JD Graffam Serial Acquirer of SaaS Apps

Episode № 6

JD and I talk about buying and selling SaaS applications and share some details from the process of selling and transferring Sifter. JD shares what it's like juggling multiple businesses and how he makes it work, and he dives into the attributes and insights he uses to decide whether a SaaS application is a good opportunity or not and how he does business a bit differently. This is an episode that's near and dear because I feel like it shares some of the less-often seen aspects of transactions like selling businesses. I really hope you enjoy it.

Garrett Dimon: Hello. We are here today with JD Graffam, of Simple Focus, Clear Function, Sifter, Pulse, Ballpark, Temper, ClientFlow, ProjectList, and sure to be many more in the near future. Thanks for coming, JD.

JD Graffam: Hey!

Garrett: Can you give a quick overview of how on earth you got to be the serial SaaS acquirer and running two agencies? Try not to get too lengthy, but help people understand where you’re coming from on this.

JD: Sure. The first acquisition I ever completed was… I’ve been running Simple Focus for four or five years, and I looked at a product company called Pulse as a small business that some friends of mine were looking to get rid of. It was a very profitable, healthy little business, even though they hadn’t really been putting much energy into it.

I didn’t know much about SaaS at the time. I didn’t know what SaaS metrics were. I didn’t know the word churn. I didn’t know anything about SaaS businesses, which freed me up to look at it as a business. I think that’s the lucky ignorance that I had at that time.

I looked at it and I said, “Well, OK. This business has been running on autopilot for three years. It’s been flat, hasn’t been shrinking. It’s been getting 10 customers every month and losing 10 customers every month, and the guys that were running it weren’t putting much time or energy into it.”

I thought, looking back at this business’s performance and the fact that there is zero in advertising, it was selling itself through organic SEO. I was like, “It would take a lot of work for me to go screw that up. It seems like a pretty good investment,” so I did it.

I actually put a little TLC into it, grew the business, learned all about what SaaS was. Since then, I basically have done that over and over again.

Garrett: Including with Sifter.

For me personally, one of the red flags I watch for is someone who’s trying to get out of the business for the wrong reasons.

JD: Including with Sifter, yeah. Except, if I’m being completely honest, Sifter is a completely different situation than Pulse where Pulse was on autopilot and a couple ticks short of being neglected.

Sifter, I learned, was actually a completely different beast in that you had been running Sifter for eight years full-time and your heart and soul was poured into it. There was not as much low-hanging fruit to improving Sifter.

Customer support’s always been fantastic. The codebase is in great shape. The functionality’s all built out. It was just a well taken care of business. It was a completely different type of deal than Pulse. But, at the same time, it falls into that category of SaaS, where it would be hard to run it off the tracks, so to speak.

Because with recurring revenue and metrics that you can look back on over time, it would…You’ve got like 600, 900, 1,200 customers on a product who don’t know each other. It would be really hard for you to make them all upset at once, and have the business crash and burn into the ground.

Whereas, some agency friends of mine who run agencies, it’s a completely different type of business. I love it, but an agency has a lot less distributed risk. Some agencies with a staff of 20 or 30 people have five clients.

If you have a bad couple of months where two or three clients decide that they don’t need you anymore, even if it’s no fault of your own, it just wasn’t good timing for them to be spending $30,000 a month hiring you out for marketing websites, then your business is in trouble really quick.

To shore up that risk, I looked to these SaaS businesses as ways to stabilize the cash flow for my family of companies. That’s pretty much how I got here, just using common sense.

Garrett: How does the juggling of not only different businesses but also different sets of different types of businesses play out? How are you able to stay on top of that without going crazy?

When a seller really cares about what happens to the product after they’re done with it, that’s a good indication that they’ve actually put some TLC into it.

JD: You’re assuming that I don’t go crazy, which may not be fair. Before I answer that question, one of the things I will say is that there are, I think, two kinds of people in the world. There’s the kind of person who really wants to focus on a thing, and give it his or her full attention, so they can maximize the investment of time and even resources.

I’ve got nothing against that, but that’s not me. That sounds really boring to me. I’m not saying that it should sound boring to anybody that’s watching this. I’m just saying that there are different types of people in the world, and you need to figure out which kind you are. Don’t let people tell you that you need to focus on one thing if that just doesn’t come naturally to you.

