Jan. 26, 2022

How2Exit Episode 14: Andrew Pierno - a degree holder in Computer Science and founder of XOXO Capital

How2Exit Episode 14: Andrew Pierno - a degree holder in Computer Science and founder of XOXO Capital

Started his venture in Santa Monica and is now one of the founders of XOXO Capital. Was head of dev for a while at a venture studio and CTO of a venture-backed AI company.

We talked about the criteria he's looking for in buying SaaS, what's the...

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Started his venture in Santa Monica and is now one of the founders of XOXO Capital. Was head of dev for a while at a venture studio and CTO of a venture-backed AI company.

We talked about the criteria he's looking for in buying SaaS, what's the multiple for a well-running SaaS, other areas he's interested in and much more!
Contact Andrew on
Twitter: https://twitter.com/AndrewPierno
Linkedin: https://www.linkedin.com/in/andrew-pierno/
Website: https://xo.capital/

If you’d like additional ways to support this podcast, you can become a patron here: https://www.patreon.com/bePatron?u=66340956
Reach me to sell me your business, be on my podcast or just share some love:
Linkedin: https://www.linkedin.com/in/ronskelton/
Twitter: https://twitter.com/ronaldskelton
Facebook: https://www.facebook.com/How2Exit

Have suggestions, comments, or want to tell us about a business for sale call our hotline and leave a message: 918-641-4150
Watch it on Youtube: https://youtu.be/zg2NJt4BoT8
Other interviews:
Zoran Sarabaca: https://youtu.be/OLqszNP7yHY
John Andrews: https://youtu.be/vmGWbd2y5x0
Chris Daigle: https://youtu.be/jHWzFGRbpD4
Arturo Henriquez: https://youtu.be/uwN7y8AE4EQ
Joe Valley: https://youtu.be/ZQLdybxcZKs
Christopher Wick: https://youtu.be/xhIf9ltgedA
Jonathan Brabrand: https://youtu.be/oC82Ls54CXo
Carl Allen: https://youtu.be/VIU2Lqj_FY4
Klint Kendrick: https://youtu.be/eJ2GICCj2TA
Walker Deibel: https://youtu.be/xoUH_Ixeook

Ronald P. Skelton - Host -

Reach me to sell me your business, connect for a JV or other business use LinkedIn:
Ronald Skelton: https://www.linkedin.com/in/ronskelton

Have suggestions, comments, or want to tell us about a business for sale
call our hotline and leave a message:  918-641-4150



Ronald Skelton  0:06  
Hello, and welcome to the how to exit podcast where we introduce you to a world of small to medium business acquisitions and mergers. We interview business owners, industry leaders, authors, mentors and other influencers with a sole intent to share with you what it looks like to buy or sell a business. Let's get rolling

Hello, and welcome to how to exit. Today I'm here with Andrew, and I'm gonna let you say your own last name once you tell us your name there. 

Andrew Pierno  0:47  
Sure. Andrew Pierno. 

Ronald Skelton  0:48  
Pierno. So I think I can get that one. Right. So there's a growing trend where I'm butchering people's names, and I'm trying to get out of it. So. So today, we're here, and you have experience in buying. And the first one we've had on the show, we're buying software company, right software as a service, SaaS. And so I think we're gonna get into that the first place I like to start always is kind of how did you get into this space? Your origin story a little bit? So just can we start there? Would that work for you?

Andrew Pierno  1:20  
Yeah, absolutely. So I, I went to school at Berkeley, I have a degree in econ and computer science. And I kind of got my start at a venture studio here in Santa Monica. So we had half of the business that was pure traditional venture, right, just kind of a fun. The kind of more interesting side of the business was we also had small fund to build companies internally. Again, when I say companies for the duration of this, this conversation, I just mean software. That's all I know. So we had a small fund to build, we got like a million bucks, 3 million bucks a million to do for each company, right. So like, each company got a million bucks, tried to do a consumer application that didn't work, did kind of like a distressed venture deal that one went like decently well. And then the winner in our portfolio was a machine learning kind of deep tech, computer vision type thing, I ended up becoming CTO of that. We raised about $8 million for that it was a whole kind of venture track type of type of deal. And fast forward. You know, several years later, we sold the assets off, it wasn't it wasn't a meaningful or great exit. But that informed how I think about buying software businesses today. The I joke that I figured out the like the wrong way to do a venture studio. And almost everyone I've ever talked to that's done a venture studio has about the same feedback, which is, you know, don't do it, if you're not familiar with venture studio is it's like the idea of, it's almost like a search fund, but like you building a bunch of different things. And then you just kind of quote unquote, see what works. And then you just go do the thing that works. It sounds so logical, right? But the execution of it is much more difficult. But there are kind of core concepts that we still use today. So yeah, that's kind of how I got into it just through the venture studio. And I'm skipping over like six year gaps, right. I was CTO of that company for a long time. And then yeah, once once that ended, I just decided, you know, what if we, what if we skip that that painful experimentation phase that might take between one and three years, and we buy something that's working to some extent, and see if we can take it and grow it from there.

Ronald Skelton  3:43  
Awesome. So when my guys are out there, the guys that listen to the show, a lot of them are on the acquisition side, they have a buying criteria, meaning that, like, for us, it's typically a lot of brick and mortar. So a lot of things like they've been in business for five years, they show a profit, they starting to at least get some standard operating procedures and stuff. So there's some systemization around it, what would be the buying criteria that you would look for for a SAS, you know, a piece of software under this SAS model?

