On today’s episode of Startups For The Rest of Us, Rob Walling (@robwalling) talks with David Newell (@davidsnewell), a Senior Advisor at Quiet Light Brokerage, about the dos and dont’s of SaaS valuations.
The topics we cover
- 4:12 Running your business as if it were a sellable asset
- 5:15 Quiet Light deal count and other stats
- 8:53 SaaS valuations today and how SDE valuations work
- 17:50 How revenue valuations work
- 21:19 David Newell shares stories of dos and donts of valuations
- 29:52 What do the best buyers do?
Links from the show
- Quiet Light
- Resources for Buying and Selling Online Businesses
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Rob: Welcome to this week’s episode of Startups for the Rest of Us. I’m your host, Rob Walling. This week, I have a conversation with an M&A advisor named David Newell. David is a Senior Advisor at Quiet Light. According to his bio, he’s an industry expert in evaluation and sale of SaaS businesses. He’s a former investment banker at Citi which he did for three years before moving into the online business space.
He’s advised on the sale of several well-known bootstrapped B2B apps including in the sale of Drip back when he worked for FE International. He also helped with sale of apps like LessAccounting, Sifter, Codetree, and HitTail as well, which is another one that I had sold through FE back when David worked with them.
I’ve known David for several years. I met him at a few conferences. I believe he was at Rhodium Weekend, Chris Yates’ event in Vegas years ago. David just has a lot of experience on the sales side and also working with buyers of SaaS apps.
In our conversation, we talk about what valuations look like today and it’s fun because I threw out my rules of thumb and he says, “I think they’re a little bit richer.” He said, “I think they’ve gone up. It’s a little hotter.” My valuations were probably from (let’s say) 2–3 years ago and that’s the beauty of SaaS. It just keeps going up into the right. You can hear us bat back and forth some rules of thumb valuations, both on if you’re going to sell for net profit versus I’m going to sell for revenue multiple, at what point that transitions and then what instances you can sell for profit versus revenue multiple.
We talk about things that sellers do really well and things that some sellers do very poorly. You can mentally evaluate where you, yourself might fall even if you never plan on selling or buying a SaaS company. Still a lot of good information here about how to have a business that is well-documented and that operates well.
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Thanks again to Basecamp and I hope you enjoy my conversation today with David Newell.
David Newell, thank you so much for joining me on the show today.
David: Thank you.
Rob: As I said in your intro, you’re a Senior Advisor at Quiet Light Brokerage and you specialize in SaaS. I wanted to have you on the show today because obviously, a huge chunk of our listenership are either SaaS founders, aspiring SaaS founders. I’ve been saying this for years and people don’t tend to believe me. I’ll say you may never sell your business, you may never sell your SaaS app, but my guess is you will. Most people do.
We can point out a few examples, like Yesmail, MailChimp, Basecamp, and Wildbit. There are a couple others, but the majority of people eventually either get tired, get bored, get old and want to retire. They do whatever and they want to get rid of their business. Even if you don’t and you want to run it forever, running it as if it was a saleable asset can make the business more efficient. Not only make it more valuable if you want to sell it, but it can just remove your day-to-day stress and how much you need to be an operator in your business. Just make it a more efficient asset.
David: 100%. It’s very funny, actually, when almost everything that you do to improve the business for sale actually makes the business better operationally. It’s been said to me at least a dozen times when we’ve gone through the prep process for going to market. Owners have said I actually decided that I really, really love my business. I’m not sure whether I want to sell it now, having gone through the kind of understanding that it’s needed to prep it for the market. It’s a philosophy and a mindset that if you build in from the get-go, you’re only going to improve your life operation in and of course when you come to market.
Rob: That’s the thing we’re talking about before we hit record, that whether you’re a seller or whether you’re going to operate your business, thinking like a buyer is just helpful to have that context and that it can improve your business, as you’re saying, operationally. I think a key piece to this is as a listener, if you’re listening to this you think, I never want to buy a business or I never planned to sell a business. I would reconsider that mentally because I thought that I wanted to, and now I’ve sold many. Also, even if you truly never do, still hearing how this works can improve the business you run day-to-day.
As we get into it, I want to set the stage for folks. They may have heard of Quiet Light Brokerage. Quiet Light’s been around for 13 years, you were telling me since 2007. I didn’t realize that they’d been around that long. I’m curious how many deals approximately or just some idea of how large the brokerage is, how many deals you guys do in a year?
David: There are 10 of us now internally working as advisors in the business. The deal count varies by year (I think), but it ranges usually between 75 and 100 close transactions a year. The average is about a million to 1.5. Say, it’s typically around the 75–100 million in close transactions a year.
It’s a lot of activity across a lot of people and a lot of business models around us. We do e-comm, SaaS, and content. We really get to see a lot of different digital business models and interact with a lot of different buyers and sellers.
Rob: Some people hear those numbers and they think that’s not a lot and other people think that’s a lot, depending on the perspective you come from. When I think of building a little business and selling it for a $250,000– $500,000 sale price, you have to do a lot of deals in a year to get to that $100 million mark. I’m curious. Let’s say I own a SaaS app today and I was going to sell through a broker like Quiet Light. What’s the bottom end? It’s seller discretionary earnings, but let’s define that in a minute. Let’s just call it net profit for now. We both know it’s SDE, but what’s the bottom end net profit that would be worth going through a process like this for a SaaS app?
David: I think the floor really for us varies by different advisors. For us, it’s about $100,000. We tend not to list anything below the $250,000–$300,000 mark. There are the more independent brokers or smaller and […] places that might do it. Once you hit that $100,000 threshold in SDE, then it’s very much worth stepping into working with one of the more established brokerages.
Rob: Right. Let’s define SDE. Let’s get into that. Seller Discretionary Earning, the way I’ve heard it described to me or the way I understand it is, it’s your EBITA, it’s your net profit that you would make from the business in a year, but you get to add things back to that.
For example, I always charge my laptop, my cell phone bill, my home internet bill because I work from the house. Some people charge their cars, I don’t know how they justify that if you’re earning a SaaS app, but people charge all types of stuff. I’ll charge trips to conferences. I just charge it all to my business. Even a salary that I take out. All of that, I can add back in because it is profit in essence and I’m just taking out and maybe using for expenses that are maybe on the edge that otherwise, I would just pay for it personally. Is that an accurate representation? Do you have anything to add?
David: Exactly. I think it’s operating profit plus three big categories of expenses. All of your owner compensation, and that could include your health insurance and anything basically attached to you and compensating yourself, dividends and so forth. And like you said, anything that’s personal expenses—travel, meals, accommodation. Just random things that people like to add in to reduce their end-of-year tax bill. The third piece is one-time sunk expenses. For example, you got a trademark that year or you did something like intellectual property work or some legal work that sunk. Anything that’s not going to be recurring or that a new owner taking over the business wouldn’t like routinely have to pay for, so you’ve taken that on, you can add that back. Those three categories of expenses you can add back and then you get to that magic SDE number.
Rob: And then if we were to roll from SDE right into valuations. Let’s talk about SaaS valuations these days. I have some rules of thumb, I’m curious to see if they’re still relatively accurate.
There’s this conversation around selling based on SDE or profit, in a sense, versus selling on revenue multiple. The way I try to describe it is if you have a strategic buyer where they’re going to acquire the company usually with the team and the technology, if I were selling my company and their strategy was buying, I would only sell for a revenue multiple if I were selling a SaaS app.
