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With Scott Orn

A Startup Podcast by Kruze Consulting

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Scott Orn

Scott Orn, CFA

Mark MacLeod of SurePath Capital - Startup Fundraising

Posted on: 02/06/2017

Mark MacLeod

Mark MacLeod

Founder - SurePath Capital

Mark MacLeod of SurePath Capital - Podcast Summary

Mark MacLeod founded SurePath Capital after serving as Startup CFO for Shopify and Freshbooks. Mark was also a VC at Canada’s Real Ventures. Mark started SurePath to help startup founders fundraise more effectively and even help sell their companies. Mark talks about the metrics a startup needs to raise money, how much money to raise and the difference in fundraising approaches between a Seed & Series A Stage Companies and Later Stage Companies.

Mark MacLeod of SurePath Capital - Podcast Transcript

Scott Orn: Welcome to Founders and Friends podcast with Scott Orn at Kruze Consulting, and my very special guest today is Mark MacLeod of SurePath Capital. Welcome, Mark.
Mark MacLeod: Hey, Scott. It’s great to be here.
Scott Orn: So we have been friends for many years. We originally met when I was at Lighthouse and you were at Freshbooks. We had the opportunity to work together there, which was awesome. And now you’ve started your own firm, it’s super cool. It’s called SurePath Capital. Do you want to tell folks what SurePath is and how you got there?
Mark MacLeod: Yeah, thanks. So first of all great to be here, Scott. And yeah, I’d love to talk about SurePath. The best way to understand SurePath is maybe to understand my journey, because I’ve been around a lot longer than SurePath has. So I want to go back to the beginning, but go really quickly.
Scott Orn: You look like you haven’t been around that long. You still look young.
Mark MacLeod: Yeah, yeah, yeah. Every grey hair has been earned. Trust me. So I’m a CPA by training. I spent 6 years in that world - three doing audit which was boring and painful; three doing corporate finance which was better. I got into the whole venture-backed startup world in the late 90s and never left. So I spent 14 years as CFO for a number of venture backed startups, and had the whole range of outcomes from a company that went public to one of those ten extra turns that investors are looking forward to writing off 11 million in capital from one company alone to everything in between. Along the way, I started to specialize in Software as a Service companies generally, and SaaS for SMBs; Small and Midsized Businesses specifically. So the last two companies I was CFO for were Shopify and of course, most recently Freshbooks where you and I met. In between those two, I actually went to the dark side for 3 years, and helped create Real Ventures which is Canada’s largest and most active Seed Stage venture fund. There I did ecommerce investment in some companies like Unbounce, on the SaaS side.
Scott Orn: I did a [inaudible 00:02:03] from Unbounce, that’s a good company.
Mark MacLeod: And Frank and Oak on the ecommerce side. We’ve done companies like Breather, and lots of really cool companies.
Scott Orn: I had a chance to invest in Breather, and I just didn’t do it. That was a huge mistake.
Mark MacLeod: Yeah, that’s best [inaudible 00:02:21] type portfolio.
Scott Orn: Oh God, I wish I would have done that.
Mark MacLeod: So anyway. Lots of operating. Lots of focus on SaaS, and some time on the investment side. When I left Freshbooks, just about 2 years ago, I decided to take all that experience and create a unique advisory firm. So, I reflected back on all that time in that space and I felt there were 2 needs that I could build a firm around. One, is one the fundraising side. I think it’s never easy to raise any capital, but relatively speaking easier to raise Seed and Series A - we could still pitch the dream. Harder to raise those growth rounds where all the boxes have to be checked. So helping companies prepare for and raise growth capital is half of what we do. Then the other half is a growing exit practice. What I saw on the M&A; side over the years is the really credible name brand investment banks tended not to touch any deal that was less than 70 million in enterprise value for the boutique firms, and 100 million and up for the global firms. Unfortunately , most exits are well south of that. So for companies that don’t want to be the next Shopify or never could be, which by the way is most companies, I felt they had no one credible to turn to. I like to think of us as a non-sketchy investment bank, really, because at the end of the day we are deal driven. We are not going to sell your mother to get the deal done. We don’t charge as much as investment banks charge. Most of the experience that we bring to bear is from my time operating, not my time on Wall Street.
Scott Orn: I was an investment banker for 3 years. The other problems I see with companies… investment banks representing Late Stage startups is if it’s not a certain dollar amount, they act as if their fees are impacted, so they just don’t care. They’ll sign an engagement letter and then literally do no work.
Mark MacLeod: That’s right. They lock you up.
