Turning a $2M Business Into a 9-figure Windfall in 3 Years

 

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When Matt Schmeltz and his partners acquired CloudCraze, it was a simple software application helping businesses that use Salesforce.com manage their customer relationships. CloudCraze generated $2 million in annual recurring revenue, but Schmeltz & Co. figured it could do much more.

The acquisition kicked off a three-year value building odyssey culminating in a 9-figure acquisition offer from Salesforce.com. It was a spectacular rise, which is why it was so shocking when Schmeltz’s largest investor threatened to kill the deal in an expletive-laced rant claiming Schmeltz was not looking out for his shareholders. It was a surprising turn of events that almost lead to disaster.

In the end, Schmeltz saved the deal and delivered a 15:1 return on investment for his shareholders. It’s a fantastic story in which you’ll discover:

  • What drives value for an enterprise acquirer like Salesforce.com.
  • The danger of having your most natural acquirer sour on their decision to buy you.
  • The three most essential things Schmeltz and his partners did to turn a $2 million business into a 9-figure exit.
  • The benefits (and risks) of partnering with your most natural acquirer.

CloudCraze was built on the Salesforce.com platform, which ended up being both a blessing and a potential curse for Schmeltz. The integration helped CloudCraze scale and attract the attention of Salesforce, but Schmeltz also risked becoming too dependent on Salesforce, which could undermine his negotiating leverage. Not being too reliant on one supplier is one of the three legs of The Switzerland Structure, a key driver in your company’s value. To see how your company is performing on all eight factors acquirers consider, get your Value Builder Score now.

Our guest

Matt Schmeltz is a serial entrepreneur who co-founded Modern Business Technology, acquired by USWeb, Acquity Group, acquired by Accenture, and CloudCraze, acquired by Salesforce.

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Transcript

John Warrillow:

Really cool interview coming your way with Matt Schmeltz, who started CloudCraze. In fact, he didn’t start it, he bought it as he will describe and took it to a million-dollar company and scale it very, very quickly. What I found fascinating about this interview was how they partnered quickly with Salesforce and built out their solution on the Salesforce platform. That was both a blessing and a curse. Blessing in the sense that Salesforce knew of them. And when it was time to sell to them, it was like a coronation of sorts, but it could have been a curse in that he was deeply dependent on Salesforce and had the deal unraveled, it would have been very hard to resurrect. Here to tell you a wild and crazy story about his sale to Salesforce, is Matt Schmeltz.

John Warrillow:

Matt Schmeltz, welcome to Built To Sell Radio.

Matt Schmeltz:

Thanks John, appreciate it. Thanks for having me on.

John Warrillow:

Yes, we just had this like five-minute dialogue trying to figure out which of the billion companies you’ve started to refocus on. I was looking at your LinkedIn profile and I’m getting down to the seventh company you’ve started. I’m like, “When does this guy ever have a job?” But apparently you’re unemployable because you’ve had so many companies that you’ve started. And I just can’t wait to draw on you all your expertise. We kind of had this back and forth to focus in on CloudCraze as a company that has some interesting twists and turns. Tell people what CloudCraze did if you could.

Matt Schmeltz:

So it was a kind of an interesting situation where prior to us acquiring CloudCraze, we had been in the digital services business. So we had implemented Adobe and a lot of their content management products. Hybris is a B2C product. And they also do a little bit of B2B work and had gone through a sale of our last business to Accenture and started a group with my two other partners Chris Dalton and Paul Weinewuth. And it was called Aktion Partners. And the idea was as the name would say, we wanted to put a little bit of action on companies that we saw and really kind of get away from being the operators who being more of the investors and board level involvement.

Matt Schmeltz:

So as we were going through this process, there was an individual in Chicago that had a services company. And on the side, he had this kind of a pet project that was a company called CloudCraze or a services entity called CloudCraze. We hadn’t really done a lot of work with Salesforce, but it was a B2B solution that was written on the Salesforce platform. So they’ve got all these different I think it’s somewhere in the three or 4,000 apps that if you buy Salesforce, have it in your environment these other applications that you can plug in for a whole variety of different things that your business may need. One of them being B2B. And as we were looking at it, if he had had it for five or six years, was doing just under $2 million in ARR and he just didn’t have the resources to put towards it. And we were able to come in and buy that entity from Bill over probably 12 to 14 month extended acquisition process. And he kind of kept shopping around and then we were able to finally acquire it.

Matt Schmeltz:

So basically if you think about the B2B space at that time, one of their biggest clients was Coca-Cola. And what they were trying to do is go through a process of, instead of three people showing up at a retail store, they wanted to get that down to two. And what they were going to eliminate is that salesperson that would come in. So you’d still have the delivery person, you’d still have the inventory person, but when someone needed in a bodega in South America or at a retail outlet here in Chicago. That person actually would have an app that they could go right on their phone and order realtime, the different products that they needed from Coca-Cola and having them put on the truck and deliver the next day. Which was different than either faxing or calling in and waiting for customer service. That’s just probably the best and clearest example of what the platform is.

John Warrillow:

It’s kind of like the unsexy plumbing between companies like company A and company B wants to do business together. And there’s all this stuff that needs to go back and forth between them.

Matt Schmeltz:

Yup. And probably an example at a much larger scale is GE Water was one of our customers and if you’re running a processing plant, there’s products within that, that are GE parts that overtime will wear out. And those parts can be $100,000. So for that person, when it breaks down, they would have to call a rep, get the rep on the phone. They know exactly what the part is. You’ll go through that whole process, which can take two to three days. Meanwhile, they’re bound where with our application literally can pull it up, rebuy the exact same product that they have before price has already been negotiated because we’re under contract and that thing can be set to deliver the next day. So there’s different applications for it. And you’re right none of them are kind of that the sexy interface that you would see with a traditional retail outlet, if you go to a Levi’s or a Nordstrom’s or something like that.

