Startup Acquisition Stories w/ Greg Lazarus – Managing Director at Polychrome Capital

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

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Transcription:

Andrew Gazdecki:

All right. I am here with Greg Lazarus from Polychrome Capital. Greg, thanks so much for your time. How are you doing?

Greg Lazarus:

Doing so well, Andrew. Thanks so much for having me, this is great.

Andrew Gazdecki:

Yeah, it’s good to catch up.

So for those that may not much about Polychrome, do you want to give just a two minute overview of what you guys do?

Greg Lazarus:

Sure, yeah. First of all, big fans of Acquire. Great work with what you guys are up to.

Andrew Gazdecki:

I love that company too. I know a guy that works there.

Greg Lazarus:

Yeah.

Andrew Gazdecki:

If you need him just call me.

Greg Lazarus:

It’s pretty cool.

Andrew Gazdecki:

Yeah, if you need an intro, let me know.

Greg Lazarus:

Awesome. Well, again, it’s great to be here. My name is Greg Lazarus, I’m a partner at Polychrome. And Polychrome is a PE firm focused on acquiring 50% or greater equity positions in B2B software companies. That’s our primary focus and that’s what we do pretty much every day.

Andrew Gazdecki:

Nice. Are you comfortable expanding on what makes you guys unique in the market?

Greg Lazarus:

Yeah, definitely. That’s pretty much what we talk about all day. When we think about the market, we think about… When we built Polychrome we built it as a bootstrap PE firm. And when doing that, you have to think about what is your advantage in the market and what do you offer. And when your bootstrap, cash isn’t what you’re offering, we have cash and we have ways to get it. And we can talk more about that as well, but really what we offer and our expertise use on a day to day is our operational backgrounds from startups to building very successful companies. And so…

Andrew Gazdecki:

And let’s double click on that, just because I want to bring this to the forefront because I love the model, but before Polychrome, what were you doing?

Greg Lazarus:

Yeah. So before Polychrome, I was a Chief Revenue Officer at a company called Returnly, which was Acquired by a firm. Prior to that I built sales. I was on the team that built sales at Optimizely for four and a half years.

My partner Alex Boswell was eight years at Twilio pre and post IPO in finance and operations. And then Matt Althauser was the CRO and COO at amplitude analytics three and a half years that went public a few months ago. And then he was the first non-technical hire at Optimizely. Then we also have an…

Andrew Gazdecki:

Can you…

Greg Lazarus:

Go ahead.

Andrew Gazdecki:

So you guys are just go-to-market bad asses.

Greg Lazarus:

We’re go-to-market folks. That’s what we do. We take companies that are really early stage and we grow them to some sort of exit.

Andrew Gazdecki:

Nice, I love that. So I guess my next question would be, did you want to add anything to that?

Greg Lazarus:

No, that’s pretty much Polychrome. We have an amazing person on our team Ilia. He runs marketing for us across the portfolio as well.

Andrew Gazdecki:

And just to summarize for listeners, what Polychrome does to my understanding is, when you Acquire either a majority stake or the entire company, what you really do is you really help on the go-to-market side and really help grow the company. So a founder could come to you and do say, a majority purchase and they keep a part of the equity and they can potentially benefit a second bite of the apple as they call it. As you guys build out, the go-to-market strategy and scale the company much farther than they could have on their own. Is that kind of accurate?

Greg Lazarus:

Yeah, that’s pretty much and I’ll add a little bit more to that. So we are open to full buyouts, we’re open to partial buyouts. Our core structure though, is typically keeping the founder in place. And we are typically partnering with technical founders who don’t have, the go-to-market expertise or who just don’t want to sell or the go-to-market is what’s keeping the company from taking that next step in their growth trajectory. And so what we’ve done and what our typical structure is we’ll do cash, let’s say for 25% of the business. And then we’ve earned another 25% of the company through getting to a certain revenue milestone. So I’m joining the team in sales, so is Matt, Alex’s operations in finance and marketing or early as marketing. And we’re really partnering with the founders every day to grow their businesses and grow the company to an agreed upon milestone.