What I’ve learned about myself is, what comes naturally to me is delegating to a team of really smart people. Swooping in and providing some high-level guidance, direction, and vision casting-type stuff. That’s where I fit.

What I’m able to do is paint a picture, a vision for the direction I want the business to go as a whole. Then I can focus on each individual product and give it some attention. Then I’ll bounce to another product and I’ll dive into that. Then I’ll bounce to another product and I’ll dive into that. Then I’ll switch back to the agency when one of the agencies needs my attention.

That’s the interesting thing, though. It’s not so much that I’m switching from being a SaaS operator to an agency operator. The way the SaaS businesses are structured is that the Simple Focus or Clear Function, they don’t own the apps. They’re separate LLCs. When Ballpark or Sifter needs work done, Ballpark hires Clear Function or Simple Focus.

What that means is that I’m actually able to be the client and I get the agency treatment from Simple Focus or Clear Function. They treat me like a client. The apps pay the agencies for their work. I’m able to switch between them in that way.

One of the things that I hear a lot is agency owners want to get into product business because, “Ah, you know, clients are obnoxious,” and, “They don’t get it, man,” stuff like that. The truth is, I absolutely love doing sales, relationship-building, and running the agency business. It is fantastic. I love running product businesses. I just love them, though. I love everything.

It’s not really challenging or difficult for me. I do have some time constraints. I think that having a capable team and being able to delegate is a big part of what makes that something that we can be successful at.

I’m taking it from a much more conservative perspective when I value a business. I actually value stable, secure business higher than I would a growing business because the growth is risky.

Garrett: I think there’s a lot to be said, too, for just being able to switch gears. Sifter was the first time for me in a long time, or really ever, that I’ve been focused on one project. All I did before that was consulting. At the same time, there’s times where it can be exhausting focusing on one thing that long. It’s nice to have something to switch gears to.

In the case of a running a single app, you can switch from marketing to design, to development, but you still aren’t getting away from that one core problem. Which, for some people is great, because it gives you that one thing to just chew on, tear up, and really go at it. There’re definitely situations where it feels like it gets exhausting.

It’s like, “I want something fresh to think about. Something to give perspective.” You can really get in a rut, creatively, if you aren’t fiddling around and trying different things in other spaces.

JD: Running a bunch of different products and couple of agencies, for me, sometimes does feel like the same old, same old. I’m switching brands. I’m taking this hat off and I’m putting this hat on, so I do get in those ruts. One of the things that I found a lot of reward in lately is I’ve been writing more again. I was always a writer, and then I wasn’t able to write for a long time.

Exercising that muscle surely helps reinvigorate me creatively. I also like doing projects around the house. Those help me get over the creative ruts, too. Sometimes just getting out from in front of the computer and away from work is what it takes.

Garrett: Looking at SaaS apps as a buyer, somebody who’s seen a lot of SaaS apps, reviewed them, as product people it’s easier to focus on the code, the actual interface, and that kind of thing.

As a buyer, who’s theoretically buying strategically and with healthy finances in mind, what are the red flags to you, or the things that are, “Oh, this is going to be a great business. There’s a lot of opportunity for me to help improve it, grow it.” What are you looking for out there?

JD: I’ll start with the red flags. The red flags, for me as a buyer, aren’t necessarily the same red flags that every buyer’s going to have. For me personally, one of the red flags I watch for is someone who’s trying to get out of the business for the wrong reasons.

For me, one of those reasons is just they want to cash out and start something new and different. They never really finished what they started because maybe they just felt it was going to be take too long to finish what they started.

They want to give it to somebody else to do that. Instead, what I look for are people who are getting out for the right reasons and the right reasons are…In your case, this is a really good reason. You wanted to focus on some health issues, and refocus on your family, and make a change to your personal lifestyle.

I think that’s a really admirable reason to make a difficult decision of selling a stable business that’s done a lot for you and your family. It wasn’t an easy decision for you and it shouldn’t have been. It can’t be if it’s the right reason. This may be a simple decision but not an easy decision.

Frankly, your reputation, when I buy a business from you, matters a great deal because it makes the transaction and the contracts simpler.

Garrett: Great. It took about two years to really, really finally make the decision and pull the trigger.

