Episode 827 | The Founder’s Guide to Selling Your SaaS for What It’s Actually Worth

Rob Walling (00:00): This podcast is brought to you by Mercury, the banking solution I use across all of my businesses. You already know traditional banking is broken, slow wires, clunky interfaces, tools that feel like they were built in 2005. Mercury is what banking should feel like in 2026. Everything just works. At TinySeed, Mercury keeps surprising me with features I didn’t know we needed. Like ACH fraud alerts, we used to manually review every ACH to catch unauthorized pulls. Now we have a list of approved vendors and if an unfamiliar one comes through, we get an email. One click to cancel or let it proceed. We went from checking every transaction to only seeing the ones that matter. Whether it’s daily bill pay or wiring large sums to the dozens of companies we invest in each year, Mercury handles it. Simple when I need simple, robust when I need approvals and controls. 

Rob Walling (00:48): Over 300,000 entrepreneurs have made the switch, and when founders ask me where to set up their account, I send them to mercury.com. It’s free to get started with no in-person visits and no minimum balance. Visit mercury.com to apply online in minutes. Mercury is a fintech company, not an FDIC insured bank. Banking services provided through Choice Financial Group and Column NA, members FDIC. Welcome back to another episode of Startups for the Rest of Us. I’m your host, Rob Walling, and in this episode, I sit down with Einar Vollset to talk about his new book, The Definitive Guide to M&A for B2B SaaS between two and 20 million ARR. And the entire book is available at discretioncapital.com/guide. You can read it online. Or as you hear Einar and I bandy around in the interview, he is looking into getting paperback copies printed as well. And I believe there are going to be hard copies available at MicroConf in Portland if you are hearing this. 

Rob Walling (01:44): I think this comes out maybe the week or two before Portland. Speaking of that, MicroConf in Portland is sold out. You can get on the wait list at microconf.com/us in case any tickets open up. It’s going to be an incredible event here in just a week or two after this episode goes live. In addition, MicroConf Mastermind matching is open. Masterminds have had a huge impact on my entrepreneurial journey and we have matched almost 1,800 founders in 64 different countries into these peer groups. These are four or five person groups that are often hard to form. And that’s why we started offering matching based on a lot of factors like revenue, location, experience, et cetera. And this isn’t just AI, right? We have a human on our end looking at every single application. I’ve been part of two or three masterminds over the years, one of which has run for 15 plus years, and they’ve had a huge impact on my journey. 

Rob Walling (02:44): They are folks that you’re going to go through the trenches with who can help you think through problems and be a sounding board. Applications are open until April 17th, just head to microconf.com/masterminds. And if you’re curious about what goes into creating a great mastermind, you can check out our free playbook at microconf.com/guide. And with that, let’s talk to Einar Vollset about his founder’s guide to selling your SaaS for what it’s actually worth. 

Rob Walling (03:19): Einar Vollset, welcome back to the show. 

Einar Vollset (03:22): Thank you very much. Thanks for having me. 

Rob Walling (03:24): So you are most widely known across the internet as one of the panelists on Startups for the Rest of Us Hot Take Tuesday episodes. That’s 

Einar Vollset (03:31): Right. 

Rob Walling (03:32): But some of your… 

Einar Vollset (03:33): Claim to fame. 

Rob Walling (03:34): Yep. That’s it. Some of your lesser contributions include co-founding TinySeed with me and being the founder of Discretion Capital, which we’re going to chat about today and folks who listen to this show know the story there, but we’ll get into it. And in addition, maybe this is another thing, accolade that you’re adding. You have written a book, you’re following in my footsteps. 

Einar Vollset (03:57): Yeah. I saw the glory and riches that came your way because of this authorship stuff. And now that SaaS is dying, this is the jam. I’m going to become an author, a published, successful author. It seems easy. 

Rob Walling (04:09): It is so easy and so lucrative as everyone knows. Yeah, 

Einar Vollset (04:13): That’s what I hear. Everyone knows this. Yeah. 

Rob Walling (04:15): You’ve written The Definitive Guide to M&A for B2B SaaS between two and $20 million and… 

Einar Vollset (04:22): Just rolls off the 

Rob Walling (04:24): tongue. It really does. Have we not workshopped that? It’s 

Einar Vollset (04:26): a classic. 

Rob Walling (04:27): But yeah, so you’ve written this book. We’re going to have hard copies at MicroConf here in Portland in just a few weeks. Big question. Why? Why did you write this book? 

Einar Vollset (04:37): Why write it? 

Rob Walling (04:38): Yeah. Why write a book? It’s painful. I’ve done it. 