Andrew Gazdecki:

So you increase the value of their equity. So it’s win.

Greg Lazarus:

It’s a win and I think you mentioned this before, but it’s really allowing the founder who’s been growing this company for a few years on their own or with a small all team to take some cash off the table and then also stay on for a larger exit down the line as well.

Andrew Gazdecki:

I love this model so much because the other route is the technical founder raised his venture capital. Then they have to go and find a good head of marketing, head of sales. They have to go and find those people and the team you’ve put together, I don’t think a seed round or a series A would cover…

Greg Lazarus:

No, you can’t afford that.

Andrew Gazdecki:

Yeah.

Greg Lazarus:

You’re going to have to raise multiple rounds. You’re going to have to hire your first few sales people and all sales people interview well. You’re going to have to go through maybe a few in order to get the right person and…

Andrew Gazdecki:

And you have skin in the game too. That’s what I love more…

Greg Lazarus:

That’s true.

Andrew Gazdecki:

It’s like, you’re literally saying, we’re confident enough that we can grow this company, that we will structure something that basically, if we win you win too, I love it.

Greg Lazarus:

Yeah, we’re in the trenches with the founder every day.

Andrew Gazdecki:

I love it. I guess my next question would be, what startups are you looking to Acquire right now? What’s your criteria?

Greg Lazarus:

Yeah, it’s a good question. So…

Andrew Gazdecki:

Or I guess, I could frame it like a different way. What would be, if you had to make up a startup, that’s just a perfect fit. You could make up the name, what it does, size.

Greg Lazarus:

No, I mean, listen, I totally understand the question. I’m not in the business of building startups, I’m in the business of helping startups that I’ve already have some product market fit grow. So the first way you framed the question was easy for me. We’re really laser focused on the open source community. And we’ll talk a little bit about that today, I think. Open source software is something that we’re really passionate about and opensource developer tools is something that we’re really passionate about. When you think about open source, it is literally a technical founder who built a product for free that has some traction probably on GitHub. And if they want to monetize it, they need to take that next level, so it fits our model really well. And we really like developer tools a lot. And so, we want to be at the point of building a software, we focus a lot on tools that are used every day that have a lot of traction that just need to monetize.

Andrew Gazdecki:

Nice. And then in terms of size, what’s the smallest acquisition you’d look at, and then what’s the largest. I know that’s a hard question to answer without the nuts and bolts, but what’s the largest you’d look at, and what’s the smallest you’d look at, in terms of revenue?

Greg Lazarus:

In terms of revenue, I think we would, honestly, go anywhere from $50,000 even a year in revenue. That’s pretty small obviously, but definitely open to those conversations. And probably all the way up to 2-3 million dollars in revenue.

Andrew Gazdecki:

Nice.

Greg Lazarus:

So it’s definitely at the very early stages of a company.

Andrew Gazdecki:

Nice. And so we have your criteria Open Source Step Tools. How do you evaluate startups as they come on? Let’s say I’m a founder, I have a open source developer tool, I’ve created. I think you’re a good partner for a potential acquisition. How do you evaluate these startups to ensure they’re a good fit for Polychrome?

Greg Lazarus:

Yeah, we’ve actually built an internal scoring system. What we look at is first, some of the basics that, I would say most people look at and most people measure their business by on a month to month or day to day basis. So, first and foremost is what is the industry. Second is, what is the team that they have in place. And then some of the key metrics like year over year growth, number of customers, EBITDA, we really are profitable bootstrap companies is really what our focus is. Who are your top paying customers? Will people spend money on your technology, is really important to us, like an example could that shows us that go-to-market or direct sales, we can be useful. A lot of these metrics we care about because we want to know that we can be useful because we’re teaming up with the founder.

Churn is super important for us. We’re go-to-market folks mainly on the sales side by trade. So we want to know that the product is sticky and folks are sticking around. And those are just to name a few. And those don’t make us very unique, I would say, what makes us unique when we’re evaluating a company is we actually used this a framework, we didn’t invent it. Brian Balfour came up with it and it’s actually called Market Product Model Channel Fit. And this is something that we use when evaluating companies. And this is something that we do when we build strategy for all of our companies on the go-to market side. And so what this is, we put together this framework, again called Market Product Model Channel Fit. And we take a look at the current market that the company serves.

