Hello, (SaaS) World!
Welcome to our blog. This first article will introduce you to the founding members of Alleyway Capital, what brought us into the world of micro-SaaS (software as a service) acquisitions and the journey we have had since.
A meeting of the minds
Both of us come from very different journeys - Mahesh comes from a seasoned finance, M&A, and private equity background while Sunny is an experienced technologist, academic, and entrepreneur. Our interests overlapped in technology investing and we met as part of an angel investing group where we became friends a number of years ago.
Subsequently, we realized that we had both finished up in our previous roles with some success in our lives and had complementary skill sets and matching value systems. Both of us had a passion for real estate and angel (venture) investing, which were diametrically opposite in many respects. This led to discussions between us on the relative attractiveness of these two business and investment philosophies.
Opting out of the venture track
We had seen and experienced our share of glamorous venture-backed tech startups as Angel investors. Some of these were led by world-changing teams with bold ideas and were nothing short of inspirational. But the overwhelming majority were sales decks with grossly inflated TAMs (or more relevantly SOMs), led by founding teams hooked on the VC siren song of blitz scaling and big paper valuations. Business model, market need, company culture, and even personal relationships were sacrificed for the need-for-speed mantra preached by the venture capital world. Further, we had enough experience in the trenches to know that there was no blueprint to sure-shot startup success - serendipity remained a BIG factor especially in the initial stages where product-market fit was completely absent. Both of us kept thinking that there had to be a better way than seeing founder after founder throw their blood, sweat and years away using such a high-risk model for success.
Our real estate journeys were enjoyable and we had both had some success with it. The payoff to being scrappy and creative was exciting. Building (in case of development projects) was fulfilling. And the cash flow and potential for risk adjusted total return were attractive. Through this lens, both of us started exploring our next journey as co-founders.
After months and months of self-reflection and discussing startup ideas that we didn’t have the conviction to dedicate the next decade of our lives to, both of us started to put together the core values around what our next company should look like. Among the most basic principles was the ability to create a respectful, transparent, and flexible company. Life is too short to hate what you do and who you do it with. This is one of the major positives of the venture ecosystem and something we look to keep learning from. The typical software startup in California, for all its shortcomings, has given entrepreneurs the ability to create great culture and company lifestyle if they so choose. The software industry (and technology in general) plays by its own rules. Toxic corporate culture and complicated org charts are truly optional.
Our next set of investment principles came from our aversion to the high-risk of starting something from scratch with a lofty goal. Instead, we decided to acquire smaller SaaS companies to methodically build towards the bigger picture. Each of these acquisitions would need to be profitable and growing (modestly or possibly stagnating for a reason we believed we could fix). We were also excited about rolling up our sleeves and operating the business, building on the existing products and leading the team. This is quite different from being a passive venture capital or private equity firm and is one of the key differentiating principles that guides our acquisitions. If we are not excited by the idea of operating a business, we are not going to buy it. From a selling founder’s perspective, they can rest assured that we intend to run their startup with the same enthusiasm they had for it when they were getting started. And we intend to do this over and over continuing to acquire a portfolio of such companies.
The final set of investment guidelines are more a matter of pragmatism rather than philosophy. It's a question we get asked often and so we have done quite a bit of research into both venture capital and debt. To set things up early the way we see them, we have decided for the time being not to raise external capital although we are open to partners who bring equity and specific expertise that will complement our skill sets, particularly entrepreneurial growth marketers. We are fortunate not to have to raise external funding for our first few acquisitions but this also limits the size of such acquisitions to a ceiling of $5M. This, in essence, limits the types of companies, channels, and products we can consider as potential acquisition targets. While modest debt could work well for the types of companies we are buying, at the micro-SaaS level, debt still tends to be quite expensive and typically hard to justify.
All of this distills our company philosophy down to us acquiring companies with these attributes:
SaaS business (minimal managed services).
3+ year operating history.
Profitable / cash-flow positive.
SaaS metrics matter too but we will discuss those in a subsequent post since we don’t have hard and fast rules here.
Verticalized but scope for product led growth, not just marketing value-add or growth through expanding the sales team.
Avoid sectors that are saturated with venture funding.
Acquisition value from $500k to $5M.
Customers in English speaking nations (US preferred, but CAN, NZ, AUS, UK etc. okay).
Finding our tribe
We finally had our investment philosophy solidified, but we now faced another uncomfortable thought - we did not fit any common mold. We were not a venture capital firm because we wanted to look at profitable companies. We were not like private equity because we wanted to be actively operating and building the businesses we bought. We were not like search funds because we were not targeting a single business to raise equity and debt financing around. We just weren’t like any of the main street investment categories. Our moment of clarity came when we finally ran into successful firms like Tiny Capital, SureSwift Capital and the like as well as less public but successful entrepreneurs who had taken a deliberate, positive approach to creating a portfolio of SaaS startups by eschewing the popular main paths to investing. This is where we realized that we were going off the beaten path. We were like a methodical pedestrian on a low-traffic side street to their destination. And, thus Alleyway Capital was born. We are excited for what the future holds and welcome you to join us for the ride!