Play Hard to Get, Without Risking Your Deal

November 13, 2020 |  

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Rob Walling started an email service provider named Drip back in 2012. Walling bootstrapped his growth to almost $2 million in Annual Recurring Revenue (ARR) when, in 2015, Clay Collins, the founder of Leadpages, came knocking. Given their growth, Walling was hoping for an offer in the range of 9-14 times revenue, but Collins was unwilling to go that high. Even publicly traded Software-as-a-Service companies were not trading that high. Talks broke down until Walling launched a brand-new feature that captured Collins’s imagination and re-ignited talks. Weeks later, the two founders finally agreed on a price.

This episode is jam-packed with insight for the aspiring value builder, including:

Watch Your Churn: Your churn rate fuels (or holds back) your recurring revenue model. Walling managed to get his net churn rate down below zero thanks to sticky customers who paid more for Drip as they expanded their email list.

You Are “Risk On”: The larger your company gets, the more you risk. As his business approached $2 million in ARR, Walling realized how much his company might be worth. He became less comfortable with how much of his net worth was tied to one stock. When you get to the point your business is an outsized portion of your net worth, consider if now is the right time to sell.

Control Your Earn-out: Most of Walling’s proceeds from the acquisition were paid in cash, but there was a part of his deal that was tied to an earn-out. Walling had heard earn-out horror stories, so was eager to avoid a target linked to revenue or profitability, which can be challenging to control as a large company’s division. Instead, he got Leadpages to tie his earn-out to the launch of software features that Walling felt confident he could deliver based on the resources he already had at hand.

There’s lots more to learn from Walling, including:

  • Using an offer from a PE firm as a dispensable pawn to get what you want from a strategic acquirer.
  • The definition of an escrow and how it differs from an earn-out.
  • The telltale sign you may be over-playing your hand and a sure-fire way to you’re your deal is about to crater.
  • The big thing Walling would do differently next time around.

Walling sold in part because he wanted to feel the freedom of never having to work again. Figure out the number that would give you a sense of independence by completing the PREScore™ questionnaire. 

Our guest

Rob Walling is a serial entrepreneur who has bootstrapped and sold multiple SaaS startups. He runs the first startup accelerator for SaaS bootstrappers, called TinySeed. Rob has invested in more than 35 startups and wrote one of the foundational books on bootstrapping startups, Start Small, Stay Small. In addition, his podcast Startups for the Rest of Us has been running for a decade and now has more than 500 episodes and 10 million downloads. Rob has been quoted in dozens of major publications, including: The Wall Street Journal, Forbes, Entrepreneur, and Inc. Magazine. @robwalling on Twitter https://www.linkedin.com/in/robwalling/

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Transcript

John Warrillow:

Okay, so what are the numbers on your company’s dashboard? My guess is, you look at your company’s revenue and profitability, which are two great metrics to track. But there are another eight key drivers of the value of your company that go well beyond just revenue and profitability, that are the things that acquirers want to know about. Going and getting your value builder score will help you look at your business through the lens of an acquirer. Takes about 15 minutes to do. Go to valuebuilder.com to get your score.

John Warrillow:

So, how to play hard to get without risking your deal? In essence, that is the nub of it. That is what great negotiation is all about. And my next guest, Rob Walling, managed to toe that line beautifully. He built a company called Drip and sold it to Leadpages. I’ll let him describe how he did that. But what I want you to listen for is how carefully he toed that line between getting exactly what he wanted for his business, not capitulating, not giving up, and yet somehow keeping the acquirer at the table to the point where he was able to consummate a transaction that changed his life forever.

John Warrillow:

Here to tell the rest of the story is Rob Walling. Rob Walling, welcome to Built to Sell Radio.

Rob Walling:

It’s my pleasure. Thanks for having me on, John.

John Warrillow:

So, tell me a little bit about Drip. What are you guys, or what did you guys do?

Rob Walling:

Yeah, so Drip is an email service provider. Listeners might be familiar with Mailchimp or Constant Contact, and Drip was a … we built it as a more sophisticated, little bit more advanced version of those. So, it was 20 to 50% more expensive, but also had a lot more automation and power. And we built it, started in 2012, and then wound up exiting in 2016.

John Warrillow:

Got it. How did you fund the start? It was bootstrapped or did you raise money or how did you do that?

Rob Walling:

I call it self-funded, because I had a prior software as a service app that was throwing off about 10, 20 grand a month, and I self-funded in essence. When I think of bootstrapping, I think, man, you’re super cash strapped and you’re pulling $100 a month off of your salary or whatever. But no, I had a decent amount of funding. We wound up going negative. I say we, it was my personal wealth, wound up going about 150K, 200K … I won’t say in the hole, but I was pulling revenue off another product, in essence, that I had built up over prior years. I later sold that too. Once Drip took off, I wound up selling that other app.

John Warrillow:

Got it. So, you’re using … What’s that old expression?

Rob Walling:

Robbing Peter to pay Paul type thing?

John Warrillow:

Yeah, robbing Peter to pay Paul, et cetera. You’re taking money out of one and investing it into Drip. Love the name, by the way. What was the URL?

Rob Walling:

It was getdrip.com, but then later, we wound up getting drip.co for … I think it was like three or $4000, and that was much better. And then, eventually once we were acquired, that company, Leadpages, they had a lot of venture funding, and they actually bought drip.com from a broker or a squatter or whatever. So yeah, right now it’s drip.com, which is pretty baller domain name.

John Warrillow:

Do you know what they spent for drip.com?

Rob Walling:

I don’t. I don’t know the exact amount. I do know that the broker had contacted me when I owned it and we went back and forth, and he basically said he wouldn’t let it go for less than low six figures. It was something, I’m guessing, with a one in front and five zeros after it, is my guess.

John Warrillow:

Got it. Okay. Excellent. So, in any event, you had a URL and you built this company with money that you had from another source. And it had a point of differentiation, it sounds like, compared to AWeber or Constant Contact or some of the other email marketing providers.