Scott Orn: Then you have an 18-month lockup or tail usually, where you pay the investment bank even if they didn’t do anything. So it’s a really crummy process for a lot of people. When you started SurePath 2 years ago, I totally got what you were doing, and it made so much sense to me. So can I take a part from the stuff you talked about? Raising early versus raising late. I gave a form of what you’re talking about - I gave that advice to a startup this morning. I do this all the time with Seed Stage companies. My advice was, ‘Raise as much money as you can.’ Because he was raising 500k, and I was like, ‘Look, raise at least one, one and a half, because you can still sell the dream right now. Versus a year from now, people are actually going to look at your metrics and look and see what you’ve accomplished.’ Is that what you see, at the early stage?
Mark MacLeod: Absolutely, I talk about the three Ps of fundraising; People, Product, and Progress. At the Seed Stage you need one of those three. At the Series A, you need two of the three, and by the time you get to Series B you need all three. At any point in time if you’re going to only have one - progress, i.e. traction. Traction forgives all sins. So certainly at the Seed Stage when it’s nothing but promise, you have no accountability for actuals.
Scott Orn: It’s like if there’s food being served, eat. If there is capital there to be raised at reasonable terms, then you should definitely take it. Because I got crunch of the data on this, for the SaaS companies anyway, and generally to get to Tier 1 large Series A rounds takes two years. But most companies do not raise 2 years of runway in their Seed, which means they’re having to go back to the kitty from a position of weakness. Either they don’t get it done. Only 48% of companies that raises seed in SaaS end up raising an A. Or, they do get it done but they end up deluding themselves and slowing themselves down.
Scott Orn: Going back to the kitty, which was something else that I told the guy today. People don’t understand this but Seed Stage investors are not set up to write multiple checks. Angel investors want to write one check, that’s what they allocated to you, and they need you to go and have a progress and raise another round from big investors.
Mark MacLeod: Absolutely.
Scott Orn: So the problem with going back to the kitty is, there’s no kitty there. There’s no one who wants to be brave and write a check. Sometimes there are some Seed Stage funds that will do it, but they don’t like to do it, and to your point; they make you pay on evaluation.
Mark MacLeod: For sure. There are some folks like Bullpen Capital that specifically fill that gap between Seed and A, but the fact that I can name them specifically tells you how rare that is.
Scott Orn: And that’s the only one I can name actually who like to do it.
Mark MacLeod: That’s right, but it’s a huge gap. I helped run a Seed Stage fund for years. Yes, we were a dedicated Seed fund, but if things were run right we would deploy most of our capital into the companies that got the A’s and got the B’s.
Scott Orn: So that’s the early stage. I really like your 3 P’s, too. That’s really smart. So early stage - sell the promise, raise as much as you can. Now there’s more meat on the bone in the later stage. What kind of advice do you give in to later stage companies and how do you—You’re really taking them through the process. Can you talk about that?
Mark MacLeod: For sure. I’ll go back to the early stage for one. Some of the best CEOs out there can get the early stage rounds done really quickly. They employ FOMO and signaling and getting the early investors to commit. There is this urgency and 2 weeks or a month of madness and the thing is done. Kudos to them. If you decide to raise a Series B, then as a founder there’s a bunch of things. First of all you are now committing to build a large company. You’re committing to go after a statistically improbable outcome. I don’t want to discourage anyone from building a big company, but it should be a considered decision. We really like to be involved. Ideally, you close the Series A, you party and you would come back to the office on the Monday. You give us a call. The more lead time you have to prep for the B, the better. So what I like companies to do, is if you’re going to go for a $20 or $30 million check, if I’m writing that check to you, I want to have lots of exposure to you. I don’t want to just come in when the road show is happening. What I really want, and what we try and set up for our clients is the situation where you can come in to the right growth stage investors. The other thing you see at the growth later stages is, the partner are very specific. Like , you have a partner who does nothing but just B2B enterprise marketing tech. They know every company. They know every buyer, and they want time to track you. If you are a B2B marketing tech company, what we would do is set up that thing where you could go in and tell that partner, ‘My name’s Scott. This is my company. This is my vision. Here’s what I’m going to do over the next 2 or 3 quarters. Would you like to be kept up-to-date?’ Person’s going to say yes, because they were the right partner for you to talk to. At which point it’s on you. If you do, what you said you were going to do. You are building credibility. You’re getting to the top of the pile. That partner is going to introduce you to some portfolio companies - partly for your benefit, partly for diligence. If you’ve done that with 10 people, then by the time you are ready to run your road show you have a warm pipeline. You’re at the top of everyone’s list, and then we can run a proper process and get it done. Another thing that we like to do, at the same time is make sure that your most natural acquirers know who you are. In some cases that will result in dual tracking, a raise and an exit. Or at the very least, you’ve decided to build a big company already having talked to the likely acquirers.