JD: Exactly. Frankly, that’s what’s happened over and over again. Pulse was not an easy decision for the guys. It was frustrating for them to let go of a business that was bringing in good profit with minimal effort. But, at the end of the day, one of the guys had a professional opportunity to pursue his career as a development director, and get a good fat salary, and focus on that for a while.

He was moving anyway. Then the other guy was going into the ministry full time. Sometimes, it’s as simple as, “Hey, we were running two or three of your products and one really just commanded all of our attention and we needed to focus on that, so we wanted to get rid of all distractions.”

When a seller really cares about what happens to the product after they’re done with it, that’s a good indication that they’ve actually put some TLC into it. That’s a good indication that you’re not buying a piece of junk. Right?

Garrett: Yeah.

JD: If they’re just selling it to the highest bidder, then it tells you possibly a lot about their motivations, not just for when they are selling it, but when they were running it as a business. That means that you’re going to inherit some headaches with the way that they built it, because they didn’t necessarily build it to be sustainable. They built it to accomplish something a little bit different.

Those are some things. As far as you’re getting a little bit more tactical, though, there’s an interesting thing that happens when buyers place a value on a software product. They place a premium on growth and they like to see that sharp curve. Boy, that’s not something I’m interested in right now as much as stability.

I’m coming at this from someone who isn’t… how do you say… loaded up the wazoo. I’ve been really successful in business and been very fortunate, but I can’t just buy apps indiscriminately and lose my investment. What I do is I look for apps that have grown, and grown and plateau, and then grown a little bit and plateaued.

They have proven that they have a market fit. They have found their natural size that is easy for them to be at. That tells me a lot about what the performance of the investment, if you will, is going to be. I’m taking it from a much more conservative perspective when I value a business. I actually value stable, secure business higher than I would a growing business because the growth is risky.

You try and…

Garrett: You pay a premium for that growth and, if the growth stops, that premium you paid wasn’t worth it.

JD: Exactly and that’s the thing. I’d rather pay something that I know what the payback is going to look like. Frankly, I’m more interested in that. It’s not that I disagree that the premium on a growth is right. It’s just that that’s not what I’m looking for and it’s a yellow flag if something’s growing.

It’s like, “Well, they probably want too much for it or, if they don’t, I don’t know exactly what I’m getting myself into.” I look for people who have a voice in the industry, who have shared what they’ve learned, who have built up a lot of goodwill and reputation in the industry.

Frankly, your reputation, when I buy a business from you, matters a great deal because it makes the transaction and the contracts simpler. The best way to put it is, if you’ve got… For example, you, Garrett. If you’ve got a good reputation in the industry, then it will not be in your best interest to pull one over on me because that would undermine what you’ve been building over the years.

You’ve got a lot more incentive to be upfront about any problems and known issues. It lets me take a little bit of risk that other buyers may not take, and I can actually close a deal faster, and make it simpler because I literally am doing a lot of it on trust.

All the little CYA details I’m not so worried about if I’m working with someone who comes through a referral, who’s been… Who’s got a heart of gold, who’s a good reputation that they want to protect in the industry.

I’m doing the same thing. I’m not perfect, make mistake every day, but am really focused on making sure that I’m somebody that, when I interact with somebody new, they know what they’re going to get.

Garrett: To know that it’s all said and done, it’s very easy to say that it was a pretty unflinching… Because you and I basically sorted out the details over text message with Sifter. Right?

JD: Yeah.

Garrett: I was like, “OK. That’s less than I wanted but I feel good about him. I feel good about it going to him.” I had made a few phone calls and checked around to some mutual friends and they all said good things.

It was like, “All right. This is a discount from the previous offer, but I’m comfortable with it,” went forward with it and, in hindsight, after the deal was done, how much simpler it was to do every little detail. I did not have one ounce of regret, even though we took a bit of a hit in the revenue or the value of the business.

The ease of closing the deal, and the fact that you and I trusted each other and weren’t screwing around and trying to insert every little clause into the deal, I think made a world of difference. Definitely, the first deal, the one for us that we ended up having to walk away from on closing day, the reason we walked away was because so many of those things kept happening.

There wasn’t trust and it got to the point where it was, “Look, we’ve done enough.” It was the straw that broke the camel’s back. It was definitely a much better experience, and I think there was benefit to both sides. Would have loved a higher price but, in the end, it was all good.