Rob Walling:

That’s right. Yeah, it had the automation side that more sophisticated marketers really gravitated towards it. And I have a bit of a personal brand audience in the startup in the SaaS, software as a service space, so those were the early adopters. And then, we started getting bloggers and frankly podcast hosts. Anyone with an audience who might use an AWeber or Constant Contact started migrating over.

John Warrillow:

Yeah. We should give your podcast a plug. What’s the name of the podcast? Where can people find it, that kind of stuff?

Rob Walling:

Yeah, yeah. My podcast is called Startups For the Rest of Us, and really, it’s about bootstrapping SaaS, bootstrapping software, and been going for more than 10 years, 520-ish episodes. Some of it chronicles my journey of Drip. When I listen back, it’s pretty crazy.

John Warrillow:

That’s wild. So, what was the journey like as you build up … So, you had a SaaS business model. For those not familiar, software as a service, you’re billing customers by the month or assuming by the year-

Rob Walling:

By the month, yeah.

John Warrillow:

… as well, in some cases. Got it. Got it. And so, what were the key milestones in your journey? As you look back, were there inflection points or one or two key decisions that you made that you think were critical?

Rob Walling:

Yeah, there definitely were. So, we broke ground on the code. I had a contractor who was writing the code, who later retroactively became a minority co-founder in the business, just because he was such a key person. So, we started in December of 2012, and then we launched November of 2013, but spent that entire year basically marketing, generating interest, building a list.

Rob Walling:

We had this email list of about 3,500 people who were interested in it, and that was a key decision that got us to about seven or $8,000 a month in revenue right from the start, which, it’s not nothing. And it was able to basically pay for his salary as well as … I don’t know, pay quite a few expenses. Then we spent the next eight months just struggling, because we didn’t have … We had a product that wasn’t great and it wasn’t that differentiated. You could wire up the existing competitors to handle what Drip could do.

Rob Walling:

And so over that next eight months, we really looked for product market fit, which is that term of, “Hey, I’ve built something that people want. It’s differentiated enough that I’m really starting to hit escape velocity.” So, it was like mid-2014 where that up and to the right. It was the bootstrapped hockey stick of, “Hey, we go from 500 to a thousand dollars a month in growth.” Suddenly, it’s like five grand a month, every month of recurring revenue just piling on.

John Warrillow:

Fantastic. And that inflection point happened, because you added the automation to the software?

 

Rob Walling:

Yeah, and at first it was pretty basic automations, but that was enough. It was the fact that we were competing against either apps without any type of differentiation, or any type of automation, or they were just really sophisticated and really expensive, $500 a month and up. And we were at that 50 to $200 price point. So, things went up and to the right, well, almost immediately as we did that. And it’s unusual, right? It was a silver bullet. It’s pretty rare that you launch a feature and it really makes that much of a difference, but in this case, it did.

John Warrillow:

And so how fast are you growing on a percentage basis?

Rob Walling:

Yeah, we were going … I remember hitting 20 to 25K a month in recurring revenue and we were growing up between like two and 4,000 a month. So, that’s what? 10, 15%. And then as we got closer to a million dollars in annual, we started growing 10 to 12 a month in revenue. So, I think that’s still 10 or 15%. So, it was this pretty long … I think there was a 15-month span where we were growing like 13% every month, month over month. It was really that startup growth curve that you just don’t see in a lot of businesses.

John Warrillow:

And so, how big did you get this company before you decided to sell it?

Rob Walling:

Yeah, we got it into … It was low seven figures, so just about a couple of million bucks. The thing is-

John Warrillow:

An annual recurring revenue?

Rob Walling:

An annual recurring revenue, yep. And the thing is, we had several potential suitors. And so, the very first conversation, we were probably doing half a million a year in revenue. And then by the time everything got to the end and closed, it was just about a couple million dollars. So, it was fast growth, but it was also a long process of 18 months of conversation and such.

John Warrillow:

I know most software companies aren’t necessarily profitable. That’s not the intent, but are you covering your expenses? Are you making profit on that two million or feeding it all back into the company development?

Rob Walling:

Mostly feeding it back into the company. Let’s say, we’d grow $10,000 in a month, and that was enough to hire another developer. And we’re in this really competitive space where there are literally hundreds of companies that do something similar to this to choose from. So, feature differentiation and just expanding the product was a big goal. So, we’d grow by 10,000, and then it’s like, “Okay, let’s hire the next developer,” or we’d grow by 5,000, and “Let’s hire the support person.”

Rob Walling:

And so, there were definitely months where we made money, and I think there was like a hundred thousand dollars in the bank when we got acquired type thing. There was enough cushion to pay, and we could have drawn money out, but it would have definitely impacted our growth. We were reinvesting in the business, because we knew it could be a five, 10, $20 million business in a matter of a couple of years.

John Warrillow:

How was your churn?

Rob Walling:

It was very low. In fact, it was net negative, which is a term … Yeah, basically, if your turn gets low, two, 3% cancellation rate, and you have what’s called expansion revenue where your existing customers are paying you more which with an email service provider, hey, they’re always growing their list. They’re importing more people. They’re doing promotions. The lists are growing faster than people are canceling. We had months of net negative churn. It wasn’t every month, but I think it was …

Rob Walling:

Especially during the last year before the acquisition, maybe it was like three or four of those months were net negative. And then after the acquisition, obviously we had even more resources and were able to get it to … I don’t know, it was 50, 75% of the months were net negative.

John Warrillow:

So, did you get a sense as you’re growing this company … Obviously, you’ve exited other businesses. Did you have any sense of what it might be worth? I’m guessing in the podcast, you’re hearing these multiples that SaaS companies are going for. Were you starting to form some opinion on what it might be worth?