Matt Schmeltz:

It’s that more kind of behind the scenes and in the time we’re in now with COVID, that digital interface it went from a nice to have, to a ton of value to be built in. The ROI wasn’t easy, a formula to put together, but with where we are today I think it’s a lifesaver for Salesforce, and I know they’re seeing a lot of traction out of the product that we were able to sell to them.

John Warrillow:

That’s awesome. So let’s just get into the acquisition. So you acquire $2 million of ARR. How does you guys think about valuing Bill’s company? Because it was a couple million bucks in ARR usually these companies are multiple of revenue, aren’t they?

Matt Schmeltz:

Right. So the interesting thing with him, again, I would almost look at it, he was running it like a hobby as opposed to his business was the services business. And when people had availability, they would go work on this product. So he didn’t really run it in the traditional way. I think he had gone down the process a couple of different times. It was someone that one of my partners had worked with. In the past, we had that kind of personal relationship. We came to an agreement and then he shopped it around for about 12 months. I think as people got into due diligence, they just didn’t see necessarily the value that he was looking for. And I think he was kind of at the end of his path and we came back around. Initially we were going to acquire it for 30% and we said, “Listen, if we’re going to do this deal, we want to buy it at 100%.”

Matt Schmeltz:

And so we were able to come to a very fair market value in that he just wasn’t… Didn’t have the dedicated time and resources that it was needed to be able to kind of take it to the next level. So I think he was kind of stuck. He didn’t have the resources, wasn’t able to find it. So it wasn’t your traditional VC type of evaluation that we were going through. So kind of unique circumstances there especially for the value that we were able to get out of it later and the clients that he had already on the platform, made it very interesting for us.

John Warrillow:

How would you think about, and I appreciate there might be sensitivities around actually sharing the actual value that you paid for? But if you think more in the kind of theoretical world, if you were looking at a company with a couple million dollars of ARR, I’m assuming the business was not growing very quickly, is that fair to say sort of flat?

Matt Schmeltz:

Yeah, he had been adding, he was pricing it just to get customer logos, he wasn’t pricing it the right way. We basically came in and said he had $25,000 clients where when we bought it we’re like 125 to 250 as a minimum, and then we’ll take, scale it from there. So he just had gone through a process of, it was exciting to get logos and be able to show value and not necessarily look at it like a traditional software company where there was coming out of the valley that had funding, those types of things. I just think it was a very unique situation that we ran into.

John Warrillow:

So what would you think a fair price for a couple million-dollar ARR business would be in a flat revenue environment? What kind of multiple, either revenue or EBITDA would you think is fair or range?

Matt Schmeltz:

What I think, if it was a flat, it depends on the space that it’s in, but I mean, gosh, you see stuff now. I mean, Salesforce is buying stuff for 24 times. I mean, if he could have pull himself together and added a couple more million in ARR and kind of ran it with some due diligence, I mean, I think he could have gotten a five. I mean, we’re looking at stuff quite often and that five to 10 range isn’t out of the question. And then you’ll see stuff that you can get value on where the person is kind of at their… They’re like, “Hey, I’m going to run out of money at some point here. And I need to do a transaction in order to be able to kind of move this thing forward.” And he retained a lot of equity, which turned out phenomenally for him. So it wasn’t as though he kind of handed the car keys over and walked away. I mean, he was a partner with us through the adventure and he reaped huge benefits from it.

John Warrillow:

That’s fantastic. And when you say five to 10, you’re referring to times top-

Matt Schmeltz:

Revenue.

John Warrillow:

ARR essentially.

Matt Schmeltz:

Exactly. Yep, exactly.

John Warrillow:

Yeah. Annual recurring revenue for those following along with the acronym. So you buy this company, what did you do to add value? What were the things you did to drive up value as much as you could?

Matt Schmeltz:

The analogy we used is it was like driving a car at 55 miles an hour, and then having to change the tires and redo the engine and all that stuff. I mean, it was in more dire straits than I think we had any appreciation for. There was really no go to market strategy. There was no sales organization, there was no customer care organization. It was just the sprint teams were insufficient for what we needed to do.

John Warrillow:

What do you mean by sprint teams? Not familiar with that.

Matt Schmeltz:

The engineering groups that would come out with new solutions, and they’re usually pods of three to maybe five individuals where they’re given a set of requirements and it’s their job to then execute that sprint and get it, write the code, test it, integrate it, launch it, and then onto the next one. And they just didn’t have sufficient engineering behind the product to really get it. Because when we came in, the expectation was, oh, we can add more features to it where we basically spent the first 12 to 18 months doing nothing but shoring up and making sure there were no issues with what they had because they really didn’t have the engineering power to get that with what he had originally.

Matt Schmeltz:

And we just were fortunate that working in a services company with about 1000 employees and we had a ton of people that had that commerce background. And without that, it’s almost like an ERP person going to work on a content management initiative or it’s like within technology things get very niche and we just happen to have one of the hardest areas to find people which is in the commerce environment. We just had a ton of engineering talent that we were able to draw on to be able to kind of shore up what he had there. So it was like the house trap like the roof’s leaking, the plumbing not working. I mean, it was everything. But and then we just said, “Hey, we’re jumping in full time.” And we jumped in, initially that wasn’t the thought we thought, hey, you’ve got a team in place here, but it took up two or three days to be like, we’re in this thing all the way.