Andrew Pierno  4:13  
So right now it's I mean, I'm sure you've seen on micro acquire other marketplaces. I mean, there are things on there where people make like $8 a year and they want a million bucks for their crappy tool they just built last week, you know, it's just crazy out there right now. So we have three partners here. I'm kind of a bit of a gunslinger and we do have somebody that's kind of in private equity on the real estate side that that keeps our keeps me and the company from making poor decisions. So he's he's really the sober one when it comes to financials, but buying criteria. I mean, the implication here is like almost a thesis type question two. We started with a very narrow thesis, right? We're going to go by some very specific kind of software and We went out to the market and there was nothing for sale. So we spent about four months just trying to find a deal that matched our thesis. And after a while, we just said, you know, forget this, let's just go buy things that are small, let's go make reasonable, reasonable buys for reasonable multiples. So if we lose our assets, it's not that big of a deal. And it ended up working out for those initial two. So we've done five acquisitions to date, we've sold one of them off. Most of them are developer tools. So Software Developer Tools, so like our audiences, we sell to software developers, which is a really difficult customer segment. And two of them are actually X Y Combinator company. So if you're unfamiliar with Y Combinator, it's like the world's premier startup accelerator. And this kind of ties it back to my experience with the computer vision company is that sometimes you get on the venture, let's call it rabbit wheel, or flywheel or whatever you're on that path. And when everything works well, and you go from step, you know, precede to C to series A to B to C, all the way up to going public, that that venture path can work quite well. And the problem is, is when you miss one of those steps, which we did, there's almost nowhere to go. And and a lot of times those deals go to zero. So I spent a lot of time these days thinking about what what does it look like for AXA to continue buying these SaaS companies, but be a little bit more specific in that we buy kind of venture distressed deals, which distressed venture deals might actually just mean they're amazing small businesses, they just don't happen to be right for the venture model.

Ronald Skelton  6:45  
Yeah, there's a huge play inside of acquisitions and mergers, even in a brick and mortar to do what's called carve outs, right? So big company, like maybe not aspect of Google. But let's use Google, for example. They buy a company that has two or three different divisions, and one of them is just kind of doesn't fit in with Google's model. Right? A lot of times the Googles of the world will either shut that down or carve it off and sell it for really reasonable prices. So I think that because it just doesn't make significant contribution to what their goals are. And I can see that the same thing happens inside of the venture capitalist, right? The venture, the VC firms are looking for 100 plus x. And if you don't have a trajectory to do that, you're kind of just wasting their time. So I can see where you stepped in and, and yeah, it

Andrew Pierno  7:34  
was just like to be very clear one, I'm definitely not anti venture, I have a bunch of friends that are venture awesome, guys, I just think that that model is very specific. And I think it applies to a much smaller number of companies than you might believe just reading stuff about software startups, in the Wall Street Journal, or whatever they they make it seem like, Oh, you want to go start a software company, step one, build something, step two, go raise a bunch of money, because that's how this is done. There are just like so many other paths that are much more reasonable. And so I always use these these moments to say, look, there are other ways to do this. And particularly for younger first time entrepreneurs, like if you don't have some, I don't know, let's say some, whatever your your f you money in the bank number is, if you don't have that yet, actually, like maybe don't go take a unicorn type of swing, right? Don't go try and take a home run, swing, but try and take like a get a base hit. Right, let's go see what that's like. And that's such a more reasonable, I think, predictable path. And I always again, like to use these opportunities to just reiterate that there's more than one way to build a software company. 

Ronald Skelton  8:46  
Yeah I can, sorry. I can see that totally. And I actually tell people all the time, I don't do I don't go unicorn hunting. Right. And that includes in some of like, there are some brick and mortar type of businesses who believe they're kind of a unicorn, right? They're going to be the next billion dollar company. Chances are more often than not, you're not going to be. And if you're trying to sell at that valuate like I'm going to be that then there's an unrealistic expectation. And there are lots of people on the planet, that need is fulfilled. There are plenty of unicorn hunters on the planet. VC firms and private equity, that type of stuff that you can enroll in your vision and and they'll put money into it. I'm just not that guy. Right? I'm looking for, like when I go out and look, I'm looking for something that immediate returns, it's running well, we can grow it, maybe bolt on some other stuff. There's some arbitrage plays, you can play inside of the acquisitions and mergers games where if you get above certain thresholds, the multiple businesses worth it goes up. And I'm sure that's the same way in your realm, right? You buy businesses to generate $1,000 a month you can get it at one or 2x sellers discretionary earnings. You get the thing up to you know, you know, 100,000 $200,000 a year $500,000 A year in profit. Now in the SAS space, that's crazy right now, isn't it like 30x? Or so what's the, what's the multiple for a well running SaaS right now,

Andrew Pierno  10:07  
some Well, the listed multiple and the thing that people like the the amount they actually pay because what's interesting is like, one, I don't know that one to two exists right now we've gotten we've gotten very lucky with some very specific deals that were off market. So I mean, I, I'm finding deals on twitter or just through my network that are off market and they're never gonna go to market, right, we'll just kind of incrementally keep offering them more not to go to market right now. Because I don't I don't think one to two is possible. I think three to three to five is reasonable. But some of these are just astronomical, I mean, anything above 10 to me listed on micro acquire just doesn't make sense or any of these marketplaces, because those are strategic acquisition numbers. And we're not going to be a strategic acquire, like we're just, we're just not if you want that 10x, then go to your competitors that are big and have raised a bunch of money and go see if they'll pay 10x. Because like we can't, we can't make, we can't make our business model work if we pay those numbers.

