Startup Acquisition Stories w/ James Crennan – General Partner at Xenon Partners

This is a mini-series within SaaS Acquisitions Stories where we profile the top Private Equity firms and firms acquiring online businesses at scale.

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Transcription-

Andrew Gazdecki:

Alright. I am really excited to have a very special guest on this podcast, James Crennan, who is a general partner at Xenon Partners, a firm that I’m a huge fan of who has done a ton of wonderful acquisitions. I’m even wearing a shirt for a company called UXPin that you guys were so kind to send me. So James, welcome to the podcast.

James Crennan:

Thank you, Andrew. Delighted to be here.

Andrew Gazdecki:

Well, to kick things off, do you want to give the listeners background on yourself and Xenon Partners as a whole? What you guys do, founding story, any relevant points you thought might be helpful?

James Crennan:

Sure. My background’s really boring. It starts off with, I’m Australian. So apologies for the accent to any listeners. And I started off actually with the Australian military. So I was flying planes for a little while, I then jumped into infantry, deployed to Afghanistan briefly.

Andrew Gazdecki:

This is the coolest background ever. Like what?

James Crennan:

It’s pretty boring. I promise you.

Andrew Gazdecki:

Okay. I’m just flying planes and now I’m acquiring companies.

James Crennan:

Yeah, well, I guess. I was in the military, did a ton of study, basically ticked off every leadership box that I wanted to do in the military. And there’s a point in time where your career goes from quite tactical, leadership-orientated stuff into a little bit more bureaucratic political and a bit of a lottery as to where you end up. That was kind of the time for me to jump out of the military.

James Crennan:

And at that point I jumped into investment banking and realized that I hated it within six months. And then I was lucky enough to be doing an MBA at the time at this school called INSEAD. I met Jonathan Siegel there and people might know of Jonathan Siegel, who’s got a book out at the moment called The San Francisco Fallacy.

James Crennan:

It’s a pretty in-your-face title and the content follows up on that title, but he introduced me to this thing called micro private equity, which wasn’t really a term back then, and said, “Hey, I run a company that finds software companies that we think are good businesses, but they’re just being run by people that need to escape to reclaim their lives. And so our whole shtick is that we come in, we are like a brand new set of eyes and often that can be really valuable. And we talk to these founders who have built this business that is in all senses a great business, but when you overlay the venture capital trajectory that needs to happen for businesses to be doing actually great by the label of great in the modern world, then these companies aren’t typically hitting the growth rates that are required to really provide enough of an opportunity to the founders to have up sized returns.

James Crennan:

So he said, “If this is interesting to you, come join me and we can get stuck in and you can do a wild ride of learning the SaaS space. And that was about five years ago. And I can honestly say that I love Xenon and I will do this until the day I die, unless I’m removed for being too senile at one point in time.

Andrew Gazdecki:

That’s a…

James Crennan:

But I absolutely love it, it’s…

Andrew Gazdecki:

That’s a very helpful intro. I guess the question I have is, how many acquisitions has Xenon made in total?

James Crennan:

So we’ve done 49 transactions with founders since 2010. So, around 12 years old, around 50 transactions, that gives you a bit of a feel for our cadence. And I think that if you’re talking about micro private equity, then Xenon might actually be one of the first companies on the scene doing this sort of thing. And it started with Jonathan doing, actually, a transaction with one of his friends, a friend who had a main company and then a side company that he was working on and the side project started to pick up steam. And so he was like, “What do I do with this main thing that I have?” And that was a company called Exceptional. And this design project was a company called Intercom. And I’m sure yourself and most people on the call know what Intercom.io or .com is today?

Andrew Gazdecki:

Yep.

James Crennan:

So the first transaction that we actually did was working with the founder of Intercom to remove his main distraction.

Andrew Gazdecki:

Whoa. So you Acquired the founder of Intercom’s previous company, and then he went on to found Intercom, is that…

James Crennan:

Yeah, I guess. He’d already founded Intercom, but he couldn’t devote as much time as he wanted to it. And he had a team as well, but this was really symbolic of when founders decide they should come speak to someone like Xenon, is when they have a moment where they actually look at their existing business and there’s this thing called this endowment effect. I’m actually doing a Harvard Business School course at the moment and they talk about endowment effect and it’s a behavioral heuristic. So if you build something, like if you get given a bunch of Lego and you build something with that Lego, and then someone offers to buy it, you’ll probably want a higher price than the actual commodity price of the Lego.

James Crennan:

And that’s because you’ve built something with it and it’s actually sentimental and it might actually mean something to you. If you scale that up to infinity and take it to the depths of forever, that is sort of what a founder might have, this sort of maternal or paternal attachment to their company that they’ve built.

