Buying 134 Software Companies in a Year

Colin and Brent discuss a competitor being bought and how Constellation buys so many companies.

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All right. Hello and welcome back. This is Colin Keeley here, and I'm Brent Sanders and we are two guys buying and building wonderful internet companies. Yeah, and it is, it's 2023, I think this is our first recording of the new year, right? Yeah, probably Happy New Year. Happy New Year as well. Yeah. So this year, I mean, we talked last episode about our, our goals and our kind of reflections of the, the prior year, this week, what do you wanna talk about?

What do you wanna talk about? So kind of an interesting thing. This week is automatic. It's one of our businesses, database backups and different types of backups. One of the competitors or probably the main competitor, snap Shooter, is a indie software out of the uk. It was just, picked up by a big strategic called Digital Ocean this week.

Mm-hmm. . So kind of an interesting acquisition, aerospace, awesome outcome for Simon, the sole founder over there. And we were like, what does that mean? Because we are also building on digital ocean . So this week we were about to launch and announce our digital ocean integration, which, you said that to me.

What was it Tuesday? Was it yesterday morning? Wednesday morning, something like that. And I was just, I, I was a little crestfallen. I was, I mean, I'm happy for Simon. That's a huge win, especially for like a solo founder. He's gonna find a home and a new company. And like for somebody who's been building in public, like it's a, it's awesome.

It's, it's a net win for everybody. It lifts kind of all of us. But I was like, fuck, . Like . They're go. So let's just explain what, what happened in this space. So Digital Ocean, what about three, four years ago, maybe I could be wrong in my, my time. So they're a hosting company. They're a competitor of aws or competitor of, they're a cloud provider.

So, They started offering a managed database service, and then that opened the doors for, okay, well you're hosting my database, who's gonna back it up? Like there's some other big players that were doing this, like Heroku had a, a Postgres offering. And without getting too nerdy and technol technology oriented, it, it's like there was a clear gap that.

You know, they're hosting your database, but then they're doing some backups, but they weren't doing, they would only back it up for two weeks. So you want to back up monthly. Beyond that, you gotta do it yourself. So Simon definitely filled that gap. And then they opened a marketplace about a year or two ago or so, maybe 18 months, and he was the first.

Company kind of highlighted in there for digital ocean and had a really strong integration. We've essentially tried to, you know, catch up with him and, and have finally done that. And then just recently got a, you know, an acquisition happened for him, so a strategic coming in and essentially swallowing the product.

So I was a little like, oh man, like. There's not going to be as much of a need. You'd probably, I don't know how they're gonna integrate the product, if they're gonna keep it, if it's snaps you to buy a digital ocean or just their backup tool and they're gonna give it to you for free. You know, I, I still think there's plenty of space in the market.

I'm not like disheartened like, oh, but it, it was like our strategy in the short term to kind of go into that marketplace and, and pick up some of that, that market share. Yeah. So I did a bunch of research on them, you know, months back. And he builds in public on Twitter and his podcast, so it's pretty easy to get a lot of information.

And his biggest distribution is digital Ocean, like the marketplace. So it's like one click integration. So it's kind of like thinking it of Shopify marketplace or something like that. And another one is Twitter. So he just builds in public. A lot of developers follow him, agencies, whatever, and sign on that way.

The big question is always, So, a strategic bot, your competition, like, is that good for you or bad for you? So like, yeah, it's not clear at all. I think often it ends up being good for you. So I think going through the bad first is like in theory they have way more money to improve the product, really push on distribution and like crush smaller competitors or are they integrated into the main product and like competitors are not worth like, meaningful anymore?

I think realistically. . Often these things are like cool ideas by someone within the company and just are not the priority, and often they kind of end up withering and dying cuz they just, you know, don't get the attention. And then the founder, so I don't know how the structure was set up, he's staying on, so I assume there's a large ock component.

So he probably sticks around for a couple years and then leaves. So maybe there's a push for like increasing revenue in the short term, but in the long term I think he got this bundle of cash. Yeah, it's just not gonna be a priority. I think people also like kind of supporting third party companies.

So you were saying it's a big motivation in this space to not have it all in one product. You kind of wanna separated. Yeah, and like, let's be clear, we host, you know, automatic has some of their hosting on digital oceans. So, you know, it's the, the idea that everything is, is in one place as a third party backup.

Like, we have stuff on aws, we have, you know, redundancy, we have. Like, I guess I don't know if he was, if he did ever done, then see if that'll stay any longer. But there's more importantly, there's like the visibility of it. It's like, oh, well this is a digital ocean product. I shouldn't use a digital ocean product.