Rob Walling:

Not until we started being approached by potential acquirers, because it just wasn’t on my radar. I was running this business. I felt a little bit hair on fire, to be honest. By the end, we were at about a team size of 10, although it was like two contractors and several full-time people. But I was not thinking about multiples, because I just wasn’t thinking about selling it. It was this fast-growing, breakeven/slightly profitable bootstrapped company, and my co-founder and I owned a hundred percent of it.

Rob Walling:

And so I wasn’t thinking, “We need to sell.” I was thinking, “I’m kind of burning out.” That was definitely happening. But it wasn’t until potential acquirers started poking around that I thought, “Man, I do need to figure out some range here, because if I get into any type of conversation, I need to have some confidence in what I’m talking about.

John Warrillow:

What was your first seller? What was the first person who approached you with the conversation about acquisition [crosstalk 00:12:48]?

Rob Walling:

Yeah, the very first, I believe they were bootstrapped as well, and it was a software as a service app that was like membership websites or some type of membership platform. And we got in talks when … It wasn’t even talks. It was a handful of phone calls, basically, Zoom calls. I believe we were doing about a half a million a year in revenue at the time. And it became apparent pretty quickly that I don’t … A, I think we were bigger than they thought we were, but B, I just don’t think they had the cash to pay.

Rob Walling:

Because by that time, I started looking into SaaS multiples, and most people choke at the multiples that you get for a SaaS company. But typically if you’re doing north of a million dollars in revenue since it’s subscription, you can get anywhere from three to 14 times of revenue, not profit. And it depends on how strategic the acquirer is and this and that, but really, I wouldn’t sell a SaaS company like that for an EBITDA multiple, which is obviously the typical model.

Rob Walling:

So, once we started talking about that, it was going to be several million dollars for these guys to acquire, and I just don’t think they had it. So, they backed away.

John Warrillow:

Got it, got it. And it sounds like you had a few of those conversations before.

Rob Walling:

We did, yeah. I was contacted by a couple of different private equity firms doing roll-ups. There’s a lot of private equity in software as we’re discovering SaaS in this time. This is 2015, really, when the conversation started. And the one that piqued my interest the most, we had about five folks contact me over the course of 18 months. They were interesting conversations, but I definitely struggled a little bit with the idea of getting acquired by private equity.

Rob Walling:

I had a lot of my personal brand invested in this app, and I didn’t want customers to get let down, I didn’t want the employees to get let down. I was married to it a little bit. But the one that was most interesting was this venture-funded startup called Leadpages, and they’re who we eventually did the deal with. I knew the co-founders, because we had just grown up in the same orbit in essence. Like, he was a podcaster doing marketing podcasts, and I was in the startup space, and we knew of each other.

Rob Walling:

So, when he emailed me, it was this very short email of like, “We love Drip. Would you be interested in selling it?” It was just very forward thing, and he’s like, “We should have a phone call.” So, it was not the typical corporate development kind of dance of strategic partnership language. It was really, “We’re interested in acquiring. Let’s have a talk.”

John Warrillow:

And what was your reaction to the email?

Rob Walling:

So, my initial reaction internally was like, “Oh my gosh, this could actually be something.” So, they had raised $38 million in venture funding. And they had specifically said in their press release for their last raise of 28 or 30 million, they said, “This is to acquire companies.” So, I knew he was serious that they were trying to roll up … Leadpages is landing pages and websites. And when you have a landing page, the next thing you want to do is send people email, right?

Rob Walling:

You capture email, and then you nurture them, and get in a relationship with them. And so I knew they were looking probably to acquire a smaller ESP and-

John Warrillow:

ESP is email service provider?

Rob Walling:

Correct.

John Warrillow:

Okay, got it.

Rob Walling:

Yep, yep. So, when I got the email, I remember thinking, “This is a great business I’m running, but also, we either need to raise a small amount of funding …” Because I felt like we were bursting at the scenes. From the outside it didn’t look like that, but I was running around with my hair on fire. I needed to hire another developer. I needed to hire an operations person, because I was doing everything.

Rob Walling:

And I was thinking, “We could raise an angel round of, let’s say, $500,000 go through that. Then, maybe I can sell in two, three, four, five years, or this might be an opportunity to take cash off the table.” I’ve been doing startups since 2005, so I’m about 10, 11 years into the journey, and all my chips were now into Drip. I had sold everything else that I had ever built. And I obviously have this many millions of dollars of net worth, but it’s tied up in private company stock, and I’m completely undiversified.

Rob Walling:

I remember I was a little terrified, just that I didn’t have some type of liquidity outside of Drip. And with all the competitors nipping at our heels, I’m maybe a little bit too pessimistic, but I was always thinking, “What if it goes under tomorrow?” There were spammers, would break in and attack us, and our sending IPS got blocked. At one point, we couldn’t send email. There was always that fear of, “What if this goes to zero next month?” Well, probably not super realistic. It definitely was in the back of my head of, “How long do I want to run like this?”

John Warrillow:

So, all your chips … To describe your personal life at this set, you were a single guy living in a condo on his own, or do you have dependents, like the mortgage? What’s going on?

Rob Walling:

Yep, married with two kids and a mortgage in Fresno, California, which is fine. All that was getting paid for, and I was never worried about going bankrupt or anything like that. Again, I had a hundred thousand dollars that I’d pulled out of the business at one point. So, there was money there that would keep me going. And I’ve started five, six companies by this point, so I knew that I could always land on my feet.

Rob Walling:

The worry was not that. The worry was, “This is my home run. This is the one time that I’ve really knocked it out of the park. This is the biggest app I’ve ever built. Don’t screw this up. A, don’t sell it. If you do sell it, don’t sell it for too little. B, if you don’t sell it, don’t run it over the top. Run it into the ground.” I’ve seen folks, it’s on the upswing and you get these amazing multiples, and then the business crests. And by the time you go flat or you start decreasing. Well, now that business is barely worth anything, right?

Rob Walling:

A SaaS business might sell for one times or one and a half times revenue at that point, because you don’t have that growth going. So, there was definitely a little bit of fear motivating me to not screw it up.

