27
34 Comments

I've bought 6 VC-funded startups with my own money. AMA

Have you ever wondered what happens to VC-funded companies after they don't raise a second or third round? I spent years working with nearly 100 VC-backed startups looking for those that had built great tech/community but were having a hard time being supported by venture going forward. Among them include Clarity.fm, Launchrock, Zirtual.com and others. These are all part of Startups.com. Happy to share the details of how acquisitions are structured at this stage, how we value them, and how this strategy could work for you as a buyer or a seller.

  1. 3

    This is so cool, thanks for posting. I toyed around with the idea of raising a Search Fund in the past, but most of them target small/MM businesses in low growth, low risk industries and then buy, rollup, buy, rollup, etc. I'm just not interested in that.

    Sounds like you've found a way to make something similar to a Search Fund model work for distressed software companies, which is something I've never heard of anyone doing.

    Few questions:

    1. What is the number 1 thing you look for in a potential acquisition? It sounds like synergies/similarities in the userbases to the companies you already own drive some of that. As in, cross selling can buy time to figure out new growth strategies.
    2. What's the hardest part of convincing a CEO/Board to sell?
    3. Are you able to lever some of the acquisitions if they're cashflow positive? Not sure if that's possible with asset purchases, I've never dealt with those.
    4. What is the most common problem you need to solve post-acquisition, other than hiring new people?

    Don't feel obligated to answer all of these haha. Cheers!!

    1. 3

      Diego, if you took the time in your day to write all of these questions I'll certainly take the time to answer them ;)

      1. Where you have to focus this is making sure all the acquired businesses have an accretive effect. Each business you acquire has to bring in users that will buy the other products you acquired. Otherwise, you're just randomly tying boats together - it doesn't scale. BTW, even having all of the same user bases doesn't guarantee the cross sale, but it at least points you in that direction.

      2. We looked at over 100 companies so I had a lot of conversations with a lot of Founders. If you knew me well you'd know that I am 100% Founder-focused, through and through. I would explain to Founders "I don't care if you actually sell to me (there are plenty of companies to buy) but I want you to understand how this process works, no matter what. That involves how valuations work, how to present this to your investors, how to make sure you don't personally get screwed, et al. I'm going to walk you through this even if you sell to someone else." And in many cases I did. It wasn't a sales tactic - that's just who I am. And many Founders took comfort in that, as they should.

      3. You can do some cash flow arbitrage but you really have to have a "mothership" of a business that can help offset the early losses. Our is Startups.com where we have a $29/mo subscription to our education, community and software. It pays the bills.

      4. The most common problem you need to solve for post acquisition is actually making sure you have enough internal resources to run the business at least as well as the folks did that were selling it. It sounds way easier than it is. When you buy one business it's a given, when you buy 6 like we did - not so much. This is so damn easy to overlook. We've been at it 9 years and we're just getting the hang of it!

      1. 1

        Wil, thank you for such a thorough and enlightening set of answers. What really resonated with me was your 100% founder focus during acquisition. It sounds like that's a natural trait of yours, but I can imagine that even with plenty of deal flow and a successful 'mothership' as a backstop, most people would have trouble putting the interests of the founder first throughout the process. Maybe that's the trick! Thanks again.

        1. 2

          In my mind it's more about "life is too short". No acquisition is going to make me feel good if the Founder feels awful.

          1. 1

            100%. Found your email in another comment - I hope you don't mind if I reach out!

  2. 3

    So when you buy them are any of them cash-flow positive or are you grabbing them just as the runway runs out? DO you prove the traditional VC world wrong to a high degree by coming in? I would imagine that the companies you buy need to cook a bit longer so how do you deal with the lingering notion that others think it would be throwing good money after bad? DO you buy them out entirely? How do you deal with the existing founders and staff, are they demoralized at that point, or is it relief?

    1. 2

      All great questions! Let me try to pick off a few and you let me know where to follow up more.

      1. Some have cash flow, but mostly they were accretive to our thesis of helping startups grow. As it happens, as we bundled these products together, they fed each other in users and revenue, so while one product may not have a ton of revenue, it may have generated a lot of traffic (users) so it boosted another. They weren't random buys.

