The Acquisition

The story behind my first SaaS acquisition

One of the best aspects of running an agency is that it cashflows immediately. There are no R&D costs, no products need to be manufactured, or raw materials sourced. You’re essentially selling knowledge, or doing specialized work which the customer can’t do themselves.

Successful agency owners end up with a “good to have” problem, an ever expanding bank account (assuming they have “lifestyle creep” under control).

Since money sitting in the bank loses value over time because of inflation, agency owners need to work out what they should do with my profits.

An agency unfortunately isn’t a great vehicle to invest back into. You could hire an expensive design firm to redo your website, or invest in paid ads to drive more leads but the options are limited.

I had this “problem” last year and needed to work out what to do with my growing cash balance.

My first approach was to invest in the stock market. I was already dollar-cost averaging into the S&P each month to take full advantage of the tax benefits available to me as a sole proprietor in Israel. This approach would provide me with an average return of about 9% a year before inflation. In Israel the tax benefits max out after investing about $10k USD in a single year, so my returns would be hit hard if I exceeded this $10k amount. I needed another option.

The second approach I started to investigate was value investing.

I started studying value investing by reading books, and through YouTube. I came across the Everything Money YouTube channel which was a great resource. I also started consuming everything I could from Monish Pabrai, a well known value investor.

After a few months of study, I decided to buy individual stocks of Alibaba and Asana. Alibaba was picked up by both Monish Pabrai and the famous investor Charlie Munger and was considered a very cheap stock by many investors much smarter than me. Asana was a much riskier play but I decided to go with the thesis of buying a great company with the aim to hold it long term. I’m a huge fan of Asana and have been using it every week for over 7 years.

My average price for Alibaba is $109, and Asana is $32. I’m planning on holding these stocks for a very long time. If everything works out, I’ll see a return somewhere between 14% - 20% a year on average from this investment. Not bad and quite a bit higher than the 9% I’ll get from the S&P500.

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My entire strategy for where I should put my profits changed in August of last year.

I came across Microacquire.com, a fast growing marketplace where people could sell their online properties. The main categories on Microacquire are SaaS, Shopify apps, marketplaces, crypto and “other”.

I was immediately intrigued and excited to learn about the process of acquiring a SaaS.

The main reason most SaaS products fail is because the founder ends up building something that the market doesn’t value. I realized quickly that by acquiring a SaaS which clearly had product market fit and good retention, I could eliminate this risk entirely.

Since I have 7 years of experience analyzing online businesses, I know I’d have an edge in quickly determining if an app had the necessary traction and potential.

I was hooked and obsessed over finding my first target for acquisition.

I had about $25k in cash which I could put into a deal so I’d have to start small.

About 2 weeks into my search I came across Pulsebanner.com, a SaaS with about $1.5k monthly-recurring revenue (MRR). It was more expensive than I planned but it checked off so many boxes I needed to find a way to make it work.

Some of the reasons I found the PulseBanner deal so attractive:

• It was selling at 2.5X annual revenue —> Selling at a decently low multiple.

• It had over 4.5k signups and 150+ active subscribers —> This showed me there was demand.

• The app cost less than $50 a month to run —> I would be running the app at >80% net margins.

• The service had some virality and was growing with no real marketing —> It would continue to grow without a massive investment of my time.

• It was a mature product which didn’t need any further development —> PulseBanner is a simple idea done right. I had no intention of hiring a developer to continue building onto the product. I wanted to keep the margins high.

• The app had a strong brand and was loved by users —> Important for continued growth and retention.

Some of the main negatives:

• B2C vs. B2B —> PulseBanner serves streamers who are B2C. This would mean a higher churn rate and more failed payments than a B2B app.

• Platform lock-in —> PulseBanner relies on Twitch and Twitter for providing value. There is an added risk of these platforms making changes which could disrupt PulseBanner.

I put in a letter of intent to purchase PulseBanner for $46k and it was accepted. I was fortunate enough to get the necessary financing through a personal loan from a close friend. Without him I wouldn’t have managed to close the deal.

I’m not going to go through the entire handover process since it’s quite boring I think, but if you are interested, hit reply and I’ll happily answer any questions you might have.

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I’m really happy I bought PulseBanner. As you’ll see below, the economics are incredible, and I’ve learnt a lot through the process.

I estimate PulseBanner will generate between $20,000 - $25,000 this year which is a nice chunk of change.

Below is a P&L I built for PulseBanner and you can see that right now my annualized return is 37%, which is quite a bit higher than 9%:)

In the next edition of Coffee + Revelation, I’ll tell you about Hawkeye Ventures, the holding company I formed when I acquired PulseBanner.

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