Einar Vollset (04:41): It is. It actually took me significantly longer than I thought. So actually what ended up, what started was it was one of my partners, Dan Shapiro, who’s like, “Dude, you should just write a book. You should write a book or a guide or something because you’ve been doing this for nearly a decade now and people don’t know.” And I was like, “Oh yeah, I probably should.” And look, it’s sort of obvious. It’s obviously content marketing for Discretion Capital and that’s the reason to write it and to spend all this time on it. But also it is true that it’s such a weird opaque market, this sort of two to 20 million of ARR. And even pretty sophisticated founders who may have even raised tens of millions of dollars or feel like they understand the space they operate in are sort of noobs when it comes to M&A. 

Einar Vollset (05:26): And so look, obviously I would prefer if you’re doing eight, 10 million of ARR or less or more, I prefer you come to us and at least talk to us and maybe become a client. But a fair few people are going to DIY this often just because somebody emails them or a strategic gets in touch and all of a sudden they find themselves in an M&A conversation. And quite often, it’s startling really how often basically all this value gets created by these founders. They sacrifice so much. The reality is if you could build a five or 10 or even two million ARR business, you could probably also go work for Facebook or Meta or whatever they’re called now and make bank, but instead you’ve sort of sacrificed for that and you maybe worked nights and weekends and taking the smaller salary than you could. 

Einar Vollset (06:16): And now it’s time to get paid. It’s time to cash out and get liquid on this. And it’s not unusual that I hear about situations where I’m like, okay, well, yeah, but you left like 60 or 70 or 80% of the value of the company on the table because you didn’t know what was going on here. Like you didn’t understand the universe of buyers, what market pricing is like and what things are worth in the market. And so look, yeah, you should probably come talk to us, but even if you’re not going to, at least read the guide and so you’ll get a sense for like, these are the games that people play and this is where it’s at and this is what moves the needle in terms of price and what things are worth. And these are the kinds of buyers that are out there. 

Einar Vollset (06:54): Yeah. 

Rob Walling (06:54): And the Discretion Capital website, so folks know, discretioncapital.com, it says M&A advisory for B2B SaaS between two and 20 million ARR. Don’t settle for the buyers in your inbox. We routinely add 30 to 300% to initial offers for B2B SaaS founders selling between two and 20 million. Through a structured process targeting more than a hundred strategic and private equity buyers, we create competitive tension that drives your price up. So this is different than something like Acquire.com or like a brokerage that has an email list of potential buyers where they say we have 20,000, 40,000 person email list and we sell websites, content sites and SaaS, usually at an EBITDA multiple or an SDE multiple, right? Isn’t that profit, let’s just say multiple. You operate in this space that I really had almost no knowledge of before you and I connected in, I guess it was after the Drip sale. 

Rob Walling (07:49): So it was probably 2017, 2018, and you told me, oh, private equity is moving down market. Because that was the thing I always heard. Dude, when we were selling Drip, I asked a founder who had sold and I said, “Did you get an advisor or an investment banker or an M&A advisor or whatever to help you?” And he said, “Oh no, for deals this small, bankers don’t come down below.” And he named a number, $30 million or $50 million. And I was like, “Well, then I guess I can’t get a banker.” But then suddenly I met you and I’m like, wait, what? You do this? So what happened there? Why did the market shift in the mid 2010s? Talk us through that. 

Einar Vollset (08:22): Yeah, I don’t exactly know when, but it certainly was like, I’ve heard numbers, 20 million in revenue in ARR, like we’re talking ARR numbers here, not sort of outcomes, 20, 50, certainly at like 10 million for the longest time. They just weren’t interested. It just wasn’t worth their while for the bankers to do it because, and the reason for that is the buyers weren’t there. And so what happened is private equity moved down market. So prior to, certainly prior to 2010, private equity wouldn’t even touch anything sub certainly 10 million. And like your acquaintance said, maybe even 20 or 30 million. And so because of that, there wasn’t really a very liquid market. And that combination of things meant like, okay, well, if I’m a banker, it takes me as much time to sell a five million ARR business as it does and probably more because it’s harder to find the buyers than a 50 million. 

Einar Vollset (09:13): So what am I going to get the highest fees on? The 50 million one. So you ended up in this weird… I sort of just kind of lucked into it actually. And really what happened was private equity moved down market to the point where they were buying at least tuck-ins to their portfolio companies for one to two million, but really like no proper investment bank boutique in even the lower end of the middle market would do deals that size versus that’s what we started doing. I used to joke like Discretion Capital, when I started, I was like, Discretion Capital is the world’s best investment bank between one and 10 million of ARR, which is what I used to cover when I just got started. And that was true because we were the only one really who was doing it. You ended up in a scenario where basically you either had to try to convince some of these boutique banks that, “Yeah, yeah, I’m definitely big enough, please take me on.” 