John Warrillow:

That’s such an interesting, well articulated, and I think unspoken reason that a lot of people decide to sell, right? It’s like, “I’m all in, and every day, I’m all in.”

Rob Walling:

Yeah.

John Warrillow:

Did you find that your decision-making was impacted by that realization that you were all in? Did your decision making change from when you had 10,000 in MRR versus-

Rob Walling:

Couple hundred thousand?

John Warrillow:

Yeah, yeah.

Rob Walling:

A little bit. I’m an engineer, so I used to write software code. So, I’m pretty left-brained about it. While I was stressed about the decision, I took a year or more to make the decision to sell. So, it was not an impulsive decision, and the negotiations were long and drawn out, partially because I wasn’t going to sell for less than made sense. I needed enough money to never have to work again. That was my goal, and I wasn’t going to sell for a penny less than that.

Rob Walling:

And so I had it all worked out. Based on my finances and where we lived and what was going on, I was like, “Yeah, I can do that.” So, while it was part of the motivation of like, “I can let this go, and I think it’s potentially a wise decision to be able to move on to the next thing,” I didn’t have to sell. And I never found myself saying, “No, I need this deal to go through,” because I didn’t want to back myself even mentally into that corner. Because I knew that it would potentially cause me to make a bad negotiating decision.

John Warrillow:

You’re a relatively young guy. For folks watching on YouTube, they could see that firsthand. You’ve said you already have five or six other apps in the past that you’ve created. Why was never having to work again such a motivating thing?

Rob Walling:

Yeah. That’s [crosstalk 00:20:41].

John Warrillow:

It’s funny, because … We’re going to talk about it later, but you started another business, and there’ll be another one after that, and another one after that. Why is having enough money so that you’d never have to work again motivating? Because, clearly, you are working and [crosstalk 00:20:55].

Rob Walling:

I am working. That’s the thing. I’m glad you pointed that out. It’s not that I never wanted to work again, because I knew that I would. I’ve been blogging and podcasting and writing books and running conferences on the side now for 15 years, on the side of running these software companies. So, I’m always going to do something. It wasn’t that I never was going to work again, it’s that I didn’t want to have to. There’s a difference.

Rob Walling:

It’s this freedom. The three things that I live my life by are freedom, purpose and relationships. These are the three things I value. And I started companies, because I wanted freedom from working a day job, from having a boss and coworkers that maybe I didn’t want to work with, and from basically being reliant on other people. So, I wanted that freedom. And then, purpose is building interesting companies, and obviously I have purpose with my family as well. And then, relationships, of course, family and friends and such.

Rob Walling:

But that freedom, it kept feeling fleeting. I had a SaaS app right before Drip, and it was almost 90% net profit margin. It was throwing off 20 grand a month that I used to fund Drip, sometimes 30 grand. It was this amazing profitable business. It was just life life-changing in terms of what we could do with our life, but it kept … The competitors would come, and Google would delist it, and Google broke the API.

Rob Walling:

I kept looking at this thing of, “I’m never going to rest easy until I have that cash in the bank.” Just having a business that’s throwing off two or 300 grand a year, it was amazing, but that was always looking over my shoulder. And that really became the goal of, At what point do I not look over my shoulder anymore and truly feel like I do have that perpetual freedom.” That was it. It was getting to that number.

John Warrillow:

I think a lot of entrepreneurs would be listening to you right now, Rob, and say, “Yeah, I definitely want that feeling, that sense of not having to work if I don’t want to.” So for you, it sounds like you kicked in your left brain and you did some calculations. What were the calculations that you did to figure out what that number was?

Rob Walling:

Yeah, that’s a good question, actually. I spent several months looking at … Obviously, starting with Google, and then learning about … There’s this thing called the 4% rule that’s a dubious rule, but basically some economists and investment types did a research study, and they said, “Hey, in theory, you could live for the next 30 or 40 years on 4% of what you have in the bank, if you invest mostly in stocks.”

Rob Walling:

They run a back-test through the stock market, and so they said, “All right, so if you had $1 million in cash today, and you only draw out 40,000 a year, that theoretically you could, in most cases, live for 30 or more years.” And some of the simulations, you actually had more money left at the end of that 30. You literally had more than a million dollars, so you could almost live perpetually on it.

Rob Walling:

Now, since then, we’ve had these two massive market corrections. We’ve had all this stuff, and so people were-

John Warrillow:

Pandemics and …. Yeah.

Rob Walling:

Totally. So, it depends on when you start that. And so, really, I started saying, “Well, what does three and a half percent look like? Well, what is a 3% rule?” And that’s what I started hearing is, if you want to be really safe, you just ratchet that down to a point where … Honestly, if you’re going to live on 1% of what you have, there’s almost no one that would say, “That’s not going to work,” right?

Rob Walling:

So, there’s some number between one and four that works. And so I started looking at two and a half to three and a half range to feel comfortable. So, that was it.

John Warrillow:

So, you knew your monthly nut, what it took to run your family, the mortgage, the school, all of your expenses. You knew what that was, and you backed in to say, “Okay, in order to generate that amount of money, what kind of pilot money do I need?”

Rob Walling:

Right. I also have some other smaller income sources. Again, I run a conference for startup founders, and that still generates a little bit. And again, I knew I would still work, but I didn’t ever want to have to count on any of that revenue.

John Warrillow:

Such a fascinating calculation, I think, for folks to do. I love the distinction between not wanting to work, but not never having to work, which in your case was the ladder and a beautiful decision. Let’s get back to the deal. So, the Leadpages guy, what’s his name, the one who sent you the email?

Rob Walling:

Yeah, his name is Clay Collins.

John Warrillow:

Clay, okay. So, Clay sent you this email. Very direct, love it. What happens next?