Ronald Skelton  11:09  
But what he just brought up is a strategic purchase for you, for you guys that are own businesses and looking or thinking about selling the difference between a buyer like myself or even an institutional buyer, we're looking for something we'll own and grow a strategic buyers, typically one of your competitors, or somebody who's gonna buy you because it improves or plays upon the strategy they already have. And they're gonna pay a higher premium, right? They're gonna pay, they're gonna pay more, but there's far fewer of them. So it's, you're almost a unicorn or you you're, you know, you've got unicorn qualities, or you're or you've, I've seen people, what's called Built to Sell type of things. They build their business to be bought by Google, right i in the marketing space, I was actually on the phone for one of the marketing acquisitions we were looking at. And she came from Google, they created a firm around like all of the employees are expats from Google, like they are all Google. And it's very likely Google. They're doing millions now. Google and Google's their biggest client now, like Google, I think will eventually buy them back and bring them back in house. But that's, that's even rarer. So.

Andrew Pierno  12:17  
Yeah, that sounds like some inside baseball, by the way. I mean, it's that's almost as rigged as a lot of things in the startup world, right? Like, think about what Y Combinator, one of these accelerators do effectively with a network of 1000s of companies. Now, if you get funded by Y Combinator, and you can sell your product to other Y Combinator startups, you've just created some kind of cash machine to at least get to a certain level. Right now, it's that going to get you to escape velocity to become a unicorn or a standalone business? No. But could you carve out like a nice five to $10 million a year business just by initially selling to YC companies? I think yes. And that's kind of like I haven't really heard that. articulated very often that honestly, a lot of these these games that you see being played and celebrated. It's a lot of inside baseball, like what you said, with people that came from Google left, Google sold a product to Google, and then Google buys the company happens a lot, right? And then, of course, getting in one of these accelerators, where you have this cohort that can sell products to each other, and kind of use, you know, the the explosive economic growth and the cheap capital to get just absurd valuations very quickly.

Ronald Skelton  13:35  
You know, it's been happening for quite a while, too, I left the tech industry. Shoot, I've been married for what, 14, 15 years now. So I left the tech industry at least 15 years ago. And the last, the second, the last big company, I worked for startup wise, about 100 employee. Our CEO, basically one of our bigger investors. Our last CEO came from I can't say who it is just because I don't know what I'm allowed to say or not say, but the story is still relevant. The CEO came from that, that company, that was one of our bigger investors. And then within a year that company bought us, right. So we were looking for a new CEO. One of the key employees from that bigger company left and came over and became our CEO. And then within a year we sell back to the bigger one of our primary investors. That happens a lot. Right? Yeah. So yeah, there is an insight game beside of the acquisitions and mergers side that couldn't work for you or you just got to know is there

Andrew Pierno  14:35  
 Yeah, well another another part of this is just this is a relationships business, right? I mean, this buying a business there's so much after you buy you wish you knew during the diligence process that you're just never going to catch. And so there's a lot of trust between a buyer and a seller. One of the main obstacles I think micro acquire needs to overcome is because even though it's you know, it's listed and transparent, you can log into the payment processor, the bank account There still needs to be some trust built up that they're going to be there for you post acquisition. When stuff really hits the fan, which we've had some, some buyers that were great hire some sellers that were great. And some that soon as we were at the money, we never really talked to him again. And those obviously were tough for us.

Ronald Skelton  15:19  
So I've met people in this industry who've been doing it for 20 years, 30 years, I'm interviewing a guy tomorrow, who's literally been buying and selling business for over 30 years. Now. He's kind of a, I don't want to put words in his mouth, but he kind of does a search fun type of thing. Nobody helps people find businesses to buy. But the one of the things I've noticed is, we're always always learning, there's always new stuff inside of this space to learn. So one of the questions I'd like to ask is, what is the biggest area around buying and selling mergers and acquisitions that you're curious about? And why?

Andrew Pierno  15:55  
What's the biggest like knowledge gap? I haven't in buying these

Ronald Skelton  15:58  
knowledge is something that still creates your steps, there's is there an area that you're still kind of exploring learning that you're just curious about inside of the mergers and acquisition space?

Andrew Pierno  16:09  
I'm not necessarily in the merge. I'm, I'm curious about learning more, we need to learn more. And we need a marketing function and a growth function, which I don't think we have really locked in. I mean, you know, it'd be absurd to kind of say, oh, yeah, we know, growth, and we know growth super well. Because every business is quite unique. And obviously, if you could do that with any kind of predictability when, I don't know, you would never need to work again. But I don't think that that's what you meant by your question.

Ronald Skelton  16:41  
No, I was curious if there's some area out there, like, you know, if we, you know, our next move is to learn this like to I don't know, you know, switch from the capital version to do an LBO leveraged buyout where we're doing SBA loans to buy bigger, bigger chunks of companies? Or is there an area that you haven't gotten into yet that you're interested in?

Andrew Pierno  17:03  
Definitely. So we've, we've bought all five with just our own cash. And the reason we did that is I wanted us to kind of go first and make the mistakes on our own dime and get a bit of a track record. Before taking in outside investors money, I think the next few acquisitions that we do will be kind of a funless sponsor type of model, where we're just pooling investors money into a single LLC. And that LLC is controlled by us, right, and then put the asset acquired the asset and, you know, kind of shove it in that LLC. I think we'll do a few of those. And then at the same time, I would absolutely love to explore an SBA loan for software.

Ronald Skelton  17:45  
Cool. So you know, you're out there, you're looking at deals and stuff, you've been doing it for a while, you learned a few things. What is something you know, now you you wish, you know, you wish you would have known the day one on your first acquisition? Like, how can we give the people are listening a heads up, like you should probably focus or learn this thing? Or, you know, before you get going?