Back up my digital ocean product I should use. Just the nature of what these products are is they're, they're meant for increasing redundancy. So you want to kind of use a couple of different providers, maybe use something that isn't on a cloud provider, and that that's what we, we kind of offer. So I think there is still plenty of space for us in the market.

I think the innovation that we've done to fix our sort of top of funnel to allow people to kind of get in the door faster and easier. Is definitely gonna continue to help us. But you know, more importantly, as you look at like your overall, disaster recovery or. Yeah, you're like, how you're, you're backing things up and where the these things are living.

I think that it actually may dissuade people from, you know, doing things on, on board. Although, you know, I think they were missing these gaps. Again, I'm looking from the outside as a user of their, their services is, they had more backup options on like their native platform and then they kind of went away with those and they must just be using this kind of backfill.

Issues or gaps in their internal software. So I think that's the direction it's gonna go. It's gonna become part of their platform. It, it gets swallowed up by a product team. It's like I don't see him innovating the product into kind of the other directions that we're going, like into GitHub backups or some of the other developer tools that, you know, data backups that you want to be, be doing that are, they're outside of just databases and hosting.

Yeah, it's worth saying like, we're not building exclusively on digital ocean, so maybe the Shopify comparison isn't perfect. I guess long term it probably means don't focus on digital ocean quite as much, but that was never really our sole focus anyway. So not a huge deal. But it's also, it's maybe just good as like a.

A, you know, stick in the ground to see or flag in the ground. That's what we call it, to see a big outcome for kind of an any developer in the space. Yeah. I assume it's a big outcome cuz he mentioned on the podcast like it was a strategic multiple before that he was talking through. That's awesome.

I'm happy for him. Like regardless if it's a competitor or not, like I think that's such a great thing for this space to see, you know, so the, I dunno if I wanna call it like micro sas cause I, I don't really don't know what his number is. They must have been, you know, good enough for someone to, to acquire it.

But I know he surpassed, he good to see. So he was public until he is like 20 k r and it was growing quickly and that was, I think over a year ago. So I, I don't know where he was at. I would say 5K at least. Yeah, but I don't know. Good, good. . Cool. Well, you wanna talk about, besides this, kind of interesting thing I discovered this week is constellation.

Went public or, it was reported their 2022 acquisitions. So some of them are just crazy, you know, we were encountered a couple of them. So they bought 134 software companies in 2022. They deployed $1.743 billion. The median deal size, which is the craziest, was 3.3 million. Yeah. So tiny, tiny companies.

Largest deal, 700 million. And this works out to almost three deals per. Which is wild. That's awesome. That's awesome. I mean, it, it's unimaginable to me, you know, to be doing it, but you know, you break it into teams. If you were to have, you know, enough people working on this, that, that pace is great. But I, I love that number of the, the median deal size I saw that tweeted out by someone else as well is like, there actually is still a lot of activity on the lower end of the market.

What I would say that sub $5 million. What felt like when we started doing this was like, well, people just don't really buy software. You know, big companies don't buy software companies that are, you know, sub 5 million, but, they clearly do and they see, you know, I don't know if this is an effective saturation of bigger companies already getting purchased or, you know, being in a place where they're, they're hard to work with, but it's gotta be a clear driver that, you know, if you start at this lower number, it's easier to create higher.

Yes. So the other thing that they estimate is that the average price paid is 0.8 times arr, which is Wild sub one times arr. Wow. Yeah. Okay. How, wow, I guess, are these not growing businesses? We think. , I would, I would guess most of them are flat. So we've encountered 'em where they've paid, you know, four and a half times arr, you know, quickly growing companies.

Mm-hmm. . So maybe a unique situation, but, yeah, this is what these like analysts kind of back into is that they're paying point A times a r I don't get that. That's wild. That's kind of a, an interesting number. How do you explain it? I mean, the best explanation is like, I could go through the sourcing process.

and I think it's just these companies that don't have other options and they cozy up to 'em over a long period of time. Um mm-hmm. . But so one of the business unit leaders, so like Constellation, spit into like six different tribes effectively, and most of 'em go by vertical. So one of the leaders, I think, I think he was Harris, I don't remember exactly, was on a podcast and he talked through their kind of sourcing.

So they have three different types. They have outbound, so they have, army of folks kind of calling prospective owners and managers daily, and that's like to initiate conversations and maintain relationships. Then they have brokers and advisors, so make sure brokers know what markets they're in, type of businesses they're interested in, and then corporate carve outs.

