January 18, 2020
The Limitless SaaS Space with Einar @ TinySeed.com – EV Ep. 11

The Limitless SaaS Space with Einar @ TinySeed.com – EV Ep. 11


People are asking us, you know,
how many B2B SaaS businesses can there be in the world? My answer is always, you
know, 100 times as many as there is now. Why is that? Where do you see
the opportunity? Well, I think just
talk to someone who has a normal
job ask them, hey, how’s your day-to-day
interfacing with computers? Yeah. Your workflow, yeah. Yeah. And then they’ll just
start telling you how terrible this giant
bit of software they have. It doesn’t work, it doesn’t
do this, it’s awful. Or that they manage
everything in a spreadsheet. Spreadsheet, it’s all Excel,
or like fuck computers. Like that sort of thing. [MUSIC- THEME SONG] Ignition
sequence starts 3, 2, 1. [ROCKET SOUND] Interval set. Hi. What’s up, dude? [GROANS] Appreciate you coming on, man. Sure thing. So those who don’t know you– YC alum, sold your
company to Google, did another company,
exited that. Discretion Capital– Flower farmer. TinySeed. Flower firm owner. I own a tractor. Tractor. Two dogs. Chill. Where at, again? Santa Cruz mountains. Santa Cruz Mountains? Sounds super stressful. [LAUGHTER] It’s hard. Sounds hard. And start-uppy guy. Partners are involved in the
TinySeed fund with Rob Walling. Yeah. It’s me and Rob. Yeah. You and Rob. And then MicroConf fan. OG man, in the space. Yeah. I feel old. What do you see as kind of like
the fun stuff in the SaaS space that’s keeping you busy? What’s interesting to you? To me, the most
interesting thing is the number of
companies started. It’s always like, I was
always flabbergasted, particularly in the B2B space. It’s like I’m
always flabbergasted at how much money you
can make in tiny niches, and how much bad software
there is out there that people and companies are fixing. I mean, that’s essentially
a big part of that thesis with TinySeed is
like, there should be– like one of my friends runs
a kitchen countertop installer software company. And the first time I met him,
I was actually a little bit of an asshole as usual. Kitchen countertop installing–
so service business. No. No, no, no. You didn’t get it. You have to listen to
the whole sentence. Kitchen countertop
installer software. [LAUGHTER] I didn’t hear that last part. It’s software for kitchen
counter installers. And it’s a great business. Hi, by the way. And the first time I spoke to
him was actually at MicroConf. I was like, oh, yeah, yeah. Sure. That’s so nice. Whatever. Cool. Yeah, yeah, yeah. Million a year. It’s fun, whatever. Yeah. Sounds fun. And then I ran into him again
like a year or two later and I was like, hey,
are you still doing that kitchen installer? And he’s like, yeah, yeah, yeah. And then he told
me what it’s doing and I was suitably humbled. [LAUGHTER] Those are always good. I was like, damn–
like his partner drives a 911, put it that way. Yeah, yeah, yeah. So but I feel like that’s– people are asking us, you know,
how many B2B SaaS businesses can there be in the world? My answer is always, you
know, 100 times as many as there is now. Why is that? Where do you see
the opportunity? Well, I think just talk to
someone who has a normal job and ask them, hey, how’s
your day-to-day interfacing with computers? Yeah. Your workflow. Yeah. And then they’ll just
start telling you how terrible this giant bit
of software they have– it doesn’t work, it doesn’t
do this, it’s awful. Or that they manage
everything in a spreadsheet. Spreadsheet, it’s all Excel,
or like fuck computers. Like that sort of thing. Yeah. And so, yeah, I just think
there’s a huge amount there. And in a way that
like, you know, the big things like
Dropbox, HubSpot– sure, those are exciting
and they’re big. Trello. But there’s just like this–
it’s not even a long tail, like a fat tail of products
that come out there– Yeah. — I think will be– I’m sure. I’m sort of seeing it
now, it’ll be amazing. And then what about the
liquidity on the back end? You’re seeing this
with your finding. You do some due diligence
for a lot of PE firms. Yeah. Yeah, the M&A work
for Discretion. Yeah. Basically, what seems to have
been happening the last– eh, I’m going to say,
like five years– is that there is an awful lot
of institutional money moving downmarket. So I was at a private equity
sort of lead Gen conference actually, here in New York
City a year and a half ago, and someone did a slide,
and it was like, oh, the amount of dry powder as
in like committed capital to private equity but
not actually deployed– Real capital. — doubled. Like it doubled. What, in a 12-month period? No, the last five years. Five years? That’s– 2X? 2X. 2X as many SaaS companies? No. But what I mean is, these
guys are not historically buying SaaS companies. Oh, Ok. I’ve got it. And typically, there’d be
some and they come to me, like, hey, let me know
when there’s anything above 10 million revenue. Yeah. And now those same
guys are like, you know, we have this project,
maybe we’d look at a $2 million business. Yeah. And so there’s just an
awful lot of money– institutional money– realizing
that particularly a B2B SaaS model with a recurring revenue
is an amazing business model. It’s an annuity. I have private equity friends
and I tell them, oh, yeah. Like I’m selling this $2 million
B2B SaaS business and yeah, the gross margin’s