Andrew Pierno  18:11  
I, in all honesty, don't feel like we have an answer to that question yet. I think that there's going to be quite a bit of stuff around financing, that when we really figure out what this model looks like for the next 20, 30 acquisitions, we're going to look back and say, shoot, I wish somebody would have just written this on like a three by five card and five bullet points and saved us about two years. And I don't know a million bucks. Right? I don't think that we've we've landed on it yet. The mistakes that we've made, I think so far have been in partnerships. So the crew that we have today for xo is not the crew that that started with the company. And that's kind of just the nature of falling out with any kind of co founder stuff like that. So that was tough. So picking the right business partners, I think is you know, the biggest the biggest thing you can get right because almost everything else is kind of fixable, right? The tech is fixable. business problems can be fixable. You know, all those things can be easier when you kind of can put a couple of smart minds together that'll stick with each other through thick and thin.

Ronald Skelton  19:22  
I just learned that lesson extremely the hard way. The right team members can't go into details right now. We don't know how far we're going to go down the getting lawyers involved roll with it. But uh, we were looking at like a $500 million rollout that blew up because of the wrong team members. So and we had over $100 million worth of companies under contract to join us in revenue, not profit, but revenue. That it said yes, we're working on negotiating the finals of the contract. When one partner did something that disrupt the whole thing. I can see like that's the biggest thing on any of these deals is knowing your teammates, knowing who you put on your team, you know, the best you can I mean, there's always going to be something the benefit that we got out of that one is one of the things that's the benefit us is we use Mike Moyers, I don't give ever studied or heard of Mike Moyers', slicing pie, the dynamic equity model. So, people so basically, it's the simplify the dynamic equity model by Mike Moyers have book called slicing pie or slicing pie handbook, what it's called. You earn shares per hour. So instead of like you and I decided we wanted to create a business together set to say that's 50-50, let's go do this, we go, okay, your market rate is 200. All agree my market rates, probably $200 an hour, we'll give each other to 200 shares per hour per hour we put into this project. And then at the end, that creates a pie or a pool of shares and 100% and know how much time and effort you put in, you earn a percentage of it. So you don't have people that come in, like if you have four partners, and one of them doesn't do any work, and you still only 25% of it, that that's not possible under Mike Moyers model. So we use that that helped a lot. And I'll use it again, I'm a big fan of it now. And he's really accessible. I'm not trying to plug the guy, he's just like, there's a few books and tools out there that I like, that worked really well for me. And that's one of them. But uh,

Andrew Pierno  21:23  
I mean, that's, that's kind of like the whole point investing, right, which is not, I don't know if that's normal, and it's normal in the software world, every employee, even co founders, when you raise enough money that will put you on a vesting schedule with a one year it's generally a four year vesting period with a one year Cliff between zero and one years zero, right? And then monthly vesting after that.

Ronald Skelton  21:46  
Right. So I've had a few of those, I had those types of options. Actually, I had those type of auction options at quite a few of the startups that I got to be involved with. One of the things I like to you know, just to kind of dive into a little bit is, there's a SaaS is really hot right now. And I believe that like every industry, every profession, has some myths, some things that people like, perceive is true. But if you're in the space, you're working it day in day, you just absolutely know it's a myth, and you just wish it was go away? Is there anything like that inside of SaaS and or, you know, buying and selling these software companies that you just the industry thinks it's true? Like, I think it's 30x? Multiple, you're saying, Yeah, not so much. So that's not like that could be one. But is there are there myths out there that people assume around software as a service that just aren't so

Andrew Pierno  22:44  
I have a few around products, I think there's a lot of misconceptions about because because if you're coming from a non technical background, I don't know that you think of product in the same way that I would think of product. And so there's there's a couple like conflicting ones that might create some cognitive dissonance. But like, there's, there's a bunch of products out there that are ugly as sin, and extremely profitable, and sticky. And if they don't change for the next 10 years, nobody cares. They're going to continue using it and paying for it. So there's that. But also, that's probably not the product that you're thinking about buying. Even though it probably looks ugly as sin and you think that you can just kind of clean it up and flip it around. Yeah, no, I the technology, maybe it maybe this is a tweetable one, technology doesn't matter as much as you think it does in a tech company.

Ronald Skelton  23:43  
Okay, so does it not doesn't matter? As much as I would think it was, what does matter?

Andrew Pierno  23:51  
I think the same thing that matters when you're when you're selling washing machines, or you have a you know, window cleaning business, its customers profit, right? It's building real business, outside of venture land, instead of venture land. What matters? Honestly, I think my answer to that question is story. Story matters. You're crafting a story around some some innovation wave, and there's a timing piece of that. But

Ronald Skelton  24:15  
I think we work that exact example of how scary story works, right inside of a venture capital space, a story. The story is the business. And a lot of the VC backed things. It's and it's the people can people believe that you can fulfill on that story, right? Can you tell, can you tell a believable, you know, story that people want to get behind and help you try to accomplish? And that's true with any business right? In any business. You got to enroll and get people to see your vision and help you get there. But in the venture capital, I can see where that outweighs a lot of stuff. It's almost in my world. It's almost irrational. Right? You know, go back to your ugly, ugly software mode. I mean, how many people you think have wasted money trying to reinvent craigslist.com? And, you know, to this day people are still paying and using that, you know, it's Yeah. Yeah.

Andrew Pierno  25:11  
One One quick note on the story thing, though. I mean, I think the world's captivated in the past couple of weeks with the Elizabeth Holmes thing. And I think what outside of the politics of what went down, etc. There's a lot of gray area in what a founder says in some of those rooms. And, you know, it's it's, you could imagine a scenario I'll say, where she ended up being right after they're in the, in the very long haul, right, raised a bunch of money, but ended up building the machine that did the thing, and was actually a hero of the story and not a villain. I just think that that's that's just illustrates how powerful this this kind of story concept is in that world.