Scott Orn: Yeah. So you said a ton of really smart stuff there. A couple of things that I just wanted to add. You’re talking about building a track record, to which I completely agree. For them to be able to see the numbers and the numbers build - that’s how they build faith in you. People forget. Those investors are writing much bigger checks so they don’t even have as many shots on goal as much as seed stage investors. They have to get those 2 or 3 investments they make in a fund, correct. Or else, they are fired. They are out of a job.
Mark MacLeod: No wasted bullets. One or two bullets a year, it matters.
Scott Orn: And if it doesn’t perform, they have wasted $20 million. Huge amounts of money. The other point you made which is another really good one is, they will often introduce you to potential customers. I’ve had smart CEO friends of mine when I was at Lighthouse would be like, ‘Hey, I want to come and pitch you. Now, who are the 5 companies you can connect me to so I can be their customer or, so just I can sell to them.’ So it’s actually a great way to have some revenue traction, too. And then I really liked what you said about the acquirers knowing who you are. When I was doing investment banking at Hamburg and Chris, whenever you are doing a private placement fundraise the advantage of having someone like you involved is you can very casually - you know all these people, you know all the business development and corporate development people - you can very casually just make a phone call and say, ‘Have you heard of this company? They should be on your radar.’ That’s a non-intrusive way of saying if they might want to acquire you. Then I want to circle back to something you said earlier which is when you raise a Series B or Series C you are committing to building a big company. Do you want to explain that? I know what you mean, but can you talk about the math involved with that? And why you say that?
Mark MacLeod: Sure. You look at the distribution of exit outcomes. Three quarters of exit outcomes have no disclose value. Maybe sub 10% of disclosed outcomes have north of 100 million. But if you think about it now, I am a growth stage investor. I wrote a $20 million check. I own 10% of your business. If you don’t sell for a massive outcome, it’s completely irrelevant to me. 200 million and up. 600 million in fact to get the multiple. So, if you think about the companies that sell for 600 and can deliver me my target return, they are few and far between. It’s just that the stakes are really high.
Scott Orn: And that target return is what you need as a growth investor to stay in the partnership, and be relevant and stay alive and kicking your investment. And like you said, they just don’t have any wasted bullets. They just have to get a return on those things. One other thing that people don’t always understand, and this is always negotiable in terms of your document, but often times the last stage investors will have provisions that you effectively need their permission to sell the company. They are not going to let you just take their money and then decide when to sell. They will have either a vote as a share class or some other mechanism that keeps you from selling the company. So unless they are happy, you’re not selling the company.
Mark MacLeod: Yeah, if we go back to our Freshbooks days, my CEO there had a saying that I heard from him at least once a month. ‘There’s two things you need to succeed in life and business; alignment and shared values. If you have that; the rest is easy.’ So if you think about now, so you as a founder you’ve got opportunity costs. This is your sweat, blood and tears. You’ve been in it forever. But you have no hard dollar cost. And then you can trash that with this investor who just put 20 million bucks in. If you look at your slice in the Cap Table, it’s worth a lot. There’s a range of outcomes where you’re happy and you don’t have to worry about your family, and you’ve got a house and all that stuff. But for that investor the range of outcomes that matter is far, far smaller. So there can absolutely be situations where you are not in alignment. So that investor has a blocking right. You’ve got some tough conversations to have.
Scott Orn: How do you navigate that, negotiate that? Is it really just setting the expectations with the founder before you do…interview with some of the investors like, ‘This is what you’re getting into. Are you sure you want to do this?’ kind of a thing?
Mark MacLeod: Yeah, I think a good strategy begin with the end in mind and works back. So when we are modeling with companies, we at the very least model what the next round looks like. So we’re setting pricing for this round, looking at where the company is expecting to perform, looking at where the price revenue multiples are and making that sure we’re not screwing ourselves. We’re feeling really good today because evaluation’s high but then teeing up a possible down round next time. So that’s table stakes.
Scott Orn: Can you talk about just the down round and the mechanics of that? How a company could screw themselves right now? Because I don’t know if people always understand that.
Mark MacLeod: Yeah. The valuations have gone up and down. They are not totally frothy now but they are warm. So there could be a situation, where - like we have a client right now that is closing a really competitive round. The valuation very quickly got above target. and that’s a great deal. But that client - now, we’ve had very clear conversations. I said, ‘Okay, this deal’s going to close at this value. This is what you monthly recurring revenue needs to hit, and your growth rate needs to hit, in order for you to maintain or grow your revenue multiple.’ They are closing this round from a Tier 1 investor. There’s another dynamic there as well which is - well, I hate to say it - it’s like the secret handshake. It’s like very much the insider club. So if you are a Tier 1 fund and you led, let’s say the Series A, you don’t want a Tier 3 fund leading the Series B. You want the same tier. There’s just a ton of ego.