In addition, there are private equity firms that are paying revenue multiples. Once you get started getting to seven figures, they will pay revenue multiples. This is specifically SaaS because I’m not hearing about this in ecommerce and I’m not hearing about this in content sites, but SaaS is hot these days. Versus selling on the net profit multiple, the SDE multiple.
I’m throwing this out and I want you to counter or correct it. But those tend to be the smaller deals that I hear about. If you’re doing, like you said, $100,000 a year in SDE, then you get a multiple on that. You’re not going to get a multiple on top-line revenue. Where am I correct and incorrect with that analysis?
David: You’re absolutely right. SaaS is very interesting as a valuation landscape. As you said, it’s the only business model that straddles to different valuation approaches. Your earnings led multiple or your revenue led multiple. I guess some of the confusion that comes up with that—which one to use when—is really in thinking about where’s the life cycle of the app?
As a rough guide, I would say that the revenue multiple starts to kick in as a valuation approach app, like you said, $1 million in ARR. That’s not an absolutely hard and fast number, but the reason it’s chosen there is typically because the business has started to achieve a level of scale at which the buyers that are operating there, like PE and strategics, feel that its commencer to apply that kind of valuation approach.
There are some other caveats to it, which the business also needs to (at that point) have been really reducing its churn down to 4% or lower per month. It really needs to have a proper team in place, proper CTO, proper development customer support, onboarding, customer enrichment team. All of which would have done the work of reducing the churn component. The last piece is it really needs to be starting to grow very, very strongly, at least 40% year over year in revenue growth.
What you see basically is most apps—you know this, Rob, because you started several yourself—start as they often a single owner operated businesses. You build out the code base, you start getting your customer base, you start generating some earnings, and you can beget to $100,000, $200,000 or $300,000 in MRR. An app can actually get to be relatively profitable if you start adding back your owner compensation.
That’s the kind of early stage life cycle of an app. If you want to, you can exit for an SDE-type multiple. But there’s almost a decision point you need to make there, and I think you did this expertly with Drip, of course, where you just decide, I’m going to start reinvesting all of the profits of the app, everything I have into getting a team in place, into getting proper development, customer support, and start ramping as much as the marketing as possible. You then start to head up to that seven-figure ARR figure and then you’re really solving some of the bigger challenges in the business. You’re taking it from this smaller side project app, if you like, into what starts to look like a proper company.
When it comes to deciding, is my business earnings or revenue multiple based, what does it command, you really have to look at what’s the stage in the life cycle that it’s at, how fast is it growing, does it have a proper company operator surrounding it. That’s going to inform who’s going to be interested in buying the business, which to your point, informs what actual valuation approach it takes.
That’s how the dynamic works. It can vary a bit even around the size because you can still get a revenue multiple for a business that sets (say) $400,000 or $500,000 in ARR because you may have solved all of those problems very quickly and you may have a strategy that’s a great fit knocking on your door. But on average, it tends to be at the seven figure and up.
Rob: Yeah. I’ll keep some folks anonymous for obvious reasons, but through stuff we’ve worked on with TinySeed, I know of a founder who got an offer and accepted it. It was 10X revenue and his revenue was approaching six figures ARR. He’s still in five figures, but he had really good tech and he had just enough traction. It was worth it and he wasn’t going to sell for less. There are always exceptions to the rules, of course, but I like the way you’ve thought about it, the way you described it.
When I think then, let’s talk about selling for SDE multiple. Someone asked me the other day. They said, I have a SaaS app that’s doing a couple hundred grand a year in net profit. What type of valuation should I expect? I said it depends on how fast it’s growing and stages, that and stuff, but I would think 3–4 times your annual net profit or your SDE.
Often, when I run a loose rule of thumb, I’d go 3½ is a typical one I use today. And then I said if it’s flat or declining, it might be something a business that I sold, that you and I worked on several years back. If I recall it, it was like 2.7X because it was either flat or actively declining a few percent per month that time. Of course, I was willing to sell it because it was still a nice chunk of cash for me and I had so much else going on that I just wasn’t going to turn it around. With that range in mind, what do you think?
David: I think the markets probably got a little bit more buoyant since then, which is good for sellers. I would say that now, the typical range is between three and five. The median, I would say is probably 3.8, 3.9 or so. The big informing, there’s always multiple variables that really define where you fall in that range, but I think the big things are really age, growth, churn, and owner time. Obviously in the one that we worked on.
Typically, you probably wouldn’t try and list something like that. We felt that we like the underlying app and even with slight decline, we probably got away with it. And we did at the end. I think 3–5 is a solid range to think about. If I think of an app that’s doing 25% growth year over year, that (say) 20 hours of work a week and maybe they’re 2 or 3 years old, that’s probably going to come on to something around the kind of 3.7–3.8 level with relatively low churn.
Rob: Yeah. This is great. I was doing this buying and selling stuff before I knew about any of the brokers. Really before the brokerage ecosystem had evolved in our space. I was buying and selling on SitePoint, and then on Flippa when it came around. The multiples there were 12–18 months of net profit. It was really gnarly.
David: It was the Wild West back then.
Rob: It was and it was tough. I bought a few deals I just got completely screwed on and then I got several deals that allowed me to quit my job. But I, for one, like the fact that we do have this. As a seller of apps, as a builder, as a maker, I think the fact that we have raised that multiple for SaaS, that this 3X–5X range exists, and then we all know that because it was really helpful.
It was similar to buying and selling real estate. Yes, we have Comps, Zillow, and Redfin. You can get an idea of what something’s worth versus certain assets like art of really expensive silver-age comic books. It’s not as liquid a market and often it’s hard to really find out how much this thing is worth. Having these rules of thumb is helpful for us as an industry. It just allows there to be more of a liquid space because buyers don’t come and think, I want 1X, and sellers aren’t thinking, I want 10x. That’s an illiquid market. The closer we can narrow it down to where everybody’s on the same page you’re coming to a transaction, the more likely it is to go through.
David: Yeah. Not to pat myself too much on the back here, a lot of that actual improvement evaluation has come from professionalization at the secondary market and that has come from a lot of advisors working really hard to present deals better, get better metrics, do a lot of buyer and seller education and just make the whole ecosystem way more transparent and robust now. That’s why the numbers have gone to where they are.
Rob: Yeah, I would agree with that. Those are SDE (Seller Discretionary Earnings) which again, in my mind it translates to net profit valuations. If we’re going to talk about revenue valuations, I don’t think we spent too much time on it, but again, when I think of an app that’s growing (like you said) 40% a year more, hits that seven-figure ARR mark, again, as a seller I would always do forward-looking ARR especially if I was growing. Meaning you take the current month then multiply it by 12. You don’t look back at the last 12 months.
I would think if I got to that million-dollar mark, then I’d be looking at between maybe 2X and 4X of revenue. As they start to get up to $3, $4, $5 million, I’m thinking 3X–5X, 3X–6X revenue. It can go up and down from there. Obviously, a lot of factors, but is my mental model (you think) is accurate or what are you seeing in the market today?
David: I think it’s probably a little richer again. This is a difficult one because as you know and you’ve seen a lot in TinySeed, there’s a big distortion factor between where should […] can come in on specific deals, when the right stars align, and where private equity (I think) arguably set a more stable financial approach to valuing businesses. I tend to try and stick with the financial private equity model because you never know when the strategics are going to come in with the whacking multiple that makes sense specifically for them.
