but yeah, I mean, okay, sure. If this thing ended up just like growing somehow without any more costs added to it, which by the way is like not how that works at all. And if it does, that's called like winning a lottery ticket. And I just don't, I don't play that game.
I don't, I don't believe in that. But if we did, you know, it would have regular tax implications, which also kind of sucks. So what percent of excess time is dedicated to this? This is where I'm going to dig in a little bit more. We have one engineer or a dedicated each portfolio company, and we rotate them on a 30 day basis. So occasionally like currently we kind of have more portfolio companies than engineers. We do have more portfolio companies than engineers. However, some of those are, are more important. You could kind of just stack, rank them by.
The amount that they're growing or they're the recurrent revenue and understand why we would neglect a smaller project. Something we bought for a really cheap that was maybe some, some, some experiment we were running versus something that we, we just bought, for example, like growth bar where it's, it's pretty important that we.
Start getting our heads around that and growing that. So that's kind of the simplest case. It starts to get a little more complicated when we have some contractors that come with the business. So in growth buyer's case one contractor came with the business, buy, came with it. I mean, he was the guy that built it and is still available to us to work on an hourly basis on the project, which is phenomenal.
It doesn't. Impact our engineering resources. Danny doesn't have to manage that person as much. Right. There is very little execution risk on a net new product feature or idea that we come up with. Given that this person has been working on this project. Since day one, right? They wrote it from scratch in this case was.
Which is just an absolutely lovely experience to be able to from day one, say, okay I can growth buyer's case. One of the very first things that we're doing is. Instead of forcing people to sign up with a credit card for a free trial. We're just going to remove that altogether and kind of see what happens to conversion and see if we can get more top of funnel.
So even though we currently have shared resources, it is our dream and our goal to start having dedicated resources on each portfolio company. And that's why I'm trying to push for. Closer to a million dollars on the res. Because we will actually be able to hire people. And it becomes less a question about where is EXOS time or my time and more a question of who is the right person to double this in 12 to 24 months. Giving them some upside.
Et cetera. For customer support, we have one full-time person and she handles inbound customer support tickets across the entire portfolio. So that is an ad hoc task. But at the end of the day, the goal is to always have zero on resolve tickets. She's awesome. So this is one of those areas where we can just loop her into the new acquisition.
There's definitely some of, a bit of a learning curve with any kind of new product and how to route those messages to the right engineer, et cetera. But I. I think broadly she's been doing a great job and we'll continue to do a great job on whatever we acquire. So again, growth bar came with a contractor, but that's not always going to be the case.
And especially when you start to think about what our strategy might be for a particular acquisition. So. In one case we might buy something and some of our best ones. Well, I have two examples of this sheet best we bought. We've done very little engineering work. It's grown like five X. We. Rarely spend any engineering resources still on it at all. The product is complete. It was complete when we bought it. It's complete. Now it's not going to do a thousand things. It does one thing really well and people like it and stick around and that thing's just been kind of growing and our efforts have been focused on growth on that company.
Screenshot API, for example, we've also nearly 10 X, that one, but when we bought it, I said, I think we need to rewrite this. And I rewrote it myself. This was one of our very first acquisite. It was actually our very first acquisition. So I just said, you know, whatever it takes, I will do the engineering on it and I rewrote it from scratch.
And once we rewrote it, now, it's sort of on that path where we actually spend. Almost zero hours per week. Doing any kind of engineering work on screenshot API, and that's been great again, it's another one of those single purpose applications. It kind of just does one thing and does one thing really well.
Now we start to get into a little bit more complex of a scenario where if I'm buying a company that is quite a bit larger, like I buy something for a million bucks it's doing, I don't know, 20, 30,000 a month. It's likely that the surface area of that product, not always true, but it's likely that the surface area of that product is slightly larger than she passed her screenshot API.
So we're kind of hamstrung by our shared resources when we start talking about bigger companies, but that's okay because we can. I actually take the revenue because there is actual revenue enough to hire somebody dedicated to work full time on. Engineering at least. And that is a wildly different.
Operating dynamic. Then when we have to rotate developers and catch somebody up on what this other developer did or, or, you know, whatever the case might be, but there's certainly some kind of drag on our productivity for that context, switching on the developer side. And it just makes much more sense to acquire somebody and staff, staff, somebody full-time.
Another strategy might be if we want to rewrite it, or if we don't want to rewrite it, right. We might find something that is ugly as all sin. When you look at it and say, this is a really great product and it might have like great other business attributes, like. You know, great retention or great growth, despite how fugly it is. And part of our thing might be to kind of rewrite the front end, maybe the back end, maybe both. And that would be kind of like our take is like, Hey, why don't we just bring this into at least.
2020, if not 2023, because it looks like it's 1986 over there. That might be part of our strategy. And then kind of the second part of that is when we go to sell it, it might be the case that an acquire doesn't want any more personnel. But I think it's more often the case that they would at the very least like access to the person that built the thing. And so.
That might be part of our plan to get some kind of multiple expansion on the sale is to have buy a company without any employees, staff at our . Properly lien, but, but maybe one GM and one. One individual developer and in the flip fund context, when we know we're going to sell the thing in a, in a.
In a specific time horizon, you know, you can be upfront with those people and they can often carve out or negotiate separately with the acquire for some kind of deal. That makes sense for them all kinds of good things can happen there. But I think it opens up our pool of potential buyers. And just gives them the option to have the people come with the business or not.
And that might just get us a little bit more of a multiple expansion than what we've been seeing. When we currently sell businesses. Also just the nature of buying something that's making 20 to 30,000 and selling it when it's making, you know, 40 to 60,000. That type of a buyer. You start to brush up against the very, very low end of the actual private equity market, which I don't see us as a part of. We're just too small.
It's probably still going to be too small for a strategic acquire. It just that's the reality. It's just too small and, and these guys would probably spend a million dollars just on head count costs, like direct meeting costs for them, just trying to get a deal done. So getting deals, sub $10 million done for a lot of these strategic acquires just doesn't make any sense at all.
So again, we will probably be selling to somebody like ourselves or, or another business owner. And the business is a bolt on to their existing business or the businesses an additional product line for an existing company. That's the most likely, that's the most likely buyer of, of whatever we acquire. And, and then flip. So what does doubling over 24 months actually look like? And I, I might actually get this tattooed because I think it's, it's a, it's a nice thing to be reminded of. It's roughly 3.2% month over month growth.
If you start out with a business that's making 20,000 a month in 24 months of 3.2% month over month growth, you'll end up at 40,000. And this of course is net of churn. So that's it. That's where we're at with the flip fund. If you are an accredited investor and want some more info on what's up with the flip fund, you can just email me or reply to the email or hit us up on notes. xo.capital or we have a form on Exodo capital, actually that a. You can submit and let us know, and we will add you to that list. Thanks for watching. See you next time.
