The Closers M&A Playbook: How I Sold Grasshopper for $100m+

please help me in welcoming David Hauser from grasshopper to the stage David welcome [Music] all right guys so it's the end of the day so if you could just help me do something real quick everyone stand up yeah get get a little bit of movement real quick but we're going to do something to make everyone outside really jealous because there's a few people outside that aren't in here

um so we're just gonna play a real quick game we're all going to sit down I'm going to come back up on stage and we're going to give a standing ovation we're going to make as much noise as we possibly can so everyone outside is super jealous that they're not in here okay so we're gonna try this ready and here we go

all right perfect perfect thanks guys I just had a bet with someone that I couldn't get a standing ovation so I appreciate it um no but in all seriousness is nice to move around a little bit um so I I have about 18 minutes here um I'm gonna keep this as casual as possible but walk through a little bit about how we think about M A obviously we've gone through a few transactions for those that don't know grasshopper

press the button um yeah we did build grasshopper bootstrapped at 100 um built it from zero to Thirty million dollars a year in Revenue before we sold it and ultimately sold it to Citrix for 175 million dollars in total um I I'll talk a little bit about how we use debt as well um also built charger Phi um sold that company twice most recently to battery Ventures um and I've also raised Capital as well so happy to talk about that most

recently raising uh 42 million dollars for uh vanilla from Insight partners and venrock um I also make a lot of Investments not just by companies um so talk a little bit about our Revenue growth here um we were very lucky in our first year we broke a million and a half dollars right away um and then you can kind of see that Revenue trajectory and how it changed in those later years we sold it over here in the 1415 period

um and uh we got really lucky um happy to talk about uh kind of some of the team changes that happened here I was talking to some people a few minutes ago about how at kind of about 10 million dollars we went from a lot of doers on the team to a lot of thinkers right so from 1 to 10 million dollars in Revenue you can have a lot of doers on the team which means hey do this come back do this come back to get from 10 to 20 you need a lot of thinkers which is

people that come to you and say David here's what I'm going to do and here's why I'm going to do it and I'll come back to you when it's done right so those were those changes that happened there also the biggest changes that really happened through these periods paid advertising each of these periods we found a new marketing channel and put more and more money into it plain and simple right like people want to stand up here and give you complex things we paid more marketing dollars we

grew more profitably continuously right and the later years we spent 12 and a half million dollars on radio right so those take a lot of tests to get there so how did we do that and spend 12 million dollars on radio in the later years we we took on some debt right and this is one of the reasons that I really love what Nathan's doing here um with uh founder path and being able to get people access to this

um we used svb because there were very few options at the time for us we were also at a revenue kind of point that they allowed for that um these were roughly the terms I think it was actually 12 and a half percent interest so it wasn't cheap but there was no warrants no equity so we retained 100 and they allowed us to spend without covenants um assuming that our underlying metrics stay the same so there was no draw down covenants or anything like that we could spend the full amount that we had from them which was about 15 million dollars

we spent 12 of it in those first periods uh when we got there um so obviously I just said that this is why I really appreciate what Nathan's doing I think there's a big gap in the market uh for that one to ten million dollar company to be able to access debt right and I I would encourage everyone to think very deeply about you know how can you utilize debt properly and my

number one takeaway on that is only use it for things you know are working marketing channels you know are working it's not for testing it's not for hiring it's not for growing product it's none of those things it is I know that if I spend a dollar here I get two dollars back and I need to spend more of those dollars right that's how you accelerate growth with debt so yes we sold the company for a lot of money

I don't know what else to say there um

I I I I I have to say that I think there was a definitely a timing and luck factor to that we built a great company but someone way overpaid for it so tricks um and uh they've done very well now right so I think the company will do 85 million dollars this year and you know definitely will hit their 100 million dollar Target which was part of the metric that they decided on before they bought things um but they overpaid at the time um and that that really I think

contributed to our management team um and the people that we had on that core team when we sold the company we left the next day me and my partner right so there was no burnout there was no time we had to spend there nothing else and that was because of the management team that we built they all stayed on um and they were valued tremendously by Citrix many of them stayed for a long period of time uh including one of my current Partners Mike who who spent a lot of time there

um so let's jump into a little bit about um the m a process I'm happy to also answer questions so I'm going to save a few minutes at the end um to make sure that I can get the things that you want to talk about um and also I promise to give you a few quick takeaways as well um outside of this um so let's just jump right into here um this quite honestly is a matrix that we stole and adapted for our purposes for how we think about the m a process as a whole and I think is useful for