I look a lot at this concept of the rule of 40 when it comes to revenue businesses. That’s a revenue multiple in SaaS businesses. That’s basically if the businesses’ revenue growth plus its EBITDA margin for that year is at or above 40%. Let’s say it’s growing at 35% year over year and it’s got 5% in EBITDA margin, then it’s just to that threshold. It starts to command (probably at that point) around the 3½X–4X revenue, and then every kind of meaningful step-up is above that level. If it’s growing 50% year over year or 55% year over year and has a 5% EBITDA margin, add it together it gets to 60%. Then, it’s 20% north of that rule of 40 number, so it really starts to approach higher than that. All of that needs to be qualified with the quality of that revenue growth, which then feeds into what’s going on with the churn number.
The range that I think balances revenue multiple would stretch if we’re just talking about where PE guys land. Yes, anywhere between two at the bottom, where something that’s really, really flat, stretching up to eight times of seeing private equity guys comfortably go to, they tend to tap out a bit after that. Then, north of that is very much the realm of strategics. That’s very, very specific and unique to the deal in question.
Rob: And the higher the revenue, the multiple it tends to edge up to you. If you’re at $2 million ARR versus $8 million ARR, it’s a different conversation.
David: 100%. That’s the same across every business model. The reason for that is simple, which is that it’s much harder to grow faster in a scale and you have a much more valuable business oversee your scale than you do believe that. If you’re continuing to grow 40% year over year doing $10 million in ARR versus $1 million then yeah, it’s going to be a meaningful shift in multiple.
Rob: I want to mix it up a little bit. You’ve done a lot of deals in your career, but maybe if you can think back to an example in your head of a deal that you worked on in the past year where you’re representing a seller. First, I want to talk about—obviously, we’ll keep it anonymous because of NDAs and all of that—when was a deal where you felt like the seller just did everything right, had all their ducks in a row and as an advisor, it was just a really, really easy deal to present and it was obviously had all right information and stuff?
I love to hear some items on that list where you showed up and this thing is dialed in. Then, we’ll flip and point where someone did everything wrong or most things wrong and maybe hear about the most common pitfalls that people have in businesses that lower their valuations. I really hope the one who did everything wrong was not me. Let’s start with everything right.
David: I think if you want to get the best value in the market, you have to have transparency and you have to be able to display how good a business is. That really pours through into two deep components, which is the SaaS metrics, pertaining to all of your revenue churn, LTV, ARPU, everything. The more granular you can get into that, the better that […], the better. The second is (of course) the financial side of things.
Where I see the biggest challenge come up with SaaS businesses is that, in my experience working with a lot of SaaS businesses, they often have multiple projects on the go at any one point in time. They hold them all under one particular holding company and they share their resources across different apps. Some of which works out, some of which don’t. Which means that you then have this incredibly mixed expense base across all of these different apps. When you go to sell it, it becomes extremely impossible or extremely difficult to articulate to a buyer how much expense should be attributed to a particular app, the particular app in question.
Thinking about this contrast of one business that worked really and one that didn’t, […] six months or so. The biggest marker as a difference was that in the case of the one that was working very well. She turned up everything was incredibly well dialed-in in terms of […] well her metrics. Financials were completely crisp and clear in QuickBooks, isolated within one corporate entity, everything was measured up and tracked. She had IP assignments already in place with third party developers. Measures how to […] documentation, set and ready.
The biggest thing that she did right was she had taken a very, very structured approach to marketing in terms of contacting, lots of affiliates, lots of influences in her space, and put everything that she’d ever done into a spreadsheet in terms of contact information and communication. That was an example of incredible level of detail. But when you could display that to a buyer and say you can literally just pick this up, go, and run with it now, it was a slam dunk going to market. We had incredible success with that and put it under offer very quickly, a very high multiple.
Conversely, just recently, I had a listing where all of the customers have built essentially by wire. Nobody’s using Stripe or any of the classic merchant processes. There’s nothing to plug in in terms of SaaS metrics. There was no tracking of customer numbers, no tracking of any SaaS metrics whatsoever, you just got X dollars in the bank every single month. We like complete opacity into what’s actually going on inside the business.
We essentially had to go back three years and rebuild the customer waterfall chart that you would normally see in biometrics or something by hand, which is very time-consuming. I think he’d run into the same issue, again, with the number side of things. He had multiple app developers working across them all and then you just run into a real problem with buyers around how do they trust the numbers that you’re saying in terms of the expenses associated with it.
It’s a tricky one. To be really honest with you, that situation is not entirely cured through the multiple. I think a lot of the times sellers […] take a whole multiple, one or multiple off my price if I deal with that. Sometimes, actually, it becomes almost impossible to sell. You reduce the trust down because it’s just not enough transparency. I think really having metrics and financials dialed. I know it sounds incredibly basic, but it’s very, very important before coming to market.
Rob: I can imagine it sounds like documentation is a big part of it and just clean finances and clean metrics with SaaS would be the thing. As I think about it, when we go to invest in TinySeed or pre-TinySeed when I would go to invest with my own money, there were just a handful of things I asked for. That’s what it is. It’s like, what do your numbers look like? What’s your funnel look like? What are your conversion rates here and there? And I’d probably dig in more maybe than a buyer of a SaaS app would because growth is the end result of all of that stuff.
When we invest, I’m like, what is your trial-to-pay, what is your visitor-to-trial and all that stuff. It gives me a sense of the business. I’d have a mental model about how SaaS works and I can start fitting it into these buckets. It does make sense that that, to a buyer, especially a savvy buyer, can really describe the health of the business just by having clean finances, clean metrics, and having a reading document in a way that you can prove it out.
I remember when I sold HitTail, I’m trying to think if I had stuff split out and I don’t think I did. Certainly with Drip, by that point I had spun it out into its own S Corp (I think), whereas HitTail was mixed in and I did have to do some pulling apart of expenses. I remember it was a lot of work on my side. It was not an ideal situation. That would certainly be a mistake I wouldn’t make again in the future, is having shared bank accounts, having shared credit cards and all that. It just seemed easy at the time.
Again, it’s that thing of, I don’t think I’ll ever sell this. Then, you get to a point where I want to sell this. Now it’s a real pain in the ass to go back and reconstruct the stuff.
David: You can get away with that to a crazy degree on a smaller sale, which is a situation around HitTail. If you did try to do that with Drip, it would be almost a nonstarter. The challenge is that—this all Rob—when you’re building a business, it can be very easy to get stuck into the operation nuts and bolts and not really zoom out and have to think about that particularly on the finances side of things. I think most of the time people have got the metrics property data, still sit every now and again without paying a bit of a piece. If you start scaling the business, you end up in the situation where you are (I’m saying this) at a reasonable scale, but it looks like a car crash when you look at it from a reporting standpoint.
Rob: Speaking of reporting, there’s obviously these great metrics tools like Baremetrics, ProfitWell, ChatMogul are the three that I hear about most often and frankly a bunch of my investments I use them. If someone uses one of those, is it pretty much a slam dunk for you guys to pull stuff out?
David: Yeah. That stuff is de facto standard now. I think ProfitWell is free as well. It’s no excuse to not use it.
Rob: Yeah, no indeed. In fact, one of the TinySeed companies called Summit—usummit.com—integrates with all three of those and then pulls their data in and does forward-looking projections. If I was a buyer these days, of course I want to look back, but I almost would love to see different scenarios of like, hey, if I can improve this number to this or if I hire a salesperson, I think it’s going to do this, you can project it out. I think that could be a pretty interesting thing moving forward.
I think the founder’s headed where the puck is going in terms of this like SaaS tools, both metrics tools but just all the tools we have to build these apps as they get more and more sophisticated. They can make it just a little bit easier as it gets more competitive. I think we need better tools to be able to keep up.