And so they're nurturing tens of thousands of these companies, tens of thousands of. and at all times they want to know kind of where they are in the development and life cycle, in thinking around terms of like, you know, an exit or a sale. And their goal is not to be like the only person that's contacted, you know, when a company's ready to sell, just to like be in the conversation and like be ready when it happens.

This was a crazy sta set, is they actually, the average time from identifying a company to closing a company is four to five years. So it's not like speed dialing . It's like very much long-term relationship building and like dinners. Dinners over many years. That's awesome that, that's actually good to hear because you know, I think we , I think there's been a lot of conversations that we have at least over the last two years.

Of folks, that have great businesses that are just like, they want to sell, but then they, they're like, you know what, I, we're gonna go back and we're gonna make this an even better opportunity two years later, four years later, whatever. So that's actually gives me hope that, you know, a lot of those conversations and time isn't just necessarily squandered, but it's just part of the game of like, you know, a building your own reputation and then b, You know, building a relationship with somebody, knowing what you're getting into, because I, I would say when we do find a deal, do the diligence, close it quickly.

It's like, it always feels really, really, really fast from a, what you're acquiring is like, you know, either a decade of somebody's life and there's so many. Like, you're not gonna find all the things and you're not gonna really know all the dynamics, but you know when the opportunity's there. So it's way better to know, kinda go through that over, you know, a couple years and understand the ups and downs and the, you know, otherwise I think there's a fair, I don't know, a fair explanation for, you know, going back and looking at, at the business.

You just kind of know it versus coming in and looking at it for, okay, three months or however long it takes to close a. . Yeah. My figure around this is like, man, four to five years, I don't know how many companies are buying in four to five years, but it's gonna be a lot more than today. And it's like, you gotta start planting these seeds now if the Yeah.

And the expectation, like you gotta start hundreds of conversations in a year so that it's actually fruitful in four to five. I've talked to other like cereal acquirers and theirs is more like ours where it's like four to five months from meeting someone to closing mm-hmm. . You know, you wanna do it in 30 days.

It just never seems to work out that way. . But yeah, if this is the approach, it's like, huh, we have to think about this over a much longer period of time. Another kind of interesting thing, the only way they're able to do so many deals is they have, they call them hunting licenses that are decentralized.

So many, many senior leaders kind of maintain their own relationships with all these different folks, all these different, prospects. And they're empowered to close their own deals up to a certain dollar amount. Often it's like 5 million. before they need management approval. It's like five to 15.

It's something like a, a good multiple of the median deal size. Hmm. Interesting. Well the other thing as we continue to Yeah, go ahead. Ahead. The, the other thing about winning deals is, so this, you know, 0.8 to one x ARR is the price they're paying at teams most of the time. So they're rarely the highest price paid, but the big thing they offer is just a good home.

So sellers know that they're not gonna get embarrassed or like be in the paper for something weird that Constellation did, and then the ability to close. So they always have the capital kind of ready to close quickly and you know, deploy it. So brokers like the ability to close, they obviously hate the prices that Constellation's willing to pay

Yeah, and that's funny. That's counter to I guess the, the deals that we looked at, although, In thinking of the one deal that we, we kind of were, were in talks to close, and then they came in and, and, outfit us is like, they were willing, they would've been willing as a guest, they would've been willing to kind of close for less.

I think they were in a weird situation. It's funny, as you think about, you know, there's just a lot of unique situations and I guess that is where. You know, being around it helps, but also just having capital definitely is one thing. But you know, it's funny to hear, it doesn't sound like they're paying top dollar.

It doesn't sound like they're, you know, my expectation is they're just coming in up updating everybody by a, you know, a fair margin. Cuz they can, but it, the reality is, is that sounds like they're getting really good deals. And it, they're not really trading on price. They're trading on something else.

It's wild. I mean, the deals on paper, it is not exactly what we've seen in reality, but they're so good that there would be like hundreds or thousands of like search funders out there willing to pay good multiples of what's actually being paid. But Constellation is still out there winning, you know, hundreds of deals every year.

It's wild. Yeah. It's very cool. Well, so they publicly put that out, huh? They just kind of do that. I don't know what the source was for this initially. Is it, cause they're a public company, they're doing that? Yeah. You're asking whether public companies have to disclose, they don't have to disclose like valuations.

Yeah. So like small things often just never get disclosed. You know, startups get acquired, people won't disclose the amount by the public company. I think maybe they have to say it in aggregate, but they don't have to say it individual. . Yeah. Interesting. Yeah. Cause so like for example, I was wondering if we'd be able to figure out what, you know, simple backups, it was acquired for a digital lotions public company.