      2. We buy them out entirely and we don't bring any of the staff/Founders with us. We are very up front about that and really the Founders appreciate it a ton. We don't believe in indentured Founders.

  3. 2

    Hey Wil!

    Thanks for doing this AMA.

    Couple questions:

    1. As someone who has worked with many VC backed companies and then purchasing them, where did you see they went wrong (focus on development vs building customer base?) that got them to the spot they got to and willing to sell?
    2. What will you do to improve those businesses? (Sorry vague as every business is different but perhaps a macro overview)
    3. To circle back to your question from your post, how do you evaluate a value of a business?

    Btw, if you’ve got any free time, would love to have you as a guest on my podcast to talk about these topics and startups.com more

    1. 2

      Great questions, let me answer in order -

      1. What you find is that at some point not every investment take a company far enough to warrant follow-on investment. It doesn't necessarily mean it's not a good company, it just didn't get far along in the race for X amount of investment in Y time. It happens. But the net effect is these companies wind up in this "dead zone" where they don't have enough revenue to grow but also can't raise money. In some cases the product is actually fantastic.

      2. Sometimes all we need to do to improve it is add the right infrastructure. We have 200 people at Startups.com and so every department is paid for. So if your business is struggling to keep up with $50k/mo of payroll, none of that payroll exists (it's paid for) in our business so that's $50k of investable profit.

      3. When a company is struggling to pay it's own bills, it just can't focus on growth. Kinda hard to build when you're trying to eat. So we can just fast forward to basically what the company would have been doing had it taken on additional capital.

      4. Re: Podcast - Any time ;) I'm [email protected] so I'm easy to find.

      1. 1

        Appreciate the detailed follow up and all the answers - really appreciate it!

        Just sent you an email to follow up to the podcast, look forward to your reply!

  4. 2

    Since this is mostly a bootstrapped community, I'll ask the obvious question: Have you ever bought a bootstrapped business? – and if so, can you give some insight into how that deal looked and went down?

    1. 3

      Edward - we're a bootstrapped business too!

      A great structure that I like to look at for buying bootstrapped businesses looks like this -

      Your business makes $5k per month in total revenue. That's not quite enough for you to cover expenses and pay yourself, but it's damn close. I will guarantee you $5k per month for the next X years, no matter what. You can go get a job, build your next startup, whatever (most people get a job) but you know you'll have this check every month.

      Having $5k, no expenses AND another source of income is a huge bonus for folks.

      For us, the $5k pays for itself with income, but we obviously make $0 on that alone. For this to work we have to grow the business (which is more than you did, so it's not taking from you) in order to generate our own profit. We buy a business with $0 out of pocket and you guarantee an income with zero liability.

      1. 1

        Thanks for answering my question! That's actually a really interesting model for buying a business, I can see the upside for both parties. Is this a common practice? (sorry my m&a knowledge is very limited). Just need to get to $5k MRR now 😅

  5. 2

    Can you tell us the story you think is the most interesting from these 6 purchases?
    I don’t have a specific question in mind, but would love to know how the process went from A to closing.

    1. 5

      Oh man. Without question the most interesting story was when we bought Zirtual.com.

      Zirtual, which is an incredible company, had run out of money overnight. It's a long story, but suffice to say no one saw it coming (broken bridge round). I got a call on a Sunday night about what had happened and agreed to purchase the business at 5 a.m. the next morning - sight unseen - with 450 employees.

      A week prior I had signed up to be a customer with no connection to the business at all, I just thought that having a virtual assistant for a few hundred dollars would make a ton of sense as a Founder.

      Because of the nature of the deal, which would take months to finalize, we had basically restart the entire company, because we technically didn't own the asset for what would be a few months, so we had to let 2,000 paying clients go (8-figure-revenue) and have them hire our 450 people directly so that we could make sure no one was without a job. It was a hell of a ride. Fortunately it worked out and we were able to "save" the business, but holy hell!

      So much to unpack there so let me know if you have questions.

      1. 2

        Waiting for your war stories in blog post format 😄

        1. 1

          I'm actually a bit shy about posting too much detail because my "war story" is someone else's failure in some cases. I fear that if I say the wrong thing or present it the wrong way, I'm ripping off a scab that they need to heal. That could be anyone from the Founder to staff to investors.