As we start to wrap up, I want to ask you a little bit on the buy side. I tend to think on the seller side and I know you do, too. As an advisor, you deal with the seller first. You have to get their numbers together, put together a prospectus, and you’re essentially marketing that to buyers.
If there are so many audiences who’re thinking about maybe buying their first SaaS app and whether they have a couple of hundred thousand in cash, which most people don’t—I’m guessing—whether they do have some money to do it or whether they are going to be thinking about doing an SBA loan or come in a little bit of seller financing along with some cash, what are the best buyers have? What do the best buyers do that’s different than deals that are maybe more difficult or they don’t go through because of issues with the buyer?
David: The most intelligent buyers tend to understand that a really successful deal will come together if they go out in partnership with the seller that’s already there. I think they take an extremely collaborative operation even from the outside. As soon as they jump on the call, if they’re like the early call about discovering more about the business, they’ll send you to sign a bill of friendship and relationship right away.
Rather than looking at it as a closed-and-done transaction, where just going to pay the amount, do the due diligence, clays out, and leave it, they realize that the owner is still a massive storehouse of information within the business. That is going to give them, if they can keep them on site and maybe can keep them incentivized to help consult (for example) after the deal, that’s going to be massively conducive to their success in the business. Everyone that I’ve seen is a master operator when it comes to buying the business. That’s a kind of partnership vibe right away and they continue it through due diligence.
That intent to create that deep relationship per sale is incredibly important. Particularly the larger the deal, the more so. Then there’s just so much per sale and any deal that you don’t know fully about the asset that you’re buying, and obviously, you know this Rob to some extent, it was obviously moving over to Lead pages to help the first few months or the first year or so. The same principle applies even on smaller transactions. I think that really, really intelligent buyers get that.
I’d also say we respect their due diligence process as well. They get very deep into ensuring that they’re going to be able to run with the business per sale, so looking a lot into the quality of the codebase, looking how well annotated it is, looking at how documented it is, speaking a lot with the developers to really understand some of the critical components behind it so that you don’t end up in a situation, 3-6 months post sale, where you were tinkering around with the codebase that you don’t fully understand yet, and the seller’s not around and not particularly amenable to helping you.
Everyone that I’ve seen that does very successful by-side work, kind of sticks to those principles and plays them out from offer through due diligence and then to closing.
Rob: All right, David. Thanks so much again for taking some time with me today. Folks want to dig more into this stuff. You’ve done a lot of writing on this topic and one of the articles is like a damn book. It’s like an ebook length for sure. Will link it over the show notes, but it’s called How to Build, Value, and Sell a SaaS Business for Six, Seven or Eight Figures. There are eight different sections and you just talk more in-depth about all the stuff we’ve talked about today. Again, link that up into that show notes.
If folks want to keep up with you at Quiet Light, it’s quietlightbrokerage.com, and on Twitter it’s @quietlightinc.
Thanks again to David for coming on the show. I haven’t done a Q&A episode in a while, but I think in the next one or two episodes, I will be. If you have questions for me or a guest that I bring on the show about this ambitious yet sane SaaS companies, a lot of bootstrap, some self-funded, there’s a few that are raising their angel rounds and they’re indie funded, but just around this idea of building companies where it’s founder first, where founder maintains control, where we focus on building profitable, real companies, real businesses for real customers. Send those questions in firstname.lastname@example.org. Voicemails always go to the top but always happy to accept text questions as well.
Thank you so much for listening and I will talk to you again next Tuesday morning.
In this episode of Startups For The Rest Of US, Rob and Mike answer a number of listener questions on topics including monetizing B2C, selling a small SaaS,and insurance. They also get a update from a past listener’s question.
Items mentioned in this episode:
Rob: In this episode of Startups For The Rest Of Us, Mike and I talk about monetizing B2C, selling a small SaaS versus running it, and more listener questions. This is Startups For The Rest Of Us Episode 437.
Welcome to Startups For The Rest Of Us, the podcast that helps developers, designers, and entrepreneurs be awesome at building, launching, and growing software products, whether you’ve build your first product or you’re just thinking about it. I’m Rob.
Mike: And I’m Mike.
Rob: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. Speaking of mistakes, Mike, you’ve got on a podcast with me today and that was your first mistake. So don’t make the same mistake that Mike has just made.
Mike: 436 times in a row?
Rob: Exactly. You’d think you’d learn. Fool me once, shame on you. All right. Who is the only non-Jedi in the original Star Wars trilogy to use a lightsaber?
Mike: The only non-Jedi? That would have been Han Solo.
Rob: Nice. Which movie and what was he doing?
Mike: Empire Strikes Back and he was slicing it to open to keep Luke warmer after freezing.
Rob: There it is. Well done, Mike. I thought they smelled bad on the outside. What is the word this week, sir?
Mike: That was not a great lead-in.
Rob: Not at all. We lost our three listeners.
Mike: Well, I have an article that’s going to be in the SaaS Mag on email follow-ups. It’s coming out I think in the next week or two. We are at MicroConf this week and my understanding is that the magazine is going to be distributed at MicroConf by FE International, who is a MicroConf sponsor.
I’ve been working on the article since the fall at some point. It’s very different than working with online articles where can do all the editing and you just publish it versus something that’s actually printed and then months later it’s actually printed.
Rob: We have lead time on them because they’ll have them sure printed overseas and they get shipped here, they have all that layout and all that stuff. It’s tough. I’ve heard when I’ve contributed articles to a magazine, it’s like 3–4 months lead time.
Mike: Yeah and my wife used to work in the magazine industry at EH Publishing and that what they did is the same thing. She never knew what date it was because they had to work three or four months in advance, so all of her work was three or four months out and she’s just like, “What is today? I have no idea what the month even is,” so she’d always gets confused about that.
It should be coming out next week. I haven’t seen the final article but it should be good. It will be interesting to see that in print.
Rob: Congratulations. That will be good. And as you said, we have at MicroConf day, we’re hanging out emceeing and doing all that kind of stuff when this episode comes out. I also wanted to mention again that next week in a sense, I’ll be in London with my family and I’m thinking about putting together a bootstrappers’ meetup with Sherry. So if you have an evening between April first and sixth, go to robwalling.com/london, fill out a quick three-question survey to figure out if we can pull something together. I believe we’re staying in the West End of London, so we’ll probably be within that vicinity. I hope to see you there.
Mike: Cool. I would recommend that we should never have MicroConf scheduled in late March ever again. That is the worst time ever.
Rob: I know. This is the first time we’ve done it early and it will never happen again. I think you and I have both just had experienced great pain of trying to pull it together.
Mike: Yeah. Part of it is just because of the beginning of the year and obviously, taxes kind of factors into it but my health insurance is right up for renewal about this time. So, I’ve got all this paperwork to go through for that. Between my business, my wife’s business, then personal taxes, and all the stuff going on with MicroConf, it’s just really, really hard to keep up with everything.
Rob: And then it’s one last month to sell tickets. I think you and I have to start thinking about the first of the year, like, “Hey, MicroConf’s in a few months,” but that didn’t work this year because we had 90 days from the first of the month, so we just had to push everything on a different time scale. Given that I’m cranking on all this TinySeed stuff, which we have mental goals to get a bunch of stuff done by MicroConf, if we had another month, things would be just so much better. In the past, we’ve often done MicroConf like April 30th and I think if we can get as close to that date as possible, that’s where we want it to be.
Mike: One last thing on MicroConf, if you’re listening to this and are coming to Starter Edition this year, we have a new addition. We have a MicroConf community ambassador I want to introduce you to. This is Marie Poulin. She has spoken at MicroConf this past year and she’s also attended the previous two years.