Ronald Skelton  25:50  
Yeah, unfortunately, she, she's playing a high risk game of, can I develop it before the figure out the fact that I didn't do that? I don't have it. Yeah, but

Andrew Pierno  26:01  
But you know, that that feels that feels not that far off from the kind of common place of at least my experience with Silicon Valley and building tech companies is that you are selling ahead of where you are technically, how far ahead you sell and how far ahead you paint that picture. And then how you know what ends up happening when the rubber hits the road. And the customer says, Okay, we need to buy it. It's I don't know, it's tricky. It brought up a lot of kind of conflicting things for me, and I don't know where I stand on some of these things it takes if you are going to be 100% truthful in this world and go pitch to some of the best VCs in the world, you're not going to get the money. I believe that 100%

Ronald Skelton  26:39  
It's interesting as I tried to create an online dating service, and I hate to parade my failures out there, but I created a site called honesty first.com. And I spent an enormous amount of my money, trying to get it up and running, I thought I'd solve the Mr. Potato Head or Mrs. Potato Head problem, right? You go out on a date, and it kind of looks like the first thing you've seen online, but somebody moves some stuff around. Right? So but I kept I built an algorithm. And, you know, I say I hired I was in California hired a Stanford professor to come in and help me write an algorithm that did a weighted measurement to help people keep people honest, in their profile based off of reviews from others. And problem is nobody wants to be honest on their date side, right? So I created a I solved the problem. Nobody wanted solving. Right? But a one and the biggest problem I you know, I didn't think that was the problem. At the beginning, I thought I had a chicken and egg problem, right? Nobody wants to be the first lonely soul in a city on a dating site. And everybody else at the time, and I won't say who they are, because I don't want to take on myself into a lawsuit with somebody who's who has enormous amount of money at this point. But one of the fairly popular more recent, I say more recent 10 or 15 years old now. But dating sites faded, faked it until they made it. They used to jump on the developer forums like the war rooms and stuff we would hang out and you know, these little chat rooms, we, you know, we'd hang out in the eye and say, Hey, I really need somebody help me create a bunch of fake profiles, and they would send out fake, so they faked it until they made it and now they made it. I could not no wonder why. And I just could not do that personally. And secondly, I need my site honesty first. So it would be the death of the 1000 swords if I got caught doing that. Unlike these other guys who named themselves something a little more logical. Um, but yeah, they would create offensive fake profiles and then send fake flirts like they want some hot chick would flirt with you on there. And I just can't do that. Right. I had, you know, I had an entire development team I built out of India that was writing software for me, we could have done it, I think it was stock photos and did what they did, or paid people to let me use their photos, like they were doing and wrote, you know, tools in there to, you know, random sets, you know, I just couldn't there wasn't that hard. The technology wasn't hard to fake it. Yeah. But I just could not pull myself into it. And I was like, so I'm out there pitching VCs to raise money for something and couldn't get traction. And both a blessing and a curse. I had a family emergencies that kind of made me reformat my attention. And taking my eyes off of it. Like, I'll just be straightforward. My mom passed away of a heart attack. And then 18 months later, I came here to Oklahoma to help with that, and then started spitting my startup back up getting it you know, more involved again. And then I got my dad got diagnosed with terminal cancer. And, and so I kind of shut it back down to focus on him for a little while. And that reprieve away from it opened my eyes like look, I'm spending all this money in the world on this and it's not working, how far down so I never I never pulled it back out of the mothball after that it kind of learned my lesson. And one of the things that VCs actually were saying to me during the process is like look, you don't have a dating site. You have a software toys, you try to sell your technology to match and eHarmony and those type of things. And I talked to some kind of low level guy over at a one of those. I won't say who it is but there's like, nobody there that was it told me nobody was to be honest, in their profile, we actually thought about going down this path, you know, a couple times and I talked to two different than those bigger, bigger ones. And they both said that we thought about going down this path, but you know, our members, they wouldn't use it, they would actually not like it, you know, lesson learned, um, just jump back into kind of the bond, I'm way off track here, right.

Andrew Pierno  30:26  
So looping back to your your, like Craigslist point, either about how many people tried to reinvent Craigslist, you know, to build like the this is what I think one of the myths and business broadly is that like, if you see a bunch of competition, you should stay away. I think that that's broadly wrong. Like the number of you brought up a CRM tool, the number of vertical specific CRM tools that are just pure software businesses that are out there, it's just astounding, and to go talk to their customers, their customers just love them. CRM for chiropractors, sounds stupid is not stupid, you know, could be a very profitable business. So I think that too, if you're out there looking for some of the software businesses don't shy away from something that has quite a bit of competition, right? It's okay to be the 35th dating site, if you have something unique and specific, that fills a need, there's a lot of people out there.

Ronald Skelton  31:16  
Yeah, I totally agree with that. Um, it's inside of the, I think we brought we were approached just a little bit, but when I'm looking for a business to buy, like, I have a selection criteria, and it's, you know, five years in business for profitable the team is in place, you know, if somebody right now has a software as a service, and they're looking to exit out of it, what is something you're looking for, as you I'm sure it's slightly similar, but different? What is your buying criteria to, to look at a Software as a Service?