Einar Vollset (10:02): And they would maybe do it as a favor at the higher end of the ARR range, but you’d still end up with… Yeah, you might get to talk to the partner before you sign the deal, but then you get handed off to some junior guy because it’s the smallest deal they’ve done in 20 years, right? You were just doing it as a favor. So that was one end of it. And then the other side, you had your, like you mentioned Acquire.com and some of these other more sort of generic, you’re not just selling B2B SaaS, you’re selling info products and drop shipping websites and all this stuff. And those guys are, they’re good. They’re very good. They’re very good at what they do. And I sometimes talk to people who have businesses in that size and I’m like, look, you probably want to talk to one of these guys because I don’t know how to get to the kinds of buyers that will buy things that are doing 500,000 ARR, for example. 

Einar Vollset (10:46): But the flip side of that also is like, typically those kinds of brokers aren’t great at understanding like this is the universe of buyers that are buying five million ARR or two million ARR, 10, 15, 20 million ARR businesses. And so their sort of frame of mind and their go-to-market just isn’t right. And so you quite often end up in a scenario where if you pick the wrong kind of broker, like you still, “Hey, I hired a broker.” But one of the stories I tell at the start of the book is like you end up with scenarios where maybe your broker is pushing you to take an offer that is 50% of what it should be because you have the wrong kind of broker. So there’s all sorts of issues to deal with. 

Rob Walling (11:24): And tell me that, the wrong kind of broker, what do you mean by that? 

Einar Vollset (11:30): That’s what I mean. It’s like, look, the fact of the matter is in this revenue range, about 70% of the deals are done by private equity, either directly, like they are buying it because they want to use it and build around it, which is basically what’s called a platform acquisition. Or particularly commonly on some of the smaller deals is like they already have a platform, they already have a portfolio company that might be massive. We sold one business to Blackstone, biggest private equity company in the world. They had taken this 1.3 billion public SaaS company private, and now they bought like a four, five, six million ARR business that we were representing as a tuck-in. So you end up dealing with these enormous banks and things like that. And so that’s the challenge. If you’re used to, like you have a large list, like Acquire.com is a good example, right? 

Einar Vollset (12:19): Blackstone’s not going to sit on Acquire.com and be like, oh yeah, let’s just pay the fee and connect. That’s just not how Blackstone operates. And so if you’re not able as a banker or broker, if you’re not able to put the deal… I mean, this is the most important thing I think that your banker does, is that it figures out and understands the universe of buyers out there, who owns what, and puts you in front of the people that will pay the most, i.e., the people for whom you are the most valuable asset. And the fact is, if you’re just used to blasting an email list and selling info products and things, you’re just not going to be able to do that effectively. 

Rob Walling (12:55): I want to keep going with this thought because I have the, as you’re talking about it, I want to ask you in a second about how does this actually work? You’re talking about Discretion doing outbound and having an auction process and we’re going to come upon this statement of aren’t businesses sold, not bought, right? They’re bought not sold. And so I want to put a pin in that. First, I want you to define, you’ve used the word tuck-in, the phrase tuck-in twice. I know what it means. I bet a lot of people in our audience don’t understand what that means. 

Einar Vollset (13:22): Yeah, yeah, yeah. So in the private equity world, there are basically two kinds of purchases, two reasons why a private equity company will buy a SaaS company. One is what’s called a platform, and this is the thing that they want to build around. So taking a step back, it’s important to understand the incentives for these buyers, right? These buyers, typically a private equity fund, a buyout fund, is looking to three to 5X their investment in three to five years. If they can do that, if they can 5X in three years, they’re doing super well. If they can 3X in five years, they’re still doing pretty well. And so fundamentally, those are incentives. And so for a platform purchase, they’re thinking to themselves, we’ll buy this asset and then we’re going to be able to both grow it and maybe buy some other assets to tuck in to that larger platform in order to have an asset that we can sell for three to 5X in three to five years. 

Einar Vollset (14:13): And so those are the two kinds of businesses. And so when you’re operating in the space that we are, it’s kind of rare for like a two, three, four, five million ARR business to be considered a platform. Maybe some of the smaller, lower middle market private equity funds might do it. And there are some specialized funds that definitely go as low as two, but most of the time you’re going to need to be at like 10 or maybe even 15 or 20 to be considered a true platform. So probably most of them end up being tuck-ins to the larger platform portfolio companies that they already own. So this Blackstone thing is a good example. The company was like an events SaaS company and the company that we were representing, they were handling scanning of business cards and things at physical events. And they didn’t have, the larger billion dollar company didn’t have this capability. 