What we wanted to do is we wanted to have essentially a community ambassador in place that people could go talk to. I get the impression that some people are a little hesitant to come talk to you and me directly just because we’re involved in the conference itself, but at Started Edition it really made a lot of sense to bring somebody else in who could act as the interface and the ambassador, either on their behalf and make them feel comfortable to coming to MicroConf. Not that we don’t do that ourselves but I do sense some hesitation from some people in talking to us just because they’re just starting out.
Rob: Sure and we can’t talk to everyone and we can’t gather everyone. The first year we did the conference, if I recall, it’s like 110 people. You and I could almost single-handedly—seemingly stayed up until 4:00 AM every night which we did—almost talked to everyone there, almost get everyone gathered, and try to build that community. That was a lot of hustle in the early days but given that we had back-to-back conferences, both of the conferences were substantially larger than that and since they are bigger, there’s more moving parts, you and I are just busier than we used to be with stuff. This makes a lot of sense is to have another person. Zander does as much as he can, too, although he tends to be running a lot of the logistics and such, but to have someone else who can help connect to people and who they feel comfortable gathering around, I think is a really good idea. You’ve come up with that idea yourself?
Mike: Yeah, I did. I reached out to her and asked her if it’s something she’d be interested in doing, she said yes, and it kind of worked things out.
Rob: That’s cool. I think we are both excited to have Marie hanging out and building some community at MicroConf Starter.
Mike: What are we talking about this week?
Rob: This week we’re going to be running through some listener questions, some comments, we actually have a callback to a question we discussed a few weeks ago. It’s a pretty good mix today. Several voicemails which, as you know, I like.
The first question is actually a comment from Michael Needle. And he says, “You guys so crush it. I’ve written before and you responded to at least one of my questions on-the-air. I just listened to the latest episode about SaaS KPIs and I wanted to say that you nailed it. This info came at exactly the right time for a project I’m working on, so thanks for keeping the podcast going and keeping it so relevant. I’m always learning something from you guys, but today it was really helpful. Thanks.”
Really, I appreciate that. It’s nice when we hit someone right where they are at that time.
Our next email is a follow-up from Zamir Khan who had emailed a few weeks ago about his B2C SaaS app called VidHug, which he built as a scratch around itch and has a little LTV and that kind of stuff. He asked us if he was crazy and you and I discussed it for a while. He says, “Hey guys. Thanks so much for answering my question on the podcast and in such great detail. I have to admit, when Mike first answered yes to my, ‘Am I crazy?’ question, my heart sank, but I soon realized it was a joke. You guys really got me.”
“I was actually bracing myself the whole time for a take that I would strongly disagree with, but it never came. I pretty much agree with everything you guys said and giving myself a finite timeline, likely the end of the summer if not earlier, to scale VidHug beyond the point you talked about, for example, $5000 a month. If not, then I’ll put in the word to remove myself from it and make it a mostly passive income stream if that’s possible.”
“Recently, the experience I’ve had that I think is another downside of B2C is it’s extremely important to set support expectations. I’ve got customers in multiple time zones and they’re all working on an important special occasion. I can’t afford, from a mental standpoint, to take all of that on, so I’m putting in work to set up some real expectations when we’ll be available to respond, et cetera.”
“I appreciate now that in a B2B North America-focused business, that problem is quite easier to manage. Even still, I imagine setting support expectations as something a lot of new founders don’t get right away. Things like having a live chat widget on your site. I have one from Drift and I’m removing it. The value-add hasn’t been great in terms of talking to customers, where it seems to signal that we’re available at all hours even when it shows offline. People aren’t understanding that. I love to hear your take on setting support expectations chat versus email, et cetera.”
I don’t know. In all honesty, I think he’s doing a good job of it. I think just setting them is the right step to letting people know how long it will take you to respond. With some businesses, I think chat works great. When I was still a single founder, I would never put chat on the site. It’s just too interruptive. If you’re trying to write code and get other things done, you push them towards email. People do tend to think deeper about what they’re going to email about, whereas with chat, they can just start typing as soon as they have any thought. If you’re B2C and you’re a high-volume-low-cost thing, you really do need to think about narrowing that focus down to just the critical chats to get through. If you’re higher-priced, it might be a lot less of an issue.
Mike: I think if you are going to have that support, if you get a true support system in place—there’s lots of direct apps out there that will do it; there’s Zendesk, there’s Teamwork Desk, there’s Groove, there’s all kinds of different things out there—just about any one of them should respond to an email with a ticket number or should be able to and give them a ticket number, and tell them, “This is what you should expect in terms of a response time.” If you don’t set that expectation with them through email, they send the email, and they don’t hear back from you, it’s very easy for them to say, “Oh, I haven’t heard from you guys in three hours. I’m going to send another email,” or five minutes. There are people out there who will send you an email and five minutes later they’re like, “I haven’t heard from you, yet.” So, you need to set those expectations and having some sort of automatic reply with a ticket number and saying, “Hey, this is when you’ll hear back from us, and this is the days of the week we will respond to tickets.” That’s going to go a long way.
Rob: I wouldn’t do that from the start. I would do it when it becomes a problem. It’s nothing personal because I personally find them irritating when I get the response. It’s like, “I don’t want that.” If it’s not a problem, don’t clutter people’s inboxes. Thanks for the feedback and input and best of luck. Moving forward, feel free to update us at the end of the summer, based on what happens with VidHug. I think we’re all curious to hear about it.
Our next email is actually another follow-up. Zee has asked us about insurance and what insurance does a SaaS app need, I believe was the question a few weeks ago. You and I have discussed it. He says, “Hey guys. Thanks for taking my question and the feedback. I actually did find Founder Shield and got liability insurance through them before hearing your response on the podcast today. Funny that you mentioned it but yes, they are awesome, highly recommended.”
“This biggest thing was not just the personal insurance but the cyberdata security. As you grow your SaaS, I think it’s important to protect yourself, especially if you’re doing B2B and storing a good amount of data. The insurance was not too bad, roughly comes out to between $1500 and $3000 per year, depending on your policy, up to around $1–$3 million in protection. Hope that’s helpful as a follow-up. Thanks again. You guys are doing an awesome job. Keep it up.”
I always love to hear the follow-up. You and I can have ideas and thoughts and experience because I’ve used Founder Shield, but it was couple of years ago. It’s cool. We get better as the community gets better.
Mike: Yeah. Things change over time and you don’t necessarily always have the context from when you first did something versus what recent updates are. Sometimes we’ll grandfather people or sometimes we’ll change policies and you don’t necessarily notice because you’re just still a customer operating under some slightly different agreement that was in the past. So, it’s good to hear these types of updates.
Rob: For our first question of the day, we have a voicemail about monetizing a B2C app.
Gurpreet: Hi, Rob and Mike. This is Gurpreet. I’m calling you from India. I have a question regarding a new side project that I have just started. Check out the website flowlog.app. This is a personal productivity tracker, which was inspired from a recent podcast that I heard on the Tim Ferris show of a great writer called Jim Collins. He has a system to log his creative hours and so on. I’m making an app around it.
My question is more around monetization. This is a side project for me and I’m not planning to earn big money from this, but I would like that my expectation would be that in a reasonable period of time, let’s say about six months or so, that app should start generating $3000–$5000 a month so that I can continue working on it, developing it, maybe spend some resources on marketing and so on.
My question is, what, according to you, is the best way to do that? One way that I could think of is have a free app on the app store but have a subscription model for certain advanced features. That is one. It would have to be a very small amount $2–$5 a month, or I could just set up a Patreon page and see the people who are benefiting from this app might want to donate something. Can you share your thoughts or how would you think about it?