90%, and the net mar– the EBITDA is 30 or 40. And they just they
just can’t believe it. You know, they’re
buying and selling industrial manufacturing or pipe
bending businesses or whatever, and they actually
don’t believe me. Like I’ve been called a liar,
says no business is like that. I’m like no, look– and it’s all
recurring, by the way, as well. And so I think the smart money
on the institutional side is starting to realize what
you and me and this community has realized for a
long time, that this is an amazing business model. And so that’s why
like, 5, 10, years ago, if you had a $2
million B2B SaaS business– Good luck trying
to find a buyer. Yeah. It’s hard to sell and you
have maybe one or two buyers, you pick up three, maybe four
times seller discretionary. Yeah. Yeah, yeah. And now people are
talking revenue multiples. Yeah. Like it’s just across the board. And I think in part, that’s
the smart money like on the LP side and institutional
investors, and in part that’s
because of just leverage. Like you see it now. I was on the panel
with TIMIA Capital, and there’s SaaS
Capital, Lighter capital, all these people– well it’s the same
investors behind those guys. So they’re just getting
part of the whole stack. Right. The same investor bounds,
it’s the same risk profile. If anything, it’s a
little less risky– For sure. — to provide that kind of
leverage to buyout firms– buying the, fully
controlling the firms. Yeah. So that’s what’s happening. You think it’s less risk to
buy the asset than to finance. I think so, because then if
you’re providing leverage to a buyout fund, then
you’re the first line, right? If something goes
wrong, you liquidate and the person with the
leverage, they get paid first. They’re first paid. The equity guys get wiped
out, but the debt guys don’t. Yeah. So yeah. And how did what’s the
thesis for TinySeed? I mean the name, in some
ways, gives it away. But– [LAUGHTER] — how do you guys
think of that– [INTERPOSING VOICES] Well, either way. I mean, I have
investors who both hate, and some that love
this explanation. But the way that I
think about it is, it’s like YCombinator
for non-unicorns. Yeah. So when I did YC, like in ’09– and by then, it’d
become a thing. But like ’05 or 6, like
when YCombinator was getting started, when people like First
Round was getting started, there really wasn’t
a hole in the market. Like you couldn’t–
if you wanted to– That’s super angel-ish. Yeah. Yeah. Yeah. There was people
come along, and you had to basically
have a Harvard MBA, and like a big business
plan, and do all this stuff. And what YC did was, they
came along and they said, ah, we don’t need any of
that– please no MBAs. Just like, we’ll give a little
bit of money to three dudes and then get them to where
they can raise money. Yeah. And that really– I
mean, look at them now– they’re like 300 companies
a year or something crazy. Yeah. It’s just a machine. Exactly. And so we think that TinySeed
will fill that same market, but for companies that are
probably not going to IPO. Don’t require– yeah. Well they’re not going to IPO. So like I said, the kitchen
counter installer software– Yeah. — it’s not going to IPO. Why would it? That doesn’t make any sense. Yeah. It’s just a great
cash-flowing asset. But it can still be
an amazing business because of the nature of the
underlying business model. Yeah. And we think there are
ways for these companies now to get funded,
but it’s a little bit like what YC was like. It’s like there’s some
angels– some good, some bad. And there are some people are
able to get a hold of capital because they pretend like
they’re going to IPO, but they know in their
heart of hearts they’re not. Yeah. And so that’s
essentially our thesis, is, can we provide
like a platform where if you’re building this
kind of a B2B SaaS business but you don’t want to sell
your soul, work 100 hours, and try to shoot
for the moon, you’d be perfectly happy
to have a $20 million ARR business that
throws off, you know, 30% to 50% free cash-flow. That’s our– What’s the structure? Structure’s equity, basically. Yeah. We looked at– there’s some
other people in this space. But is there some level of
expectation for distributions? Yeah. So we basically say– the way we’ve done it is– we’re sort of– there
are other people in this space, like probably
most well known as Indie. Bryce Roberts– Yeah, that’s Bryce. — is sort of a
pioneer in this space. We think of them as
a little bit later stage than us,
although Bryce will kick my ass for saying that. But yeah, essentially
what we did was, we adopted very similar
terms to what Rand Fishkin did with SparkToro. We essentially say, OK,
we’ll take an equity piece and we’ll cap your salary
at some reasonable number like an engineer’s, like
in the closest large city. And we say, above that,
for you and the key execs, you have to kick out
dividends and we participate pro-rata on those dividends. Yeah. I mean that’s essentially– It’s a neat model, man. I’m just fascinated with
the different ways– I took a lot of time to
think about it, actually. Yeah. But it’s just cool
because there’s different options,
now, to founders like revenue-based
financing, de– you know, the Lighter Capitals of
the world, the TinySeed. You know, the VC seems to
have gotten a little bit more value-add than just coming in. And there’s the spray-and-pray