Andrew Pierno  31:52  
So we have, we have stuff around price, the thoughts around price. And we're a little bit more flexible on market segments. There's some stuff that I just don't want to touch really like I think people when they think of software, they bundle like b2b software and b2c software. I'm not a b2c guy, you couldn't pay me enough to try and do a consumer application like it's just not what I know. And so it's only b2b SaaS. Ideally, there's 80% gross margins unless they are higher, unless there's some very, very good reason for it. That's another kind of gotchas when you're digging into some of these SaaS businesses like oh, well, it's pure SaaS, yes. But if they have, for example, a lot of costs that they're paying out to Google or Amazon or whomever, you might end up with a profit margin that looks a lot more like a service business. And so be careful on that front, we have one of those that is a little bit higher, just pure software costs that we pay out every month. So it's pure SaaS, but it's only, I don't know, 60% margins, which I know to this audience probably sounds great, but it's not great for us. And then I think there's a size criteria for what we're trying to do I know capitals cheap right now. I've been putting together a small pool of investors to go syndicate our next deal to it doesn't feel like capital is going to be an issue. I've just been spending a lot more time, the past year and a half just trying to learn before I take outside money and go scale this up. I don't think the scale up will be that I mean, of course, it'll be difficult, but I don't want to do it without having kind of gone first with our own capital. Yeah,

Ronald Skelton  33:38  
all right. Are you looking to buy scale and then exit? Or are you doing by profit ties, scale it or whatever? And then hold on to it because it's a revenue generating tool for your, for your system? What's your are you? Are you? You know, do you have exits? Plan? Like an exit strategy for everything you buy?

Andrew Pierno  33:58  
No, we do not. So here, let me let me I'll walk you through where we're currently at. We have two paths ahead of us, I think one the traditional path of Let's go buy something bigger. Right? What was the last company we bought? How much do we you know how much they make a year. Okay, double that. That's the next thing we want to buy. I think we're gonna, we're gonna try some of that. There's also I believe, a huge need and space in the micro SAS world where if you make under $10,000, and MRR and you meet certain criteria, right? So some of that criteria might be like net negative churn. It's kind of like a buzzword but basically you're you're you're making more each month and new subscriptions then or you're making more each month then in people upgrading like plans if you had like a silver, like a bronze silver gold type thing, then you are in turn. And then of course, like some some kind of growth. But if you meet these criteria that will just like by you, right, maybe it takes two weeks for us to just go And can we can we scoop up 100 of those in the next 12 months, right if I had a war chest, and I'm like. So those two paths, I feel like, look very different in five years. And I don't know which one is right. There are a lot of people going, let's buy bigger. And there's almost nobody I've seen that's really trying to say, how do we operationalize with a shared services team? 100 companies that do $10,000 a month?

Ronald Skelton  35:30  
So inside of your model, or if you're don't have an exit plan those stuff? Are you just monetizing the monthly use of it and accumulating more revenue that way? Are you actually looking into what what's the game plan?

Andrew Pierno  35:44  
Yeah, so there's and then so the second part of this is what, you know, how long do we hold these things for? If it's for our if it's with our own cash, you know, having the cash flows? Lovely, right, having just this cash flow stream is great. The reality of it, though, is there's not that much leftover for us, we're putting everything back into to growth, as we should, as we should. So they're permanent capital models, like if you wanted to check one of those out share swift capital, that's a tiny capital as well, it's kind of the permanent Capital One, they're not really looking to flip physical businesses now. Versus something that that I don't know, is buying stuff for the short term and kind of flipping it. I don't know which one is best for us. I don't know, I think that when we start bringing in outside investors, and do the funless, sponsor model that there's going to be and expect to people are gonna expect that we're going to have an answer to that. And I think that for these initial ones that we do, we're going to do like a max hold period of three years. That's it, right. So like, after three years, or any time before that we're going to sell these that's that's kind of the objective, but long term, I'm just not sure.

Ronald Skelton  36:44  
Okay. So one of the things I like to like, talk to business owners about is, if you're thinking about selling a brick and mortar business, or a traditional size business, there's a few things that almost all guys are doing acquisition are going to look for, we're gonna want to look at your last three years of books, write your last, everything's based off three years, last year, three years income statements, last year's three years tax returns, we want to see kind of how you've been performing. That's totally different in your space, like some of these tools have been around there. So what is that? Like if somebody wanted to like build something, and they're ready to sell it? And they're just like, once they've got their next idea or next project for whatever reason they're selling? Right? What do they need to do to prepare themselves for you to look at it? Is there some thing they need to make sure they've got nailed down so it presents well, for you?

Andrew Pierno  37:37  
Yeah, there are, there's a ton of education we have to do almost every time we talk to every time I ping somebody on microcar, hey, we're interested, I know, it's gonna be at least 30 emails of me explaining like, here's 16 terms that we use that are standard that like, I just want you to know, so that we can like I don't know, have a decent conversation, right? Almost nobody understands really what SDE is, or EBITA. Like, nobody's really thinking about their little SaaS business in terms of that. Almost nobody has a p&l. And I mean, like, literally can't even export stuff from QuickBooks and just give me something right, they just don't have that. We got a p&l the other day that that like removed all of the people costs, I'm like, dude, like, that still counts. We need to know that. So there's a ton of education that that I think that we have to go through. But yeah, I mean, just the basics, right? Like, the thing that we always ask for is obviously that p&l, so like, at the base base base level, who are you paying? Like the people? And then what are you paying like for, you know, the software, right? It's like, basically server costs, and then people costs because the rest is frankly, like negligible sub, I don't know $100,000 MRR, it's like, you're not spending that much money on anything other than people or tools. People are servers. Really? I mean, sometimes tool costs are high, but not not often. But yeah, we're looking at like, total number of subscribers. What's your like lifetime value? What's the churn rate? Some kind of growth rate. We always love to know, like, let's say for instance, we leave the business and do nothing on marketing for the next quarter. But where are these? How are these people finding the business? Like what's what channels are working as a cold email working? Is it just organic search that's working? Is it I don't know miraculously Google Ads somehow something like that. It's always nice for us to come into a business knowing like, Have you figured out some semblance of a product market fit and the implication there is some channel to reach these people then of course conversion rates right how many signups you getting a week, how many free trials right? What's your conversion rate? Because a lot of these are something freemium? Yeah, so like you sign up and you just put your email address in and you can use the product for free for there's all kinds of variants, but mostly it's like there's a free tier and then a paid tier. Yeah, I know that was a lot. But