JD: I will say this about your character personally and your whole approach to this. I want the people who are listening to this to hear this about you. There is a pretty standard thing in the accounting world that you brought to our attention after the deal was closed basically, where you on your own, without any prompting from us, went through and ran a query of the annual…

Garrett: It was monthly because we didn’t have annual.

JD: Sorry, yeah. You ran through the monthly subscriptions, and you said, “All right. So, you as the new owner have to service customers who have paid in advance of the coming month.”

Which means that, in the accounting world and purely for accuracy and being really clean bookkeeping sake, which meant you actually sent us a check for the accounts that we’d have to service over the rest of the month for money that you had collected because of the closing date. I thought that was a really classy thing to do, and of course we accepted it.

Garrett: Wasn’t so classy you were going to say no.

JD: Yeah, no. It was a super classy thing, but I wasn’t going to say no anyway. It’s one of those things that shows, Garrett, that you thought about Sifter as a business, and you understand business. More than that, you were really concerned with making sure that I felt good about the deal, that the customers were going to be taken care of, that everything was above board 100 percent.

I think that’s been an inspiration to me, looking at how you handled your business and how you handled that transaction. It’s certainly been something. I look up to you for that. Not just that but the whole deal, the way you handled everything.

Garrett: I feel out of it. The fact that every time you and I’ve been in the same city we can meet up for beers. I can’t imagine there’s a lot of times — I’m sure they exist — but there’s not a lot of transactions where people buy a business and then they still want to meet up, have some drinks and talk over and all that stuff.

JD: I always want to do that…

Garrett: Well for you… I just wouldn’t have expected that. There’s a lot of value in that, I think. It’s something for anybody looking to sell their business to really consider. If you get somebody who’s just too business oriented and there’s not some inherent trust, it’s — at least to me, now doubly so — would raise some red flags about whether it’s the right move and that kind of thing.

JD: Yeah. I don’t see any reason to not want to have a relationship with someone that you bought or sold a business to or from, but it depends on the individuals. Maybe I’ll buy a business one day from somebody that I don’t really respect, but right now I’ve got enough businesses that I’m buying and running that I can be really selective.

One of the boxes I want to check off is, “Is this a good person? Is this somebody that I want to have a relationship with?” because, heck, you’re still in the slack channel. You’re still in the slack account.

Garrett: I keep wondering when ya’ll are going to kick me out.

JD: I don’t want to kick you out because that’s the way that I get to chat with you one-to-one with private conversations. I think it’s so funny that I just picture your Apple watch vibrating or something when you’re in a meeting, and it says, “Here’s the code deployed to Sifter,” and pull out your phone real quick and you’re like, “Oh, guys, you forgot about this such and so.”

Garrett: It’s not quite that bad. I want to make sure that everybody’s good on some of those new features and all that stuff.

JD: It’s been a blast having you chime in every now and then. It really feels, in a lot of ways, like you’re still part of the family. I feel bad some days that… because it’s not typical. You’re the only person I’ve ever bought a business from who lasts more than 30 days in communication with us.

Garrett: Does everybody check out?

JD: It’s because we don’t mind and you don’t mind, it doesn’t seem. As soon as you’re ready to turn off the notifications you certainly can, but I’d love to be able to chat with you…

Garrett: I’ve scaled it back. I’ve been a little less responsive and some of that because I don’t want to be… not too much helicopter parenting in there.

JD: Yeah. I don’t want to kick you out because I want you to decide when you’re ready, Garrett. Feel like maybe we should send you a check, like you’re on staff or something. In all seriousness, one of the things that I like about the deals that I’ve done is that the founders typically aren’t able to give it the focus anymore. We do make it easy for them to hand it over to us, check out because we’ve got a really competent team.

I’m buying products that have similar back office stuff with regards to the hosting or the technology. Trying to get everything on Postmark because I love Postmark, and I love you guys and the Wildbit team. Trying to get everything onto more, more, and more similar stacks.

Garrett: Yeah, there’s a lot of benefit to that.

JD: Yeah. Well, for me, there’s a lot of benefit in being able to take over apps easier and get the original founders moved on to the next thing in their careers so that they’re not feeling like they’ve got to hang around too much. With you it’s been fun, but it’s certainly been the exception having someone as engaged as you seem to like being.

Garrett: Yeah, for sure. Not to talk too much about the Sifter deal and ideally cover some more ground, one of the other things I really wanted to touch on — and I know that you’ve seen this, you’ve experienced it, you’ve been on the far side of it — is a lot of the fear, and I had this.