models of the 500 startups. I mean, it’s just neat to see
this over the last 10 years, really, the amount
of innovation on the financial instrumentation. Because in other
industries, this is just how the private equity
guys have been figuring out how to slice and dice. They’ve been doing
random stuff forever. Yeah. Essentially what
we’re trying to do is to say, OK, like
venture is great. If you’re trying to [INTERPOSING VOICES] Yeah. There’s just optionality
now for founders. Yeah. If you a Tesla, or
a SpaceX, or you’re trying to shoot for
the moon, great– there’s plenty of
that capital around. But if what you’re wanting
to do is, like I said, build a $20 million
SaaS business, then we think our model
is as good if not better. Yeah. Most people watching, 2
million, trying to get to 10, bootstrapped,
non-coastal cities– Utah, for some reason. I don’t know what’s in
the water in Utah, but– [LAUGHTER] –something. Yeah, there’s something– a lot
of really great founders there. And I just love the fact that
now, if they’re like, hey, we’ve got this engine,
we want to invest in it, we can do some debt financing. Yeah. And it’s fair, it’s
not ridiculous. There’s no– back in the day,
there was a handful of players that sometimes, their terms
were ridiculous with warrant coverages and– Warrant coverage,
and like personal– like you’d lose your
house if you crashed your business, which
is like, come on, what are we doing here? Yeah. There’s a risk assumed there. What kind of companies– I mean, you already mentioned
kind of these like non-sexy, won’t be covered on
Tech Crunch kind of– Yeah. — kind of fun, but where do
you think the opportunity lies in the different stack
of a corporate workflow? Like what’s the– I think it’s all over. I think– I didn’t even pretend. Like we had applications,
we stopped taking them for the first cohort,
now, middle of February, and I think we’ve gotten
nearly 900 applications. That’s amazing. And it was just
fascinating just looking through the applications
and be like, oh, really? You’re doing that much money and
that’s in that peculiar niche? And I wouldn’t pretend to say
like, oh, it should be finance, or it should be kitchen
countertop installers or whatever, but I
think it’s a wide set. But the way that I think
about portfolio construction and how we want to
position ourselves, I think we want a
mix of companies that are like my friend
Nathan Barry’s, which, like ConvertKits, which
is sort of a tech that can go across industries. I just had him on the show. He’s a good looking guy. What can I say? And then– Brings the viewers. Brings all the viewers– [INTERPOSING VOICES] –to the yard. He’s on the front page of
the [INAUDIBLE] magazine. I did, I embarrassed him. I was like, hey,
man, not bad, bro. There you go. There’s that, but we also like
the sort of more traditional– on the higher end, like this
is what private equity tends to buy, the holding companies
which are more like, I’m dominating this
particular niche– it becomes like the be-all and end-all. In part, because
it’s just easier. Like customer acquisitions
is easier, churns lower, and it’s harder to dislodge. And you’re not– you’re at a
slightly less risk of being or priced out of the market
by a super well-funded venture funded competitor. Yeah. So that’s– those are the
two things [INAUDIBLE].. Do you see anybody doing– because in the
traditional PE, kind of retail brick and mortar,
they do these roll-ups. Yeah. But have you seen anybody
in the SaaS space do that? And what kind of things
are they putting together to make it work? Is it shared customer
segments and then trying to cross-sell
to other solutions, or what are they buying? So certainly that,
I think, happens. I don’t think it happens
as much as I think it will. I just haven’t seen it done. I don’t know– I’ve seen it done a little bit. Typically, the sort of
big player in this space is like Constellation Software– For sure. And like [INAUDIBLE]
and whatever. I think I haven’t
seen too many of them, but interestingly, it’s not
necessarily like super-related. Like you do a
traditional roll-up it’s like I’m buying
dentists offices in Indiana Bunch of offices. And then just– Or like autobody shops
and window production. Yeah. For like a B2B
SaaS thing, I think the interesting thing is that
the back end is very similar. Everybody needs figuring
out paid acquisition, everybody needs to
figure out as SEO, everybody needs
to figure out HR– whatever. And everybody needs disaster
recovery, and backup, and blah, blah, blah. So back office can be shared. Right. And so what I have seen are
people buying companies. And so if you go below
like a million ARR– Yeah. — there are still
deals to be had. Like in terms of, you
don’t necessarily– Who’s buying? Individuals are
buying, a fair amount of these holding companies
are putting together– Really? They’re building their own teams
to manage the technical side and– They hire. A lot of them are
just contractors they have all over the
place, in some cases. In some cases, there’s a big
one out in– for some reason, it always seems to
be in San Antonio– Yeah. There’s something
live going on in — like there’s a bunch of the
old rec space guys are doing it. There’s a bunch of
these holding companies that their whole shtick is
like, we want to go and buy B2B SaaS businesses. We actually don’t care that