Rob Walling:

So, obviously, I got a little panicky. I had never been through an acquisition like this, where it’s like, “Hey, I’m going to sell the whole company.” I’d sold SaaS, but just technology before, where it’s just a smaller deal. I’m not selling a whole team and potentially relocating and doing all that. So, I did ask for some advice from some startup founder friends of mine.

Rob Walling:

And they basically said, “If you’re going to do it, play hard to get. Basically say, ‘Hey, willing to talk about it, really don’t need to sell. We’re profitable and growing,'” which was all true. So, that was my initial response. And I think it was pretty much radio silence for like a month. He just didn’t respond, and I thought, “Man, that sucked. Did I killed that deal that quickly?”

John Warrillow:

I love it.

Rob Walling:

But I later learned that-

John Warrillow:

What’d you do? Did you just sit on your hands and not …

Rob Walling:

Well, again, this was July of 2015, and the business was growing. I think I hired … We were only four or five people at that point, and I hired three or four more in the next several months, because we were just growing. So, I was busy with the business. And while a potential acquisition was a great dream, it wasn’t a necessity, and that was a good place to be in. And so, I waited for him to come back around and [crosstalk 00:26:38].

John Warrillow:

So wait, your email was, “Hey, happy to talk, but don’t need to sell. We’re growing, so …”

Rob Walling:

That’s it, yep, and then didn’t hear from him for a month or two. I later learned … I asked him about that, because again, he and I have breakfast now every few months. We live in the same town, and he said, “What happened is I got really busy. We raised this big round of funding, and I got really busy managing the business, and I just didn’t come back to it. It was purely …” I always thought it was this big negotiating thing, and it wasn’t. It was just what happened.

John Warrillow:

Right. Just life takes over and he got busy. So, where does it go from there?

Rob Walling:

So, he wound up circling back and saying, “Hey …” It was a couple of months later, “We should continue the conversation, and we’ve actually hired a corporate development person.” For folks who don’t know, corporate development is code for acquisitions. That’s, “We’re going to buy some companies, M&A.” So, this is probably the fall, now, of 2015. And so, he introduced me to the corp dev guy named James, and he and I started talking.

Rob Walling:

But it really went slow, and I could feel that James maybe didn’t have the authority to run the acquisition through, and that I think Clay was really busy. His wife was pregnant with twins, and life what’s happening. And the company, they were at 150 employees. Fast-Growing startup, raised 38 million, so a lot was going on and there were big gaps between conversation points. It was probably in November that I was pretty stressed about it, “Thinking I don’t want to mess this up.” I actually got a broker involved, a software broker who’s in our space.

John Warrillow:

You’ve got plug? What’s his or her …

Rob Walling:

Yeah, FE International is the brokerage name, and they’re a small one. They’re a niche. They do a lot of SaaS and they do some e-commerce and stuff. I had a broker there named David, who really was advising me like, “Hey, just relax, chill out, play hard to get. This is going to work out.” At a certain point, I believe David and James, the corp dev guy, eventually, by November or something, started hinting around and throwing out a sales multiple range of like, “Well, it should be between nine and 14 revenue.”

Rob Walling:

“Oh, it should be between five and 10 …” That’s where like the loose negotiations started, and then it just dropped, and they kind of said, “It looks like we’re too far apart, and this isn’t going to happen.” And that was it for the holidays.

John Warrillow:

Got it. And what’s your emotional state at this point?

Rob Walling:

I was stressed, and I was thinking, “If we don’t sell the company, I need to raise a round of funding, because my …” Back to my hair being on fire, “we need more capital to run this business and grow it well.” I wasn’t going to go the venture track or raise buckets of money, but did I need a few hundred grand to help ease some things. And so, I actually started gearing up … An entrepreneur, it’s like you’re just constantly battling that next roadblock, that next speed bump of, what is the challenge?

Rob Walling:

So, I actually did start gearing up to raise a small angel round. I was disappointed. I wasn’t devastated, but I definitely thought of it as like, that would end the pain a little bit, the pain of running the business. I enjoyed running the business, but there’s also just a lot that you’re dealing with. And so, I knew that if we didn’t sell it, that I figured we should bring some capital in for growth.

John Warrillow:

Is the broker actually throwing out numbers, like nine to 14 times revenue?

Rob Walling:

Yeah. It was months of conversation that wound up … That kind of stuff came out, and they would ask me, and it’s like, “Well, you name the first number.” It was on phone calls of like, “Well, you name the first number. You name the first number.” Maybe it was six phone calls that wind up eventually getting around to … Because they were asking about revenue, and then they’d come back a month later and ask, “Update us on your churn and your revenue,” and I’d prepare it all again.

Rob Walling:

Obviously, we had a mutual NDA at that point, but no LOI. And it started to become … I don’t think they were doing this on purpose. I think they were just waiting to see what things were doing, but it started to become a little bit of a burden of like, “I don’t want to give you more information every two or three months on our growth. We need to start talking numbers, or this isn’t worth it. Are you even willing to pay?” Because, I think at the time, public stock markets were … SaaS valuations were maybe five to six times annual revenue.

Rob Walling:

And so, is that where they’re going to be, or do we need to be higher than that or whatever?

John Warrillow:

So, you’re looking for a multiple higher than a public company.

Rob Walling:

Well, at least to start negotiation.

John Warrillow:

Wow.

Rob Walling:

That was the thing. Yeah. To be honest, we had … And then we had another suitor start talking to us around this time, so that became leverage as well. So then it was like, “Well, we have this other company we’re talking to.” That was where it was bouncing back and forth and almost doing … I wouldn’t say we were doing a bidding process, but we were definitely playing them off one another. That was a private equity firm.

John Warrillow:

Got it. And was that something David found the PE firm?

Rob Walling:

Well, no. They approached us out of the blue. We kept getting on these lists, like the VentureBeat, big startup lists of … Whatever year that was, and that brought in a lot of interest. That actually brought in venture capitalists too. We would get two or three emails a month from venture capitalists wanting to invest, and that wasn’t a route I wanted to go down. But it definitely brought some acquisition interest too, which was helpful.

