Portfolio Update Update: February-March '23

We decided to bundle February and March for our first portfolio update because there was a lot of boring stuff we had to take care of. We’d like to keep these updates on a monthly cadence from now on though. Let’s dive into it.

Portfolio status #

We closed on StandupBot, our first acquisition, right at the beginning of February. Along with the asset, we also got a mix of excitement and anxiety for free: we were now officially in business, with a lot of work ahead of us.

Through these first couple of months the business is flat on a MRR basis, due to churn being higher than our target (and its TTM average) since late Q4 2022. We knew that going in. Some of it is macro-related and some of it is product-related, and it’s our top short term priority.

We’re averaging just over 2% monthly net cash-on-cash returns on our investment. It’s still modest for this asset class^[1], but we were willing to go with a suboptimal valuation for our first deal because it was small, we’re playing a long game, and we really wanted to get started. We added yearly plans in March to improve the cashflow performance and we haven’t actively promoted them yet, although some customers have upgraded on their own (completely unprompted), which is great to see.

What we’ve been working on #

Although the transition went really smoothly and we haven’t needed much support from the former owners, we quickly realized that before executing on our product growth plan there was a ton of housekeeping that we couldn’t avoid. It took us nearly 7 weeks to get it done, although that is counting some unexpected sick time off^[2].

The biggest “gotcha” moment was realizing that you can’t just change a Stripe account’s company, if you’re operating from a different country than the one the account was initially set up in. The business was running from a US-based Stripe account and we don’t have an entity there (yet). You can request Stripe for a secure customer and credit card data transfer to another account in your country, but they don’t take care of migrating products, prices, or subscriptions. You have to do that yourself.

We wanted to use this opportunity to move to a Merchant of Record like Paddle to get out-of-the-box tax compliance and simplify our admin operations. We reached out to their support team to see if they could do the customer and subscription migration for us, but by their answer it seems they only do that for larger businesses. Their proposal was for us to have all existing customers re-subscribe through their platform. All the work required to change the billing code to a different platform was already giving us pause — asking everyone to move made it a non-starter. Thus, we stuck with Stripe.

We had to create a data migration script that re-created products, prices and subscriptions (with the same billing cycles), under our new Portugal-based account. That took time, but at least we can reuse it on future acquisitions.

Next up was updating the Stripe integration to use their Tax, Checkout and Customer Portal products so that we didn’t have to implement any VAT calculation logic on our end. Remitting taxes is still on us (unlike with a MoR), but at least we get calculation and other VAT-related data requirements out of our hands.

The final bit of housekeeping we had to do was updating the app’s Slack marketplace information. It is very outdated and needs to reflect the app’s new ownership. I don’t want to get too much into the weeds here, but due to how Slack’s publishing system works, this also meant we had to update some parts of our integration to use more recent APIs in order to get the updated listing approved. Another big chunk of time here. We’re going through the review process and changes aren’t yet live, but we should get there over the next few days.

While all of this was going on, we also:

• Started tracking website traffic. The previous owners didn’t use this data (the site was using an old Google Analytics tracking code nobody had access to) and so we had no traffic history. We’re big fans of privacy-minded tools, and set up the site with Fathom Analytics ^[3], which is what we’re using on all our websites.
• Launched a new website with a fresh look. The site hadn’t been updated in years, and it showed. The goal here was to increase trust when people land on the website and improve conversions. Unfortunately, we don’t have a good way to validate whether this change had any effect (per above: no historical traffic or conversion data). It wasn’t a huge initiative though, so we were fine going with our guts on this one. We needed a more modern starting point for what we want to do with the site anyways.
• Launched annual plans. As mentioned above, we set up the billing portal to now offer annual plans (with 2 months free). We haven’t promoted them yet to existing customers, but obviously plan to. We’ll see how that goes.

And that brings us to the end of March. On future acquisitions we’ll definitely err on the side of overestimating the amount of ancillary and cleanup work needed to take over a product.

Looking ahead #

It’s been a mix of learning and necessary-but-not-growth-related work so far, so it’s only natural that the product’s baseline trends haven’t changed. We hope to start improving them as we get to focus on growth going forward.

We’re also still looking to acquire a couple more businesses. Deal quality and volume seem kind of low right now (at least in our price range^[4]). We’re constantly tapped into different sources, and we haven’t seen many interesting opportunities^[5] over the past few weeks. We got close to making an offer on a business, but the seller wasn’t willing to move on their valuation. Keep calm and search on, I guess.

That’s it for now. See you next month!