much about the industry, but we’re going to centralize,
like support centralize, actually, engineering
in some cases. And then just sort of
plop these things on. And if they can do
cross-sale, great, but they don’t actually need to. I think– They don’t care. No. I don’t know, man. I’m just such a
product guy that I just can’t understand how anything
great will continue to happen to the product from a product– you know what I mean? Like innovation. But think about private equity. You know, it’s not about this. You’re the guy who
wants to do the product thing for the next thing
and 10x it in 18 months. These guys are like,
if they keep it steady and improve the
margins slightly– yeah. Don’t break it. — they are– and particularly
if they have leverage on it, it’s cash flow. Like who do they care? Like the main thing
for some of these guys is, is it uncorrelated
to the general market? In which case, yay, I
can get $500 million to buy a fund to do it. That’s neat. And what do you think that a
lot of the founders, what’s going to draw them to
decide to take one– when the money all looks green– Sure. — what do you think the
value-adds are becoming important to the funds to have
to demonstrate to a founder who decides to– I mean, I think
how we positioned TinySeed is that it’s just new. It’s early stage, we’re
taking sub– usually sub- 20,000 MRR and we’re
specifically going after companies that are saying like– do not have a story
that includes, and then we IPO in two years. I think, at least
initially, our positioning will be unique from
that perspective. Yeah. I don’t think anyone else
is doing that right now. And the capital typically goes
to marketing, or engineering? Typically, no. Typically, it’s
actually so early stage. You know, it’s– like our sweet
spot’s like 2,500 to 10,000 MRR. And it’s actually, it’s funny– I was sharing the deck
with your boy Nathan and he was laughing
because his name is all over the pitch deck. Because essentially
what he did was– I don’t know whether he actually
shared that in the interview– but he was doing ConvertKit,
it was just aw, you know, this thing he launched. And it was– I mean,
I was a first– I was a customer back in the
day when it was doing nothing. It was awful. It was an awful product– it was terrible, unusable. Well he said he
bounced at like 2k. Yeah. Like 2, 3,000 for several years. Yeah. And then actually one of our– he’s been super helpful, one
of our mentors, Heaton Shaw– I told him, dude, either
shoot this in the head or make it the thing. Yeah. And he took some
capital, I think he had some money from his
info-product stuff, and said, all right, I’m going
make that the thing. And he went for my 3,000
MRR to 64,000 MRR– In a year. — in a year. And now he’s doing, I don’t
know, like a gazillion– Gazillionaire. — bazillion. You know, he’s got so
much money he’s like– Yeah. He’s building tiny houses. Yeah, exactly– he’s
still got his Airbnb. [LAUGHTER] Yeah. It’s good for him. He’s diversifying into real
estate, building tiny homes. [LAUGHTER] Exactly. So that’s sort of the thing. And what ended up happening,
then is, I pitched this to Rob, and Rob sort of was
like, dude, I’ve had this thing in my
notebook since like 2011, we should do a YC for this. And yeah, I think we kept seeing
this pattern over and over again. People in the community,
they’d build something, they’d launch something
because they saw a need. Either it was a custom
thing they’d already sold to a customer,
they’re like, oh, there’s got to be
lots of people like you. Or it’s like they’re
scratching their own itch and they build
it, and launch it, and it gets to a certain stage. But in most places, if
you’re making 3,000 MRR it’s not going to pay the rent. No, no. So then you have to be like,
OK, well, I’m going to go back and I’m going to do like a
three-month consulting gig. And then you come back
three months later and your business
is even shittier than it was and never
really goes anywhere. But if they take just
a little bit of money– either usually like friends
and family or just savings– if they can make it the main
thing for an extended period of time, then– It can become a thing. — it can take off. So our goal, essentially
is, we do a cohort, it’s a year long, fully
remote, and basically we’re simulating the fact that
one or two founders get to– Focus on it full time. — make enough money to
sort of do it for a year. And essentially you
provide the infrastructure from an acceleration
point of view to give them some thoughts
on positioning, [INAUDIBLE]?? Yeah. So we have a ludicrous amount
of stupidly talented mentors– Totally. — who are excited about helping
and that’s a big part of it. And we’ll do like two or
three in-person retreats to get people together, we’ll
do biweekly or weekly sort of mastermind-type calls. At least that’s the plan– I guess we’ll see. Still early days. It’s early days. Yeah. And do you think any of
the guys– like the Vistas, I mean they’re probably buying
such a later stage company– They are, typically. — that the CEO is really just
trying to get the best price and they don’t care so
much about how the asset or the company is treated
after acquisition. But I mean, how are they
competing for deals, or is it just purely who’s
going to pay the most? On the buy side– Yeah. — you mean, for later stage? Because I mean