James Crennan:

And I think that moment when you actually step back and you look at your company and you might have a moment of clarity and say, is this thing that’s consuming my life, which it does for a lot of founders, is this thing actually providing me the outcomes that I originally intended it to? And when we speak to people who come in and they want to have that first conversation with us, they might say things along the lines of, it’s been eight years and we’re flat, or we’re growing like 5 to 10 to 20%, but I’ve got this side project. Or My co-founders and I, we don’t get along like we used to, or I’ve had a family and my priorities have changed, and while I love the business, I don’t want to be pouring 14, 16 hours a day into this thing that is only growing a certain amount of time.

Andrew Gazdecki:

I love that. So essentially what you’re doing is you’re unlocking founders to take more shots on goal so they can, maybe they have a business that’s doing well, Xenon Acquires it. And then the founder’s able to go…whatever they want to do. They can start another company like Intercom. That’s an incredible story.

James Crennan:

And certainly, the way that we structure our deals is that we allow founders to just drop the keys and walk away. So we operate on two real, main promises and ethos, I guess, which is one: do what you say you’re going to do. We actually think this is so powerful because it sounds so basic, but no one does it consistently. So we really try to hold ourselves to that account. And two, where we try to be easy to work with. So a lot of what we do is we’ll deal with founders that have never sold a business before, or we’ll deal with founders that like there might be actually a little bit of damage. Revenue might be going down, or some key customers might have just walked out the door and really rattled the founders and the team. A whole bunch of the team might have just left.

James Crennan:

We often deal with these companies that have these marks on their name that I think a lot of others would look at and just say, these are smells that we don’t want to be involved with. We’re very much not like that. And I guess that might be an advantage with our age is that we just look for patterns. So we’ll look through a lot of the headlines that might jump out at other people. And we’ll just look to get into the patterns within the business. And for us, that’s really numerically based. I suspect you might ask us about valuation a little bit later on. I’m happy to talk about that, but when you’ve done 49 acquisitions and you’ve run 49 businesses, you do start to see a pattern and for us, people might come and sometimes, Andrew, there might actually be a little bit of shame as well from founders.

James Crennan:

Like they might feel ashamed that they might not be able to present all of the data that they would like to, or they might feel like they should have done better. They Feel like there’s these judging eyes on them, like their tech isn’t using Rails 8 or whatever it is. And I’ve just got to call that out here for any founders that might be listening. That’s just absolutely absurd. If anyone makes you feel that way, that’s completely wrong and you’re probably speaking to the wrong people.

Andrew Gazdecki:

Yeah, I love that. And I can definitely confirm, I’ve heard from a few founders that have worked with your firm and you treat founders amazingly and you’re giving founders, again, small but life-changing acquisitions. And I think that’s amazing. I guess my next question would be, and I’m not going to ask about valuations. I’ll let people reach out to you directly to figure that out. Because as you know, valuations is inexact science, there’s so many variables that we can go. We could a whole podcast on that one, which maybe we will at some point. But in terms of the startups that you’ve…I know you’ve Acquired some companies that I admire, like Acquire’s integrated with Baremetrics. You guys bought that company, UXPin, a lot of really great SaaS businesses. How do you…what’s your sweet spot? What’s a company that if it comes in, you’re like, this is perfect for Xenon Ventures.

James Crennan:

Yeah, so we are pretty agnostic. We’ll have conversations with pretty much anyone, even if then outside our criteria, because we like to just say hello. And the least we can do, especially if it’s your first transaction, is give people a bit of a heads up on what they could expect and what they should actually insist on, what’s standard in the market. If you’re going to sell, these are things that you should probably insist on having, and these are things that you should definitely not, or you should at least pay mind to, and here’s what they mean. So we’re always happy to have those conversations, because we sort of believe we play a role in the ecosystem, and sometimes especially for founders outside the Bay Area where they may not have the community of other founders that have gone through these similar experiences. And we find they have less knowledge about what they should accept and what they should not. So you’ll need to now remind me of your question, because I’ve done this thing where I’ve just walked off the trail of the question.