Scott Orn: And that other Tier 1 won’t pay up on a high enough multiple of the last round unless the numbers are there.
Mark MacLeod: That’s right. So everything’s got to work. The other dynamic is if you’ve raised some money and then you’re out raising the next round by yourself versus having the investor who first backed you like having his or her roll and paving the way - you’re screwed. It’s a total negative signal. The investors know it. They know your investor’s not behind you. The deal’s dead. So you have to think about all of that when you’re closing this round. You can’t just get excited because someone’s willing to pay up. You have to actually realize that all of the risk is still ultimately on yourself to execute.
Scott Orn: And maybe don’t maximize valuation to a degree. Take something that’s fair, that leaves you some room to grow. It’s crazy. I see people maximizing valuation to their own detriment all the time.
Mark MacLeod: It depends. If you are just building to flip, then maybe you’re a little less concerned, and you’ll tolerate being out of alignment for a while. In most cases, good things actually take time. If you’re trying to build a real company, you have to create a financial strategy for good times and bad, and for missing plan, which you’ll do all the time. You have to create that.
Scott Orn: Maybe you can talk a little bit about some of the metrics. You guys focus on SMB, the end customer SMBs; software providers that sell to small businesses. What are some of the metrics you focus on? I knew when we met on Freshbooks, and we talked on the phone. You sent me this amazing spreadsheet, which was like every investor’s dream because you basically laid out all the metrics for me. It took me 10 minutes to realize I wanted to do something with Freshbooks - it was that good. Can you talk about what that looks like in the metrics that you focus on?
Mark MacLeod: Sure. I’m actually going to take a little tangent first of all and talk about why we focus on SMBs, and then I’ll talk about some of the metrics.
Scott Orn: Please.
Mark MacLeod: So at SurePath we really do 2 sectors. We do Software as a Service companies, and we do ecommerce companies, but within that we have a deep focus on companies where the end is a small and mid-sized business. And we do that first of all because it’s the world I know best from my time at Freshbooks. Also most of my investments at Real Ventures were SMB/SaaS. But more fundamentally, if you look at the small business market - there are 30 million small businesses in the US; 60 million in the English speaking countries; 600 million globally. First of all it’s an evergreen market. There’s like 3 million new businesses starting every year. Everyone of them needs email marketing - a domain, a website, an accounting software. These markets are just evergreen and they are too large for any company to dominate. You think of Freshbooks where I just came from prior to starting SurePath. Again, 30 million small businesses in the US. Intuit has 5 million of them, even though it started 3 decades before. Now you contrast that to enterprise software markets and especially consumer software markets. Those markets tend to have a shorter half life and a market winner is established relatively quickly. So I really like, first of all the evergreen nature of the market and just how large it is. What that means as a founder is there are different paths to succeeding as an SMB. You could choose to raise the big venture rounds and go for it, and blow it up. Or you could choose to do what the 37 Signals guys do and just bootstrap and go with a certain amount every year. The market’s always going to be there for you. So I really like that. I also think there is a real turnover in the market. The older generation of entrepreneurs were very happy running their business on pen and paper, but the new generation are going to assume that for whatever need they have, there’s some app for that. They are going to look in their phone. They are going to look on Google. They are going to find it and try it. So I think many categories of SMB software are going to explode. The final thing I’ll say, especially when it comes to selling businesses our hope at SurePath is to be, without a doubt, the leading advisor in the SMB software space, and to have the deepest relationships and access to help our companies get into the right plans. I think you can only have that access and level of insight if you are a specialist. It’s just a thing that we think about. Anyway, that’s a big.
Scott Orn: As we see that, one of the reasons we are successful is that before anyone even knew who Gusto, or Expensify or Bulldotcom was 5 years ago, she (Vanessa) had found all these companies, and knew it had made her life easier as an accountant, and then started putting all her clients on it. It really optimized all these startups that were using crappy payroll solutions or crappy accounting or whatever it was. I totally relate to it. The founders or anyone starting a business is going to look to technology as a solution.
Mark MacLeod: For sure.
Scott Orn: Because it makes them so much more efficient, and they can spend their time on doing what they love, what they got into business to do which is build the company.
Mark MacLeod: Exactly right. Back at Freshbooks, I met Josh from Gusto back when it was Zen Payroll. I don’t even think he had an office because we kept just meeting in South Park and would go for walks. If you look at even Payroll, there would never have been a happy 80p customer. Ever. But now people are raving about Gusto, and that’s just going to keep happening across many product.