there’s deal flow, and then there’s
if you get founder and you get optionality,
I think more and more– I don’t know. Personally, I
want– my last exit, I chose the acquire that I
felt was going to do right, best for the community
that we built, and the customers that we
built, and not fuck it up. Well I think it depends. To a degree it depends on
the founder personality. Some founders really
care about what happens with the community
thing and with their customers– Employees. — and employees. I think pretty much universally
people care about it. Is there– I forget the
name of the company, but I think he’s
an old Trilogy guy, and he buys companies and just
slices out the engineering. Did you hear about this? Yeah. It’s a guy out in Texas. Yeah. Another Texas guy. Another Texas guy. Yeah. And it was like
they essentially– I think he bought a
company in Portland, they had about 300 engineers,
they fire everybody. I mean that’s model–
he essentially optimized for profitability. And I’m just like, OK,
that’s a way to make money, it’s just who’s selling their
businesses to these guys. So I think the people– without sort of
badmouthing anyone– I think the people who– Oh, you can. [LAUGHTER] Nobody listening. Yeah, there’s nobody listening. Just between you and I. And that guy. Yeah. And it’s like– [INAUDIBLE] the microphones. It’s just I really like to
have this big black thing– Big phallic looking
thing in my face. Ooh, [INAUDIBLE] something. Anyway, I think those guys
are buying on the down side. So you have to
understand, yeah, you can get 3, 4, or 5X quite
easily, revenue-wise if you’re growing, and it’s on the
up, and there is a story. The second you have a year where
it’s like a downward slope, eh, the number of
buyers goes away. I think, in part,
that’s a leverage thing. The Lenders turn
around and say, eh, I’m not going to give
you as much leverage because you didn’t do that. So if you’re down
15, 10, 15%, even from a pretty healthy growth
rate the previous years, the number of buyers
fall away pretty quickly. Yeah. And I think those guys are– I wouldn’t exactly call
it distressed assets– but it’s certainly
like, you know– they don’t– like if you
go to someone like that, they don’t pay the
highest multiples. They’re more like their
whole shtick is like, OK, do we understand
the unit economics? You might be losing money. Today you’re losing money. Yeah. So the Portland
company you might be losing money with three
hundred engineers in Portland. Yeah. You know, the
Kombucha and things is expensive in
Portland, I hear. Yeah. But so you couldn’t sell
it on the EBIDTA multiple. So then it’s like, yeah, you
got it and they turn around and they can make
a profit from it. There’s only so many
people who can do that. Yeah. That are willing to buy
those kind of assets. Yeah. So my piece of advice is, have
a profitable company that’s growing what you
want to sell it. [LAUGHTER] Yeah. Crazy idea. Things are easier in
that case, you know. It’s a lot harder work to sell
a company that’s on the down, or [INAUDIBLE]. Yeah, try and
explain that story. It’s like, oh, we’ll turn
around like six months from now, but you should buy it before
we actually check [INAUDIBLE].. Yeah, before we have that thing. What do you see– I mean, you’ve obviously been
around a lot of strong founders that are scaling growing
companies– you know, the Nathans, at
ConvertKit, many others. What are you seeing them
do right to make sure that they continue to
accelerate that growth? I have no idea. [LAUGHTER] I have no idea. I think a high-growth
business like ConvertKit– no idea. I think, usually
what happens is– anecdotally, anyway,
when I talk to people– it’s like people try a
bunch of different things. They try paid
advertising, they try SEO, they type partnerships, they
try influencer marketing, they try referral mark–
you know, whatever they try. And then they find one
channel that works just a shit-ton better
than everything else and then they just throw
all their money at that. And you know, big companies
can be doing that. I used to do due diligence
work for private equity and you’d see like a 50 to
$100 million e-commerce company and they had one
thing that worked– it could be like Google Ads. Like, well, we care about– They made it work really well. Yeah. The CEO could literally be
like, all I care about is CPC. Like what is the CPC? And I was like– we fired that guy because
the CPC went to 2.9 from 2.1. And I’d ask him
questions like, yeah, but what is the actual
cost of acquisition here? [INTERPOSING VOICES] Like did it change? Did it improve? Maybe you’re spending
a little bit more money to convert a lot better. And he’s just
like, I don’t know, but CPC needs to be under 2.5. And that’s what
he’d been working, that’s how he got to the size
he did– he was just throwing money at this one channel. I don’t think that’s necessary
the best in the world, but that– But it is a good– I mean, the strategy of
not diluting your focus and doing 15 things. And if you find one, actually– Find one that works. You don’t know how long
it’s going to work, it could be like a blip,
but you might as well put $100 in, get $500 back. It’s good a good
business, I hear. Yeah. And then what
about the founders, like the TinySeed founders. What if they– I guess you have equity,