Andrew Gazdecki:

I can relate on that more than you know. I was just asking, what is a dream company that fits within your criteria and you were saying you’re pretty agnostic. Let me reframe it. Is there a certain size in terms of revenue or use case? I noticed a pattern, a lot of your acquisitions are developer-focused tools. What’s a perfect acquisition for Xenon? And that’s that’s a really hard question, so…

James Crennan:

No, no, no. We actually have it written down. We have certain deal criteria. So for us, we focus on B2B, first of all. B2C, different skill sets than what we have. We have a circle of competence and B2C is outside of our circle of competence. The second thing we’ll look for is, we look for around $1 million in recurring revenue at a minimum level, at a low bar. And that’s because we feel like at that level of revenue, the business has enough to support itself as its own cost center without needing an injection and capital to sustain marketing and sales operations, which we think are actually critical to a business. And the other thing is a recurring revenue stream. So the revenue model needs to be recurring. There are instances where we’ve actually done transactions a little bit outside these criteria. So one example would be Scripted, where it didn’t actually have a recurring revenue subscription business, but we immediately saw that one could be implemented. So we went ahead and applied that to Scripted.

Andrew Gazdecki:

Nice. And I guess my next question would be, all sort of founders think about acquisitions at one point or another. Even if they say they don’t, you’re not going to pass down your SaaS business to your children. You’re going to probably want to look for a buyer at some point, but there’s such a lack of education in terms of, how does an acquisition process go? What should I prepare for in advance? If you had to give maybe just two or three tips to startup founders listening, looking to sell their businesses, what would it be? Prepare in advance? Clean up? Just the top two or top three, cause I’m sure you have 50, but I want to hear the top two or top three.

James Crennan:

Yeah, so first I would say before you go down that path, have a real think about…if you have a significant other, talk to them…and come to an agreement on what you would accept to hand over your business. And I think that’s really important to get that done and out of the way and clear because that point alone, especially if you have a significant other, could cause you some strife down the line. And I think you need to have that number or those terms in mind, to be able to talk with potential buyers in good faith and with full representation and intention of transacting. Second of all, I would say know some basic numbers and they don’t have to be exact because, oh my God, getting a firm MRR number, that can be a struggle.

James Crennan:

We know this, we bought Baremetrics. So we know the struggle. But if I’m super honest, Baremetrics has two competitors as well, ProfitWell and ChartMogul. There’s probably some emergent companies as well. I think a great thing to do if you’re using Stripe or Recurly or Braintree or, in Baremetrics’s case, Shopify as well, if you connect to one of these service providers, one of these SaaS metrics, data aggregators it’ll load all of your data. And there’ll be a little bit of a processing time, but it’ll give you all of these metrics. And especially if you’re using Xero to do invoicing or QuickBooks to do invoicing and Stripe to do credit card payments, it’s a great way to aggregate everything. And this will give you your your headline figures to be able to represent the business two potential buyers.

James Crennan:

And some people are a bit coy with giving these metrics. I think if it’s going to be an honest transaction, you’re going to get to revealing those anyway. And it really quickly allows you to not waste your time because you can start saying things like, post signing an NDA, you can say, my MRR is X. My LTV is Y, my revenue retention rate is this, my churn rate is this, breaking that down to a net and gross figure, both by logo and by revenue churn, it looks like this. Being able to represent those numbers with confidence enables the buyer to very quickly get around how they would see your business, if it’s in their wheelhouse or not. And if it’s not in their wheelhouse, then they can probably give you some guidance on what they would pay if things were a little bit different.

James Crennan:

And that might give you an incentive to go away and fix those things. Or it might give you some guidelines that when you have a conversation with the next firm, which they can probably refer you to, when you have that conversation, you’ll probably have some benchmarks around what valuation you can expect. And the final thing I would say is, if you’re going to get someone to come in and do a major repair work item on your house, like painting your entire house, you might go and get three quotes. The similar logic would be smart to do when you’re selling your company.

Andrew Gazdecki:

Yeah, I agree with all that. I mean, especially with the first piece, that’s usually the first question most buyers have. Why are you selling? And having honest answers to that. And then yeah, tools like Baremetrics are fantastic, because most SaaS companies, unless you have an in-house VP of Finance or controllers, CFO, you don’t have a detailed P&L that you can put together quickly.

Andrew Gazdecki:

A little tip there is, I don’t know if you would agree with this, but in-house, someone who’s able to prepare a financial statement in house can add a lot of goodwill in an acquisition. Because if you’re at a size, let’s say you’re doing $10 million revenue and you start getting questions like, how many support tickets do you get? How fast you answer them? What is the cost to answer each question? Really, as your deep and due diligence, just having that good faith, at least this was my experience. I don’t think I could have sold my first business without having an in-house VP of Finance, given the due diligence requests. So I completely agree with you, just know your numbers and then if you’re able to have someone available to provide a deeper layer as you go into due diligence. Would you agree with that as it just adds goodwill in terms of your ability to quickly understand the business?