Scott Orn: They brought design and they brought customer service to this market that had never experienced it. It’s kind of that simple. It’s amazing. Okay, so I interrupted you., sorry for that.
Mark MacLeod: The metrics.
Scott Orn: Please.
Mark MacLeod: The big thing - again the big criticism that investors have about the SMB market is churn. These small customers - they come and they go. It is hard to acquire them, and hard to keep them. So the unit economic math doesn’t work. Those are a few things that really matter. Again, SMB can mean everything from that solo-preneur who works from home to a 100 even 500 person company like Hubspot sells to SMB but has a very large agency customers. So it’s a very wide definition of customers against them. So if we think about the monthly recurring revenue. That could be a wide range. That could be a $10 a month product, or it could be a $500 a month product. So I like to think of it more in terms of key ratio. So long term value over cost to acquire. And long term value in this case being how much you charge per month times the number of months you keep them times your gross margin equals the lifetime value to you. Divide that by your fully loaded cost to acquire. Were you paid in marketing to get the lead? If you have a sales team, the sales and marketing body, it’s a fully loaded cost. If you below 3X, it’s really tough.
Scott Orn: That’s the magic number.
Mark MacLeod: If you are even 3X, you’re good. You’re not great. 4X and up, you’re really starting to be interesting. So I really target 4X. Then the flip side of that is targeting a 12-month or less payback on your CAC. And then on the churn, there’s two ways to think about churn. logo, that’s the amount of customers that just quit. And then revenue - how revenue is lost. So on a pure logo basis, if you have more than 3% of your customers leaving every month. It’s just a lot of gravity.
Scott Orn: It’s like a hamster, really. You’re just running to stay in one place.
Mark MacLeod: It may be easy to replace those today, but imagine when you are 5 times the size that you are. The absolute number of customers that you have to replace, just to stay flat becomes really big.
Scott Orn: I was fortunate enough to invest in a couple of 5X businesses over my career and those companies kicked ass. There were huge wins. Investors know within one minute of what they are looking for, when they meet a company with this recurring revenue model. They can do the math on the customer acquisition cost. If it’s above 3 you’re in play, and if you can get 4 or 5 - you’re a great company.
Mark MacLeod: Yeah, so we’ve got to be thinking about SMBs specifically. There are only a few ways to really build a large company in SMB. So one is to have a very low cost of acquisition driven by some kind of Mailchimp or Dropbox. The product is inherently viral and just through the use of electronics. The second is just to tough it out on one product, and then build enough of a customer base so that you can buy or build other products to cross. That’s what GoDaddy does.
Scott Orn: And raise the revenue per client.
Mark MacLeod: That’s right. Now you’re selling new things to customers That’s what GoDaddy does. That’s why they have so many lines of business. That’s why they are requisitive. A third is to build channel, like there is only so far that your direct response. You can only do Google Adwords so far, before your incremental cost of acquiring the next customer equals their LTV. Again, if you look in the accounting software world, a third of Intuit’s revenue comes from channel. You think about small businesses, they don’t have IT departments. They may seem old school to you but there are value added resellers around the Google echo system and around the Microsoft echo system who are basically the IT department for small businesses.
Scott Orn: And we’re the channel for all the accounting software. There’s a reason why all these guys have done with this podcast, because they want a message out to our clients and say, ‘You should be using X, Y, and Z software because it’s the best.’ We’re doing all the education on behalf of Intuit and Expensify and Bulldotcom and Gusto. It’s amazing. Are there any lessons from looking those three prongs of increasing your revenue, low cost of acquisition or channel that you’ve seen work really well over the years?
Mark MacLeod: For sure. Yeah, a lot.
Scott Orn: How did Shopify get going? And by the way thank you for working at Shopify. I ended up buying the stock after I went….did an IPO, and it has done phenomenally well. Because of that connection I actually bought the stocks. So thank you. What did Shopify do so well to become this huge company?
Mark MacLeod: Yeah, I think it’s many, many things. If you break them down; first of all great outcomes like timing [inaudible 00:26:57] material portions. There were Yahoo sites. There were plenty of places to go and build a website before, or an ecommerce site before Shopify showed up, but they came with a fundamentally better product, with a real emphasis on design. There’s an important element there - which is again if we take SMB, massive, massive market. If you try and build that horizontal Swiss army knife that serves all of that market; you’re really serving no one. What Shopify did right out of the gate was it really focuses on highly technical, highly design oriented early adopters. Tobi, the founder and CEO was one of the original contributors to Rails. She really leveraged that community for early customers. One of his cofounders Daniel is a professional photographer. Everyone talks about design now, but they had a huge emphasis on design long before it was as buzzy as it is now.
Scott Orn: But I do remember that from Shopify early days, that the products on the retailer sites looked better.