at some point there’s an understanding that they’ll
be doing distributions, but I guess you want them
to not do side projects, not do anything else? Yeah. Yeah. So there’s an understanding that
this is now your primary thing. This is a full time thing. Like the whole pitch is,
we give you the money so that you can do
it the full time. There are some people
who are coming to us and saying, like, yeah, I have
this thing and it’s nearly [INAUDIBLE]. Can I take some money
and then I still want to keep this
profitable side bu– it’s only 20 hours a week. And I’m like no. Doesn’t fit. No is the answer. So we’ve turned that
down so far, for sure. How many deals you guys do? We’re going to do 10 to 12
in the next couple of weeks and then we’ll do another
cohort this time next year, probably a similar size,
maybe a little bigger. Yeah. And then I’ll be on the streets
fundraising for fun, too. And do you think there’s
a lot of brokers out there that are part– like
do you think there’s traditional guys that used to
do bro– like are they getting into the SaaS space? Is that growing in regards
to the people on the– On the M&A side? On the sell side you mean? Yeah. On the sell side. Yeah. I think there’s more
people moving in. I mean, part of the reason why
discretion capital works is because we take
the kind of deals that a boutique like your Lazard
or whatever wouldn’t actually want to touch,
because they don’t want to do anything less than
$100 million enterprise value. It doesn’t make
any sense for them. Versus we can do like
sub-20 million, no problem. Partly because we
wrote the tech to not have to have five MBA
students full time, working and doing their thing. But I think there hasn’t been
too much qualified competition in the space so far,
but I mean, who knows? So you guys with TinySeed fund,
and then Discretion capital will also represent them
on a sell side transaction? We haven’t really decided,
I think we probably will. I think the sort of
structure we’ll do– at least we’ll give them– so one of my pet peeves
in this sort of space is, and this happens in
Silicon Valley a bit. It’s like you have a company
that maybe is venture funded, and it’s a good company
but it’s clearly not going to be a big
unicorn-type thing and so the VC just
wants to get rid of it because they don’t want to
go to the board meetings– it’s just a distraction
or whatever. Yeah, yeah yeah. Have that on the– yeah. And so they will say, I
just go to sell it that guy, or, you know, sell it
for– and they end up selling it for a
pittance, like 1X revenue. Versus, if they
came to us, we could turn around we could probably
get them 3 or 4X revenue. Which, that’s the
difference between, oh, I can afford to buy a
used car, or I can afford to buy a house in the Bay Area. Yeah. So that’s a big
difference, I think. And how do you think
founders should evaluate– I realize I’m asking a
butcher to answer what I should have for dinner, but– I think meat. Yeah. [LAUGHTER] — but how should founder
that has 80k MRR think about financing their growth with
these different options, like the equity versus the debt? I don’t know. 80K MRR would be bigger
than we’re currently doing with TinySeed, so you
should take my advice 100%. [LAUGHTER] It is now. I think it depends. I think I can see, I
can imagine scenarios where, say, the
TinySeed companies, they get to the
end of the year– But evaluate both–
like the other company mentioned earlier. You know, you’ve got those guys
that are doing later stage, taking equity, but then you
know, distribution or buyout their position if you
don’t want to sell, and then you’ve got like
the Lighter Capitals that’ll finance on MRR. How should they think
about those two options? I think it’s a
personality thing. You know, we run into
founders who are like– and I don’t know
why they apply to us or contact us just to tell us
that they don’t want our money, they would never sell anything. Yeah, yeah. They’re like, we
want to tell you no. We’re going to apply– it’s like, actually, I
don’t want your money. Yeah– well then,
why did you apply? I didn’t force you to
put your name in here. What happened? Yeah. And I think– some of
those people are like, I don’t want to give
you like an inch– like I don’t want to give
anything whatsoever back to my company. I just want to own it 100%. In which case, yeah, do that. Yeah. And if you’re over
a certain size– I think 80k, you’re
probably in an odd spot, but say you get 100– then yeah, Lighter
capital, TIMIA capital, it’s a good thing. I mean what I’d be wary
with some of them– and I’m not going
to name any names– is that some of
them, actually, make sure that they don’t actually
take personal guarantees. Like some of them do. Yeah. Somewhere in their terms
it’s like, you know– Yeah. In the fine print. Yeah. And there are some– like this is probably the reason
we end up with the equity, is it’s pretty straightforward. We own 8% or 12%
of your company, and done, versus
some of the more sort of finicky documents– Or financial engineering. You sort of have to work
out, like, oh, well, what happens in this case? And I haven’t done that, and
all of a sudden it’s like, whoa, how come you own
28% of my company? Why is this backed by
mortgage-backed securities? [LAUGHTER] Yeah, exactly. So you know, I think
that’s the thing to look at with
the actual thing, and actually understand what
