Startup Acquisition Stories w/ Akeel Jabber – Investment Director at Horizen 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

Akeel Jabber:

It’s all good.

Andrew Gazdecki:

All right. I’m here with Akeel Jabber from Horizen Ventures. I’m super excited for this. We haven’t gotten up in a while, man. How you been?

Akeel Jabber:

I’ve been good, man. It’s a pleasure to be on. Great to chat with you again. Glad we can catch up.

Andrew Gazdecki:

You as well. Well, so for people that may not know of Horizen, do you want to give just a brief background around what you guys do? Just maybe the 60-second quick pitch.

Akeel Jabber:

Yeah. Sounds good. So Horizen Capital, we invest in B2B SaaS companies. We do acquisitions, we do investments of all sizes, generally somewhere between 500K to five million in ARR, B2B only. And our portfolio now, we have about five companies active and slowly doing deals as they come through.

Andrew Gazdecki:

Nice. Well, progress, man. Like it. 

Akeel Jabber:

Yes. Yeah. 

Andrew Gazdecki:

So I guess my next question would be you look at a lot of deals per month, I’m guessing. So as you look at these potential startup acquisitions, how do you evaluate startups that you’re looking to Acquire?

Akeel Jabber:

Yeah, sure. So we start with high level filter. So this is our first criteria we look at is what are the companies doing between, like I said, 500K to five million in ARR? We’ll look at growth. So potentially, zero, look at a flat line up to 30% growth. So we don’t like these super high growth companies and we’re not competing with VC money or capital investments.

We like profitable or at least break even, so we don’t want anything that’s burning. If you’re burning capital, we’re not going to invest in you. And then the other criteria is looking at monthly churn of less than 3% and LTV of at least 1500. So that’s the first step. If we’re happy with that, then we go into next stage, which now, we look at whether we think when we look at this company, can we make a significant impact to actually grow this company? Apply our playbook and make a difference, and make a worthwhile investment. 

So we’ll look at things like your website, your analytics and their competitors, look at their sales and marketing process. And then assess quick wins. What are some quick wins we can do and improve within the first three months, the first six months? If we feel we can add value, we’ll build a plan, we’ll go deeper into an audit. And then we’ll deep dive into different fundamentals. So your customers, your competition, the different sales channels, your marketing channels, break it down and see what’s working what isn’t. And then management, let’s look at the management, the market, the money, so the actual financials of it, the product, the projection, partners, who are the different partners? 

Do you have affiliates? You have resellers? The actual technology, the transaction terms, what are they looking for? Is it worth what we think it is? And then what is the risks around all this? So we’ll take all these different factors. We’ll plug it into a scorecard, and then that’ll give us an idea of like, “All right, what are some red flags here? What are some areas we need to improve?” And what we think based off that, what do we think it’s worth at this point, and whether we want to move forward.

Andrew Gazdecki:

Nice. That’s quite a detailed answer. I guess one side question I have based on that is what are some big red flags? And this ties into my next question of with us going into 2022, a lot of founders are looking to sell their businesses. I’d love to hear just your top two tips or founders, looking to position their companies for an acquisition and maybe red flags that you come across commonly.

Akeel Jabber:

Okay. So I’ll start with red flags. I guess, red flags, market, so this is a declining market and even their company, are they declining? I mean, that [inaudible 00:03:50] thing was like, “All right, something’s going on here.” These founders are smart. They’ve built this thing to a solid place for a reason. They know what they’re doing, but something’s going on here. 

So we’ll red flag that and see what’s happening there. And then from partners and customer concentration, so we don’t like… or even in the marketing channel, so three things, those things are pretty inter-tied where if 30% of your traffic comes from one keyword, if 30% of your customer represents 30% of your… So one customer represents 30% of your revenue, or a lot of these things, there’s a lot of risk on one small thing that could go wrong.

Andrew Gazdecki:

Yeah. You lose one of those, you lose 30% of the revenue.

Akeel Jabber:

Exactly. You’re scrambling how to figure that out, get that back. And then tips for founders going into the next year, I guess, first thing, if you’re looking to sell, clean up your financials and reporting. If you have clean, reliable, well-presented data, I think that’s just confidence to any buyer. Like, okay, this guy knows what’s up. He has his stuff in order, and he has nothing to hide. 

I think that’s the image of shows. And then before going into a sale, figure out your priorities. Do you want to get as much guaranteed payment up front for your company? Or it’s just like, all right, this is a total potential consideration important to you. Other questions we get are like, “Is the legacy of your business important for you? Is the future of your staff important to you? Do you care if they stay or they’re gone? Are they going to move on with you? Do you still want to work with the company post-transaction, or are you looking just get this off your plate, move on or retire and live in Cabo?” And then [crosstalk 00:05:20]- 

Andrew Gazdecki:

Where I just got back from.