This fear just dominated my mind through all my health issues… was that, if you neglect a SaaS app and you’re not updating it and releasing new features, that it’s going to shrivel up and die overnight. I know that’s not the case now. I still have a hard time believing it, but it’s the truth.

Can you talk a little bit about some of your experiences with that, either on specific apps or in general across the apps?

JD: Sure. I will tell you that the first several products that I bought I would get email notifications on every support ticket. Let me start by clarifying this for anybody who’s listening who doesn’t necessarily know this. I have the staff of Simple Focus and Clear Function running the day-to-day of the apps.

I do engage with them, but I am more of a business owner than I am the operator personally of the apps. What that means is we’ve got a couple different guys that handle email support. I would subscribe to email notifications and have the Twitter account on my phone.

I’d log into Baremetrics ten times a day, and I would get daily bank balances. I was constantly looking at all the different metrics.

Really overwhelming is I went from two to three to four to five to six products. I was constantly checking those metrics because it was fun, but also because I was worried that something might happen, especially when you take over a new app. As happened today with ClientFlow, we didn’t have any notifications set up for the security certificate, so it expired.

A good friend, Ian Landsman, Tweeted at me that the security certificate was expired for ClientFlow, so we fixed that pretty quick. Little things like that happen and you think, “Oh, my God, it’s going to fall off a cliff and die.” It doesn’t because that’s not how churn works. Pulse went down several years ago for 36 hours.

Garrett, we didn’t lose a… We may have lost one customer but, statistically speaking, we didn’t lose any customers. There was no blip in almost a day and a half of being down.

Garrett: Well, they can’t cancel when it’s offline, right?

JD: No, absolutely not. We did get some support emails, a bunch of panicky people, but they really appreciated that we responded right away. We said, “Uh, so, you know, something stinky has hit the fan, and we’re trying to figure it out.” Do you want to know what it was? It was so sad. The data center unplugged the wrong server.

Garrett: Oh, man.

JD: This was right after we took over Pulse. It was within weeks or a couple of months.

Garrett: How do you troubleshoot that? It’s offline. It just disappears?

JD: Exactly. You start calling the datacenter, and then you get the previous owners on the phone. You’re like, “What was the number on that server at the datacenter?” All the sudden, it’s not a number that anybody recognizes. Then some guy shows up to work at 8:00 AM the next day, and they mentioned it to him. He’s says “Oh. I think I know what happened.”

Within 30 seconds the server had booted up, and the app was running. Seriously. You worry about stuff like that when taking over an app from somebody because there are always those hijinks. Right?

At the end of the day, churn and customers, they sign up for a product because they get the value out of it, and they run their business on it, and they don’t have a lot of incentive or desire to stop paying you. They have desire to pay you because they use your product. That was a really extreme example.

It was the first app I ever took over, and it was a memorable experience. Nothing that bad has happened since then because we got better at what we’re doing. That fear nags at you even though you know it’s irrational. You trust in the formula. You trust in the math and the churn metrics and things like that.

Garrett: It’s one of those things. You don’t want to trivialize it. We are laughing but, at the same time, you realize in hindsight you laugh because it’s like, “Oh, ha-ha. We were stressing out sweating bullets that day and now, in hindsight, “Oh, ha-ha. Somebody unplugged the server.” When you look at the big picture, it’s like you said. They signed up for the app. They want the value.

As long as they know you care and you’re working hard, if you aren’t constantly having problems and proving that you’re incapable of handling it, then people are going to generally give you the benefit of the doubt to give you the opportunity to do the right thing. A few people might not, but, even so, even if a handful of people leave, the business is going to stay healthy and keep on chugging.

You have to really prove that you’re incompetent to make people want to leave a product that they believe in.

JD: Yeah. I’d say that 90 percent of the angry customer support emails we get across all six or seven of the apps are from people who think we’re some big faceless corporation. We’re not. There are 30 people here, small business America, economic engine that powers this country and all that, paying taxes, and showing up to work, and going home and being with our friends and family.

We have different apps with different payments and everything. For the apps that have credit card required upfront, we will charge you after your free trial is up. One of the things that happens is that people get a credit card statement with your phone number on it for customer support.