Einar Vollset (15:01): Now they bought this SaaS that we were representing and cross-sold against their entire customer base. And so it was worthwhile for them to be doing it. The nice thing about this too is people hear the word tuck-in and they think, oh, small, not great, like just a tuck-in. But actually tuck-ins often outcompete strategic bids because it’s so valuable to them. So we kind of think of it as like almost the best of both worlds. The problem with dealing with a strategic buyer, and by that I mean like a public company, large one that wants to buy you. That’s what everyone wants. This is the whole like be bought, not sold kind of thing. You’re just doing your own business and here comes Google and they’re like, “Here’s a billion dollars, just let’s buy it.” But the fact of the matter is often these kind of deals fall apart, they get retraded, they’re often personality driven. 

Einar Vollset (15:50): It’s like someone’s promotion, that’s why you’re getting acquired basically. And if they leave or get fired or get promoted even, then it could be dead in the water versus dealing with private equity is easier in the sense that these guys are deal makers. That’s what they want to do. And so if you can have that combination of dealing with folks that are willing and able to act quickly and will outbid strategics, that’s sort of the best of both worlds. And so that’s why you can have five million ARR businesses selling for 15 times ARR to an asset that maybe the private equity company bought for 3X ARR because it’s strategic to them. But you need to know that and you need to be able as a banker to put the asset, the company in front of the buyers at the right time. 

Einar Vollset (16:37): And so, look, I can get really geeky about this. It’s to the point where like, look, when are they most likely to buy a tuck-in? Well, it’s when they’ve had it for six to 12 months and whatever, and not when they’ve been holding it for five years. And so that’s the whole timing of the company. And then you got to think about which fund is owning this asset and where is that fund in its life cycle. And it’s not just like, oh, this would be a good fit. It’s like this would be a good fit and it fits in with typically what are these guys’ life cycle hold times for all these assets. 

Rob Walling (17:09): Everyone’s talking about AI in marketing right now, but AI without strategy just means generating more bad marketing faster. The real advantage comes when experienced marketers and designers know how to use AI as a force multiplier. That’s what Conversion Factory does. They help SaaS companies build strong funnels, run rapid experiments, and use cutting edge AI workflows to scale what works. They’ve worked with more than a hundred startups, including several TinySeed companies. Book a call at conversionfactory.co and mention this podcast for $1,000 off your first month. And if you’re at MicroConf US in Portland, grab Corey Haines in the hallway track to see how they can help you. And just to give folks an idea, something I learned from reading the book, which folks can get for free online, discretioncapital.com/guide, but I believe you’re also… Are you going to have paperbacks and stuff available on Amazon? 

Einar Vollset (17:59): Hopefully. Hopefully. 

Rob Walling (18:00): Yeah. Okay. Yeah. 

Rob Walling (18:02): So if they want a print copy, potentially that’s a thing. But for now, something I was reading through the first few chapters and you talk about how with B2B SaaS between two and 20 million ARR that is growing at a certain minimum amount, 70% of the deals are private equity and about 20% are strategics and then 10% was other. And this is the opposite of what I understood as a software founder, as a SaaS founder myself. When I talked to, again, when we were selling Drip, I talked to several founders who had sold because there was no one like you doing what you were doing and no bankers would talk to me because the deal was too small. And the founders that I talked to were like, “Well, who are all your competitors?” And go talk to them, right? So it’s like, of course, as Drip was like, “Well, I’m going to reach out to HubSpot and to Mailchimp.” You know what I mean? 

Rob Walling (18:51): And it did so happen that we got acquired by a strategic, right? It was Leadpages. It was another startup and it made sense. It wasn’t private equity. But what I’ve learned is actually the exception to the rule. And it sounds like that is a recent thing that’s over the last 10 years really that they’ve come down further, but if someone’s not paying attention to private equity and they don’t have the kind of system or auction in place, this is where we’re going to get to. But I thought, Einar, that startups were bought, not sold, right? And why is that? You come out really strong against that. Yeah, I do. Yeah. Talk us through that. 

Einar Vollset (19:24): So I think fundamentally, I think that’s a misalignment of incentives that mostly arises from the VC world. That’s what I think. So if you think about it, what are the incentives… And this is where you end up with a scenario often where your investors, if you have them, particularly if you have VC investors, what are their incentives versus what are yours? So often with VC investors, they are really only investing… I mean, TinySeed is the exception here, but they’re only really investing because they think it can eventually be worth $20 billion or more, right? That has to be the goal. You’re not going to write a check unless you think there’s a small, but still a decent chance that this will happen. What is the fastest way to make sure that doesn’t happen is doing M&A, right? So if you have a portfolio company as a venture capitalist and it’s growing well and it’s doing great and all these things, and then say they’re at 10 million of ARR and growing crazy fast, then you’re going to be pretty much like, look, definitely don’t run an auction process and sell now because then you’re guaranteed not to get $20 billion. 