Akeel Jabber:

Exactly why I said it. 

Andrew Gazdecki:

You don’t want to live in Cabo, or maybe you do.

Akeel Jabber:

Maybe a couple weeks. Yeah. And then being clear with yourself on what your priorities are to help you target who you want to approach and pitch to be more consistent. So I think just have your number in mind. I think be clear with yourselves. That set point, like if I sell at this number, or I don’t sell it all, just think through that situation. I think you’ve been through that. It was like, “Yeah, you’re close. This is a number. I might take it,” but then this one’s like, “Yo, this is a great deal. I’m taking this. This is way better than I thought.” So if not, it’s like, “Okay, be willing to walk away and just continue running your business.”

Andrew Gazdecki:

Yeah. I like that a lot, especially I think so many founders underestimate just the importance of a clean three-year P&L that just gives you a good, healthy financial snapshot of the business, because it shows they have their books in order. Two, they’ve prepared in advance and all that can really give good signals to buyers that they’re serious about doing an acquisition rather than just like, “Here’s my Stripe stuff, you figure it out.” So the more they can make your lives easier, the higher their chances of being Acquired.

Akeel Jabber:

I wonder from your perspective on Acquire, do you see that the ones who come in prepared with everything, the process just moves a lot quicker, I’m guessing than the ones who-

Andrew Gazdecki:

Oh yeah. If you have a data room set up, you have a clean P&L, you have metrics attached or connected. It just makes a buyer’s decision that much easier, but more importantly, it signals to buyers that you understand the acquisition process, you’re looking to sell the business, and just the difference between having all that and then compare it back to let’s say, an equal startup without those things, unless that other startup is growing four times faster, buyers are going to gravitate to one where there’s clear signals that this is a serious seller and they’re looking to do a deal and they know what buyers are looking for to make that decision.

Akeel Jabber:

Exactly.

Andrew Gazdecki:

Absolutely. So my next question would just be your favorite acquisition story. This can be partial buyout, it could be a full buyout. It could be one you’ve heard about.

Akeel Jabber:

I heard about? I mean, maybe I don’t follow other people’s stories as deeply, but I’m sure there’s a ton of those cool ones. And maybe too, so $99 Social was my first bigger six-figure, I think seven-figure acquisition. When you talk about risk, people looking at that P&L, when it comes to investing, there’s just risk. Understanding your risk from a micro and macro level, and then emotions and being able to tie that together, and I think people think, “If I want to start a micro PE firm, you have to get right in and buy this big company.” I think it’s like, build yourself up slowly, just start investing, understand if you know what you’re doing, unless you’re really, really good at marrying those two together.

And I think it just takes time and experience, so $99 Social was the first bigger one that over many different investors, that one came out. Bought that one, was able to double it within five months.

Andrew Gazdecki:

Wow.

Akeel Jabber:

Yeah. So that one, we did really well. And then started building up from there. From there, we went to bigger deals and that’s where we got today. So I don’t think you have to start really big. Start small, start in the stock market, start in real estate, whatever. But that emotion of understanding risk and then how to manage it with your emotions I think is probably more important.

Andrew Gazdecki:

Nice. That’s great advice. I always recommend for those looking to get into acquisitions, starting small and learning, even just going through the motions, even if it’s a very small… Like a 20K deal, treat it like a larger deal, so when you do get to that point, you- 

Akeel Jabber:

Yeah, my first deal was 2014, I think it was. A 50K content site, and that’s where it really started. It was like, “Oh, this is actually real. You can actually make money online,” and then it moves up from there.

Andrew Gazdecki:

Yeah. Then you just learn as you go, and then the next thing you know, the only difference is you’re adding is zero at the end of the deal.

Akeel Jabber:

Basically. Yeah, more or less. Yeah.

Andrew Gazdecki:

Right on. Well, I guess, my last question would just be so last year, we had a record year in terms of just private equity activity, acquisitions, everything was just on fire. What do you think we’re going to see in this next year? Good times? Maybe a return to normal, bad times, better times? Something else? If you had to just predict where we’re going to be at the end of the year, what do you think it’s going to be?