They’re going down their American Express or whatever and they see this phone number. They’re like, “What is PulseApp.com? I don’t remember signing up for that.” They’ll call you and they’ll be angry because they think you’re some mega software corp or something.

The phone number I put on those apps is my personal cellphone. Let me tell you how I answer my cellphone. When I was starting out in my career, when I was younger, I would answer the cellphone like a consultant, “This is JD. How can I help you?”

Now that I got a little bit more comfortable in my own skin and I know who I am and I don’t care, I’ll answer the phone — because I’m from Tennessee — “Hello.” “Yeah? Uh-huh. Oh, yeah. Well, you must be… I bet you’re a small business owner. Are you a small business owner?” “Yeah.” “All right.”

“This is my cellphone. My name is JD. I’m the owner of Pulse. Yeah, you got the right number. No, I gave you my cellphone because… Well, yeah. Yes, ma’am. Uh-huh. Well, OK. I put my cellphone down there, not an 800 number, because I want somebody who’s concerned about credit card statements to get the boss, and I’m the boss. I’m the owner.”

“I just wanted to let you know that…” “Yes, ma’am. It’s PulseApp.com. It’s cash flow management software. You or maybe somebody at your company… You got any employees? You have three employees. I bet one of your employees signed up with your company card, didn’t they? Oh, you do recogni-… You do remember. OK, you had that cash flow thing. Yes, ma’am.”

“All right. Well, what I’m going to do is I’m going to get Caitlin to give you a refund on that because you all didn’t use it. Yeah, I checked and I looked. Sure enough, you hadn’t logged in. We’re going to get you a refund, and we’re going to downgrade you to a free account so this doesn’t happen again, but I’d love for you to give it another try. Yes, ma’am. All right.”

“I look forward to it. Email support if you ever have any questions. All right.” That’s just how I handle it. What’s great is they go from angry to, “Oh, you’re a small business person just like me.” They go from angry to on your side. I’ve had them insist that I didn’t have to refund them. “Well, you don’t need to give me the refund. No, no, we shouldn’t cancel.”

“It’s not a big deal.” When I answer the phone, they’re like, [angry voice] “Excuse me, I’m trying to reach PulseApp.c,” [normal voice] because it gets truncated on the credit card statement.

“I thought this was some big mega corp. No, you’re a small business person just like me.” They Google you while you’re on the phone with them. They’re like, “You seem like a nice guy. You’re from Tennessee? I’m in Nashville.”

The next thing you know, you’re chatting it up with them. Being real is the way to go, man.

Garrett: That is one of those things that so many people are afraid of, being small against a big corporation. They’re afraid of how people will perceive it, that they’re fly-by-night or something like that. That’s never the case.

People are always like, “Oh, wow!” They feel like they can relate and, all of a sudden, it becomes real. Right on, OK. We’re getting to the tail end here, but there’s a couple of things I still want to touch on.

One is, you’ve seen all these apps. What are some of the good and bad things that you’ve learned about apps where people under invest or over invest, and that going through due diligence or whatever you see, and you’re like, “Oh, wow. It would really be more impressive if they had done more with this or that”?

It’s so simple to do it the right way. It’s way simpler to do it the right way than it is the wrong way. That’s a lesson you’ll learn. Get. A. Bookkeeper.

JD: Still, this is not something that developers want to hear, but you need to keep your books clean. It’s so simple to do it the right way. It’s way simpler to do it the right way than it is the wrong way. That’s a lesson you’ll learn. Get. A. Bookkeeper.

I’m not talking about bench.co. If you want to do that, that’s fine, but get you some guy, some lady, some whoever who’s a CPA down the street from where you live that you can go talk to five or six times a year. They’re going to do a couple of things for you.

Number one, they’re just going to make sure that your books are clean. Number two, they’re going to be looking at your business and your numbers. They’re going to be able to talk you down off the ledge because they work with business owners, and freelancers, and small business people day in and day out.

You don’t really need somebody who gets SaaS to be your bookkeeper or your accountant. What you need is somebody who gets accounting. Let them be your accountant. That’s one thing that just makes a big difference.

When I kick the tires on a product to evaluate, I’ve looked at 30-, 40-, 50-page prospectuses. I’ve looked at just a Baremetrics login and everything in between. There are two or three screens in Baremetrics that I care about.