Rob: For listeners following along, it’s a personal productivity app, so very much B2C. It’s based on Jim Collin’s system that he talked about on the Tim Ferris podcast, and it’s flowlog.app. What do you think, Mike?
Mike: I think the question he’s trying to answer is what’s the best way for him to get the app to generate between $3000 and $5000 a month in 3–6 months. The thoughts that he had were maybe putting it out as a free app on the app store, maybe having a subscription model for advanced features, or maybe doing a Patreon page, what sorts of things would we think about in terms of going in that direction.
I think putting the free app on the app store, it’s a great idea in terms of getting distribution. The problem is determining which features you’re going to charge people for and how you’re going to get essentially traction there to the point that people are going to pay for it. I would be careful about, in terms of the subscription model, is I would not charge $2–$5 a month. I would charge a yearly fee instead of a monthly fee.
If you’re charging $2 or $5 a month, then what you’re going to end up with is people sign-up for a month or two and then they’re going to churn out versus those people who sign-up whether it’s because they’re aspirational or because they’re really committed to tracking that stuff and they want to get the full experience. You’re going to have a lot less charge-backs, a lot less churn. It’s going to be easier to deal with if you charge on an annual basis.
There’s a bunch of apps that I pay for on an annual basis but if I were paying for on a monthly basis, I would probably think twice just because sometimes, I’ll fall off the wagon, so to speak, and stop using it for a little bit, and then I’ll come back to it later. But with an annual plan, they can always come back to it later. If they’re going to charge for it every month, if they stop using it for even a couple of weeks, they may very well second-guess it and say, “Oh well, I’m not going to continue paying for this because I haven’t used it.”
Those are the things that I would probably think about. You have to do some customer research to figure out whether or not the features that you want to charge for are going to be worth it for people to pay for them. That’s going to take some customer development. You’re going to have to talk to people and without using your app, I don’t know exactly what those features would be.
Beyond that, you could also go the route of trying to charge outright for it. But I feel like that’s probably longer-term, potentially losing proposition because you have back-end stuff that you need to keep running to store their data or be able to export it, do reports on, those types of things are probably going to be a support burden for you that you’re not going to want.
Rob: I don’t think I have anything to add. B2C is really hard. I think $3000–$5000 a month in six months is extremely, extremely ambitious. You would have to just catch a lucky break to grow this to that if you’re charging, as you said, $60 a year or $100 a year. I guess that’s the thing.
Let’s say you were able to pull off $100 a year. You do only need to sell 30 people a month on it to be able to use it. If you use a freemium model, you’re going to get about 1%–3% to sign up. That means you need 10,000 people to get between 100 and 300 and that’s every month. I guess if you’re charging $100 a piece at that point and you could pull it off, then that would be a substantial amount of money because 100 times 100 is 10,000. But I think that getting 10,000 people that download your app every month, and I think the price sensitivity of this group, means that you’re not going to be able to charge $100. With some more realistic numbers, I feel it’s doable but very difficult and you’re going to have to catch a lucky break. You’re almost going to have to have Jim Collins endorse it, link to it from his website, or tweet about it and then get some momentum. Interesting stuff needs to happen.
So these are those plays where it’s a little more hit-based, meaning, it’s not exactly but it is more similar to writing a hit song or making a movie that everyone likes. It is B2C rather than building a more boring B2B app that has that repeatable process that we know how to execute on, whether it’s inbound or outbound sales, you do this marketing, you optimize your funnel, and this and that. It’s more erratic and it’s more difficult to accomplish with mobile.
I don’t want to discourage him from doing it. I think if you’re super interested in doing it, you want to do it as an experiment, and you don’t need that much money, I wouldn’t have the expectation of $3000–$5000 in six months. I think it’s one thing. I think you can make that as your high-end goal. If you achieve it, that’s awesome. Let us know. But I think it’s much more realistic to build this and make a few hundred dollars a month by the time you get down the road.
But again, it depends. You just have to get in. You’ll know more than us in two weeks or four weeks or whatever when you get this app in people’s hands. It’s like what is the price sensitivity and how are other apps like this charging? Can I only charge $30–$50 a year? How many people can you get in? And all that stuff. Definitely, I wish you the best of luck and hope it works out.
Mike: My other comment that I would add on, that I agree with you on the fact that it’s probably going to take longer than that 3–6 months to get there. There’s also the trajectory to consider because very early on, you’re not going to make as much money the first month.
Let’s say you make $50 or $100. You want to progressively be making more money as time goes on versus having a giant spike either early on or later on in the 3–6 months time frame that you’re looking at that is going to peak and then come back down. Maybe you hit it for one month but then it drops. I don’t know what that’s going to look like for your app or for these types of apps, but that’s something to be careful of is what does the trajectory looks like over time.
Even if you’re selling, let’s say, annual subscriptions. Let’s say you sold 10 annual subscriptions this month and 20 the next month. As long as those are continuing to go up, you’re going to get there at some point. But you want to make sure that you’re on that trajectory. If you’re not, then it’s a problem.
Rob: Thanks for the question and best of luck. Our next voice mail is about whether to sell a small SaaS app that’s doing about $100,000 a year versus continuing to run it.
Adam: Hey guys. My name is Adam. I have a SaaS Ruby on Rails app. I just hit yesterday $100,000 ARR, which is awesome. I have a question about choosing to have someone acquire an app versus running it myself. The question is, what is the true value of this thing that accrued? I actually talked to FE International and it looks like you get a bump for SaaS, but the multiples for a small company like mine seems to be two to an app.
So if I made $50,000 in net income from that $100,000 ARR—that’s without paying myself—they would say that it’s worth maybe $130,000. But for me, if I continue to run it, I’m going to make all those cash flows from the future cash flows for the business. It seems like I would be a sucker to sell it for 2½ times net income because if I run it for the next 10 years, I’ll get 10 times my current income and probably going to continue to grow. Are the valuations really, really low for small businesses like us?
I see companies traded on the stock exchange and they’re getting these huge multiples like 20, or 30, or 100. Is it true that we’re getting screwed as small micropreneurs and we only get 2½ of our income? Is that ever a big deal for a developer who’s running a company? Would you ever want to sell it for 2½? It seems the buyer really gets the benefit, not the seller. Could you talk about these issues? Even with success, what is the value of this thing even if you’ve made it to $100,000 ARR? Thanks so much. Sorry for the long message. Bye.
Rob: So just to clarify, 2½ times net profit sounds low to me. I would thing for a small SaaS app like this, you should get 3½, and if it’s growing, you should get between 3½ and 4 even for a small app like this.
But I don’t think that counters his point. He’s basically saying, 2½, 3½, whatever, he sees things on the public market trading at 10 or 100 times net multiple. And shouldn’t he just run it for 10 years and get 10 years of of running rather than taking 2½, 3½, whatever it is? What do you think, Mike?
Mike: I think one of the things to keep in mind is that your operating in this price range, I would say, where the multiple is going to be different based on where you’re at. If you have a business that has a, I think you’ve mentioned, $50,000 net income, if somebody takes it over, they’re probably going to have to put somebody in, which essentially reverses the earnings of that particular business, which again, is totally true. But if you had, let’s say, 10X that, you had $500,000 of net income, the difference in value of that business versus something that only brings in $50,000, is going to be very, very different.
