Episode Transcript
Well though, it's Andrew from XO capital. And this week I wanted to talk about acquisition entrepreneurship. It's starting to become more popular, especially with one particular company coming to rise, acquisition.com. I'm sorry. That's I'm on an Alex or mosey kick. I was talking about acquire.com used to be micro acquire.com. Now it's just acquire.com. They're just totally dominated the Marketplace for buying and selling businesses. There were a lot of other marketplaces in the past, frankly, they were all pretty ugly and hard to use, or it was opaque and you had to go through a broker and then there were all these confusing things, but. acquire.com. It's just made it really easy to put a company up for sale and then have prospective buyers take a look at it and connect those two parties. And that's the entire business. It's it's. It's wonderful. It's great. For, for myself. You know, I feel like there are many paths to Rome. I didn't really think that I would ever go into acquisition entrepreneurship. I have done a venture thing before I've done a bootstrap thing before. And you know, I think myself and a few others are starting to come to the conclusion that it's pretty awesome if you can buy. And de-risk a little bit just by, by a business that already has some level of product, some number of customers in some channel that's already working. And typically those are the three things that your. Buying when you, when you acquire a company. So what is acquisition entrepreneurship? If you're a reader here, you probably already know what it is, but it's the practice of acquiring an existing business to grow and scale rather than starting a business from scratch. Two primary reasons are you would buy overbuilding. I mean there, there, there are a ton, but mostly it's it's reduced risk and a quicker path to profitability or in this case, I'll say at least revenue. Cause you should be buying revenue.
So one of my blind spots personally is I'm a developer, so I can build whatever product we buy given some amount of time and some amount of resources or, or, you know, if there's a part of the application, I don't know. Right. You could hire a contractor, but generally speaking. The product itself can be built. I could build a product. That's not really what I'm interested in by the part that I'm interested in buying and struggle with personally is, is this a product the market wants? Right? My whole history is around being a software engineer. So I have never been in, for example, the real estate industry.
Right. Or been in the legal industry. Right. I don't know those people. I don't know those problems. So. The, the delusion that I fall into sometimes is that, oh, I imagine this market will have this problem. And for the past, I don't know, 10 years, I built a ton of stuff that falls flat on its face because I genuinely don't understand the problem that I'm trying to solve. I just thought of an idea. And you know, of course I've done a hundred iterations of that, where you're trying to solve your own problem.
Turns out not everyone's like you. Right. And so you don't get any customers that way easy that way either. Either. So. My favorite thing about buying a company or at least a product. Is that there's some level of product market fit already. I'm not saying these companies have achieved product market fit. I have another post on that where I kind of go through each of our portfolio companies at the time and go through which ones I think have product market fit and which ones don't. So sometimes they do have product market fit. A lot of times they don't, I would think it would be safe to assume that they do not. However, if you have for a product led growth type company or a freemium type company, tens of customers that are already paying with, and they've been there for three, four or five months, and you have some kind of sense of an LTV, some kind of sense of chat support about what people are saying, the product needs.
If they like it, you can take a look at all the usage, all of these things add up to wildly de-risking. my time investment on a new idea. And occasionally there will be somebody that is farther along on an idea that I like or have had, or have wanted to build. And I can just buy that and I can save all the time. It would've taken me to. Build the MVP start trying to get traction in the market. Right? Because even if you do have a product that let's say is at feature parody with some competitor, who's doing $10 million a year. You know, I have some confidence now that I could say that. Okay, well, I could go get a certain number of customers, but the reality is that it's, it's really difficult. So even if you do have that product, that's done, it's that, that, that has almost nothing to do with the business itself. Other than you have a product that's complete, but you still need to go get traffic.
You still need to go get customers. There's still going to be all kinds of nuance about especially if you just kind of like naively cloned, somebody else's app, there's all kinds of nuance around like why this button is here or, you know, the 80% of stuff that. You don't see that's all around like a particular workflow that if you're going into an industry that you're not a part of, you probably don't understand. It looks foreign and funky and you think to yourself, oh, I could simplify this, but actually the customer, that's not what they want for whatever reason. So there's a ton of reasons that I've just come to the conclusion that that buying revenue is awesome. Buying companies is an awesome way to get into entrepreneurship. And you just get a little bit of a headstart. So I'm not saying that it's, it's , easier, or it's a faster path to wealth by any means, but. Broadly when you're starting a company from scratch, right? You got to go build the product, validate the market, go get the customers, et cetera, all the operations and all of those failure points along the way can take anywhere from, you know, A month to like three years, right. And when I buy the company, I just get to delete all of that time. I start with some product, I start with some kind of channel that's working. I start with some customers. And so from there, I can just say, okay you know, at this point in, in we've done 10 of these acquisitions, what is this company most similar to?