everyone in this room to think about how can I generate the most value from a prospect you know an m a prospect over time but more importantly these are the things that make your business valuable to you right so it's not just to me but these are the things that represent a great business right so we'll walk through each of these and kind of how we do this and it's a matrix it's in it's in the USB drive right um we also this one is specific to direct to Consumer companies so some of these things might not make as much

sense but we have a SAS one I also have the original Matrix if anyone wants it just let me know I'm happy to talk about it um but so so here's how we think about these things at the top is is revenue right each of these are rated on a one two one two three zero to three scale um and as you step down it makes a lot more sense right so Revenue the higher the revenue more importantly and it's not just because it's the number it's

because it gives us cushion right it means if we make mistakes after we acquire things we have more chances to make another mistake to correct it or kind of go through that process again right so that's why the smaller the company the higher the risk right ebits are the same right it kind of translates through if if I'm looking at a company that has a million dollars of ebitda that's much more risky than a company that has four right it's pretty easy to

lose a million dollars in a mistake right so again it's about comfort and cushion right aov you know this is for a direct to Consumer like I said but same same concept this just tells me how much money can I spend on marketing right that's the only thing that that I care about here six month repeat rate that's the same as fast retention right this is kind of the repeat rate for consumer goods

um how how much do I have to resell right if I have to resell my entire customer base again and again that's much more risky much less valuable right so each of these metrics are the things in your business that make it more valuable addressable Market is really one that's interesting to me because a lot of people think about size of addressable market and I think quite honestly that doesn't matter for most of us in the room right unless you're doing hundreds

of millions of dollars the size doesn't matter as long as it's big enough right and I think for the most part we're all working on things that are big enough what I want to know is is it growing stable or Contracting it's really hard to operate in a market that's Contracting right no matter the size there's just a a downward pressure continuously if it's Contracting so this this makes it less valuable and unfortunately is less controllable

right these other things you can start to work on addressable Market not as much right existing channels uh we can skip over that because this is all that's kind of really direct to Consumer um roaz this is one of our most important metrics because we are a very Market driven company uh and we care about how much money can we spend to generate new customers this matters more than anything else right assuming that we have enough ebitda enough

Revenue row as matters and it's only on new customers so stop kidding yourself and dividing over you know other things it's really actual new customers um the last one I'll talk about is growth potential here which is down here as the acquirer how can I grow the business right does it fit with my expertise right do I have to do more marketing do I have to

do have grow a bigger sales team do I have to go to Amazon like whatever the things are how can I grow this company right so Nathan asked that I actually rate a take some companies here um and and kind of go through it but you can kind of see how this falls out at the bottom right and one of the key things here is we won't necessarily just buy the company that's at the 35 or the 36 Right company one or three um those are going to be our Highest

Potential ones to look at it's not automatic right so maybe I'd buy three uh like I said it it's on the the USB drive um so that's a little bit about the template if anyone wants that template or the SAS one or the original one that we stole from Sanford Stanford happy to send it to you or send you the link um it's super helpful but I would

suggest thinking about all of these categories for how you can make your business most valuable for yourself and then how we on the other side of it think about these things so a few of the stuff that's not on the Matrix um necessarily but I did want to talk about from an m a standpoint um first like I mentioned at grasshopper we got out of the business we had a management team this was tremendously valuable to the acquirer for so many reasons first the transition was easy

they actually paid more because they didn't have to find expensive positions for me and my co-founder to be in and stupid titles right so they paid more cash up front to not deal with that um and I think this is true most acquirers like if you're working in the business it's a big concern build a strong and independent team and that means people that can operate without your oversight right so you can

provide high level strategic Direction but they can operate the business without your Insight or you're you're you being there right um document all your systems and processes because it goes into the next point which is you should be actively building what is like a data room it doesn't have to be as structured but all of that stuff should be there it's good business practice to do it one um but two it will show you the gaps and weaknesses in your business than in a

choir will look at and say hey I'm going to devalue this part of it right hey your legal contracts are not all in the right place you don't you're not able to assign them on acquisition all of those things might as well clean that up now but document every process in the business foreign the next one is kind of counterintuitive but it kind of goes to the last which is timing leave some meat on the bone if you want to get the most value for the

company you don't want to have optimized the out of everything right because then they acquire is like well I can't really do much with it and the only choirs that are left then are strategic acquirers which are relatively rare as a whole right so leave some stuff so they have some excitement hey I could double radio ads I can make more money right hey I could cross sell an upsell to my customers you haven't done that yet right so while we could have built

grasshopper up right to that next 50 million 65 million we left enough for the acquirer to be interested and excited to overpay today so it's kind of counter-intuitive the next one is don't worry about running a process right lots of people will stand up here and we all hear on the news Cisco and Microsoft were bidding for my company so I got a billion dollars right that happens