Einar Vollset (20:31): The chance that you get to 20 billion might still, even at 10 million might still just be 1%, but as a venture capitalist, that’s what you make your money on. You make your money on these outlier, basically founders being crazy enough or sort of ludicrous enough to be like, “Yeah, I’m definitely going to go public or sell for $20 billion and I will take no less.” Versus as a founder, most of the time, let’s be honest, we would survive with $50 million cash, both of us. You know what I mean? We would have to make some sacrifices, but even me, we could make it work. So that’s the situation where your incentives and your VC investors aren’t aligned anymore. And so that’s where it’s at. It’s like, don’t talk to bankers, don’t think about selling. And this is where that whole meme came from. 

Einar Vollset (21:15): It’s like, oh yeah, the businesses, startups are bought and not sold. And what they mean is like, look, the only kind of M&A that I am interested in as the venture capitalist is if a strategic comes to you and begs to buy it and is gaga for it and will pay a crazy price. That is the only kind of M&A a venture capitalist will care about. And so that’s where that comes from. That’s what they mean versus for you as a founder, particularly if you don’t have any investors either, if you’ve been doing it for five, six, seven years and you’re at 10 million and you’re growing well and chances are this is where all your money is. Most chances are among your net worth, the majority is in this business now. What do you want? Do you want to sell for 50 or 60 or 70 million in cash or do you want that two, 3% chance that you’re going to IPO in another five, maybe 10 years? 

Einar Vollset (22:06): And so that’s my reaction to it. It’s like, it makes sense if what you’re optimizing for is maximizing a still small chance that you’re going to get an enormous outcome. But the actual lifestyle for most founders is not actually… Most people would take a fifty-fifty chance of $50 million over a 2% chance of $20 billion. 

Rob Walling (22:27): And we hear these stories of wasn’t Instagram supposedly bought in a weekend because Zuckerberg really wanted it. And for a billion dollars as an example. And then WhatsApp, I believe was bought for $18 billion or something like that. And it’s like neither of those companies were worth, and I’m doing air quotes, that money, but they were worth what, especially specifically Zuckerberg was willing to pay them. But the reason I can name two of them is because there have only been two in the past 10 years. I mean, there’s been a few more, but there are not hundreds or thousands of deals that happen like that. There are like six that we can all name, right? 

Einar Vollset (23:00): And that’s great. If it happens, awesome. Fantastic. I’ll do that. But most of the time it doesn’t. It actually relates back to an article. We wrote a blog post article we did years ago now when we started out TinySeed. We did that whole based on the Patrick McKenzie, Patio11 tweet, which was the iceberg of deals, right? This notion that there’s all these deals. And in fact, I think the math, if I remember correctly now, is like only about 7% of actual acquisitions get any kind of even tech, mainstream tech press mentions. 

Rob Walling (23:32): Yeah. Because a founder, like a TinySeed founder who sells their business, let’s say two co-founders, they sell for $15 million in cash or a single TinySeed founder sells for 25 or $35 million. That is generational wealth. But guess who doesn’t give a crap about that? TechCrunch, Mashable, VentureBeat, they… 

Einar Vollset (23:53): Then you have a guy on this podcast that has sold for hundreds of millions and no big news. 

Rob Walling (23:58): There’s no pressure. Retired founder. 

Einar Vollset (24:00): Hundreds of millions. 

Rob Walling (24:01): The last exit was at $600 million. It was fully bootstrapped, him and his co-founder. I mean, think of Kevin with Spectora, who’s now a TinySeed investor and mentor. He and his brother bootstrapped just the two of them. First exit was they sold a majority stake at $90 million and the next one was at like $150 million. But we never heard of them, never heard of them. So there are so many, so many more deals happen like this, right, that this is the way things really happen. And that is the helpful part of your book. That’s the helpful part of John Warrillow’s writings. I remember reading that and being like, “Oh, this doesn’t happen the way I thought it did. This is all…” The whole magic, the VC industrial complex… 

Einar Vollset (24:40): Very opaque market. 