John Warrillow:

How did you [inaudible 00:12:48] that with Bill the founder because a lot of founders that can be a bit dicey. What was that like?

Matt Schmeltz:

The first time we were introduced to the organization, they were having an all hands company meeting. Traditionally, it was the services company and the software company. We showed up at that meeting and they had an all hands meeting of the integrated group. And then in the afternoon they broke off and the folks that were going to go over to the CloudCraze were on that side. And we had an opportunity to introduce ourselves, walk through what our plans were and how we were going to execute against that. And I think for a group of guys that had built companies from nothing to publicly traded to acquire by Accenture, we just had a ton of background that he just hadn’t had that experience. And I think everyone around it had a sense of relief.

Matt Schmeltz:

And I think he knew in the lead follow or get out of the way. He was followed to get out of the way like these guys are coming at this like a freight train. So just, he quickly within a couple of meetings was like, “You guys know what you’re doing and I’m going to hold onto your coattails and run through this thing.”

John Warrillow:

Because he retained some equity. So it was in his best interest to have you guys jump right in.

Matt Schmeltz:

His deal was a component cash and then a component equity. So we were all in it together. I didn’t want to write a check and have him walk away. I wanted it where you’re going to stay with the organization and you’re going to sleep at night like I’m sleeping at night because either things are going well or things aren’t going well. And I think that was the right way to do it.

John Warrillow:

Got it. Back to the question around how you guys added value. People listening are really looking for kind of concrete, tactical, actionable stuff they can do right away. So in your case, you inherit this business, can you think of one or two steps you took, which in retrospect really did move the needle on the value of your company?

Matt Schmeltz:

Yeah, and we, as in my past businesses and in an Acuity Group when we went through this sale at with Accenture, we had 30 inside salespeople and we have 13 offices, two in Canada, the rest domestically across the country. I think we kind of had one of the most robust sales engines in the industry. And it was a differentiator for us in hard times and in getting webinars and anything you needed to do. We had a crew of people that would jump on the phone and just go crazy with setting up meetings. So I think first and foremost was he needed to go to market strategy. And that was not only the outside sales individuals, but it was also getting those people meetings in a… When you say CloudCraze, even today, it was such a, “I got IBM calling me. I got Oracle calling me. I got Salesforce calling me, who are you guys?”

Matt Schmeltz:

So you had to get over that hump of how am I going to set meetings up? Because I think a lot of people look at it as he had historically. And I think a lot of people and entrepreneurs in general, it’s one individual that is a alpha salesperson. And it’s hard for them to grow beyond that, where we had set up a platform for people to be successful in our organization, regardless of what their sales capabilities were because we were able to drive a system that could set meetings and put people in a position to be successful. So I think that go to market strategy was first and foremost, because if you’re not building pipeline, I don’t care what else you do. It’s not going to work. So I think that was-

John Warrillow:

For some people don’t know that, that acronym for some people may be a bit unfamiliar. So when you say go to market strategy, what does that mean exactly?

Matt Schmeltz:

I mean, it’s just your overall strategy for how you’re going to take your product marketed to and, or sell it to the marketplace and what mechanisms and tactics and strategies are you going to deploy to make that happen? And there’s anything from getting a PR firm involved, knowing where all the conferences are, making the commitment. Because a lot of these are big spend when you’re the software vendor, because you’re playing in a huge field with people that can write $100,000 check to go to a conference. Well we know these conferences, we know the people, we knew who to talk to it for us, we knew the people to talk to at Gartner. We had all that stuff kind of in our background and how to really to push this product out as quickly as possible. That if you weren’t someone that had been in the industry for the majority basically collectively between myself and my two partners our entire career had been in tech. It would have been tough to do that, but we had the confidence to really push.

Matt Schmeltz:

And I think that last piece and having a product that’s built on a platform verse something that’s built natively or on Azure or an IBM platform or something like that. Salesforce has a very defined community. And that was the other thing that we did is we spent a fair amount. And so if you weren’t generating, so they have these 3000 apps, as I was mentioning earlier. Within that they have a group of 25 that they kind of, that’s their premier group. Those are the ones that they focus on and it takes you up to a size of revenue. So a certain amount of ARR, which I think is 15 to 20 million, then you’re noticed by them. But if that you can buy in, which is an insignificant check. Right out of the gate, we did that.

Matt Schmeltz:

We bought in and we were able to get interfaces with the executive team and get on their radar screen. And really it was, I think those early meetings that got us noticed by their venture capital arm and them to make an investment when we were raising money and then us to be able to go back multiple times when we were in San Francisco and sit in front of the guys that are running the divisions and say, “Oh yeah, I remember where you guys were, why you’ve really matured. Holy cow, you’ve got a lot more…” So it was just understanding that kind of systematic approach that you need to take to get in front of what we thought ultimately would be our acquirer.

John Warrillow:

So you knew this barrier early on that you thought Salesforce was going to acquire you.

Matt Schmeltz:

Well, I mean, that was the kind of the hypothesis going into it that were built on the platform that would seem appropriate. A lot of the big companies, you look at Aviva that’s publicly traded. You look at some of these other organizations that are publicly traded that are on the platform. I think what Salesforce looks at that as, “Boy, if you get too big, too fast and we don’t want acquire you, then you’re off and you’re on your own.” And now it’s the competition of what direction are you going to go where if I could have retained all of that value and seeing that grow underneath the Salesforce ticker symbol, that would’ve been better for us. So there’s always this little bit of a game as we got to know Salesforce in that if you’re growing too fast, they’re going to want to take you out right away, or they’re going to bring in a competition or they’re going to let you just go off and not really care.