And we think about, does this market need to change in order to reach the next milestone or get to the next level? So, who’s our target market, who’s our customer? And building out a profile there. Does the product need to change? Do we need to build anything? If we come on board, do we need to build any new features and functionality in order to service that new market or that current market. And then model, what is the current pricing model in packaging? Does that need to change in order to close more deals or increase the average deal size in that market? And then channel is, how are we getting our meetings today? How are we getting our leads today? What are three different channels that we want to test in order to get more meetings and increase revenue? So is it outbound sales? Is it SEO? Is it content? And we come up with that strategy and.

We put that together before any agreements in place. We present it to the CEO or the co-founder make sure that we’re aligned. And we want to really just, again, make sure that we can help the founder. And make sure that we have belief in ourselves and our ability in what we need to do in order to grow the company. Because again, we’re taking a big risk as well by joining the company.

Andrew Gazdecki:

I love it. Again, I’m going to stop just hyping you out but, it’s a win for the founder, it’s a win for your firm, but it’s also a win for the market too, because you’re potentially products that could be of huge value to enterprise businesses. But it’s not for sure position correctly, it’s not, I don’t know, SOC 2 compliance, all that fun stuff that you kind get to when you get upwards in your sales motions, so I love it, man. I guess, my next question would be, as a lot of founders look to sell their business over the next couple years. And as given you’ve looked at a lot of different businesses, what are two tips you would give a founder looking to sell their company to just increase thought of successfully getting Acquired?

Greg Lazarus:

Yeah, I think it’s a great question. And again, obviously we talk to a lot of companies and I talk to a lot of founders as well, who are looking to sell our companies. And we say a lot of the same things, actually that you say honestly, and some of the content that you write. So the first thing that I always think about is focus on what the customer needs and what your customers are asking for. Their customers are telling you what to build and what that actually does is, it helps you with your net revenue retention because you’re building products that your customers want. And if you’re building products that your customers want, they’re not going to leave you. And they’re actually going to end up spending more money with you overtime. And if you have strong net revenue retention, the value of your business is going to increase dramatically, so focus there. I would say… I have two more, is that okay?

Andrew Gazdecki:

Yeah. As many as you want to share, man.

Greg Lazarus:

You said two, so I want to make sure, following the rules here.

Andrew Gazdecki:

Only two Greg, I said two.

Greg Lazarus:

I don’t want to break the rules. So, another important thing that I don’t think a lot enough founders and enough people do just in general, is build strong relationships and partnerships within your industry. So talk to people in your industry, talk to strategic buyers, build partnerships, build integrations with your strategic buyers, potentially. Meet people in PE, have conversations and just be out there, that always helps. And then, what we see a lot, are companies with single founders and that’s fine, but if you want to high valuation, have a team hire, see if you can hire one or two more people to join your team. The value of your company is going to increase. If you can put some people around you in place, because when you get Acquired, a lot of the time they’re going to want more than just the product to give you a high valuation. They’re going to want an engineer or somebody in sales or other people other than just the founder. And so we would say, try to staff a little bit, if you can.

Andrew Gazdecki:

Nice, good tips. Next question would be, what’s your favorite acquisition story? This could be, maybe a company that you’ve Acquired or one that is up in the pipeline. What’s kind of a story this stands out?

Greg Lazarus:

Man. I’m obviously very biased, but… So Polychrome has two really great companies under our portfolio right now. And we’re going to actually try to add two more this year to have four total by the end of the year. The first company that we have is Flagsmith, which is an open source feature management platform.

Andrew Gazdecki:

I’ve been watching you grow that.

Greg Lazarus:

Great, it’s doing super well.

Andrew Gazdecki:

Yep. I’ve I’ve been noticing.