James Crennan:

Absolutely. Absolutely. I would just note one thing to any listeners. When you say goodwill, that can be an accounting term. And I just want to be careful that it’s used accordingly. You’re referring to a intangible lens that’s applied to the company that increases its value from the buyer’s perspective. Goodwill is also an accounting term. It’s not applicable if anyone’s listening and they’re like Googling goodwill and they’re like, oh, how do I get this onto my balance sheet? Do I need to re…no, you don’t, it’s only a premium associated with buying a company so they don’t need to worry about it.

Andrew Gazdecki:

Yeah, no, no, no. I totally meant it as just trust. Like, we know our numbers. We’re able to provide you with information you need to make accurate…or make an offer on the business. And then the third one I thought was also great advice, because there’s a quote, “if you have one buyer, you have no buyers.” So it’s good to create leverage. So I really like that one. And I guess my last question is just, 2021 was a record year for M&A. Do you have any…actually I have two more questions, but they’re easy ones. But any unique insights in the industry that you expect to play out in 2022? And it could be related to Xenon Partners, goals of yours…

James Crennan:

Yeah. We think we’re heading for difficult times. We thought that COVID would be a train wreck and it wasn’t, which is great because unprecedented level of government and central bank support. But we now feel like there’s been this massive wave of liquidity injections and that’s done things all over the place. And so I think for the people that we’re talking about, which is the small SaaS founders that might be listening, with small companies that have got less than $10 million in annual recurring revenue, I think what’s going to happen is we’re going to see some of the normalities start to impact things like listed shares of tech, which have been doing really well during COVID. And they’re going to start to suffer a little bit. And I think there’s a chance that might wash through the entire technology sector all the way down to our level. And so I think over the next 12 months or 2022, I think we’re going to see some really bubbly valuations that we’ve had start to contract down again.

Andrew Gazdecki:

I would definitely agree with that. I think as we’re recording this right now, I think most tech stocks are in bear market zone, or at least correction zone. And then that obviously trickles down into the private market. So it’ll be an interesting year either way, but like anything there’s always ups and downs.

James Crennan:

Absolutely.

Andrew Gazdecki:

That’s just how a market works.

Andrew Gazdecki:

James, this has been a phenomenal conversation and I really appreciate you taking the time, but I got two more questions, and these are just two rapid fire questions.

Andrew Gazdecki:

If you were stuck on an island and you could only bring one book, what would it be?

James Crennan:

Thinking, Fast and Slow from Daniel Kahneman, who was the Nobel Peace Prize winner, and he was one of the two people that founded behavioral finance. I think that book is a Bible on humans altogether.

Andrew Gazdecki:

I have not read that. I’ll definitely check it out. And then in terms of your favorite entrepreneur or maybe a startup that you really admire, what would be the first one that comes to mind?

James Crennan:

You know, this is super lame, but it’s because I’m doing this HBS course at the moment and they’ve just been ramming Steve Jobs down our throats, but he’s actually just insane. And particularly the period of time when he came back into Apple around the 1990s and even that first speech that he gave to the Apple employees where he just…others had come in and Apple’s strategy was a bit of a wish wash and he just came back in and as the founder, he just realigned everything in one speech. That, for me, has just been the most powerful thing that I’ve seen in the last two weeks.

Andrew Gazdecki:

Yeah, we might be thinking of different speeches, but I love the one where he brings Bill Gates in…

James Crennan:

Yeah, that’s the one.

Andrew Gazdecki:

…to do capital, and Jackson. Their biggest enemy, and that essentially, arguably saved Apple. But that’s all I got. I definitely want to give a shout out to Jonathan Siegel. I’ve chatted with Jonathan and he’s by far one of the nicest individuals I have ever met. So definitely rooting for you and the entire Xenon Partners team and thanks again for joining me on this podcast.

James Crennan:

Thanks for inviting us, Andrew, really appreciate it. And well done to Acquire. It’s great, what people are doing to be able to go direct to market.

Andrew Gazdecki:

I appreciate that. And then, oh, sorry. One last thing. So people want to get a hold of you guys at Xenon Partners and want to have a conversation about selling their business to you, what’s the best way to get ahold of Xenon Partners?

James Crennan:

Oh, just email me, james@xenon.io. Just go for it, ping whatever you want. And I’ll get back to you.

Andrew Gazdecki:

I’ll put that in the show notes. I’ll put your website and everything. So if you’re interested in learning more about Xenon Partners, just click below and I’ll have all that info. So, James, thanks again. I know our time differences with you in Australia are way off. So thanks again for taking the time and hope an awesome 2022.

James Crennan:

You too. Thanks for talking to me on a US holiday.

Andrew Gazdecki:

Yeah. I mean, founders, we’re always working.

James Crennan:

That’s it.

Andrew Gazdecki:

All right. Cheers, James.

James Crennan:

See ya.