things are you actually signing up for. Because in the
debt products, it’s not so nice, and not
so easy necessarily. And I think a lot of them are– and there are scenarios where– And are these– like some
of these debt products, like back in the
day I almost felt like some of these companies
were almost like LeadGen for the distressed asset buyers. [LAUGHTER] You know what I mean? It’s almost like they
didn’t want to get paid. Yeah. I don’t think that’s the case. I think– It’s a lot better today. Yeah. I think so, and I think, again,
that has to do with the fact that there’s just a lot
more money in the space. Yeah. More sophistication,
more optionality. Exactly. And I think a lot of them
are really good options. I think it’s like, play out in
your head, or with your CFO, or whatever, what happens in a
bunch of different scenarios. I think a lot of founders–
particular when they’ve had some success– are pretty convinced that things
are just going to go the way they have been. And I would at least
play out in Excel– Yeah– what does
success look like? — to say, what happens if
growth slows a little bit? Yeah. Or like maybe growth tapers off? Yeah. How does that play out? Because some of these firms
are dependent upon the growth of MRR or ARR. And if you’re not
growing as projected, they actually take a
substantially larger chunk, and they start
turning the screws. Clawbacks. Yeah. And it could get
to the point where they need to get, now,
because you are not as profitable,
growing as fast, they need to get paid back quicker,
which is a double whammy. That’s just going
to hurt you more. Initially, you thought,
oh, I’ll grow this and then, hey, I can add
some fuel to the fire. Yeah. Now it’s like,
oh, you know what? We’re not growing
as fast naturally, and now I have to
pay back quicker. Like there is some of that
things to be aware of. Yeah. Especially if you planned on
doing some kind of financing and– Yeah. — yeah, now you can’t do it. Right. Because you have debt
things, and you know, it closes some doors. But I think, in terms of
answering your question, I think that people– it’s a personality thing
more than anything else. Some people really want
to own 100% of the company or as much as they possibly
can– they want nothing. In which case, OK, then equity
is off the table for you, which is great. OK, you do that. And if you want
enough capital, you might have to personally
guarantee some stuff. Yeah. I mean, that’s just
how the world works. That’s the nature of business. Turns out nobody gives
you cash for free. Yeah. Sadly. What do you think of events like
some of these big SaaS events where everybody– you know, you
mentioned you weren’t going to a lot of events. We’re here in New
York at LTVConf, a lot of SaaS-y people– is it frothy in the
market right now for SaaS? Do you think the
correction is coming soon and people are going to
be a little bit more– less optimistic? Because the
valuation, it’s weird. Even on the owners side
that are selling, I mean, their expectations
are pretty high. I’m like, I’m not buying at that
price, you know what I mean? No, it’s crazy. You know, I’ve talked
to several people on the sort of
holding fund side, and they’re like,
yeah, when we started I thought we could do like 4 to
6X revenue, or 4 to 6X EBITDA. And I’m like, yeah, no– you can’t buy a $2 million SaaS
business for 4 to 6X EBITDA. Yeah. But do I think it’s frothy? No, I don’t
necessarily think so. I think it’s more
a realization of, this is– given how
churn works, given how the recurring revenue, the
value of those cash streams, I think that’s devalued. Yeah. But talking about
the events, I was– you know, I’m a big
fan of MicroConf, obviously, you know I quite
like LTV for the first time I’ve been here. Yeah, it’s been great. But I went to SaaStr, which is
only 25 minutes from my house. Somebody called it
the tech refugee for, what was it called? Because I guess the
year before last, everybody was eating
on the ground. Oh, oh, OK. I remember that. It was just like too
many people in a small– Was it Fyre Festival? Yeah, yeah– it was
like a Fyre Festival. [LAUGHTER] Fyre Festival was great. i don’t know about– [INTERPOSING VOICES] I watched the Fyre Festival
commentary– the documentary– and I was like, this this guy
could be in Silicon Valley. How bad does he want– I need some water. Exactly. Anyway. So I went to SaaStr, I think
SaaStr’s too big for me. I was– it was so big I
was wandering around like, what the hell’s going on here? And then I didn’t realize
that there was a downstairs until day two or something. And I went to the
downstairs one, and actually like this
was– you know, we’re in a reasonably-sized
room here– but it was, with
the small rooms, the talks were tactical
and helpful and stuff. Whereas the big rooms
it was like, it’s pretty clear it’s
like one sponsor was talking to another sponsor
about how great they were. And I was like, why is there 500
seats here to listen to this? Because I don’t need to know
that so-and-so Cloud was really facilitated the
transition to the cloud to Acme corp. Like what
the fuck do I care? And you know, I think that
was the main complaint. That, and like– this is sort
of a pet– well, not a peeve, I guess. Like you go to
SaaStr and there was a lot of companies paying
for booths and things but they weren’t