Ronald Skelton  40:06  
so you said you had like 60? In terms of most of those, what you were just saying is the same with brick and mortar businesses, right? Is there anything besides like the tech stack? Like if you wrote this in? I don't know, I'm gonna date myself, I don't even know if they still exist, like Visual Basic, right? If you don't, even if that even still exist. But if you wrote it in Visual Basic, I don't want to see it. Because it's crap. Is there any textbooks out there, you guys won't touch like, if it's written in something, or if they built it off of a particular platform or something, it's just kind of, like, going to be more work than it's worth to fix it.

Andrew Pierno  40:38  
I'm struggling with this this answer, because we have some opportunities I'm dealing with now that are in a tech stack that our shared services team doesn't know. And I don't know, in if you're buying a big enough business, that doesn't matter, the business comes with the people that know that. Fine, you just go pay for it. If you're tight on cash flow, right, let's say there's sub 10k or 20 km RR and I can't really pay, I can only pay people like outside of the US to do anything, then I have to be a little bit more cautious. Because the business, let's say I buy it, you know? And it turns out actually, like, instead of the 10 feature requests that are super urgent, there's actually like, 50. Right. And that's one of the surprises, you know, that's one of the surprises when buying a deal. Make sure that the business can actually pay for it. One of our like, little superpowers is that when we buy a business in tech stacks that we know, and our shared services team can go and build stuff against it Dev is super cheap for us. That's like, it's like a generator of alpha for us is that delta between what what what market says you'd pay for a software engineer and what our output is for these little businesses. So yeah, at the moment, like I'm struggling with this now, do we, we're not at the point where we can add a person to our shared services team to like, add a tech stack to our ability to execute against, we're not there yet. But that being said, we do have two companies in our portfolio that are not our core tech stack. We've used contractors literally from Upwork, that we literally, after we bought the business just said, we have a thing in this language, do you know it? And I say that flippantly I, another kind of alpha that we have is I can manage, like cheap overseas labor. Because I can take a look and know exactly kind of what they're doing. Even if I don't know the tech stack or programming language, I can tell at a base level, if it's good or bad, or if they're, they're, you know, sandbag and are writing crappy code. I think that that's something that unless you have somebody technical on your team, it's gonna be very difficult to just trust that this guy or gal you found on Upwork, that's 20 bucks an hour is gonna, like do the right thing. I mean, like, they're not gonna do the right thing, you know, you're gonna get yourself into trouble. I know, I've gotten myself into trouble with that before.

Ronald Skelton  42:54  
It's interesting as a when I worked back many years ago, I'm dating myself now. 9899. Um, so back then, when I worked for Lockheed Martin, I was a senior tech test engineer. So but I could read code. And like, we have the code reviews, this is for government software. I can read it, I couldn't write it, I can understand the logic of it. I could see I could actually, like detect there's a problem in the logic of the code. And language, I couldn't sit down and write and write, you know, back then I don't think I could these days. I've been out of it for so long. I could write and see. Right, yeah, but, you know, some of the other languages and some of their stuff, err, and, you know, I built our whole that deities I was talking about it was on PHP, I'm laughing now. Because it sounds so ridiculous to even do that. But we built the whole thing on like, you know, almost a scripting language. Right. So, um, anyway, Perl and PHP? No,

Andrew Pierno  43:47  
yeah, I think that the one of the more concrete things that tends to happen is you'll say we need x, right, you'll describe some kind of an estate for the software that you needed some function that you needed to do, it needs to be able to, I don't know how to calendar, and your tech guy will be like, Oh, we can't do that. And you don't have the ammunition or the knowledge to say like, yes, you Yes, you absolutely can do that. And here's how and it should be done in three days, right. And like, you don't, I can do that. And that's how that's how we can get away with some of these things. But I think that and I've seen this and a bunch of people reach out all the time with this problem. You can't you can't do that if you don't have the technical background to do it. I'm not saying if you're non technical, you can buy SAS businesses. That's not what I'm saying at all. There's all this cool stuff around no code tools, right? Or these, the actual software product is built with another software product where nobody actually wrote code to do it, which is super cool. There's all kinds of things. So I'm not saying that all but I am saying be careful. Know what you're getting into. Try and get a tech partner to at least look at the code if you're not super familiar with it, like just have a buddy on your side or better a partner that's that's kind of incentivized in the same way you are to do the right thing.

Ronald Skelton  44:57  
So one of the things I try to avoid unless I'm the disrupter, I try to avoid buying a business where I see it could be totally disrupted before I'm able to sell it. So inside of my space, like I'm a real estate investor by previous trade, I wouldn't buy a clothing company right now, because I honestly think that not crypto isn't the coin, but the blockchain and non fungible tokens, not the art, but the actual science behind it is going to replace your typical title company for both cars and homes. So if you owned a title company on a car, I think that that's going to go into the blockchain, I honestly or even even the closing company for a house. So I don't I try not to get into anything where I think that there's a disruption company and unless you know, coming in, unless I'm disrupting it, I don't want to be like, I don't want to be in the path of that disruption. Inside of the software as a service and inside of software in general, how far off do you think and this is kind of a way out there. But I like to throw something cool in everyone. So how far off? Do you think we are before AI? Actually can write write code? I can actually look at a problem, you tell that one, you know, you give it an outline of what you wanted to create. And the AI tool itself could trade the code around it? Yeah, so

Andrew Pierno  46:11  
It just so happens, that company was CTO is a computer vision and machine learning.