That’s something to definitely keep in mind because there are certain ranges where, if a business is making just $50,000, it’s not going to be worth nearly as much as something that has $500,000 of disposable income. They can use that money to bring somebody in, pay them, and they still got $400,000 left to play around with to do other things, marketing, bring on more people, do growth experiments, all kinds of different things.
The other thing that I think he had mentioned was comparing it against larger businesses. Again, the earnings of those large businesses like public companies and things that you see in the stock market, they’re making a lot more money, so they are going to naturally be priced higher. Those are the things I would definitely keep in mind.
The thing that he didn’t mention at all was the fact that if you are going to run this for the next 10 years, for example—you said that you get to keep all of the net earnings from that, that is true—is the business going to be the same in 10 years? Is it going to grow? Is an event going to happen at some point during those 10 years that it’s going to wipe out a substantial portion of the market? Is Google going to launch a product that competes directly in your space? Or is a funded company going to do the same thing?
There’s all these things that create risk for your business moving forward. For a SaaS app, that risk is heavily reduced because people are already on a subscription and it’s easier to mitigate those types of risks, but it is still a risk. And because of the scale that you’re working at right now, it presents too much of a risk. I suspect that’s why there’s probably that 2½ multiple versus, like what Rob would said, either expect a three or four.
But you would have to keep in mind that something could happen tomorrow and your entire business goes away. You could get sued, or somebody could take the domain, or somebody could say, “Oh well, your app name is actually a trademark and we own that. We’re going to come after you and sue you for $100,000.” For only making $50,000 a year, that’s pushing it in a really tough spot. Those types of events factor in a risk over the next 10 years and you have no idea what those actually come out to be. It may happen, it may not, but there are factors you have to consider.
Rob: Yup, I agree. I think people with a first-time app feel like it will run forever. Ten years is forever in this space. This is why the small business analogy, like when people say, “I’ll just build a business. It’s like a bakery, or like a gymnasium, or a grocery store,” it doesn’t work the same with SaaS apps and technology because the stuff changes so fast. In 10 years, you said it all.
The apps that I had that were making money in 2005–2010, I sold all of them and a lot of them have basically shut down, not because of the code didn’t still work but it was often because the code is so out of date that no one can maintain it now. It’s a classic ASP or it’s like ASP.NET version 3.0 and you have to completely rewrite the product to keep it updated. If you don’t do that, then you just ran out of the ability to find developers.
Or Google makes an SEO change that completely decimates your product. I had this happen multiple times. I know dozens and dozens of founders who’ve have their business just turned upside-down overnight after years of building it into a five-, six-, or seven-figure annual business.
You can have new competitors, the market can change, you can have industries that get wiped out. Let’s say you have a job board for truckers. I’m just making stuff up here. The trucking industry is going to have a real issue, or at least truckers are, over the next 10–20 years as self-driving trucks come around.
There’s all these factors that you don’t think when you have your first app and you feel like no one can touch it. “There’s no chance that this Twitter client or this Facebook client that I’ve built is going to get completely decimated when they decide that they’re not going to support my API calls anymore,” which they do all the time. We’ve seen people within our community have apps, have to do layoffs, and get hit pretty hard revenue-wise by people churning out because you can’t provide the value anymore. Or if you run an ESP. If you don’t maintain it, you get on blacklist. Now your deliverability is not as good. On and on and on. You and I could sit here and name your name to getting sued. There are all these things that just happen the longer you do it.
I’m not saying that you should sell for 2½ or 3½ or whatever you can get for it. What I’m saying is don’t think that you’re going to run this business for 10 years without a substantial amount of work over that time. You may not have any work right now for six months, maybe nine months, then it will start sliding. Something will change out there.
If you want to put in that work, then great, but don’t think that you can just coast for 10 years and that your business isn’t going to get turned upside-down, let’s say, every 18-48 months. It’s a big range but it depends. I don’t know if you have APIs you’re relying on, who your competitors are, what space you’re in, but every couple of years you’re probably going to get this big curveball and if you’re doing something else and can’t pay attention to it, bad things happen.
That’s really why people sell for those “lower” multiples, is because there’s risk and because you want to take that cash flow ahead of time. Take this several years of cash flow and just put it into your next thing. Typically, it’s buy that next thing or buy out your own time so that you can then build the next bigger idea that can last longer. That’s what a lot of people do. Not necessarily bigger in terms of head count but bigger in terms of net profit, I think.
Mike: Yeah. I want to second that. I was not saying that you should take this because of all the risk involved. It’s more of, just be aware that that’s why some people do it and, to Rob’s point, sometimes where people will just want to take that money off the table and take a year or two of net earnings in order to be able to do other things. If that’s something you want to do, then great. If not, then you could continue to run it. Just be aware that there’s risks no matter what you do. There’s risk if you sell it. It could become huge and blow up or it may not. You may decide to run it for 10 years and it never grows beyond having a net profit of $60,000–$70,000. It’s high enough that you don’t want to get rid of it, but low enough that it’s hard to live off of that based on where you’re currently settled down.
Rob: Yeah and I think the idea of public companies are valued at 10 or 100 times, yeah, that’s true. Most are not of 100. Those are the outliers. We look at Amazon. Let’s get rid of Amazon because they […] special way. Let’s not look at the hot-hot, hyper growth, 50 million subscriber tech companies. They’re completely outliers. Look at the median price-to-earnings ratio or look at the bottom 50% and it starts to become a little more realistic. It still doesn’t tend to be down around 2–4 in the range that we’re talking about, but you’ll see a lot that are in that more 5–10 times annual earnings, which is in the ballpark. It’s within the order of magnitude we’re talking about.
And there’s the public companies. To be a public company, you have […] and all this crazy stuff you have to apply to, so you’re not going to do it if it’s going to be the same multiple. There’s so much scrutiny and all the stuff that comes along with it, so unless it had some type of premium, then you wouldn’t do it.
These are good things to think about. I think the other thing I drew out is, Mike, when I started buying apps in, let’s say, 2005–2011 time frame when it was really the heyday of me acquiring a bunch of stuff, the multiples were 12–18 months of net profit. There really was no FE International, there was no Quiet Light, there is no Empire Flippers. If they were around, we didn’t know about them.
It was all like Flippa, it was like deals on forums, it was called email, and that was the multiple. There was so much risk. There was potential for fraud, which I think has been greatly removed in our space and that is why I like the fact that we have these brokers now. I like the fact that the multiples have risen. It’s certainly a bummer from an acquirer’s perspective but I do think the whole community benefits by the fact that the multiples are where they are today.
Mike: We were just talking about how things were different then. Those were also the days where you had a Blockbuster card.
Rob: That’s true.
Mike: I’m just saying. That how old you are.
Rob: Exactly. No. That’s such a good point because you know, Mike, Blockbuster could have thought, “Why don’t we just run this thing for 20 years and just collect the revenue off of Blockbuster?” and now they’re bankrupt because Netflix came in and ate their lunch. It’s a perfect example. Blockbuster, I believe, was a public company. It’s just another example of how quickly things are eaten up by technology these days.
Mike: That’s actually exactly what happened to them because they had the opportunity to buy Netflix for $1 million or I forget how much it was, but they had an opportunity to buy Netflix at one point and they decided not to because they’re like, “Oh yeah, this is not going to fly and we’ll eat their lunch,” and it turned out it went the other way.
Rob: Yeah. Cool. So, good question. Thanks for sending that in. Our next question talks about what a SaaS app should look like at $10,000 MRR, $20,000 MRR, and beyond.
Adam: Hi guys. This is Adam again. I have a second question. I heard you say in one of your old podcast that the goal for probably Startups For The Rest Of Us listeners is to get your app to $10,000, or $20,000, or $30,000 MRR. Could you guys discuss what your business should look like at different MRRs, like when do you hire your first employee? When you do hire a customer support person?