Matt Schmeltz:

So we had to come up with this. I mean, one of my partners, Chris Dalton and I mean, that was something that he forged immediately. It’s just getting that relationship within Salesforce and us being able to kind of quickly get in and build that rapport. And with the money we spent, they give you a liaison between us and them as an organization, which any IBM or any of these big organizations, it’s a complex set of influencers and who’s actually going to pull the trigger and all the different things that go on behind the scenes. That was a big part of what we jumped on earlier.

John Warrillow:

So let me see if I understand it. So I’m not really a techie guy, but we use Salesforce at Value Builders. So I kind of I’m familiar with the platform. So Salesforce got it. So then they have a couple of dozen core product lines. They’ve got CRM, they’ve got a customer service, I think they do a bunch of them, right?

Matt Schmeltz:

Yeah.

John Warrillow:

So you guys weren’t one of the 25 core if I understand correctly. You were-

Matt Schmeltz:

Within that core, that’s the foundation of Salesforce. There’s another thing that’s called the app exchange. The way I’d explained it to people, if you have an iPhone.

John Warrillow:

Yeah, yeah.

Matt Schmeltz:

Within that iPhone, you can go to the App Store. You told me there’s 40,000, there’s 100,000 apps that are out there.

John Warrillow:

Tonnes, yeah.

Matt Schmeltz:

Think of it the exact same way. Once you have Salesforce, there’s an app exchange instead of the App Store that you can go to and buy all of these different plugins. And so that’s what we were a part of. But within that, there’s so many, the long tail of that, they really, until you gain some value within Salesforce, they don’t really care about. But for the more high value revenue generating and or influential in the marketplace apps, those are the ones that they pay attention to.

John Warrillow:

Got it. And so when you say you bought in, when I think of the iTunes store, what is it? The App Store, do you actually buy into, or to put your app on the… Or do you just apply? Or how-

Matt Schmeltz:

You have to submit, but the way to think about it is if you go to Google something or search on that on your iPhone for most popular game, the one that shows up at the top, depending on how the algorithm is written, there’s also an ad component to that where I can buy an ad [crosstalk 00:21:38].

John Warrillow:

I didn’t know that-

Matt Schmeltz:

[crosstalk 00:21:38] [inaudible 00:21:38] to the top. So when I go out there, you’re going to get CloudCraze app, not [crosstalk 00:21:44].

John Warrillow:

So you guys, when you say bought in you, you bumped up your basic position.

Matt Schmeltz:

Yes. And that happens through an investment with Salesforce. So basically what they’re doing is the rationalization they’re using is that those top 25 apps on the app exchange are generating a certain amount of revenue for them because you’re paying them rent in order to use their platform for your product. Since we weren’t generating enough revenue, we made up the delta by just writing them a check. That then pulled us up, so we had visibility within the organization that basically the other 3000 didn’t have access to.

John Warrillow:

How big a check are we talking? Hundreds of thousands, millions, tens of millions? What are we talking?

Matt Schmeltz:

It was close to seven figures on an annual basis. So it was a-

John Warrillow:

That’s a big check.

Matt Schmeltz:

At the time it was kind of, I remember we had just gone out, left the office and we were walking to go get dinner or something. It was late at night. And then one of my partners is like, okay, so we’ve already written these checks, we’re underneath the covers. We see what’s going on. We’re like, holy cow, this is going to… I don’t think any one of us knew how big of an undertaking this is going to be, you’re like, “Oh yeah, we’ll buy the house. We’ll flip. It’ll be no big deal. It’ll be fun. We’ll drive by say hi to the guys while they’re painting the outside of it.” This was not the case.

Matt Schmeltz:

And then to kind of add injury to insult, oh, if we want to get to this next level, there’s another check we need to write. And so it was just like, “Oh my God.” So yeah, it was at the time in hindsight, a phenomenal strategy at the time it was a big pill to swallow.

John Warrillow:

Did Mark cough up money to invest in that seven-figure deal?

Matt Schmeltz:

Mark?

John Warrillow:

The original founder.

Matt Schmeltz:

Mark Bill.

John Warrillow:

Sorry, Bill.

Matt Schmeltz:

Yeah. So we actually were able to, when we did the acquisition, we raised money beyond the purchase price of the software. So we did have money sitting out there that we were able to allocate and spread those payments out over a longer period of time. It basically just meant we needed to raise money in our first round quicker than we necessarily thought we were going to have to.

John Warrillow:

Okay. Got it. So you’ve raised some money to build this. So one of the core, and going back to the value drivers go to market strategy, absolutely critical number two is to get into this Salesforce kind of ecosystem.

Matt Schmeltz:

Correct. Yep.

John Warrillow:

Part of me wearing my devil’s advocate hat says, okay, but doesn’t that make you super dependent on Salesforce in a way?

Matt Schmeltz:

Well, and another hilarious part of this is if you go back early in this process there was an announcement that Microsoft had made an announcement to acquire Salesforce. So we’re sitting there thinking, “Oh my God, if that happens, our value within this thing is almost…” It could take three years for all the dust to settle. So you quickly realize there is an advantage in being a part of this phenomenal platform that’s proven. These were considerations that we didn’t necessarily in our hypothesis, we kind of took for granted like, “Oh yeah, well, we can go, or we’ll just replatform it.” And it’s not that easy as with anything in tech, it’s not that easy just to replatform it and put it on Microsoft platform or whatever we would have to do to pivot away from Salesforce.

Matt Schmeltz:

So that was another lesson learned in the middle of it, and a lot of the investors when we went to raise money are like, “Oh God, I’m done with their ecosystem. It’s just difficult to deal with. And there’s different drivers that aren’t traditional to the marketplace.” Those kinds of things. So that was just part of the nuance of the interaction.