Mark MacLeod: Way better.
Scott Orn: And that was it, probably. Many things go into a successful company. My friends who is the number 2 guy at Sports Basement; they use Shopify. That’s a big ecommerce operation. They looked at every ecommerce software they could use. Shopify - even though it was way cheaper than everything else - was the best.
Mark MacLeod: Absolutely. The segmentation is so important. And being able to say ‘No’ to things that don’t fit. I was involved with them in the early days. But even way back then they had really big merchants approaching them and saying, ‘Everyone will build on your platform but you’ll need to going to have this service level agreement. We need this feature, and we need that feature.’ It seemed tempting. But to their credit, they said, ‘No.’ And now they have Shopify Plus. They do cater to those merchants, but they did when they were ready. So, the segmentation, and the focus.
Scott Orn: Yeah, that’s really smart. Saying no is really important. We’re not Shopify, but at Kruze Consulting we do the same thing. I get people calling who are LLCs or Escorps, like chewing us out on the phone. We don’t work with those companies, and they don’t quite understand, but I learnt that the hard way. You have to focus on your core market. And then over time like you said Spotify Plus. I’m sure Freshbooks is doing stuff like that, too.
Mark MacLeod: Freshbooks is the same way. If you open up Freshbooks and you open up QuickBooks you’re going to see the very different things. At QuickBooks you can do an account for any kind of business, Freshbooks you really can’t. Freshbooks in site who is that…First of all accounting software is built for accountants, not for business owners. So if you want to make something a business owner can understand, it’s got to be simple. So they made a very clear decision only to focus on service-based business - so people who sell their time and expertise for a living. So yeah, to your point about turning down these Escorps. Any retailers, restaurants, manufacturers can’t use Freshbooks. They are totally fine with that.
Scott Orn: And there’s a bazillion people that fit Freshbooks market. That’s actually very lucrative.
Mark MacLeod: About two-thirds of the economy.
Scott Orn: That’s amazing, I remember you showing me that chart and explaining that to me. Transitioning to selling the company and talking to acquirers - what are the things you message there, and how do you go about doing that?
Mark MacLeod: Yeah, so first of all just to set the stage I guess, there’s so much that’s written about fundraising, and yet we struggle to raise capital. There’s almost nothing that’s written about how to sell your company. So, for most founders and management teams it’s a total black art, black box. It’s emotional; lots of highs and lows. And you’re not really teed up for success doing it by yourself, because you’re negotiating with your future employer, and you’ve never done it before, and you’re picturing the Ferrari you’re going to buy, and anyway.
Scott Orn: And it could be snatched away from you at any moment because they could walk away.
Mark MacLeod: Of course, right up until they hit the wire. There are a few things to keep in mind. First of all, recognize that if you’ve raised a dime of venture capital you have signed up to exit the business.
Scott Orn: Totally agree.
Mark MacLeod: A great product doesn’t just get built. Management team members don’t just get hired. Marketing campaigns don’t just happen. Anything that’s significant has to be thought of, and has to proactive. That’s true about your exit strategy as well. Even if you intend to build the next Shopify, you have to realize, I think, that first of all the odds are against you. A big thing I talk to founders about all the time is optionality. It’s not that I want you to sell early, but I sure do want you to have the choice. So if you’ve just decided that, ‘I’m tired,’ or, ‘It’s not fun anymore,’ or, ‘A buyer’s just offered me a value buyer’s just offered me a value that’s going to take me 3 years to get.’ Or, ‘Market’s collapsing.’ I want you to have the optionality. A big thing that we encourage our companies. That’s what we do as a standard investment bank. If you hired a standard investment bank, it’s clear you’re for sale. You can say whatever you want; you’re for sale. We have a different approach because we’re super focused on SMB and we’re talking to Intuit and Square all the time. I’m here in SF this week and I’m off to meet Square tomorrow. We have ongoing conversations with those folks. Then, it’s a different context. We can simply say, ‘Here’s a company that should be on your radar screen.’ Very often, we know what their priorities are where we can tee up the conversations. A dynamic that we like to tee up is to have our CEOs talk to the Corp div and product inline business leaders two or three or four times a year. Just regular updates. Again, those are one-way conversations with our clients telling them what’s going on. But over time, especially if it’s a big platform like a sales force and you’ve got joint customers and integrations and there’s meat on the bone, those are going to become two way conversations. The importance of doing that long before you actually want to have an exit is, you can never actually figure out the timing on the buy side. You don’t know what their roadmap is. You don’t know what their issues are. So if you just ran a process, you’re hoping the timing’s going to work. And it’s probably not.
Scott Orn: So many times the CEOs say, ‘We’re not buying anything for the next 6 months,’ or something like that. Something arbitrary.