      2. 1

        I love it how you said before that you usually buy out failed startups entirely and yet in this case you managed to save work for 450 people. That's sounds like an awesome move!

        1. 3

          Right before we agreed to buy Zirtual and "save" it, I woke up my wife at like 5 a.m. and said "Hey, I'm going to do something really stupid, and we're about to be poorer." She was half asleep and was like "mmm.. sounds good honey." I found the key to making big decisions like this is to talk to decision-makers while they are sleeping ;)

  6. 2

    Congrats! I'm intrigued as to how deals are structured. Also, what are the main drivers that you look for in a new deal besides the profitable aspect.

    1. 3

      At a high level, the deals are structured as asset purchases, which a lot of people don't entirely understand. An Asset Purchase is designed to purchase just the items you want from an entity without buying the entity itself. It's no different than if your company were to sell me a laptop - I'm not buying the company - just an asset.

      This allows us to avoid having to upend the Cap Table (the entire company remains) or any lingering issues that may exist at that specific entity. That way whatever consideration is paid, the Founders and investors can continue with whatever provisions they had in place (preferences et al) which saves a mountain of time and cost in the deal.

  7. 1

    Thanks for sharing Wil.

    It's a concept a few business friends and I are toying with here in the UK / Europe... but specifically focussing on buying / leveraging D2C brands. We'd provide the capital, top team members, growth marketing, finances etc.. which we could leverage between them and keep the founders in place.

    Would love some advice on how to start this from scratch and any pitfalls to avoid...

    1. 1

      I could provide a ton of specific advice if you had some things that you'd like to explore.

      1. 1

        Could definitely give you some concrete examples etc... but can't really use their names in a public forum...

  8. 1

    Thanks for sharing Wil! Speaking of acquisitions.. Would you be interested in a resume creation application which helped the creation of 650,000+ resumes from over 200 countries? I redesigned the whole UX, and people love it.

    I couldn't execute the business model though, hence looking for a potential exit.

    https://thecvapp.com

    [email protected]

    1. 1

      I appreciate the offer but we're mostly focusing on the products that we currently have.

  9. 1

    I saw one of your companies over on MicroAcquire -- was that one just not working out with the rest of your portfolio or are you just trying to get a measure of its value?

  10. 1

    Wow, such a good investing

  11. 1

    Different kind of question but here we go: what made you sign up to Indiehackers a year ago but never post anything? Considering the vast amount of experience you must have having done all these deals and spawned good revenue from the companies you acquired?

    1. 2

      First off, big IH fan. I got introduced to Courtland by a friend a few years ago and never really followed up and regretted it. I absolutely love helping Founders but never found the time to get back here. I've been building startups for 30 years and spend 14 hours a day helping Founders so if you need help, throw up the Bat signal and I'm always down - [email protected]. By this point I've seen pretty much anything you can imagine and I'm always available to help you.

      1. 1

        Thank you for your answer

  12. 1

    Hey @wilschroter, this is awesome! I'm wondering how you end up integrating the assets after you've acquired them. I know you mentioned everything rolls up as part of Startups.com, but do you try to find an operator for them to run under Startups.com, or totally dissolve them as independent organizations and pull in their functions? In other answers, you mentioned the sale is solely for the assets (not the people in the company), so how do you go about the handover?

    1. 1

      We actually run them a products, not as "companies", so the whole team works on the same stuff. In some cases the products are larger so they have a bit more reporting infrastructure but he dev, support, creative, marketing teams all work on all the products in unison. That's particularly important because they feed each other so silo'ing the products doesn't really help. I'm responsible for product roadmaps for the most part so it also helps to have some unification there. Happy to expand that a bit more if you'd like.

Trending on Indie Hackers
Just crossed $2000 on my first indie app. Here’s what I’ve learnt 26 comments I bootstrapped a cohort-based writing course to 1,400 members in 6 months (while working full-time). AMA! 17 comments Seeking feedback on MVP. Is value prop obvious? 15 comments The Best Collection of 99+ Tools for Product/UI/UX Designer, Maker & Indie Hackers 7 comments Download Product Hunt Upvoters List in 2 Mins 7 comments Roast My Idea: Widget to track order progress 4 comments