It was an AI company. So I spent a number of years doing some parts of machine learning, I refuse to call it AI because there's a lot dumber than people think it is. And by that, I mean, specifically, it's these that there is no like this general AI that can do like all these fancy things, that it's actually quite narrow. Like this one little machine learning model, as they're called, does a very, very specific thing. Like, literally, it knows how to draw boxes around people. But if you asked it to draw a box around a dog, and you didn't tell it what a dog was, Nope, not gonna happen. And that's still kind of like a, you know, extrapolate it out times, times, I don't know, some some large number. That's, that's still what's going on today with like self driving cars, and all these cool robotic stuff. Writing code specifically. So I think it's gonna happen in parts, right? So there are actually cool products now that help developers like myself, predict what I'm going to be typing next. And so it all this is to say that, like, I don't know that it'll be like you, you wake up in the morning, and you're like, Okay, Google, I want build me an app that, you know, walks my dog, and then like, bakes me a pizza, right? And then it just does that. I think it'll actually be like, four. So it'll make software engineers more productive, right. So like, let's say the output of a software engineer is five units with some additional AI tooling, it might be like 50, or 500, or 5000. But like, as we've seen, I think with any kind of self driving car, or some of these more lofty artificial intelligence applications, there's like the first 80% And then there's the last 80%. And that last 80% is a real doozy.

Ronald Skelton  48:06  
Okay, cool. Well, I appreciate we're at about 40, 47, 48 minutes. Now, one of the things I always like to do is, if somebody wants to get a hold of you, they've got us either a SaaS idea, or they've got one, or I don't know, they just they think you're cool. Want to chat with you about something they're working on. You shared with me your Twitter. So I'm going to put that up there. Now. Is there any other ways that you'd like people to reach out for you? Is this the best way?

Andrew Pierno  48:32  
Twitter's great. At Andrew Pierno, P-I-E-R-N-O.

Ronald Skelton  48:36  
So for those you guys are watching the video version of this, it's up live, that guy's on the podcast, I'll actually put his Twitter handle on the podcast description. I'll have my people do that. So you'll be able to see it in there. So if you're listening, and you didn't get that, just go back to the description of it. It'll be on there. Anything else? Is there. One parting shot like us there. I always like to say is there three tips that you'd like to give people who are looking to either build or maybe in this case, by a SaaS company that you would like to know,

Andrew Pierno  49:13  
I'm a go do it kind of guy. Like just go go try it. I mean, I think some of these things, you could buy something for 25, 50 grand, right? I don't know, whatever number you're comfortable with. I'm sure there's a software company that you could go by and experiment with. And just go try it.

Ronald Skelton  49:29  
I almost, I did a website software company. And unfortunately, I dragged my feet just a little bit too much. And somebody got in there before I did. But it was in the real estate space. And I was funny as I was looking through one of the websites, and I was like that for sale. I actually knew them. Like I actually presented beside them and a couple of real estate related, you know, meetings. And so I reached out to the lady that owned and but yeah, that was you know, it was generating 25 30,000 A year and she wanted 60,000 for it. I was all All about it. All the reason I dragged my feet a little bit is I'm not in the real estate space. So I brought on a friend who is. And by the time I got him involved with it, she had already sold it to somebody else. But yeah, so yeah, there's a lot of small deals out there to get your feet wet. So I think that's a great point.

Andrew Pierno  50:19  
Yeah, but let's, let's be very clear, you're buying a job, that that first initial small one, you're buying a job, we are still buying jobs, even though we have five of them, why not just have five jobs, but to really escape, get any kind of escape velocity and buy, start buying real kind of cash flow, it's gonna it's gonna take a while, if you think you're just gonna buy these things and sit back and set my tires on the beach, because you read one of those stupid books, like, it's not gonna happen.

Ronald Skelton  50:44  
You know, I just, I was just listening to somebody else's podcast. And he was talking about, you know, guys who bought a bunch of plugins for Chrome and stuff. And one of the guys was talking about how much money he wasted because he just thought he was gonna buy these monetize them. And he could pick them up for some of them. He said, I was picking these things up for like five or 10 cents a user like user base. And, you know, so I pick up 100,000 users for you know, you know, a few few 1000 bucks, and thinking I'm gonna monetize it. And I spent more than I paid for the company trying to monetize it stuff and the users just weren't buying. Right. So the good news, the good news is I didn't risk that much money and in the grand scheme of things, I learned enough that I'd had it, but also it would have cost me more. So there's, yeah, get out there. Do it. Just do it. I like that. I'm, uh, you said you, you're the gunslinger. I often get accused of being the ready fire aim guy. Right. I jump in and figure it out as I go. And so I appreciate that. Well, Andrew, thank you for being on. I appreciate your time. People. If you want to get a hold of him. He's Andrew. Free. No, I get that right here. No, Pierre. No, my best

Andrew Pierno  51:54  
hand is a little Italian, Pierno.

Ronald Skelton  51:58  
I like that. Like the I like the SaaS rounder, I like software as a service. Get some sass in your name to different way. So you know, I appreciate your time. And I'm going to end the recording now. And then you and I can chat for a couple seconds all right.

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