Mark MacLeod: At best contrasts - Fundraising and exits. So you decided you want to raise money. As long as you have a big market. You’ve got the team. You’ve got metrics and the growth rate. Then there’s a whole bunch of investors who are in the business of looking at that and they are going to invest on a probability space. Whereas if you want to exit, regardless of the merits of your business, you actually have to fit a strategic gap that a buyer has identified now. A gap that can be filled faster through acquisition than through building. Timing really matters.
Scott Orn: And it has to be at a price they want to sign up for.
Mark MacLeod: That’s right. So, you will never know unless you bug their offices, and hack their email system–
Scott Orn: Which you should not do.
Mark MacLeod: What their priorities are. And we’re not advocating that. So the solution to that is to make sure they know about you. Again, because we are focused and because we are talking to those folks all the time we can let them know. ‘Hey, by the way X, Y, Z company - we’re about to go help them reassess their [inaudible 00:34:42] I thought that you should know.’ The unwritten message, by the way is, ‘If you’re ever going to make a move on that company, now’s the time. It’s never going to be cheaper.’ They already know that company if we’ve done our job right. The other dynamic - if you looked at acquisitions, the rule of thumb is about half of acquisitions don’t work. They don’t meet the targeted objectives. The value that is created out of the ones that do work so vastly outweighs the value that is lost on the ones that don’t work. That’s why deals happen.
Scott Orn: After they are Series A before they’ve been marked up on a Series B, it’s a great time to buy a company because the price is still semi-reasonable. The moment they take the series B, you have to pay 2x or 3x that Series B valuation, for that investor to get the return. So that company just overnight became more costly.
Mark MacLeod: Exactly. That actually brings up an interesting….There are times where a startup has a higher probability of selling. So if you think of about 1 million in RR, then you have enough traction that the product is proven. You’ve probably raised a seed round or maybe a seed in an extension. It’s team and technology, by the way. Those aren’t the biggest outcomes but they’re the bread and butter outcomes that happen all the time. Then you decide to raise the Series A and let’s say, you’re a 2 or million, You are too expensive to be a technology buy but you are too small to be a line of business. You actually have to build up to be now around 10 million in value or in revenue to be a thing that is proven enough with a management team that a buyer can take it and run it as a product line inside the reorganization. So there’s like no man’s land in between 1 million and 10 million of revenue. And then using a 10 million revenue run-rate you raise the Series B. And then yeah, you’re really expensive. This is going to be a full-on line of business, a new division for the acquirer.
Scott Orn: Yeah, a big deal. I want to be respectful of your time here, you’re doing such an awesome job and keeping it going. What are some of the things, some issues you help founders avoid with those potential acquirers? Are there any hotspots that you have to coach them and say, ‘Ooh, don’t say that. And here’s how you want to present yourself.’
Mark MacLeod: I look at it differently. At the end of the day, founders can whip themselves into a frenzy if they are trying to anticipate what the other side wants and trying to change their spots.
Scott Orn: Totally like dating, you don’t want to marry someone who thought they were marrying somebody else.
Mark MacLeod: That’s it. So I don’t really advocate that. I do try and preview kind of, ‘this is how a buyer’s going to be thinking about this, and these are the things that matter, but at the end of the day, you go in and talk about your vision and why you built the company and how you operate.’ If they like that, great. If they don’t if you tell them what they want to hear they are going to find out anyway, and then it’s going to be a nightmare and then you’re locked up. So it’s more about helping them understand the process. So first of all the corporate development person contacts you out of the blue. It means nothing. It doesn’t mean they actually want to buy you. So don’t….Breathe. It’s all good.
Scott Orn: They are testing the waters, and trying to learn something about the market. [0038:00]
Mark MacLeod: That’s right. The decision to sell the company is really a personal one. Even though you have other stakeholders. We’re there as a sounding board to help to make sure it’s the right thing. And then the process. If you’ve raised money, there’s a certain level of due diligence. But if you sell your company as the ultimate anal probe, to be honest. There will be an army of people that will descend upon you, and there are a lot of areas where these deals can go wrong. First of all to the extent that you said one thing in the selling process, and it doesn’t pan out in diligence. That’s an issue. Very often - and again I’ll put my Freshbooks accounting hat on - no one starts a business in order to run a back office. They start it because they are passionate about a product, a customer problem. But every startup that raises capital, has a board of directors who have information requirements. They want financial statements. They want budgets. Filings have to happen, and guess what? On an exit, if that company hasn’t remitted their sales taxes the directors are personally liable. There’s a whole bunch of things and very often the buyer will commit folly of earnings report. A big issue that we run into, especially with our early stage companies that are thinking about exit or even just getting ready for Series B, is basically they are back offices. And that’s not enough. That’s why we want them to engage with folks like yourself. If you think about a core of a startup; A core of a startup is building a product and selling a product. Everything else is in support of that, including the back office. It’s not that it’s not important, but it should be outsourced to a certain point.