Greg Lazarus:

Thank you. And then our second one, is a super popular developer tool, open source as well called Browserslist.io. Both are phenomenal stories. Ben, CEO of Flagsmith, he’s out of London. Joel CEO of Browserslist, he’s out of the Washington state. So both are really great. I’ll say Flagsmith right now only because Flagsmith was our first partner that we brought into Polychrome. And they’re both equal, we love them both, Joel and Ben are amazing, and the companies are amazing, what they built. Ben was actually a founder of a company called Solid Staker, it was a development agency out of London. And they actually built Flagsmith as a side project. So they could use for their clients who were enterprises looking to get closer to continuous deployment.

And so, they built an open source alternative to launch darkly, which is the incumbent in the space. And they built Flagsmith… From Bullet Train was the first company that now it’s called Flagsmith. And we got introduced to Ben through a venture partner of ours. And they were thinking about raising venture, actually. And the partner there was like, “Hey, this is a great business. Maybe you guys should think about not going to venture route, but thinking about partnering with, go-to market experts like these guys Polychrome instead”. And it’s my favorite story, because Ben took that leap of faith with us and we’d been to London…

Andrew Gazdecki:

I remember seeing it, I saw your, excuse me, your titles on LinkedIn Chain. I felt you joined, you literally joined the company.

Greg Lazarus:

We joined the company, Ben took a leap of faith in us. And we’ve met with Ben every day for the last year and a half, every morning to help grow this company. We’ve hired people into the business from all over the world. We’ve restructured the strategy of the company and really narrowed our focus. And now we work with some of the largest organizations in the world at Flagsmith and grew the revenue, I don’t know, it’s something like a thousand X or something, since we’ve joined so…

Andrew Gazdecki:

Thousand X, not bad, not too bad.

Greg Lazarus:

So it’s been pretty fun.

Andrew Gazdecki:

Congrats on that. Next question, so this last year 2021 was a record year for just private equity activity, mergers and acquisitions. Everything was just off the charts, any trends that you would expect to see in this upcoming year?

Greg Lazarus:

Yeah, the market’s pretty crazy right now. So I think, outside of just what’s going on in the market in venture and the uncertainties and is this good for mergers and acquisitions or is it not? When we talk a lot about at Polychrome is three really key trends in the market. We believe heavily in the future of open source software. Obviously I’ve said that a lot, but we’re very biased. We talk a lot about open source and companies that are building open source alternatives to large SaaS players. We see that as like a big trend, also open source because of data privacy laws and GDPR in Europe, Europe in open source are very popular these days.

So we’re very bullish on the future of open source. The second that we think a lot about is where go-to-market is going. And this helps a lot with actually companies that are looking to get Acquire as well as, how are go-to-market motions and organizations being built and how are people buying and selling software? And the reality is, more and more the bottoms up sales motion, the bottoms of buying process is becoming more popular and standards. So free trials, a single developer or marketer comes in, tries it out then the larger organization adopts it. So we see that as a big trend.

Again, it’s easier to be Acquire when that’s the case, because typically there’s a self-service option within your product and you don’t need to do such heavy enterprise level sales as like a one or two person team. And then we see a huge, we’re very bullish on the trend of developer tools. The way that we think here at Polychrome is, and the old age old analogy is, “We think about the best way to make money in a gold rush is to sell the picks and shovels”. So what we mean by this is, if software is eating the world, but we want own the companies that make the forks and knives. And so, we really think developer tools, opensource, bottoms up, we talk a lot about that in this new, as trends and what’s coming ahead.

Andrew Gazdecki:

I love that quote and I definitely agree, “During gold rush, definitely sell the shovels”. So I got three rapid fire questions. Are you ready for these?

Greg Lazarus:

Yeah.

Andrew Gazdecki:

All right. If you were starting from scratch in terms of acquisitions, what’s one book or podcast, you’d recommend people check out?

Greg Lazarus:

In acquisitions. Oh man, it’s a good question. I think some of my favorite business books, just in general, I think a lot about Zero to One. I think about Principles by Ray Dalio. I think about, those are probably some of my, those are my favorites. Just all the top of my head.

Andrew Gazdecki:

I want to know your favorite go-to-market book too.