almost never right so don't count on that and stop wasting time running on a process identify the right acquirer that's going to get tremendous value from your business and go after those people not just invite say I'm going to get an investment bank and run a process it rarely ever happens so don't don't waste the time timing matters so I'll give you a really quick story about grasshopper because it goes into the last point which is every

conversation is a no-go go conversation we learned this from the the bankers we had involved to help us through that process so at grasshopper we sold the company in May um we closed the deal in May um six weeks later after we closed that deal an activist investor uh told Citrix they had to sell off all of their SAS business so we were weeks away from the deal not

going through right not because of something we did not because of something Citrix did an external Factor right so timing just matters sometimes it people call it locks sometimes whatever but it's timing and then every conversation is go no go meaning when you get on the call without a choir they are they are seconds away from saying yes or no every time right and you just have to understand that and no no deal is complete until

the paperwork is signed yeah well that's even better money in the bank um so that that was a good learning um so I I have a few minutes left um hopefully I've covered some of these topics um I I'll happily answer any quick questions that people have because I want to make sure that people leave with the things that they want to talk about answered um and then if we have any time left I'll leave you with a few quick

takeaways if nothing else in this presentation was useful you can at least take away that hi thank you excellent presentation um I I was very curious about the early days of your radio spend and you know how did you get to 12 and maybe what insights you had that allowed you to get to that higher number monthly and I'm sure what worked at 12 probably didn't work at one or two a month yeah yeah so we discovered radio advertising because

we were very early with Sirius XM so satellite radio as an Advertiser so we kind of discovered that with a fifty thousand dollar spend and we ramped that up to call it kind of two two hundred thousand a month or so and understood the metrics and how it worked but what we learned very quickly is terrestrial radio standard radio is very very different all the metrics are different how you buy it's different um there's a there's a path that is known like people who do this they just

know how this works you have to spend roughly a million dollars in a in a market before you can go to Nationwide and the minimum for Nationwide is 12 million right and then there's a process for three weeks on two weeks off all these different things that happen through the process but the most important thing to understand is the way radio advertising works and why it's successful is because of the long tail so when you run ads when you stop running ads for three to six weeks after you stop

running ads you still get orders in the dmas that you're testing right that's how the CPAs work because if you look at it on a pure CPA basis you're like I'll never do this right that that's how this works and you have to do it in this process most people who fail at this skip the testing thing and they're like I ran Austin and it didn't work well yeah because it's not a big enough test the saturation wasn't right and it's not a large enough dma so they give up on radio rather than

actually do it the right way and figure it out but it's a great question

just yell it yeah okay yeah hi um so in terms of evaluation so if the company is acquiring for the technology assets so that you know they can get to go to market faster like they get 18 months two years versus uh uh the company actually increases your bottom line or you know you know Top Line right so which is more valuable yeah so I there's there's three parts there so the the least valuable from an acquisition standpoint is cost savings right I buy

this company I get cost savings least valuable the next kind of down that line is I buy this company to speed up my market development and then the most valuable is I increase my bottom my top line or my bottom line together right but it's about Top Line you know can I sell more of what you have to my customers or what I have to your customers that's the most valuable I was going to ask um

how are you typically evaluating on the m a side uh our basis without multiple yeah so I think the yeah so the question was how do you value companies uh ebitda is it you know sales ARR um for for us we're a very specific type of buyer we're much more value-based um than strategic because we're putting a lot of things together so we're looking at ebit to multiples so I think the more important question is

what are the categories of buyers right and we sit in one category each of them think about valuations differently the most valuable strategic but there are other people that you know are different than us that will pay higher multiples on ARR for example compared to ebitda and all right over here uh great great uh presentation so question is if the company has two income sources one is

software as a SAS and then service side of it does it matter for evaluation purposes proportion between those two 100 it matters I think it's less about the the percentage proportion um but you will definitely get nowhere close to the value on the services right and and we went through this at vanilla when we were talking to VCS they're like listen like 40 of the businesses services not SAS

we value it at zero right in in the fundraising process right um the acquisition process is probably not zero but I could imagine it's pretty close to zero um profit margin is very different than software just uh be mindful of time just Nathan okay real quick can you jump into the philosophy of the meter on the bone and how do you know when you're there or is it new products that you talk about delivering but you don't get into them or what is that yeah I I think it's hard

to it's one of those things you kind of know and feel like the worst deals that we walk into is when someone said I've optimized everything not a place you want to be right if it's every marketing channel if it's every you know vendor if whatever the things are um it's not where you want to be you want to feel that there's like enough upside I don't know what the number is but it's like meaningful upside like if you were on the other side of the table would you be excited to be like yeah I could do

that guys on that note give it up for David Houser [Music] [Applause]