I want to get verification that you’re not lying about your income and expenses. Bank statements end up being part of my due diligence, but that’s at the tail end. What I want to see are clean books where, if you can send me a P&L for the last three years, I’m good to go. The business side, I get it.

I like to see the growth in revenue over time. That’s a screenshot I can get from Baremetrics. You can just put me in Baremetrics. That’s fine. I’d like to see a couple of other things like churn or whatever.

I want to know about the founder as an individual. I want to know if they’ve got a good reputation in the business, if they blog, if they put themselves out there, if they got a good reputation. I want to know who they know so that can do some references.

Then I want to know what the tech stack is. The references help me understand whether or not the site was going to be built well enough. Is this the kind of person who builds crappy software? Is this the kind of person who puts care and attention into it?

Those are the big things I look at. When it comes time for due diligence, I’m going to ask some really basic questions. Does the app crash randomly? You need to reboot the server every three days to keep it up?

Are there memory leaks? That’s less and less of a problem these days, but man, some of these older Rails apps, especially on 2.0 had some memory leak problems. You just had to reboot the app to get it to come back up. Stuff like that. You got any major problems like that?

I like to look at support tickets. I want to see how support was handled, what kind of questions come in. I spot check the last six or nine months of support tickets. You want to be good at support. You want to have a fairly modern tech stack, but you don’t necessarily need to be on the latest and greatest of anything.

I’d rather have a snappy MVC Rails app with good caching than a single-page app on React. It’s not that there’s anything wrong with React. It’s just a simpler product to operate. One-page app, single-page apps are great, but nothing wrong with a little page refresh that’s snappy.

One thing that really matters to me a great deal, I’m not going to buy anything that’s fugly. It’s not just about being a designer myself or a snob in any way, but I really care about the user experience of a product that says a lot as to what its traction is going to be and also, frankly, says a lot about what the code is going to be like, too.

If it looks like the design was outsourced to India, guess what? It probably was, along with the code. There’s not necessarily inherently a problem with that. It’s just that I prefer to take over things that have had a smaller set of eyes on them, someone who had to live with the code they wrote.

Something that is probably going to be easier to maintain, with less eyeballs on it, is going to be easier to take over.

Garrett: You write code a lot differently when you’re the one answering the emails about it and implementing the bug fixes.

JD: Yes, absolutely. Those are the big things I look at. As far as people overinvesting in some areas, overinvesting and staying current with the latest technology, that tells me you’re an engineer, which is great.

It’s going to tell me that you’re an engineer, but I like buying products from people who understand the whole business. It’s going to be in healthier shape, if that’s the case. There’s nothing wrong with the newest technology. There’s nothing wrong with the older technologies, either. It’s really just about what kind of shape it’s in and how well maintained it is. That’s important.

I see a lot of products where a developer will spend too much energy trying to get traction in marketing or whatever. They’ll waste a bunch of money spending on marketing or advertising that’s not working, and they don’t know when to cut it off.

You’ll see they’ll try something for three months, and they’ll say, “Oh, wasted a bunch of money.” Then six months later, they’ll go try it again. They’ll waste four or five grand on AdWords. They’re just trying to teach themselves marketing.

Garrett: I thought we were done talking about Sifter.

JD: Oh, no! No, that’s actually Sifter and pretty much every other app I’ve bought. There’s a difference, though, in the type of seller, Garrett. There’s the seller who doesn’t have capital behind their product, and there’s the seller who does. More often, the seller who has capital behind their product was less efficient with their marketing dollars because it wasn’t their money.

It didn’t hurt them to spend 10 grand because they’re like, “Well, I got 18 months I must figure it out if I spend 10 grand a month.” Whereas, if you spend 10 grand on marketing, that’s 10 grand that you don’t get to take home at the end of the day. You’re a lot more efficient with it and willing to turn it off quicker.

Garrett: Yeah, that’s true.

JD: That’s the problem. I see a lot of energy getting spent on that. That group doesn’t really drive up the value of the business at all if it’s not working.

Garrett: Yeah. If anything, it drives it down because you’re losing some of that discretionary.

JD: I got ways to spin that when I’m negotiating on price. Because I know that I’m going to be able to bring it in and make it run more efficiently because of the infrastructure I’ve got with the staff and the ability, at some point, to capitalize on cross-promotions between the apps and the audience that I have across six apps.

Garrett: I kept waiting for you to do something with that.