John Warrillow:

Did the PE firm that was at the table, did they throw out any numbers?

Rob Walling:

They did. Well, they threw out what their typical ranges were, and they said, “Well, if it’s …”

John Warrillow:

And what was that?

Rob Walling:

They said, “If you’re over a million …” I’m trying to think of what they were. “If you’re over a million growing at 10 to 20% a year, then it’s two to three times revenue, but we can go as high as five or six.” It was in the range of the public markets basically, but it was only on the fastest growing deals, and they really had to be motivated, is what it was.

John Warrillow:

Because you guys were growing fast. Right?

Rob Walling:

Yeah.

John Warrillow:

At this point when you were just shy of two million.

Rob Walling:

I think we doubled from one to two, if I recall correctly, and then I was going to try to double again. I think we were on track to double again, is what it was. So, I knew that it was a lot. You’re small, it’s easier to get those high percentages, but still, definitely had a mini brand in the space.

John Warrillow:

Got it, got it. And was the PE firm a legitimate offer? Were you legitimately considering that or was it more of a pawn as a way to lever up the Leadpages guys?

Rob Walling:

I would have preferred to go on with Leadpages. I knew the space. I knew the VCs who had invested. I knew what they wanted to do with the product, and it was to integrate it with their product and really care for it. And I felt like we would get treated the best with them. So, I would say I was open to either, but I definitely leaned towards … I wanted to use the other offer as a … It wasn’t even an offer, the other conversation as a pawn, for sure, a negotiating piece of leverage.

John Warrillow:

Yeah, yeah. Why didn’t Leadpages and Clay just throw three engineers in a basement somewhere and make their own product?

Rob Walling:

Yeah. I asked them that, actually. Because I said, “Why not just build it?” And the honest answer is, it takes a lot of time. It’s a lot more time than people think. We were at thousands and thousands of engineering hours into building it. In addition, Drip still today is one of the most well architected and well designed, from a user perspective. It’s a really elegant app, and we had gone to great lengths to do that. It was our thing that we cared for and nurtured, and it’s hard to find really good product people to design apps.

Rob Walling:

Most of the software you use on the web isn’t that great, and it’s because it’s hard to make great software. And Drip was one of those. There’s a reason that, as four people, five people basically in a closet in Fresno, we were on the top 10 marketing automation, which is a subset of ESPs. We were in the top 10 lists on VentureBeat. But everyone else on that list had raised between 50 and $200 million, and we had no funding in essence.

Rob Walling:

And it was because our app, it was just really elegant and it hit at the right place at the right time. So, while someone could have hired five or 10 engineers and spent a couple years building, you think about spending X million dollars to get there faster, and at a certain point, that just makes sense from their perspective.

John Warrillow:

Got it. Got it. Okay. So, back to the conversation. So, you’ve got … I’m trying to think of all the players here. So, James, the corporate development guy, David, the broker, they’re just too far apart. Right? So, they say, “Okay, well, I guess this isn’t going to happen.”

Rob Walling:

Yep, that’s right.

John Warrillow:

And then what?

Rob Walling:

Well, yeah, at that point … And again, that was probably October, November of 2015, I said, “Well, I guess that’s it.” As a negotiating piece, I’m not going to go back and say, “Okay, I’m willing to go lower,” or anything. I was just like, “We’re not going to sell to them. We’re going to sell to someone else, or we raise that round of angel funding.” We were launching this really big feature in January, and it’s called Workflows. And it’s this visual way to automate things where it’s more like a drag and drop builder.

Rob Walling:

There was only one or two other visual workflow builders in this space out of hundreds of competitors, and ours was just the chef’s kiss. It was a really well-designed thing. It was with all the modern tools. We went live in late January with that, and that instantly overnight doubled. I believe it doubled our growth rate. It was almost 150% increase in growth. And a week later got yet another email from Clay who said, “Hey, I saw what you launched. This looks really cool. We should have another chat.”

Rob Walling:

That was what really blew his socks off, because he knew the space really well, and he knew that we had launched something that very few others could build.

John Warrillow:

So, for him, it was really a product feature that reignited his appetite to buy your company.

Rob Walling:

Yeah, yeah. Because he knew that there was so much differentiation that we were literally in the top two or three in the space at that point. Even though we weren’t in the top two or three … The biggest one who had the visual builder is called Infusionsoft, and I think they were doing a hundred million in revenue, or somewhere in that range. And the other one was doing 30 or 40 million, maybe. So, we weren’t near their size, but we had the bulk of the feature set to compete with them, head to head.

John Warrillow:

And so, where does it go from there?

Rob Walling:

Yeah, so we started talking again, and that was where we weren’t too far apart. Suddenly, things started coming. They came up, and we just wound up finding a price. It wasn’t just price, though. As you know, there were all types of terms. It was like, “How long do you have to stay in work? What are we going to do with your employees? What type of stock compensation, what type of salary compensation while you work workforce …” There’s all these terms that we eventually started ironing out. When they hit my never have to work again number, that was a good day.

John Warrillow:

That’s fantastic. So, what was the structure like? Was it all cash or did you have an earn-out component or a financing you ended up … Not imagining there’d be financing, but …

Rob Walling:

There was no financing. Yeah, no, it was an all cash offer, but there was definitely … At close, there was the hold-back for liability purposes, which most people don’t know about. And I don’t remember if that was 10 or 15%, but it was some standard number.

John Warrillow:

That’s usually referred to as an escrow by lawyers. Is that what that was, where it’s basically, we put this 10% away, held by lawyers, and there’s these things-”

Rob Walling:

Exactly. Yeah, and it automatically comes out. That’s not part of earn-out. Whether you bust that earn-out or not, that comes to you after, I think, 12 months or 18 months. So, that was held and then, there was a portion of it … The minority of it was held. It was all cash, and the minority of it was held for an earnout of … It was 12 to 18 months, depending on some stuff, basically, and we had to launch a few features during that time.