Right now, I’m just doing everything myself with an offshore developer. That’s like $8300 MRR. What do you recommend at $5000 MRR? Could you say like, “$5000 MRR your company probably is like you have a full-time job and you’re in your basement weekends.” And then $10,000 and $15,000 and at $20,000 like the stages of growth based on the MRR, that would help a lot for me to get some kind of benchmark. Thanks so much guys for what you do. You’re awesome.
Rob: Mike, I will let you kick this off, but I think the answer is, “It depends.” It depends pretty heavily. There are people that can live on $5000 MRR. In that case, you’re not in your basement work the day job. But if you live in California, then maybe you are.
I also think it depends a lot on the app. Some apps need a ton of support. If you’re building an ESP, people have a ton of questions. It’s like Baremetrics where you just opt-in to Stripe and you […] off and then you have charts.
I bet in the early days, Josh didn’t need very many support people and could take that way, way further. And if you’re building a complicated app, it takes a lot of stuff to get set-up. Preface that and then kick it over to you.
Mike: I agree with you on the ‘it depends,’ and I think part of the problem is that we don’t necessarily have a lot of data points because so many different businesses are different from one another. For example, you Rob Walling. Your starting resources are going to be very different than the listener, or myself, or pretty much anybody else on the planet because it’s not just about the money that you have available. It’s also about the relationships the you have, the code or technology that you already have, the experiences that you have, and sometimes the relationships you have with certain people allow you to get into channels that other people would not.
By virtue of talking about those, you’re going to have to hire for different things than somebody like me or any given listener is going to have to hire for different things. The restraints on each individual are going to be different, based on whether you have a spouse, whether you have kids, whether you have a sick parent that you have to take care of on Thursday afternoons. All those things factor into it. It makes it hard to come up with a over reaching generalization that is globally applicable.
That said, you can come to certain, as you said, revenue benchmarks of $5000 and $10,000 and say this is probably where you might want to start thinking about this. It doesn’t mean you do it. It just means you start thinking about those things. I think when it gets to that stuff, anywhere between, I’d say, $3000–$5000 you probably want to start thinking about outsourcing support, when you get up to $10,000, you should probably be full-time on it, but again, it depends on whether or not you’re going to be able to support yourself when you are full-time on it.
I heard probably from Balsamic talk about this and I think it was at a business and software talk where he said that he held off on his first first hire until after he got to a point where he was just literally not sleeping because he could not possibly do all the stuff that was required of him. It’s interesting because its almost 10 years ago where that happened. It was around the beginning of 2009 and he was getting to the point of 2500 customers on a weekly basis. He was getting so much money coming in but he just could not keep up with the business. He’s like, “I have to hire somebody.”
If you do the math on it, 2500 customers in a week, I don’t remember how much Balsamic was selling for at the time. I’ll say $40 or $50 but at that rate, that’s a substantial amount of money. And that’s on a weekly basis. Not even a monthly basis. So you can figure $60,000-$80,000 on a monthly basis, something like that. That’s where he got to before he started bringing in one person and it’s because he didn’t want to hire. At some point you have to. Certain scales of problems are so large you have to do things that maybe you don’t want to. But at the same time, those things are sometimes good for the business.
Rob, I’ll let you jump in. Where do you think? At $10,000 it’s pretty not standard but that’s kind of the benchmark most people use for going full-time on it. But what does $15,000 mean? What does $20,000? What does $25,000 mean?
Rob: It really does depend on where you live, how far you can take that in, where you’re hiring out of. Let’s say you’re in Chiang Mai, Thailand, you can live on $2500 a month, you can hire people there or in your same time zone, full-time developers for $1500–$2000 a month, then you can move way faster if you want to. Or you can just bank money like crazy.
So, it does depend on are you doing this as a lifestyle thing? When I think back to my experience, I had some apps where I didn’t really want them to grow. I just wanted to rake in the $3000-$20,000 a month they were throwing off and just maintain that. I had no aspirations to 5X or 10X that, and that’s a great lifestyle business. If that’s your goal, then do that.
But if you do want to get as big as possible, you want to create as much value financially for yourself as possible, you want to grow it to $100,000 a month, and when you get into this seven figures and you have a SaaS app in a seven-figure revenue range, even high six figures but certainly if you get into seven figures, that is where the exit multiples change because there’s private equity that is willing to start talking about revenue multiples instead of net profit. So, it doesn’t become this 2½–3½ range. It can be 1½–3 times your top line revenue. But you have to get big enough that it’s worth them even having a conversation with you.
All that to say, there’s two totally different paths. I would say do support as long as humanly possible and don’t hire a support person until you feel like, “I’m either really tired of this, I’ve learned all I can from my customers, or I don’t want to do this anymore.” I can see hiring a support person well before $10,000. I can see hiring when you’re at $5000 if you just can move faster by not doing the support.
At $15,000 or $20,000 I would probably remove myself from development as much as possible, unless it’s something you really want to do. But if you want to maximize growth, stop doing it, hire someone who’s good. You have budget to do that. If you want to do it, that’s fine. You’re not going to grow as fast. Just know that that’s what you’re doing. You don’t have to. That’s the beauty of what we’re doing. We’re bootstrapping. You can do what you want.
When you get into the $30,000 or $40,000 that’s when you can either just be raking in buckets of money, which is awesome, or you can start thinking long term about, “Okay, now how do I double from here?” because I think it’s $83,333 is where you hit that $1 million a year. How do I get from $30,000 or $40,000 to $80,000, where are my plateaus up ahead and who do I need to hire to stay out ahead of that?
That’s typically when you start thinking about hiring someone to head up marketing or growth because the founders are often doing it up until that point. If that’s what you want to do, then focus. But if you want to rise up that one level to where you’re managing product, engineering, marketing, customer success, and sales, then that’s in that range where I think you have budget to hire someone who’s good at growth and is not someone junior you’re going to have to train, is expensive, much like a knowledgeable developer is expensive.
So those are the trade-offs. We could walk through a hypothetical example. I don’t know that it’s any more helpful than that. I think to me it’s like keep the team duty opposite to what’s venture fund companies do, which they try to grow headcount super fast and spend the money.
I think keep the team as small as possible, unless you’re putting yourself under undue stress, unless you’re more stressed than you should be, unless things are falling through the cracks. That’s where you’ve taken it too far. But in general, the more profit, the better because it just gives your optionality. It gives you optionality is take more money off the top. It gives you optionality to hire someone when you need it.
If you have $10,000 a month that you’re just throwing into that business bank account, that’s great. If you decide to […], “Oh my gosh, our competitor’s doing this and we really need a head of sales or a head of customer success or whatever,” you have the option to do that.
Mike: And I think that’s the entire point of the whole question is what are the different options? I think Rob just laid out a bunch of different places where, at those points you have those options, and it really boils down to what you want to do with the business, where you see it going, and what you don’t want to actually do inside the business. Those are the things you hire out at whatever those points along the way are.
Rob: So thanks for those two questions, Adam. I hope our discussion was helpful.
Mike: I think that about wraps us up for the day. If you have a question, you can call it into us at our voicemail number at 1-888-801-9690 or you can email it to us at email@example.com. Our theme music is an excerpt from We’re Outta Control by MoOt, used under Creative Commons. Subscribe to us on iTunes by searching for ‘startups’ and visit startupsfortherestofus.com for a full transcript to each episode. Thanks for listening and we’ll see you next time.