Rob Walling (24:41): Yeah, no doubt. And so some folks might be wondering the difference between Exit Strategy, the book that Sherry and I wrote, and The Definitive Guide to B2B SaaS M&A. And a big thing is, A, you are focused solely on SaaS. Sherry and I talk about other business types. We also talk a lot about the mental side of it, of thinking it through, the before, the during, the after. What do you do with the rest of your life? It’s very much a higher level picture. And in fact, I interviewed you, you’re quoted in six or seven of the chapters, talking about specific mechanics. And that’s what your book focuses on is a lot of what an LOI looks like and what you should look out for, right? 

Einar Vollset (25:16): It pains me to say this, and you shouldn’t really, but you could take this book and you would do a much better job at DIYing your own M&A process. We just released chapter seven today, but I think the next one is chapter eight, which is the anatomy of an LOI. So it goes down to extremely nitty gritty detail about, okay, you have an LOI, but what do all these terms mean in this thing? Where are the gotchas? Where are the retrades hiding? That kind of thing. So yeah, it’s quite different. 

Rob Walling (25:48): I want to ask about valuation drivers when you’re selling in this price range. I remember you gave a talk and I don’t think it was at MicroConf. Did you ever give this? The growth is number one and churn is number two. You gave it somewhere else. I saw you in a video. 

Einar Vollset (26:02): Yeah, yeah, yeah. I’ve given that a couple of times. 

Rob Walling (26:04): Okay. And what I remember is, look, again, it’s once you’re in between that two and 20 million ARR range, growth usually is the number one driver of valuation and churn I believe was number two. And I don’t remember what number three was. 

Einar Vollset (26:21): ARR is obviously the same business, just that a bigger business is going to be a higher multiple. 

Rob Walling (26:27): Okay. So why is growth so important? And churn is so important. Why is it so important? Because we see founders online who are like, “Oh, I have 8% churn. It’s not that bad.” Or 10% churn. And I got called being old school. Oh yeah, no, Rob’s dated. Rob has dated advice. Maybe when he grew Drip, you could have net negative churn, but 8% churn is the new normal. And I was like, “You’re out of your mind. That’s not normal. That is a business that’s on fire.” 

Einar Vollset (26:51): Yeah, yeah, yeah. So growth is definitely the thing that drives multiples more than anything else, for sure. And really like why? Well, it boils down to this. Like I said, 70% of buyers are private equity and what are private equity looking to do? They’re looking to three to 5X in three to five years. And if you have a five million ARR business growing 100% year over year, unless it has a ton of churn or you mess it up, then chances are you’re probably going to maybe grow into 3X just doing nothing else. And so you would want to pay more for an asset that’s five million ARR growing 100% than even a 10 million ARR business that’s not growing because as most founders and hopefully listeners to this know, it’s significantly harder to get a business growing that has stopped growing than it is to do anything else in this entire business, I think. 

Einar Vollset (27:45): And so that’s why, because they’re looking to three to 5X in three to five years. And the reason why churn is so important secondarily is think about, again, private equity. And the reason I mention private equity so much is because the other players in the market also think about private equity and what those guys are bidding, right? That’s why if you’re a strategic and you’re in an auction process, you’re not going to bid 100X ARR just because you’re going to figure out where’s the market at and then bid slightly more or even a little bit more than that. That’s your incentive. And so everybody sort of thinks about that. And so the reason why churn is so important, particularly to private equity and thus by analogy becomes important to everyone else in the market, is because if you are only three to 5X in your investment, it’s important that you don’t lose. 

Einar Vollset (28:32): You can’t lose money. That’s again, opposite of VCs. VCs care the most about increasing the small chance that they can get 10,000 times their money or a thousand times their money or a hundred times their money. Whereas private equity, they’re like, “If I can 5X in three years, that’s great, but I have to protect my downside.” And churn is the downside. Churn is this like, every buyer thinks this, they worry about it explicitly or not. They worry about, if I buy this asset, give this founder all this money and he walks away and retires and then the business falls apart, I don’t want that. And churn is that risk, right? It’s like if you have 8% monthly churn, you’re going through your entire customer base in less than a year. And so then the risk becomes like, well, I mean, I hope the growth channels are working well and they aren’t to do with just this particular founder’s special relationship and that’s why the business is what it is and all this stuff. So that’s why. 

Einar Vollset (29:30): It’s basically like growth makes it easier to sort of model out like, “Okay, this is how we 3X this asset or this business and then sell it.” And churn is like, A, it also obviously sustains the growth story as we know, but also it’s like, how do I protect my downside here? I can’t go in front of the investment committee or whomever’s making the decision to actually allocate the money and be like, “Yeah, yeah, yeah. Yeah, I know we’re going through, reacquiring our customers every year, but don’t worry, we probably won’t need to.” It’s not a good angle. 