Rob Walling:

But it was a deal that I felt good about, because I didn’t want net profit milestones. I didn’t want revenue, milestones. I didn’t want anything like that. I’d just heard too many horror stories about having to hit marks, and it wouldn’t have been a deal with these guys in terms of … I’ve heard private equity say, “You need to hit these revenues,” and then not giving you the resources to hit the revenue, so that they can keep the earn-out. And that did not happen, and would not have happened with these guys, but I didn’t know. I was being really, really cautious about it.

John Warrillow:

Got it. And so, you tied your earnout to launching certain features?

Rob Walling:

Yeah, yeah. It was a-

John Warrillow:

Interesting.

Rob Walling:

… couple of features that were on our roadmap that we all agreed, “Hey, these should get launched.” And I knew that we could … Frankly, just with my co-founder, he could launch those features in that time. We literally didn’t need anyone else. So, we were pretty confident that we could get those out. And it was features, but it was over time too. ‘Lay wanted to keep us around to do the transition and everything. I think it was at 12 months, we got a big chunk of money.

John Warrillow:

Got it. Where were you when the wire was …

Rob Walling:

Recess.

John Warrillow:

What was that like?

Rob Walling:

I was at … My two boys play cello and violin and we were-

John Warrillow:

Wow.

Rob Walling:

We were at a strings camp in Oregon, and I was signing the docs-

John Warrillow:

Let’s take a moment just to think about how crazy that is.

Rob Walling:

It never ceases to amaze me. And so, my son is being instructed by a cello teacher and email ding comes through my phone, and I pick up my phone. And I’m signing with my finger these sale docs of this incredible transaction. The wire came through later that afternoon, and we were staying in a dorm, on a university. It was my wife and I. We put the kids to bed, and I said, “Our life just changed.” And I showed her that the bank balance.

Rob Walling:

I had a bottle of scotch or whiskey or something, and we took a sip and just celebrated and sat there just dumbfounded. I was both purely in shock, but also very emotionally … I started crying. Just the stress of that six months prior was … I overstate how hard that was on me, personally.

John Warrillow:

What made it so hard?

Rob Walling:

I didn’t want to screw it up. It’s a hard decision too. Frankly, my whole adult life was all in on this business. And while I knew it was the right decision, negotiating is definitely not … I don’t enjoy it. I’m the person who wants to … I want to get things done. I want to say, “Yes.” I’m an entrepreneur who wants to ship. And if people ask me for something, “Yeah, let’s do it. Let’s do it.”

Rob Walling:

Negotiating is saying, “No. No, thank you. No, I’m going to be a hard ass. I’m going to be a jerk here. I’m going to get what I want over you.” Obviously, there’s compromise and there’s all that. And I knew we were going to work together. So, I wasn’t a mean person, but it definitely felt against my nature. And the stress of running the company full-time and also doing 20 to 30 hours a week, what it felt like, of talking through these negotiations and not telling our team …

Rob Walling:

My co-founder knew, but my team didn’t know until two weeks before, and even that took its toll on me.

John Warrillow:

What kinds of things did you say no to?

Rob Walling:

So, there was no around the price, for sure. The initial earn-out was longer than what we arrived at. I pushed back on our salaries. They were very reasonable, by the way. Their initial offer was actually a quite fair offer. It was just, I had pretty high expectations for what I was going to accept. I think there was even … There was conversation at one point about having the earn-out be based on … What was it?

Rob Walling:

It was performance of the application not going down and really stuff that I didn’t feel comfortable we could measure effectively. So, there was just a lot of conversations around that with technical people who weren’t involved in the deal. It was technical folks on their side, engineering leads, because sometimes it became contentious, because it became two or three engineers talking about how to measure something. I remember at one point, I said, “You have no skin in the game. This is millions of dollars to me.”

Rob Walling:

I became that guy, and that’s just not me by nature. And I had to get a little into it in some of the conversations. Later, they were my coworkers. They actually joined the Drip team afterwards, and Drip became … Later, the company sold off Leadpages to private equity, and Drip is the company now. So, they are my friends, acquaintances and colleagues. And at one point, I did apologize to one guy a year later and said, “Remember that one call?”

Rob Walling:

He’s like, “I don’t even …” He didn’t remember it, but I remembered. The people you’re negotiating with can sometimes be your coworkers three months later.

John Warrillow:

That’s real wow. Maybe your broker David had something to do with this. Tell me if he did. How did you ensure that you did not overplay your hand? Be such a prick that they were just going to say, “This guy’s unreasonable. I’m not going to …”

Rob Walling:

It’s a good question, and it’s a very fine line that I obviously walked, but I did struggle with it a couple times. And I remember at one point … I don’t remember what the deal point was, if it was still price or something. But I remember Clay sent me a voicemail message. We were using an app called Voxer, where you could push-to-talk, and then you get a voicemail. And he said, “This is dragging on. Is this just too hard? Are we just not going to make this work? Because we’re months into this, and I still feel like we’re not close to a deal.”

Rob Walling:

I remember I was in my garage in Fresno, and it’s like 105 degrees there. And I remember being super hot listening to it while my kid was in the next room. One of them was crying. I was just like stressed over, “What do I do here? Is he trying to tactically get me to give in to this thing? Is he threatening to pull the deal? Or am I really being unreasonable?” That was the decision point. And so then I would run it by David.

Rob Walling:

I talked to my wife, I talked to David, I talked to friends and say, “What do you think about this?” And it was all about finding my bottom line really. On that one, I think that I wound up being okay with. I think I won that deal. Again, knowing Clay as well as I do now, it wasn’t a negotiating tactic. I think he was genuinely just frustrated with it. But I didn’t push it so hard that … I could feel when he got frustrated or when people on the other side got frustrated.