Akeel Jabber:

Yeah, what’s happening, we’re getting to post-COVID. We got inflation rising. We have now the Ukraine and Russia war in Europe, and what’s happening is we’re seeing the valuation in publicly traded SaaS companies starting to drop. So I think midterm, I- 

Andrew Gazdecki:

Yeah, and one thing I’ll point out too, and you’re really right about this and sorry to interrupt. I just had to- 

Akeel Jabber:

No, no, go ahead.

Andrew Gazdecki:

I read this today. Public market SaaS companies were traditionally trading at 20X in recurring revenue. Now they’re on average trading at 8X. So we’ve gone from 20 to 8X in a period of… So things move fast in terms of we could see another quick spike up, but sorry, continue.

Akeel Jabber:

No, no. So I think midterm, you also see even not just buyers, but VCs, investors will also be more risk-averse. So I want to be surprised if some of those high growth cash burning startups who rely on constantly new rounds to survive will maybe soon struggle to find new investors and either they’re going to go bankrupt or they’re going to have to find a buyer.

So I think what we’ll see going forward is more struggling SaaS companies, and I think for you and for us, that creates more opportunities to find these distressed SaaS businesses. But also I think the valuation of SaaS is just going to be more reasonable. I think like you said, 2021 was just ludicrous, that all professionals, VCs and everybody in the space was like, “What’s going on?”

But I think it’ll come back. And I think another thing we’ll mention is that maybe we’re not used to hearing is there’s going to be a switch of mentality into ARR growth will not be the only sole purpose of the business, and it won’t be the measure of success. There’s other things, like the impact of the business. And I think even investors will switch their focus on high growth, high risk speculative play to like, “Hey, maybe let’s find more of these stable, reliable investment SaaS companies that are growing organically profitably, which is why we’re here and why we’re in business.” So I think there’ll be more of us popping up and VCs moving into this space as well.

Andrew Gazdecki:

Right on. I agree with pretty much everything you’re saying. That’s a great answer. So I got three last questions for you and these are the rapid fire ones. So if you could just look at one metric when you’re looking to Acquire a company, what would it be?

Akeel Jabber:

The one that scares me and also excites me is churn.

Andrew Gazdecki:

I knew you were going to say that. 

Akeel Jabber:

You knew it. Yeah. I don’t say growth. It’s churn for sure.

Andrew Gazdecki:

Churn. Okay. And then who’s an entrepreneur that you look up to?

Akeel Jabber:

Is that specifically SaaS or any?

Andrew Gazdecki:

It could be any entrepreneur. It could be any businessperson, just [crosstalk 00:12:43]- 

Akeel Jabber:

More well-rounded overall who I like to follow in the space, probably more like Tim Ferris, looking at it from all angles.

Andrew Gazdecki:

Nice. Good answer. Yeah. He’s definitely in the top 10, I think, across everyone’s list. 

Akeel Jabber:

Yeah, for sure. 

Andrew Gazdecki:

And then final question for those looking to learn about acquisitions or they want to enter entrepreneurship through acquisitions, what’s a podcast or one book that you would just absolutely recommend they check out, besides your podcast?

Akeel Jabber:

I was going to say, shameless plug. 

Andrew Gazdecki:

No, no, no [crosstalk 00:13:17]. Plug your podcast.

Akeel Jabber:

I’m kidding. Yeah. SaaS District’s cool. Yeah, if you want to hear about SaaS.

Andrew Gazdecki:

It’s a good podcast. SaaS District, definitely check it out.

Akeel Jabber:

Yeah, yeah. Definitely. Book-wise, I mean, I like Good to Great. I think that one’s good if you’re… I think everybody has to read that book by Jim Collins. 

Andrew Gazdecki:

Nice, Jim Collins. That’s actually one of my favorite books. It’s actually sitting right next to me. 

Akeel Jabber:

Really? He’s on my top 10 list of entrepreneurs too. So he was close to 10, so.

Andrew Gazdecki:

Yeah, he’s got a couple other really, really good books to check out. I can’t think of them off the top of my head, but this has been great, Akeel. If people want to reach out to you, maybe they feel like your firm is a good fit for a potential acquisition, what’s the best way to get ahold of you?

Akeel Jabber:

You can hit me up on LinkedIn or just check out our website, HorizenCapital.com, so it’s easy. 

Andrew Gazdecki:

I’ll put that in the show notes. Yeah.

Akeel Jabber:

All right. Perfect. Yeah, just reach out. We’ll check it out, see if it’s a good fit and see if we can work together.

Andrew Gazdecki:

Good. Akeel, so good catching up and appreciate your time.

Akeel Jabber:

Yeah. Thank you. It was a pleasure, Andrew.

Andrew Gazdecki:

Cheers.

Akeel Jabber:

Cheers.