Portfolio Update Update: May-June '23

Another late “monthly update” that had to be combined with next month’s. We spent quite some time in May & June working on a couple of deals that ultimately didn’t pan out. We were hoping to share a combined 2-month update with something like “sorry we’re late, here’s why though: [insert deal-closing announcement here]”–but turns out we’re just late (with a couple of lessons learned).

Portfolio status #

Our first little app is still humming along nicely, with cash returns in the same range as before. It’s growing slowly in the right direction, led by improved trial-to-paid conversions (that we can now say are from the onboarding tweaks we did). Although we’re doing better on active subscriber growth, we still need to do better on a revenue basis. Most conversions are in the lowest subscription tier, and there’s a lot of work to do around expanding usage beyond the initial installing team to help drive revenue growth.

What we’ve been working on #

StandupBot #

We’re now working mostly on new features, which feels great after nearly 3 months of (essential) cleanup. There’s still tech debt, sure, but it can now be balanced with stuff that’s valuable to our customers. It’s starting to feel like we’re getting closer to a more normal product release cycle.

No deal(s) #

As I mentioned at the outset, we worked a lot on a couple of deals we wanted to close, but couldn’t. There were different reasons (and lessons) with each. Here’s what happened.

Deal #1 #

If StandupBot was a size “S” deal, this would’ve been an “L”, and it unfortunately died during due diligence. The product ticked most of our requirements and it was a great fit for us. It had a couple of risks (which we knew before presenting our LOI and going into diligence):

• churn was on the high range: high single – and sometimes double – digits (monthly);
• platform risk: most revenue depended on a couple of platforms that could implement the feature-set natively or at least diminish its value at any time.

These were hairy but we decided we could live with them as long as we could jump into the product and start de-risking the investment from “day 1”^[1]. The product could (and should) support additional platforms, and there were some packaging / pricing experiments we believed had the potential to lower churn. If we could start doing stuff within weeks of onboarding the asset, we could take on the risks.

During technical due diligence however, we realized it would take us months (instead of weeks) to feel comfortable doing any kind of change to the product without fear of screwing something up for its current customers. The code wasn’t in the shape we expected and needed it to be. In isolation, we could’ve dealt with this over time, but with the other two risks on top, there wasn’t much headroom on that front. This put it over our tolerance threshold.

It was a real bummer for all parties, and something we want to avoid in the future.

What we learned

We’ll need to be even stricter with risk assessment before presenting our LOIs in the future. We don’t expect to find perfect deals, but for us, it looks like we found our risk ceiling (for now). When evaluating a business, our guiding rule could be to ask ourselves:

“What needs urgent work? Is it…”

• product?
• marketing?
• financials?

We can only handle two, at most. If the answer is more than 1 before an LOI is presented we should pass. We should assume that we’ll find additional hair during diligence.

Deal #2 #

Keeping with the t-shirt size analogy, deal #2 would’ve been an “M”. From a portfolio perspective, it would’ve been a great combo (along with deal #1): we would’ve closed our starting portfolio with S, M and L businesses^[2], which is a nice distribution. We were going to partner with a friend of ours on this deal; he’s long wanted to get into this investment space and deal #2 was a great fit for him as an operator due to his background.

Now, this deal had some risk around the tech stack (which was overly complex) and the product needed a lot of work in different areas (particularly at the top of the funnel). This said, it had very low churn and nothing was urgent, which would’ve allowed us time to work through the issues.

Alas, we couldn’t reach an agreement with the seller and decided to give up when we realized that we couldn’t get to where they wanted.

Lesson learned

Throughout our acquisition process we always try to keep in mind that although we don’t intend to sell the assets we buy, we don’t want to lose that optionality. That means staying within reasonable bounds of what we believe is the asset’s fair market price. Everything else staying constant, we want to reduce our risk of losing money if we must sell an asset for whatever reason. So far, so good.

But in this case, we opened some doors during negotiation that caused some confusion and mismatched expectations about where we were willing to go in terms of structure. We learned that we have to keep things simple – getting too creative with deals at the size that we’re aiming at can cause unnecessary misunderstandings.

Looking ahead #

As we head into the summer, things will slow down for us to take some time off with the family. Outlook stays the same though.

On the product front, we’re feeling super motivated to execute on our strategy. The road ahead is getting clearer, and we love it.

On the search front, nothing to do but to persist. We’re still looking for a couple of assets to round out our starting portfolio. We know they’re out there, but they need to be for sale and hit a fair number of our requirements – this has proven to be much harder than we expected. At least we’re learning a ton along the way and it feels like we’re getting much better at assessing opportunities.