John Warrillow:

So if you had it to do over again, would you do the same thing and build it on the Salesforce platform?

Matt Schmeltz:

Well, the prior owner had already made that decision. And he was a huge Salesforce services entity, as well as this product and with the way things worked out. Absolutely. And our employees got to go over to, I think it’s rated every year by Fortune as one of the best companies in the world to work for, not just within tech. So I think at the end of the day, the value that we were able to drive out of it at the end of it and the home that our employees have kind of walked into. And they’re just a phenomenal organization. I mean, if you’re senior enough, they’re continuing to give grants. They gave a big chunk of money beyond everything else that was trickled out to our employees as an earnout.

Matt Schmeltz:

So I think they went above and beyond. And it’s unlike anything you see here in the Midwest, when I hear people going through acquisitions, it’s like the stuff that happens out on the West Coast especially from these big tech companies, it’s spectacular and there’s difficulties in getting there, but if you can land at a company like Salesforce, it’s about as good as it gets. And then another just interesting thing as we were going through this at the very end, they’re like, “Hey what we want to do is pay everyone at 75% of their pay grade, just so that what we don’t want to lose and start losing people because they’re underpaid.” So you go through and a bunch of people get a bump right through the acquisition. So there was just a lot of great things that they did.

John Warrillow:

So you lost me there. I interpreted that as Salesforce wanted to pay your employees, 75% of what they were making.

Matt Schmeltz:

No, sorry. The other way that say you just got promoted and the pay grade is from $1 to $1.50. They’re like, “Hey, we want everyone at $1.35, even if you were at $1.10, we’re going to bump you to $1.35. So across the entire organization, everyone needs to be at 75% of where their pay grade is, regardless of how long ago they got there, whatever it is.” I think attrition is one of the biggest fears in the tech business, specifically in the SAS software business. I mean back in the day you heard stories of Oracle flying over IBM with planes with will pay you twice your salary and Google [inaudible 00:28:05] sale or Facebook, and all this crazy stuff that, again, in Toronto, Chicago, we don’t see that stuff, but on the West Coast, there’s really interesting things that happen and it benefited our employees. A lot of them [crosstalk 00:28:18].

John Warrillow:

Yeah, it sounds like. Okay. So let’s get back. So you’re changing the tires on the cars. It’s rolling down the highway, the go to market strategy needs to be fixed. You made this strategic decision to be on the Salesforce platform, even though that that came with some potential liabilities down the road. Any other major drivers of value that you think in retrospect you did right?

Matt Schmeltz:

Yeah. I think we did a really good job on our customer care side of things where that wasn’t really a defined group that he had had prior and in the software business that is once a product is sold, there’s a group of people that interface with that customer and find opportunities to upsell and cross sell the product into other areas within their business. And quite frankly, if we didn’t do that the way we did, I don’t know that we would have gotten on this high of a radar screen, as we did. Where Coca-Cola is the example we were in one division, we were able to present to them globally. And it became a platform globally for Coca-Cola. If we hadn’t spent the money to invest in the right individuals. John [inaudible 00:29:29] is one of the guy’s names that was running that group. He ran that deal. I mean, if we didn’t put that energy into the existing customer base that we had, again, I don’t think we would have been able to do what we did. So I think that was [crosstalk 00:29:45]. Go ahead.

John Warrillow:

That’s helpful. You mentioned you raised money, maybe talk a little bit about the investors along the way, who was involved in supporting this?

Matt Schmeltz:

So the first group were primarily people that we had worked with in the past in our other businesses. And a lot, I think the number, we were at 16 to 20 individuals become millionaires out of that. Our sale to Accenture of Acuity Group. So we were able to rally that really within myself, my two partners and a handful of other individuals that put that money up. So we did that as kind of a friends and family. The second one is where we were looking at more of an institutional raise, and we ended up raising $20 million with a venture group out of New York and a small chunk of that from Salesforce ventures. So that was really the only money that we went through a process of raising.

John Warrillow:

Got it. And let’s get into the exit now, because now you’ve got a formal set of investors, not just friends and family, but now you’ve got people. What triggered you to want to sell this business? What was the triggering event?

Matt Schmeltz:

Well, I mean, it’s such a fascinating story. I think there’s a movie in this thing, all in all. So the first side of it is we were in the field, we were running into Salesforce, their traditional line of people at accounts, and they had a product that they thought was pretty good as far as being able to beat CloudCraze in a B2B environment. And some of these were, one of them in particular was Adidas. So we ran into each other, but they ended up choosing us over Salesforce for their B2B solution.

John Warrillow:

Hold on and a second. So Salesforce has got its own B2B solution, which is kind of competing with yours.

Matt Schmeltz:

Exactly. They acquired a company that, again, another one of these crazy nuances that was a sleepless night as well. They acquired a entity that was a traditional B2C solution. And we had actually implemented it as part of Acuity Group. They also said they had a B2B solution, which it wasn’t really, the more you got into it, they were fulfilling the foam things that you get when you buy a Starbucks coffee, they could order it online. So they were like, “Oh, it’s a B2B solution.” Well, there’s a lot more to a traditional B2B solution and all the functionality that we had. And the customers that we had on our platform, we were able to beat pretty much anybody in the marketplace at that time. So and now it’s totally [crosstalk 00:32:24].

John Warrillow:

You’re back to Adidas. Adidas is like, you got two suppliers, they chose you over them.