What are these channels that we know we can grow in? And I can just sort of like hit the ground running as soon as I buy the thing.
So I also have never done this before, but we have enough realized gains that it makes somewhat sense to go through and talk about our IRR and our mic. If you don't know what. Our R or mic mic is multiple on invested capital. It basically just takes your total cash inflow. So like all the money that's come in from, like, while you've owned the product divided by the initial investment, it's a relatively like naive score, but it'll just give you a rough sense of like, is this a good investment or is this investment doing good?
The thing that it doesn't take into account is time. And that's where IRR comes in. It's a little bit more complicated of a metric to calculate, but it takes into it takes into account the amount of time that you've held the investment. So, I mean, the, the intuition on IRR is like, If you double, let's say you Dell, you put in a hundred thousand into an investment and you get $200,000 back. If you get that $200,000 back in, let's say one year, that's an awesome investment. If you get that same investment back over a hundred years, that's a god-awful investment. And so I R is trying to capture the time or the opportunity costs, et cetera, of holding on or that particular investment. So going back into our results are IRR for the four companies that we've exited is around 90%, which is really high, but that's because we haven't done this a lot and it hasn't been that long. So I want to look at this number over a 20 year time horizon, not a three-year time horizon. And of course, you know, the, the, a few of the initial products that we bought screenshot sheet best. Even analytics was relatively early on. We haven't sold those yet. So we don't have any real reason to, to be honest, we bought them for really cheap and they've grown quite a bit and they're still growing and. I just, I just don't see a real reason to, to sell those, but again, they're, they're just cash flowing really well. So, you know, the funky part is you can optimize for IRR and you can optimize, or you can optimize for mic, but for us, for our internal portfolio where we don't have any investment in any investors so this would be outside of the flip fund. We're not, I mean, we're looking at the IRR and stuff like that, but we're not going to go and sell a cash flowing investment, just, just to get like a higher IRR number that just doesn't make sense for us. Whereas. Sometimes for a fund. You might do that because that's the number that year investors really care about. And so you might optimize slightly differently there. So for our realized gains, basically we put in 228,000 for those initial four realized gain companies that we've we've sold. We got back 448,000.
So roughly 220,000 of profit we made from buying and then selling those companies that 220,000. Basically paid for. All the other acquisitions in the portfolio up to growth bar. So right before we bought growth bar, we owned a hundred percent of all the portfolio companies with no debt. And we basically bought them with the profits from flipping or selling the other businesses. So we're sort of playing with house money is how I look at it. So, and you know, another interesting crossing point is when the business has produced more revenue than you paid for the business now, and even better metric would be, you know, the profit the business has produced relative to the purchase price. But, you know, tracking it from a revenue perspective is, is is still nice.
So now that we have bought growth bar and we did put some seller financing debt on it. Now, we're now we're kind of running slightly in the red, but on the margin screenshot sheep as called DM workflow, all of those companies cashflow more than we paid them while we owned them, which is pretty awesome. That's how we're able to support a team. That's how we're able to you know, You know, sort of cell finance growth. So the main point is Exxon now does about 40,000 of recurring revenue. Would it in theory, be nicer if. We just had one product, one team, one focus, and we were just thinking about one company. Absolutely. But is it really difficult to go and build a $40,000 Mr. Business? Yes, it's been very difficult for me and acquiring it on a relative basis has been more expensive dollars wise, but I don't know that I would have been able to achieve this outcome again, been trying for quite a long time.
It has just historically been really difficult to. Build from scratch a SAS company that does $40,000 in MRR. There's just a, it's just really difficult to do. Despite what Twitter, LinkedIn. Might have you believe so that's really it. I just wanted to advocate really briefly for acquisition entrepreneurship. If you're not familiar with it, you should get familiar with it.
It was a gentlemen named Walker Walker. Deibel I'm probably pronouncing that incorrectly. He has a great book called buy then build. If you haven't really thought about this before, and you've been struggling to start a SAS from scratch. This is your, this is your sign to go check out what it looks like to just go acquire something and feel that out and see if that works better for you. It did for me.