JD: I’m working on something. You know what it is, but we can’t talk about it. We can’t talk about it on this show. It’s not done.

Garrett: We’ll see. I’m waiting.

JD: Yeah. I’ve got some plans for cross-promotion and setting up a little…We’re working on that. It’ll be, probably, middle to the end of 2017 before we start to really put that out there and give it the old college try.

Garrett: Good deal. We’re getting long here. Do you have any parting words of wisdom or advice for budding entrepreneurs creating SaaS apps?

It is a lot harder to start a SaaS app and get it to a place where it can sustain itself. But, once you get there, it’s worth it, so don’t give up too quickly. Don’t give up over one, two, or even three years. These things take years to develop. When they get to that point, they truly are worth something.

JD: I guess. It is a lot harder to start a SaaS app and get it to a place where it can sustain itself. But, once you get there, it’s worth it, so don’t give up too quickly. Don’t give up over one, two, or even three years. These things take years to develop. When they get to that point, they truly are worth something.

There are people who will buy them from you. Even something that’s just making enough to maybe make a living for you, when you get ready to sell it, even a modest little app is enough to pay off your house and get you completely out of debt.

If we’re talking about someone who’s in their 20s or 30s, busting their butt, and getting impatient, and giving up after two or three years, don’t do that. Go four, five, six years, and then you got something. Then you really got something.

You just got to get one customer at a time. Earn their trust. Build a good product. Make friends with your customers. Get your voice out there. Talk about what you’re doing. Share it. Eventually, you’ll go from 1 to 5 to 10 to 20 to 25 to 30 to 35 to 45 to 55.

If you keep doing that, you’re eventually going to get to 200, 300, 400 customers. You’ve got a business that’s worth more than your house. You can sell it if you want to, or you can work 10 hours a week if you want to.

Garrett: Gives you a lot of options.

JD: Yeah, or you can do it again and then run both of them, but it does take time. Building a SaaS app up does take time. Nothing is an overnight success. I’m probably about three years away from my overnight success at this point. I’ve been doing it for seven years.

I would give that advice. I’ll end with this. Decide for yourself what success is. Don’t let anybody tell you that you have to take outside investment. Don’t let anybody tell you that you shouldn’t take outside investment.

They are completely different animals, whether you’re on a bootstrap, or you get venture capital, or do a startup incubation seed hatchery, germination project like they have at every downtown incubator-type thing. Decide for yourself. Look at the pros and cons of each. Just use your own critical thinking skills to come up with what works for you. Just be yourself.

Garrett: That is so, so true. So true. All right. This is great. I appreciate it, of course, as always. Thanks.

JD: Thank you, Garrett. Before we say goodbye to everybody…

Garrett: Yeah?

JD: We didn’t talk about… See, I’m from Tennessee. Memphis, Tennessee, specifically, and you’re from Texas. I have a soft place in my heart for Texas. I was born there, but I live in Tennessee now, not just Tennessee but Memphis, Tennessee. I need you to have the barbecue conversation with me. Is barbecue beef or pork?

Garrett: I know my answer, but not being a huge barbecue connoisseur, I’m not sure it’s going to mesh. For me, it’s beef.

JD: Brisket.

Garrett: It’s brisket.

JD: Texas brisket.

Garrett: Brisket served on wax paper.

JD: Brisket served on wax paper. I love a good brisket. Real barbecue is pork. I want to go ahead and put that out there, just so that everybody understands the right answer. Specifically, it’s the dry rub Memphis style. This is important stuff so I have to share it and then we’ll be done.

Barbecue sauce is for people who don’t know how to cook meat. Dry rub is the way to go. Close second is a good Texas brisket.

Garrett: All right. I’ll take that. I haven’t been in Memphis yet. I don’t have the frame of reference.

JD: Come on. I’ll cook ribs for you in my backyard. The invitation is open. If anybody listening wants my recipe for dry-rub ribs, the Memphis way, the right way, hit me up on Twitter and just say, “Hey, what’s your recipe for ribs?” I’ll get it to you.

Garrett: Just like they shouldn’t take advice about whether to bootstrap or get funding, they probably shouldn’t. They should choose their own barbecue.

JD: That’s not true. That’s actually… That’s not how barbecue works. This has been a lot of fun. Thank you.

Garrett: Yeah, of course, man. Thanks for being on.

JD: All right. I’ll talk to you later. Bye.

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