But it sounds like, you know, the transaction itself likely not to come through, especially if there's an earn out and, you know, calculating, that'll be pretty difficult on an estimate. Shooter was the one acquired. Simple Backups is another competitor. Oh yeah, yeah. Sorry, sorry, I, I get them mixed up all the time.

Yeah, they're very similar shooter. Yeah. . Yeah. Anything else you wanna talk about? No, I think that's, that's what's going on here. We we're seeing some, some interesting activity and, I think next episode we're gonna dive into some other, esoteric business structure stuff. You put some notes together, but, yeah, stay tuned.

I think we got some interesting stuff coming up in this next month. Yeah, I've been spending a lot of time trying to wrap my head around like C Corp, LLCs, S-Corps, Q sbs, like how do you actually structure a whole game company and pay the least amount on taxes? But anyway, that's, so boring. We'll cover that next time.

it's so boring. But why It matters a lot. It's, you gotta know it. Yeah. Or someone does. And it seems like the average accountant doesn't when it gets into these complicated structures. You know what the funny thing is, is like the accountants seem to know, but then they always throw it back on you.

They're like, well, which one, which paintbrush do you want to use? Like there is a design aspect, there's a creativity to it. in, in my mind of like how things are structured and that's the attractive part to me around, around business. But like they know it, but they're always asking for you to kind of tell them because they're expecting you to design this, the enterprise essentially like, well, how are these things interconnected?

I can't tell you. I mean, you can tell me what your objectives are and. I can make an an advisement, but it's like, at the end of the day, it's like your attorneys, you kind of have to bring the terms to them versus letting them design a deal. Yeah. I'd say the other thing is like the average accountant doesn't deal with holding companies and like all these weird interrelated legal structures.

So it just doesn't come up that much. And then it really depends like the business priorities, like are you gonna be you buying, holding, cash flow, these things you think there's a chance of selling? and then it changes constantly depending on like mm-hmm. , you know, who's in power and the president or Congress and it's always under like turmoil and threat.

So what's best is not always the same. So it's kind of what's best today. But anyway, we'll dangle that carrot and I'll talk about it next time. , and, and by the way, before we wrap up, how is you are now? How many weeks into being a dad? How's it. Finn would be six weeks. When was he born? Friday or Saturday.

Yeah, he's about six weeks now. It's going well. He's getting much chubbier and like looking healthier, so that's cool. Social smiles, which is like, I didn't know this. I, I'd never really interacted with the young babies before. They, if they smile, it's like inadvertent until, you know, roughly six weeks of age.

So I think he's starting to do it and I don't think he really controls it completely. That's been fun. Little baby smiles. That's so cute. Yeah. Aw, it's all sunshine and in rainbows at Colin's house. Yeah. He doesn't cry. He doesn't wake up. No. You don't hear horse. He wakes up at night and he, he cries some, they, they have a witching hour where they just seem like irritable and that's like, you know, around dinnertime basically.

If they didn't just eat. Yeah. But yeah, he is, I dunno, it's getting better. We're doing a lot more tummy time. It's funny, I I love the like high pitch chirps where he is like really trying hard to do a pushup and like lift the setup instead of just being face planted. So those are, those are hilarious.

Well, fast forward three years, I was tickling my son. , on the couch last night and he shit his pants. So there's that, you know, you have to look forward to. And he's, you know, potty trained, right. So that shouldn't be happening. He, he is, but the accidents still happen. He's still going to, to preschool or you're not even kindergarten, preschool.

So, yeah, he, he, he can hold it. Just don't tickle him. That, that was a lesson learned. So that was a fun cleanup. So enjoy, enjoy it while you're, you're doing it. Every phase is, I guess, something to look forward to. And it's funny, we, I've been talking, I think we mentioned this in the last one, about kids.

It's like, keep talking to folks that their kids are grown and they're like, hold on to it as as much as you can. So I've been really changing my mindset after talking to friends about this, of like, Even changing a, you know, crafted underwear in the shower. I'm just kind of relishing it cuz it, yeah, it's not gonna stay on, stay around forever.

Yeah. That was another benefit of newborns is like, the diapers just aren't that bad yet, I guess. Oh yeah. They have real food. Oh yeah. I didn't, didn't occur to me, obviously I don't, didn't interact with diapers before this. Thank God. Cool. Well that's, that's the diaper news going on. Here. Yeah. Well, anyway, until next week, I'll try to be more consistent, please.

Yeah. All right. See you guys. Thanks for watching.

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