Matt Schmeltz:

So now Salesforce is very standoffish. No one’s talking about, and it’s almost kind of like a dating situation. You’re like, “Oh, okay, well everyone likes everyone, but how are we going to go on out first date?” Salesforce basically just called us in to San Francisco and said, “We’re going to get this executive team together. And we’re going to go through a process of kind of really evaluating you guys.” Which they had done one other time when they did the initial investment, which is getting engineering involved and getting their executive team involved and really kind of doing a deep dive, but in our minds, we’re like, I’m not putting the cart ahead of the horse. We’ve already went through this once. I know the prior owner had gone through it a couple of times as well.

Matt Schmeltz:

We didn’t know what exactly was happening there. And their big event is called Dreamforce. And this is 175,000 people land in San Francisco. And it’s everyone on their app exchange, all their customers. And it’s just a phenomenal week-long event. It’s a massive business development opportunity not only for Salesforce, but everybody in their ecosystem, they do a phenomenal job with it. And we had had an opportunity to have a meeting with the gentleman that ran their M&A group. And he basically said to us, you guys are our number one priority of the acquisitions that we’re looking at. And so we’d like to start some due diligence. This is probably September timeframe in 2015. And he turns around and the meeting was literally 20 minutes. That was the discussion.

Matt Schmeltz:

And then we started down this process. The interesting thing was, so then they kind of, it’s not like in other businesses, it’s almost exactly like selling a house where it’s almost an open auction, kind of a situation where everyone puts in a… You pitch your product or service. And then people come back with a number. This is kind of Salesforce saying, “Hey, here’s the number.” The interesting part of that was that our institutional investor that we had, that was in New York said, “I don’t like that value. In fact, I’ll go ahead and give you more than that value. And I want you guys to stay on.” Now, when we sold Acuity Group, I wasn’t anticipating having to be a full-time operator in a business to the level of stress. I mean, we were losing at one point 1,400,000 a month. Those were-

John Warrillow:

At CloudCraze?

Matt Schmeltz:

At CloudCraze. Yeah. So we were investing a ton of money in this thing. And I was like, okay, that your weight is going to get lifted off my chest. So quite frankly, that’s not the path I want to go down, but listen, if you… And both of my partners are like, “Hey, look at, we own a ton of equity in this business. They’re offering us an incredible return on our investment, incredible return on our investment. I don’t want to go down that path.” So they’re like, “Okay, forget you three. We’re going to interview the group below you.” This is our guys in the private equity guys in New York. The guys below us come back, they all have their reason, they’re like, “Yeah, we want to go with Salesforce. We don’t want to go with you guys.” So then they turn around and say-

John Warrillow:

Who’s they?

Matt Schmeltz:

They, the private equity guys in New York, they turn around, this is on a Friday night. Seven o’clock at night, they get their head attorney on and Kevin Young is our attorney. He’s worked with us through all three of our transactions and probably eight deals we’ve done altogether. Phenomenal. This guy kind of just bulldozed right through the whole thing. And it was, he used his typical New York, just brass run this whole thing and say, “Basically, bottom line, you guys are breaking your fiduciary responsibility and we’ll see you on court in Delaware on Monday morning at eight o’clock.” And I’m like, “Oh my God.” So then Salesforce says, “Deal’s off.” I’m like, “What, how did I go from not having to do anything again to now I’m in a courtroom in Delaware, like what?”

John Warrillow:

So let me unpack this. So when you say, so the fiduciary duty is as a CEO or an executive in a company, you are required to do what is right for the shareholders. Is that correct?

Matt Schmeltz:

Exactly.

John Warrillow:

In this case, the shareholder, this institutional investor in New York is saying, “Hold on a second, we’re giving you a higher value than Salesforce. And therefore you’re not living up to your fiduciary duty.”

Matt Schmeltz:

Right. And the thing to us was the minute you’re not in favor with Salesforce, I mean, I’ve seen it. It’s brutal. You have to deal with their entire, you have to deal with their engineering teams all the time. You have to work with their sales teams in the field, because we’re integrated with our solutions, all this stuff, if that all gets blown up, because you’re going to kind of take your play, the game that they wanted to play. I was like, “I want the value I have created. And I want to realize that right now, I don’t want to wait. Maybe it will be more in the future or let’s bet on.” We’ve all been through enough things in the last from ’99 to ’08 to 2001, I mean, you just named there’s enough every three to five years. I’m like, “We’ve had a great run here. This will be 36 months and we can unplug this thing. I don’t want to play that game.” So then-

John Warrillow:

So before we go further, so the institutional investor is saying, “We’re going to give you a higher valuation.” So when they say, “We’re going to give you, we’re going to write a check to Matt, your two co-founders and some of the other executive team, which is going to put money in your jeans.”

Matt Schmeltz:

Correct.

John Warrillow:

“But we’re also going to ask you to stick around.” So there’s going to be some hold backs or whatever.

Matt Schmeltz:

And so we said collectively between myself, Chris and Paul, which we were the majority of the folks with equity in the business, we said, “I don’t want to do that.” Because Salesforce is saying, “There’s no earn-out for you guys. We’re just going to give you that money. And this is going to be the transaction value for the people that stay, we will have carrots that we’re going to put in front of you.” But with the firm that we were dealing with in New York, that wasn’t the case. And so for us, we were like, “No.” And then they’re like, okay, let’s go to the tier below you, bunch of very competent individuals. And they said, “No, as well.” Because they’re like, “Our life’s going to be hell. I’m going to have to try and deal with this company that we said no to.”

Matt Schmeltz:

And they say in no uncertain terms, “Listen, I’m not coming back twice. I’m only asking once.” So, and they were doing 15, 20 transactions a year and I’m like, I believe them, their hands are full. The have so many different products that are dealing with, I’m like, “Look at it. I want to take this, this is the deal I want to get done, so.”