Rob Walling (30:02): I get this question on the podcast periodically, and I actually got a very specific one. It was maybe a month or two ago, and it was someone saying, “Why do so many people talk about ARR multiples and top line instead of profit?” And I think the guy’s question said, “A SaaS company doing two million and making a million a year in net profit. Shouldn’t that be more valuable than if you’re at two million a year breakeven, but you’re growing at 50%, 60, 70% a year versus a slow growth more profitable business?” And I said, “No, it’s not worth more.” And counterintuitively, why is that? 

Einar Vollset (30:43): It’s because the net margins on SaaS, at least until AI tokens started, are so high, right? The gross margins even. It’s like 95%. And so the argument is always like, look, what are you doing here as the asset? If I’m reinvesting all my profits so that I’m breakeven, then I’m doing that in order to grow faster so that I can at a later point optimize that piece. And okay, if I can grow to five million of ARR and then switch that balance between growth and profit, then I’m going to remake the money fundamentally a lot faster. And then also some of this is just that’s what the upstream market is valued at. If you get to 100 million ARR businesses and all that stuff, they often think about it in terms of revenue multiples. And so often these acquisitions are made in order to accelerate the growth or increase the revenue and do all this stuff so that that multiple goes up for them. 

Einar Vollset (31:40): That’s why fundamentally. 

Rob Walling (31:43): Yeah. I’m going to tell a story and I’m allowed to tell it in public because I interviewed Kevin, co-founder of ScrapingBee on stage at MicroConf in Istanbul. And the story is this. Kevin and Pierre started ScrapingBee and applied to TinySeed. And I think they were doing maybe $2,000 MRR at the time, very, very early stage. And they grew it to several million in ARR. I believe the last public number was $5 million that they… They put that on Twitter, so I can quote it. And then they exited for an eight figure cash sum. And it’s the two of them and TinySeed. And it was all obviously life-changing outcome for them. But I asked Kevin on stage, I said, “Do you remember when it was just the two of you and you guys were doing more than a million ARR?” And Einar and I were like, “You need to hire people.” 

Rob Walling (32:33): Because they were optimizing for profit and for like, they didn’t want to manage people. There were a bunch of reasons, but we were like, “You’re going to burn out, number one. And number two, if you go to sell, let’s say you hit two million, two and a half, three million, nobody’s going to want to buy you because everything relies on you.” And I asked Kevin specifically, I was like, “Would you do that again or would you change it?” And I was actually waiting for him to say, “No, it was fine. We did it.” He said, “No, we should have listened to you guys.” And the crowd laughed. I was like, “That’s not what I expected.” But that gives you an idea of like, yeah, that business was wildly profitable with only two of them. They had almost no other… They had some server expenses and stuff. 

Einar Vollset (33:08): Exactly. And it also ties back into the different kinds of buyers that you’re reaching. If you’re doing a SaaS business that’s doing 250,000 ARR, the kinds of buyers of that are typically going to be operators. There are people who are like, “I’ll quit my job, I’ll buy this thing, maybe get an SBA loan, do all these things, and then I’ll run it and I’ll take my profit out of that salary.” So the salary then profit is what comes out of it for me. That’s what I care about versus a bigger buyer, a strategic, a private equity company. Really anybody larger than that, they’re going to look at it and be like, okay, so this company is like the two founders and three contractors and bailing wire and duct tape. And again, what is my downside protection here? Is this all going to fall apart after I buy it? 

Einar Vollset (33:55): And chances are, yeah, it will. If you give a bunch of cash to two founders who only, like the whole business is run with contractors and you give a bunch of cash and say you can walk away, chances are the business does fall apart. So it’s much more valuable to you as an acquirer if those two founders have sat down and actually put a team in place and made themselves less of a key person risk for the acquirer. And that’s why it’s, yeah, you might have been a lot more profitable when you were just the two of you and contractors, but you’re worth less than when you’re maybe just breaking even because you have all this team around you that you’re paying. 

Rob Walling (34:34): I want to close this out with this question and it relates to a topic I have talked about on the podcast in the past. In fact, I had Ruben, founder of SignWell on to just discuss this idea of founders who run it over the top, meaning, well, I’m going to give an example and throw out some numbers. You can correct me if my ranges are off, but I think Ruben and I specifically in that episode, it was four or five months ago. Myths founders tell themselves was one. One of them was I’ll never sell. And I say, everybody sells, everybody sells. You know who doesn’t sell? Basecamp. They’re the only one that hasn’t, but everybody else sells. I didn’t think Mailchimp was ever going to sell, blah, blah, blah. That’s my rant on here. But I think Ruben and I were talking through and I said, “Yeah, let’s say you’re at two million ARR and you’re growing 100%, 100% year over year.” I think you can sell for between 10 and $20 million if your churn is good, if your stuff’s in line, right? 