Greg Lazarus:

Oh man. To be honest with you, I’m not a big business book reader. I read a lot of, and I listen to a lot of like biographies and trying to learn about people and what they built and how they run teams and how they think. And I try to make it my own after that. So, currently right now, I’m reading the Phil Jackson book about his leadership style and just… I’m a Chicago guy, saw the bulls and whatnot. And so, love those stories. The Amazon story, Elon Musk’s book. I love learning about how these people think and what makes them different and then I try to take that and apply it to my myself and day to day.

Andrew Gazdecki:

Nice. One recommendation I’d have for you on that front would be Tony Hsieh’s book, unfortunately passed away, but Delivering Happiness is Zappo story?

Greg Lazarus:

Yeah.

Andrew Gazdecki:

They were in a commodity market and they just focused on, there’s some really funny parts of the book. Fun fact about, and I agree, Shoe Dog by Phil Knight is such a good book…

Greg Lazarus:

It’s a great book, yeah.

Andrew Gazdecki:

But there’s a part in the Zappos book where someone was awarded. I don’t know if anyone should apply these sorts of things to their company, but someone won an award at Zappos for the longest customer’s protocol. And it was…

Greg Lazarus:

Oh, I’ve heard that.

Andrew Gazdecki:

Yeah. And it was like 26 hours long? 26 hours.

Greg Lazarus:

Yeah.

Andrew Gazdecki:

That’s like a therapy session, but I don’t know, maybe they had a lot of shoes to buy. But it just is a Testament to how Tony Hsieh built the culture and really thought about, if we can just really deliver happiness to customers, we’ll win in the market and they did.

Greg Lazarus:

I totally agree.

Andrew Gazdecki:

So next question. If you could only look at one stat, when acquiring a company, what would it be? I’m going to guess it’s probably Churn.

Greg Lazarus:

Churn, for sure that’s our north star.

Andrew Gazdecki:

I knew, man.

Greg Lazarus:

We care so deeply about Churn and honestly, I now taking it back to you and Acquire, a lot of these companies are very small. And if you have a sticky product, the likelihood of building a successful company is so much greater. I’ve worked at companies with High Churn and it’s so hard to build long lasting businesses. When you have holes in the bucket, that’ll leak your bucket.

Andrew Gazdecki:

And then you’re constantly fixing the holes rather than getting… Yep, agreed. The final question would just be, you touched on this with some of your books, but who’s an entrepreneur that you admire?

Greg Lazarus:

Who’s an entrepreneur that I admire?

Andrew Gazdecki:

And you can’t say Elon Musk.

Greg Lazarus:

No, I won’t. What I’ll say is, it was actually the old CEO of Returnly, his name is Eduardo Vilar. That wasn’t really what probably most people thought I would say, but I would say that, I partner with Eduardo at Returnly. I was one of the first employees there to help join him and build, go-to-market. Returnly was a self-service really Shopify app when I joined and it sold for 300 million and Eduardo built that company. He was a solo founder, he had three kids, incredible, smart, he was an actuarial science guy and he built this amazing product, super entrepreneurial, very scrappy, extremely smart, empathetic, hard worker, visionary. He sold three other companies before Returnly.

Andrew Gazdecki:

Geez.

Greg Lazarus:

He moved from Spain to Silicon valley because he wanted to hustle. And he moved his whole family here. So, he’s a great guy, person I’ve always looked up to and definitely valued our time working together.

Andrew Gazdecki:

Nice, good for him. Congrats on his success. So that’s all I got for you, Greg. If people want to reach out to you directly, maybe they have a company that they think could be a good fit for Polychrome. What’s this way to get ahold of you?

Greg Lazarus:

Yeah, you can LinkedIn, connect with me, I’m very active, you can message me there. You can also just email Greg@polychrome.com, that’s my email. I’m very responsive there as well.

Andrew Gazdecki:

Sounds good. We’ll put those in the show notes. So if anyone’s looking to reach out to Polychrome, you know where to go. Greg, thanks for your time. I appreciate…

Greg Lazarus:

Andrew, thanks so much for… Yeah, thanks so much for having me appreciate this was great.

Andrew Gazdecki:

Yeah, cheers. Bye.

Greg Lazarus:

Cheers.