John Warrillow:

So what’d you do?

Matt Schmeltz:

So we go through this whole thing and this is the best, because I haven’t said any names that there’s a component to this. So the attorney that was on the call, I mean to say, and I won’t even use a swear word. It was on the verge of disrespectful. I’ll just use that as the term.

John Warrillow:

There’s a lot of expletives.

Matt Schmeltz:

Yes. And it was one of those things where I’ve been in sales most of my career, I’ve been in a lot of big business meetings. We were publicly traded. I’ve seen people get excited. This guy was over the top. So-

John Warrillow:

This is the lawyer for the PE group.

Matt Schmeltz:

For the private equity guys out in New York. So the best part of this story is when Lori Loughlin and the whole thing broke about the college scandal. He was one of the number one guy. So he was a top attorney at that firm. So he’s no longer at that firm. And his license got taken away and I’m like, “Karma is a bitch.” So this is just one of the under stories in the movies [crosstalk 00:40:18]. That’s just one of them. We were literally every time the news came, I mean, he was on the front of the Wall Street Journal. Every time that came out, we’re texting it to our attorney like, “[crosstalk 00:40:28] a better guy.”

Matt Schmeltz:

So then can go through all of this legal stuff of going out and that, and the bottom line is Salesforce is like, “Hey, you guys got to get this legal action out of the way or we’re going to move on to another transaction. We’re [crosstalk 00:40:47] team.” Or so we basically got to the point where we just continue to move down the due diligence process. We said, we’ll get the PE to let this thing go. And as we got farther down the road and the guy that’s running the shop over their kind of came to the conclusion. He was just like you guys are being pansies about this. The underlings, I can get you to this much more value. And you’re leaving money on the table. We’ll hire anybody you guys want.

Matt Schmeltz:

And everyone was like, “Look at, this is a perfect exit. We get to go into a beautiful organization that treats its employees the way it is.” You’re setting up a contentious relationship from minute one, and it’s just going to be hell for everybody. So that took a while. We had to jump through a lot of hoops. We had to spend a lot of money on the legal side of it, but then ended up transitioning into, we were able to finally come to an agreement with Salesforce.

John Warrillow:

What was the difference in value on a percentage basis between what was Salesforce was offering and what the peanut guys were offering?

Matt Schmeltz:

Whichever number that they were at, he would just throw 15 million on top of it. I mean, they’re playing with… He has $13 billion in his organization. I mean, we’re dealing with an eight-figure transaction, low eight figure transaction. To him, $13 billion, him throwing, he has so much cash. I think with all these private equity guys right now, they have nothing but cash. So he’s like, I don’t even care. I’ll overpay for you guys. He probably would have gone $50 million over just because I now have something that I think can be worth a ton of value. And how things played out maybe it would have been a better transaction, but I’ve had a great two years of enjoying time with my family, relaxing, working on other things. And I’m glad I didn’t have pushing a rock up a hill for the guys in New York.

John Warrillow:

Did you ever get a sense of what his end game was because you were so deeply entrenched with Salesforce that had you taken the PE deal? Did he think that he was just going to grow it for another few years and then go back to Salesforce again or?

Matt Schmeltz:

Yes, that’s exactly. He goes, “They don’t care.” And to me, it was just like the ultimate ego game, but you’re just playing with too much of my money. You can be ego with your own money, but it’s like give me my money, give me the value that we created. And then you can go do what you want after that. But it’s I think these private equity guys they’d rather run it to zero or have it be 1,000,500,000 to $5 billion number versus the figure that I threw around earlier, which if you’re an individual investor and it’s your equity, I mean, it’s a game changer all the way around for the employees that stayed on and for the investors. Even that we had significant investors that weren’t in the business that are relationships that we had individually. And they’ve come back and just said, “Hey, that was game changing. I wrote a check and I got a phenomenal amount back over and above that.” And so that’s what you look at. Go ahead.

John Warrillow:

What kind of return would those guys, the friends and family, if they had given you $100 in that round, what would you have been returning to them at the end?

Matt Schmeltz:

It would have been probably 1500.

John Warrillow:

Wow.

Matt Schmeltz:

Yeah, it was a good deal. I mean, we got it. The multiples I threw out were on the low end of what we ended up walking away with and we took it from under two to 18 so that it just gives you… I’ll let you run the math on that. So yeah. It’s a game changer. And the services world, it takes so long to get you to a two something times revenue or in the software it’s well, 10 to 12 was on the low end. You hear stuff in the 20s, 30s times revenue. I mean, it’s crazy. So it’s a matter of A, B in the SAS business and then B in a… You need to have some foresight into where things are going to be into the future. Who would’ve thought that? Look at Zoom, I mean, that thing’s gone through the roof. They just happened to be in the right place at the right time.

Matt Schmeltz:

I mean, I don’t know because to me teleconference is teleconference, I mean, Adobe has one. Cisco has one, what the hell is the difference with Zoom versus any of these other ones? But they are the new SAS model that has all the functions and features that I don’t know, maybe the name is easier to remember than it is with the other guys. But somehow they become this darling of the stock market and the product because of the pandemic, it’s every… My mom and dad know who Zoom is that’s just tells you, so you just got to kind of find that right place and right time.

John Warrillow:

What was your plan B if Salesforce had gone through due diligence and for whatever reason pulled out? What was the plan B?

Matt Schmeltz:

We have been talking, so one of them would have been to continue to work with the private equity guys that we were working with. And then we were going to have to make a platform decision, if Salesforce wasn’t ultimately going to be the platform, then we were going to have to look at something else. The problem is when you go down that path is that Salesforce isn’t just an application. It’s really a platform within a business. So they’re running their CRM off of it. They’re running their business to consumer, there B2B site, their B2C. Everything is being run off of this platform. So and then there are a Salesforce shop for you to go and say, “Hey, I’m going to take that one component of your entire platform and say, I’m going to run that on Microsoft.”