Rob Walling:

It was nice dealing with humans, and not dealing with a huge committee. I don’t know what it’s like to sell to private equity, because I haven’t, but I can imagine dealing with these maybe nameless, faceless executives on a board where you don’t get to talk to them and it’s just numbers. And it wasn’t like that. It definitely felt like a more personal … There was a little bit of relationship involved in the transaction.

John Warrillow:

But it sounds like your intuition was, “Look, the brokers and the lawyers and the corp dev guy, they can fight all they want. But when the CEO picks up the phone and cares enough to call me, that might elevate my radar a little bit more,” it sounds like.

Rob Walling:

Yeah, that’s a good way to put it, is that I did at certain times want there to be a barrier. I wanted the lawyers and the brokers to deal, because it was like, “Well, I don’t want to be the bad guy on this,” or “I want to be the bad cop that’s behind them.” But you’re right, when there was direct contact and he honestly said, “This is crappy. I don’t know if this is going to go through,” there were definitely some moments of self-reflection on my part.

John Warrillow:

Do you remember what the issue was that caused him to pick up the phone?

Rob Walling:

I don’t. I was trying to think. I think at some point they wanted to pay in partial stock instead of basically all cash, and I didn’t want stock in a VC-funded company that I didn’t know of, go public or whatever. That was a sticking point for a while, so that may have been the thing.

John Warrillow:

Got it, got it. What was your wife’s reaction when you said, “This just changed our life forever?”

Rob Walling:

Well, my wife’s reaction the whole time during the acquisition was, “Oh my gosh, you are so stressed. You are not pleasant to be around.” So, that was tough. It took a toll on our relationship, but her reaction was a big sigh of relief, just like mine, I think. And just like, “Okay, so at least that part’s over,” because again, the negotiation, it was like five months of me being kind of a basket case. Which if I were to do it again, it would be so different, because I put importance on a lot of things that I just don’t think mattered that much.

John Warrillow:

Like what?

Rob Walling:

Maybe they didn’t matter, because I had them documented, but I really wanted everything in the LOI. The LOI was not vague at all. The LOI pretty much became the purchase docs. Everything [crosstalk 00:48:56].

John Warrillow:

LOI being letter of intent, for those who don’t know that expression or that acronym. So, if you were to do it again, you would not be so rigorous on the LOI?

Rob Walling:

Yeah. Maybe I should take that back. I guess I should just … I wish I had managed my own psychology a little better. I wish that I had reflected and said, “You know what? Take a deep breath, do some meditation. You do need to be rigorous, but if this goes through or doesn’t, you’re going to be okay,” because I would have been. We would have been fine either way, but at a certain point, it did become, the last month especially of like, “If this doesn’t go through, it’s going to be really hard.”

Rob Walling:

Yeah. I just stressed about it more than I wished I had, to be honest. I was unnecessarily stressed. I run a little bit, anxious as it is. Just my personality and genetics and everything, and it was unchecked during that time. If I were to do it again, I would want to be way more chill about it.

John Warrillow:

Yeah, yeah, yeah. Makes sense. Well, I’m grateful for your sharing the story. So, what’s up now? What are you up to these days?

Rob Walling:

I, obviously, worked Drip, Leadpages for about 18 months, I guess, and then took six months off after that, and-

John Warrillow:

Lucky for you.

Rob Walling:

… six months off is still recording podcasts. And I started working on a book, and I ran three in-person events, but off from running a big company. So then, I continued the through-line that I’ve been doing with helping other SaaS founders for the past decade or more. And I wound up raising a small fund and started an accelerator. Accelerators, for those who don’t know-

John Warrillow:

Oh, really?

Rob Walling:

Yeah, it’s a startup accelerator for bootstrapped SaaS founders. So, it’s similar to a Y Combinator model, although we’re a bit different. So, that’s called TinySeed, and that’s what I’m doing now. We’re on our second batch of companies. We’ve invested in 23 SaaS companies who want to take a different tact. It’s not venture funding where we have to do the unicorn go big or home thing, but it’s much more like … With Drip, I had been able to raise a hundred, $200,000 pretty easily, and still be able to …

Rob Walling:

You can still exit for 10, 20 million and have that be your home run versus once you take venture, they really want these massive, massive returns.

John Warrillow:

What a cool model. So, it’s called Tiny C?

Rob Walling:

TinySeed, S-E-E-D.

John Warrillow:

Oh, forgive me, TinySeed.

Rob Walling:

Yeah, like a-

John Warrillow:

And where would people learn about that? Is there a URL or?

Rob Walling:

Yeah, yeah. Yeah. So, tinyseed.com. Obviously, folks are starting a startup. We have a batch application process every six to 12 months. Really, the other interesting thing is we’re raising our second fund right now. Because we found these great companies, and we spent the first four and a half million bucks pretty quick. So, tinyseed.com/thesis is really our investment thesis of, we are trying to index into early stage B2B SaaS companies.

Rob Walling:

And so, we’re getting a lot of people who come to us and say, “I’ve wanted to invest in SaaS. And I know it’s this great asset class, but I’m not going to do it once they go public, because a lot of the value has already come out of it.” So, we get in the very, very early days, the pre-$20,000 a month price points type thing.

Rob Walling:

That’s really cool. What a neat spot for you to evaluate some of these applications, given your experience with applications, your engineering background. You’re in a great position to, as Clay did with you, evaluate the feature set and say, “Yeah, this has got legs and this [crosstalk 00:52:22].”

Rob Walling:

Yeah. Having run SaaS apps now for 12, 13 years, which is like an eternity, because SaaS has only been around for maybe 15-ish, it does help. And I’ve run this community, it’s called MicroComp. I’ve run that community for more than a decade, and that has also given me a lot of insight and just a lot of connections in the SaaS space.

John Warrillow:

That’s really cool. Well, Rob, I really appreciate the time today. tinyseed.com is the URL. Thanks for doing this.

Rob Walling:

Absolutely. My pleasure, John.

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