My friend Kareem Mayan and his co-founders over at CodeTree recently wrote an interesting piece - A Framework for picking and funding your business idea and this is really a great piece. It is refreshingly analytical and methodical in terms of picking your opportunity. Personally I'm more of a technologist than full on business guy so I learned quite a bit about discipline from this. However, there's one aspect of it I wanted to comment on:
"The reason for buying small SaaS businesses is that it's so hard to start anything from scratch. Even a business doing only $5,000 in MRR has validated something significant, and that makes the business valuable."
Intellectually I agree with this and it is one of the exact reasons that I bought a SAAS business in May of 2015. While I can't disclose the particular business but, after buying it, I saw sales largely collapse by a factor of 6x over a 18 month period and I thought discussing why might be interesting. Here's what went wrong:
Loss of Marketing
When I bought this business I did not realize how strongly it was generating its sales as a function of inherent web traffic it got from other things the previous owner did. And I don't think that there was a way to actually know this which bothers me to this day.
Inability to Generate New Sales from Google Ads
A lot of people on the web think "need sales - I know, I'll run google ads!". What I found is that Google ads are:
- far harder to make work than you think
- make damn sure that you look at the when / where settings on Google ads. We lost a bunch of money due to our ads being shown globally instead of US only / EST to PST since that's where like 95% of our sales came from.
- have a lot more complexity now (2015 / 2016) than that did even 2 years ago
- don't work all that well if the monthly price of your SAAS is at the multiple hundreds of dollars point
- can be used aggressively against you - you run an ad and your bigger competitors can simply outspend you
- finding a vendor who can actually help you with google ads is hard. Lots of people want to help you but few of them seem to be any good.
- not everything can be sold via adwords. One of the new products we released was a market research report that we later found out was on a topic area which could not be advertised on Adwords. My co-founder headed this up and the inability to market it was killer for us since we had planned this effort as a loss leader to jump start subscription sales.
Big Competitors Can Be Deadly
This is a market space with one really big competitor and in any competitive market space if the market leader decides to, well, they can make things very, very hard for you. What we found is that however we spent on Adwords, they would match it and boost the click thru price. It isn't illegal, immoral or fattening but it did feel wrong. And that's not even talking about the disastrous impact that can hit your business if competitors decide to maliciously click on your ads and run up your bill / prevent traffic from getting to you. I know that this isn't supposed to happen but when you're at the small, small, small side of Adwords and you're trying to figure out what works, your budgets aren't large. This means that a sharp competitor might see the keywords you're running and just plain screw with you. And you'll never know but since you are using a test marketing budget what you see is "Keyword X brought in no sales; guess it is time to move onto the next one". And maybe it was exactly the right keyword.
Here are my recommendations:
- See if you can answer the question "If this SAAS business leaves its current owner, what does the business lose in web traffic, referrals and other things - does that make the business less viable?" And don't forget that a lot of web traffic these days comes from a founder's personal blog / web presence. If you just look at corporate web traffic, you ignore that.
- If your plan is to use Google Ads as a mechanism for sales then spend your own money, before the acquisition, to verify that Google Ads actually work for this business. I'm still kicking myself daily that I didn't focus on generating new sales and test Google Ads for this. Even spending a thousand dollars out of pocket prior to the acquisition might have saved me far, far more.
- Don't ignore social media. When all this was going on, I did not focus on content marketing - blogging / tweeting. I wish that I had and I wonder how it would have turned out. However, at the time, I had my hands full with migrating the data center and revitalizing a code base that the previous owner had neglected. Sigh; too little time; too many bytes to push around.
- Be careful about large entrenched competitors. I've always been from the school of thought - small and nimble can win the race. This is only so true these days. When the number of engineers that they have dwarfs you by an order of magnitude or more, well, that's going to hurt. I seem to have bought this just at an inflection point where their funding jumped and I got hit in the crossfire. Sigh."