Matt Schmeltz:

They’re going to be like, “Whoa, wait a minute. I bought into this platform.” So it would have been incredibly painful. It would have taken a much longer period of time. It almost would have been like starting over. And that was the other reason that we were like, look at, even though as a private equity firm, you’re not getting the return you were expecting. Us as investors we’re getting more than the return. Especially when you take into consideration, we had it for 36 months. I mean, that’s that’s kind of the… I already did a 12-year run. I don’t want to do that again at this stage in my life. You know what I mean? So it’s like even if the value is not, if we’re not pulling every ounce of blood or the turnip, it’s the fact that it took 36 months, it’s going to make it that much better for all of us.

John Warrillow:

What was the most memorable conversation you had with someone who was in the friends and family around who invested 100 and you were able to give him 1500 back?

Matt Schmeltz:

For sure, I told you the number we were losing a month. And we went to raise money. We went out to Sand Hill Road in Silicon Valley. And then we went to Boston and New York, talk to 30 different companies, taken red eye flights, back and forth. We’re like, “We’re just going to do a quick road show, no brainer.” Crickets. 10 days later, crickets, stuff started flowing in, but we’d had raised enough money. And the expectation was that with any other business we went through, the minute we started a process, we were able to get interest really quickly where software is different than services. And even within the private equity or the venture arms of businesses, they look at each of them so differently. And then the platform that you’re on and then what’s the exit going to be and all these different things come into play.

Matt Schmeltz:

So in the middle of that, we go through this process, but we’re cutting it close. We’re going to be out of money in January. And the road show was in right after Thanksgiving or so it was actually, it was probably after Labor Day. But everyone’s like, “Oh, it’s going to take two to three months.” We’re thinking, well, our product is unbelievable. It won’t take that long. We’ll probably be done by Thanksgiving.” Well, we’re running up into the holidays. And I had to call the individual who I was referencing, who he was our largest investor and tell him that-

John Warrillow:

Which individuals was that?

Matt Schmeltz:

John Cultra is the individual’s name. A good friend of mine. William Blair is a company that he works for. And they helped us in some of our early deals. And he does our wealth management and a good friend of mine. He said, “Go get your checkbook out because we’re not going to be able to make payroll with what we got in the bank. So we’re going to have to start writing checks to cover payroll.” And him is like an investor. He’s like, “What the hell is that? You can’t make payroll. What are you talking about? Who even says that out loud?” I’m like, “Wow, that’s the situation we’re in. Unless we can close something quickly here, we’re all going to have to start writing checks.” And so that [inaudible 00:49:27] it’s three years ago and he still brings it up because it’s like, “I’ll never forget that call you gave to me about, you’re an investor now.”

John Warrillow:

Is he an investor going into the conversation that you had with him?

Matt Schmeltz:

Yeah. From early days, I mean, he lived across the hall from me when I was in college. So we’ve known each other our whole lives. So when we were starting any of these ventures, we’ve invested in different things with him and he’s invested in a different, so when we started this, he goes, “Whatever you guys are putting in, I’ll put in half of what you’re putting in.” So then, it was [crosstalk 00:50:01].

John Warrillow:

Sizable.

Matt Schmeltz:

Yeah, he was writing a big check. I’m like, “Well, by having a lot of equity. That means you’re going to have to come up with a good chunk of the payroll is going to come out from your own personal checking account.” So that was definitely the most memorable one by far.

John Warrillow:

Describe the conversation with John, your college buddy, when you make good on it.

Matt Schmeltz:

I mean, to this day, he has said, he’s like, because his wife’s name is Victoria. And he’s like, “You guys have changed our lives.” He’s like, “I have a cushion that I would not have been able to put together if I hadn’t gone through that transaction.” So that’s definitely the more fulfilling part of the grind that it is and that everybody that’s listening to this, I mean, I know through most of my career, every crack in my ceiling, I can tell you exactly where it is when I’m laying down. And I get it where, is this customer going to work? Or put a proposal together, is this thing going to close? I mean, all those things that went through your mind, it’s when you get on the backside and you can look back and you have people that trusted in you and you were able to make good on the promise. I think that just goes a long way.

John Warrillow:

Yes, it sure does. Listen, I’m so grateful for you sharing this story. I think there’s so many lessons embedded. Where can people find you if they wanted to reach out and say hi, in some way, shape or form?

Matt Schmeltz:

Yeah. Absolutely, John. So it’s the Aktion Partners is the entity, A-K-T-I-O-N partners.com is the group that myself and Chris Dalton and Paul Weinewuth are working on. So all of our contact information is out there.

John Warrillow:

And you’re willing to be the 60-hour guy again, right? Come right into the business.

Matt Schmeltz:

Listen, we met a guy in one of our deals. He was an individual, he walked away with $70 million after a transaction we did. We didn’t walk away with that kind of money. I want to be that guy now.

John Warrillow:

That sounds great.

Matt Schmeltz:

I don’t want to be the guy that has to do the hard work. I want to be the guy that has money, he puts it in and just gets a big check back at the end. That’s what I want.

John Warrillow:

I really appreciate you sharing this story. And we’ll put that in the show notes. Matt, thanks for doing this.

Matt Schmeltz:

I appreciate it. Yeah. John. Thank you. Take care.

John Warrillow:

All right. Cheers.

Matt Schmeltz:

Bye-bye.

 

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