Rob Walling (35:23): That’s a big range. Maybe it’s 10 and 15, 12 and 20, whatever. You get the idea. And then let’s say you get to three million ARR and your growth slows to 10% a year. Let’s say you’re at four million, you’re twice as big and you’re at 10% growth or zero, right? And I was saying, I think you’re going to sell for one to 2X. I think you get four to eight million. So suddenly you are doing double the revenue, you’ve grounded out another year or two. We all know that every dollar and yet you’re worth… It’s not a little discount. It’s not like, oh, I lost 20%. You dropped eight figures. So I mean, I guess we understand why that is because growth is number one. And so once growth slows, that’s the problem. But why is this so common? Why do you think founders do this so often? 

Rob Walling (36:06): Because we see it. 

Einar Vollset (36:08): So it’s a couple of different things. It’s one, fundamentally not understanding A, that growth is the number one factor. This is not realizing that’s what the multiples are based on and what the valuations are based on. The second thing is they end up in a scenario where they convince themselves that increasing the ARR number is always going to be better. And they’re basically like, “Look, I have this number in mind. I just want to get to whatever number. It could be three million, it can be five million, it could be 10 million.” And they’re just like, “I just need to… There’s all this low hanging fruit around me. I just want to go and pick this and then I’ll sell. I’ll be ready then.” The problem is then you’ve squeezed out all the growth of the company. And the reason why it’s so problematic is because there’s sort of this weird… It’s I think the one place in SaaS valuation where there’s a discontinuity and it’s right around 20, 25% yearly growth. 

Einar Vollset (37:04): If you go above that, then higher growth is usually higher multiple. So there’s a reasonable correlation there. If you go below it, it drops. So it can easily be like, you could sell a 35% growing ARR business probably for four times, maybe five. Depends a little bit on everything else. Obviously profit’s better, lower churn’s better. But if that same business, like if you just let it run another year or two, growing at that slower rate, because pretty much all growth decays. And so this is our friend Jason Cohen’s point, you end up like, okay, now you have a bigger business, but it’s growing 10% per year now. Maybe that the growth channel, the new customer acquisition channel is the same size. It’s just a smaller percentage of the larger business now. The kinds of buyers change. And so the kinds of buyers that are looking to buy 10% or 0% or 15% ARR businesses are sort of the value buyers end of things. 

Einar Vollset (38:02): And basically what happens is the bigger growth firms and the folks that are buying tuck-ins and interesting assets and all that stuff, they just go away because they look at the growth and they’re like, “Nah, this is going to drag down our portfolio business. It’s much harder to turn around.” And so you’re then dealing with sort of extreme value buyers, what I call steals in the guide, and turnaround shops and things like that. And then the fact is, it’s just like, yeah, you go from like four times, five times, maybe even six times to like, you’re lucky to get 2X. And it’s fundamentally because the kind of buyer changes. 

Rob Walling (38:34): Einar Vollset, thanks so much for taking time to join me on the show today. As I mentioned earlier, discretioncapital.com/guide if folks want to read the full book, if they want to keep up with you on Twitter, you are Einar. They may not want to do that, but Einar, E-I-N-A-R, V-O-L-L-S-E-T. We’re laughing because if you don’t like what he’s posting about the San Francisco Giants, you may want to not follow Einar. 

Einar Vollset (38:59): I got somebody today, I think, or maybe it was just yesterday pointing out like, what was the response? The response was like, “I hope that AI therapists or whatever get good enough that they can help you with your anger issues.” 

Rob Walling (39:14): Ease. 

Einar Vollset (39:15): I don’t feel very angry, but okay. Achievement unlocked. 

Rob Walling (39:17): Yeah. Oh, that’s funny. And if folks want to reach out to you directly, if they have a SaaS that is growing at seven figures and they’re thinking, “Man, maybe I want to sell in a year or two even. I’m thinking about how to get going. I’m growing.” What’s the best way for them to reach you? 

Einar Vollset (39:33): Yeah, either go to discretioncapital.com and there’s a form there all over the place that goes to my inbox and I’ll get in touch or you can just email me einar@discretioncapital.com. 

Rob Walling (39:43): Awesome, man. Thanks again for joining me. 

Einar Vollset (39:45): Thanks for having me. 

Rob Walling (39:47): Thanks again to Einar for coming on the show today. And again, that URL is discretioncapital.com/guide if you want to read the entire book online. Thanks to you for listening this week and every week. This is Rob Walling signing off from episode 827.