Scott Orn: This is a shameless plug here, but that’s what we do. That’s what we live for. I always tell founders that I love doing that stuff for them, because I know how hard it is for them and I know how good we are at it. It really comes down to Vanessa just being amazing at business process, and setting up the whole architecture. But the company that’s worked with us, what they are really getting is the benefit of processes that are applied to over 160 companies. And that’s very, very tough to be. We were talking before you came on the mic that we have a couple of companies getting bought right now, and you’ve got to make sure that the accounting is done correctly. And that everything is done gap wise, and you just don’t want to unintentionally mess up your accounting because you’re trying to save a couple of thousand bucks. It’s horrible.
Mark MacLeod: If you’ve raised a dime of venture capital you’re signed up for an exit. Something’s going to happen and you think about the startup life and it comes down to these few big moments. They all involve lawyers. And they involve expense so don’t get in the way of that.
Scott Orn: We actually find that most companies come to us after they raise $500 million a couple because the investors do want reporting. But that reporting that the investors are requiring is not just for their own knowledge, it’s like they are introducing real accountability to the founders. That accountability may be painful at first, but it’s actually really good training for the acquisition. Doing your financials on a weekly basis as you become a bigger company, presenting to the board constantly. That makes that presentation to the corporate development people so much easier and you have all the data. One of the most rewarding things for us is, one of these companies is getting bought in our clients. Their investment bankers were freaking out because the diligence request was super long. We filled that diligence request in 3 hours, because we had all the reports. Again that’s not me, that’s Vanessa knowing how to do the stuff and setting it up correctly. That’s a really strong signal to the acquirer that you’re a well-run company. It really helps you.
Mark MacLeod: The thing really make a deal happen, because these deals are risky. If you feel like it’s well run….at the end of the day, you’re selling trust.
Scott Orn: Really fast before we go, can we talk about you DJ career?
Mark MacLeod: Oh, come on.
Scott Orn: Where can people find the mixes? I already know sometimes when I’m working. Were the lights too bright? What happened?
Mark MacLeod: Yeah, first of all I’m a massive electronic music head. I love deep house and tech house. Not the really commercial stuff, but the more underground stuff. I actually had a side career for a long time, well into my time in startups, playing in nightclubs and after hours parties. I stopped that when I became a dad. But I still do a mix online once a month. soundcloud.com/djmarkmacleod. I even played in a club in December. I used to host a party for the startup community in Montreal and I went back and played at that party in December last year.
Scott Orn: I highly recommend. I follow you on Soundcloud and I get those. That’s why I asked, it’s awesome stuff. It’s really cool that someone can be so good at finance and so good at M&A; and fundraising and also have that creative side. On the music side.
Mark MacLeod: I’m not going to quit my day job.
Scott Orn: Just to wrap up, can you tell everyone where to find SurePath and the quick recap?
Mark MacLeod: Yeah, absolutely. So surepathcapital.com that’s our site. We put out a newsletter once a month for CEOs and VCs and corporate development executives. You could sign up for that. You can find me on Twitter at starupCFO even though I’m no longer one. I would love to hear from you.
Scott Orn: Your index is really good actually. Mark has created an index of all the best SMB companies, and how they trade publicly. I just got your newsletter yesterday and they were up 16% and performing.
Mark MacLeod: Yeah, 16% last year, beating the Nasdaq and the Dow Jones. It’s funny. If you look after the Trump election in November, the big legacy manufacturing companies rallied a little bit. But before that the SMB focus companies like 80p which is the largest company by market cap, it’s SMB were outperforming the other broader industrial companies. I think there is a lesson there which goes back to what I was saying earlier about the customers and the market they serve being evergreen. People always need payroll software, but these companies are so stable. They just consistently grow X% a year. They consistently deliver X amount of earnings per share. And that’s really valuable to the market.
Scott Orn: It’s valuable to the market and valuable to entrepreneurs everywhere. It makes everyone’s life easier. Mark MacLeod, thank you for coming on. Check out SurePath Capital, and I can testify how good you are at what you do. Awesome. Thanks Mark.
Mark MacLeod: Thanks for having me.

Kruze Consulting is regularly reviewed as one of the preeminent providers of finance, accounting, tax and HR services to high-growth companies. For our offices in San Francisco, San Jose, Santa Monica, New York and now Austin, TX, our experienced team serves venture and seed backed companies in diverse industries from SaaS to biotech to hardware to eCommerce.

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