companies selling to other SaaS companies. So why were they there? Yeah. Like, what the
hell are you doing? I don’t know. Politics? I guess they’ve got to
spend their marketing budget on something. It was– that was weird to me. That is weird. Yeah, I mean that,
in some ways, it just shows how the
market is kind of– you know, people are excited
and they’re just doing stuff to stay busy but not measuring. Got to spend the
money somewhere. Yeah. No, I just I just
find it super fun. I get to talk to a lot of
bootstrap founders and the best ones, I feel, are just
heads-down executing, and when they come up for air
they’re looking for tactical stuff– Yeah, definitely. — to add to their quiver. Interesting question
that I like to ask is, as an investor,
and somebody that’s involved in kind of
the due diligence side, what are the skills that you
had to learn to kind of be good at what you do? I think it still remains to be
seen if I’m good at what I do. Yeah. [LAUGHTER] Early days. Early days. On the M&A side,
I think actually, a guy I have a lot of
respect for is Justin Kahn. You know– Yeah, I know Justin well. Yeah. He’s the guy, I
remember him from– Justin TV. –he was walking around
with his [INAUDIBLE].. Yeah, in the atrium. Exactly. [INAUDIBLE] VC space? Which is like,
yeah lawyer space. Which is like– Lawyer, yes. Yeah. And it’s like essentially,
what he does with the atrium as a play is, he’ll say,
there’s a lot of stuff here that’s busy work, and then we
can sort of have tech in place in order to do that. And it was– looking
at that is what made me start, once people
came out of the woodwork and were like, hey, you know
private equity and things. I’ve got this business,
can you look around for me? It was that which sort
of influenced my decision to start building like
the tech part of that. And I think we have– and
what ended up happening was, I built a system that
essentially says, OK, you have this company to– you know, does X,Y, Z– who should buy it? I mean, that’s
essentially the problem of M&A, who would
pay the most for it. Like if you can– The strategic buyer. No, not even necessarily that. But just, if you have a
company that you want to sell, if you as an investment
bank can guarantee that you can find the person
willing to pay the most, then you’re a great
investment banker. Yeah. That’s your job. So how do you do that? And traditionally,
you would do that by just hiring a bunch of MBAs
as associates, giving them access to the exactly
the same databases– That everybody else has. — to spend three weeks,
and just go through, and just [INAUDIBLE]. Yeah. So I wrote some tech
that essentially just– without going into too much
detail– essentially says, I can figure out which private
equity family offices– strategic acquirers
to a degree– have active portfolio companies
where this specific company would be a good fit. And this is the person who
did the [INAUDIBLE] deal, this is his name. Which sounds like it
could be valuable. Well, so here’s the thing– the funny thing is, I was like,
oh, this should be a thing. Like I should go– so I called
a bunch of sort of boutique investment guys,
and they’re like, yeah, I don’t know that
I would pay– you know, maybe I’d pay $200
a month for this. And I was like, this is far
too valuable for $200 a month. Yeah, yeah , yeah. And I actually
don’t know how well it works outside of my subfield
of tech-enabled services [INAUDIBLE] SaaS. I don’t know if it would work
for like, plumber roll-ups in the Midwest or something. Yeah. But for what you do– It works pretty well. It means I don’t have to
hire and pay three MBAs who have giant student loans. Yeah. The tech can take care of it. Einar, where can
people find you online? Check out TinySeed.com
or Discretion Capital, or I’m extremely quiet
on [email protected] Cool. So tweet you at your Twitter? Do it. Awesome. Really appreciate you
being on the show. All right. Thank you. Thanks so much. Boom! Boom! [MUSIC PLAYING] Thanks for watching this
episode of Escape Velocity. Be sure to like and
subscribe, and leave a comment with your biggest insight
from our conversation. Be sure and check
out the next episode.

9 thoughts on “The Limitless SaaS Space with Einar @ TinySeed.com – EV Ep. 11

  1. Escape Velocity – Episode 11 – Einar Vollset Partner @ TinySeed.com on the limitless scope of SaaS and why you should always question the world.

  2. Feels encouraging. I've been tapping into the B2B SaaS space for a while now. Really close to going live with my first product. Very exciting!

  3. Thanks for another valuable piece of content Dan! Anyone in business can learn a lot from your videos, they are always packed with specific practical advice and how to. It's nice to hear about firms like TinySeed. For the often publicized moonshot companies there are many more profitable businesses that are built on vision, late nights and figuring it out. As you have said, there are many advantages in running on cashflow versus funding if you are willing to deal with the constant challenge. TinySeed gives an option many of these small profitable companies don't know about. I'll be learning more about them.

  4. Thumbs up Dan Martell for this awesome interview! We are looking forward to hearing more about SaaS! Big thanks from the domino.vote team! ๐Ÿ‘๐Ÿ‘๐Ÿ‘

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