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  • Writer's pictureMahesh

Maiden Voyage

It took us almost a year to close our first deal from September last year when we started Alleyway Capital to now. During this time, we evaluated 84 deals beyond the information memorandum stage, made offers on 6 deals, lost 3 deals due to a superior offer and passed on 2 deals post-LOI. This very well could be on the longer end of typical timelines but one that helped us really understand the ecosystem and set up our systems and processes to find, evaluate and execute on the best opportunities that would come our way.

The first half of our search was spent establishing relationships with brokers and various communities in the ecosystem, casting a wide net to see deals and evaluating a fairly broad set of companies that passed the sniff test. We were doing this in a very frothy environment for SaaS at the height of the marketing feeding frenzy in 2021 so quite often there was a disconnect between our expectations and the seller’s criteria. We focused entirely on the broker and marketplace channels during this time. For a first time buyer with a fairly broad criterion within SaaS, we actually found that focusing on the broker channel was a better use of our time as a layer of vetting on both the buyer and seller side dramatically increased the chances of connecting on a deal. Unlike the average seller on marketplaces, sellers opting to go through top-tier brokers in this space typically had their diligence in order (allowing for quick decision making) and were clearly looking to sell. Likewise, sellers could have their brokers screen buyers for seriousness, business capability and financial liquidity.

During the second half of our search, we started reaching out to companies directly as we got more experienced and started being a lot more targeted in the businesses we reached out to on marketplaces. Our direct outreach was quite successful in terms of getting responses and having initial conversations (10-30% positive response rates between two campaigns) but it turned out that many of the companies that seemed to be in our bailiwick from the outside, either were too early in their journey or were unlikely to be a good fit for reasons of price or type of capital they were seeking. Our learning from this exercise was that direct reach absolutely needs to be a part of any micro-SaaS acquirer’s toolkit. However, it needs to be precisely targeted and that can often be easier once you are already in the game and looking at adjacent opportunities.

After getting over the initial FOMO, being more targeted on marketplaces made our lives easier and the search more pleasurable. We had several great conversations, including some that we believe may materialize into future acquisitions. One humbling question we got more than once was “Okay, both of you were very successful previously in larger roles and in creating startups and have made some money, but how many small SaaS companies have you bought?” Our answer was always a dejected but simultaneously determined, “None yet, but we will soon.” This is where we believe our persistence and a little luck from the change in market conditions in 2022 helped. While micro-SaaS multiples never inflated to the extent public company SaaS multiples did (and therefore haven’t corrected in the same way), sellers’ expectations, particularly while listing their startups on marketplaces, has come back to Earth and, similarly, buyers (which include some venture funded companies doing roll-ups in the space), have scaled back or become a lot more discerning, creating an opening for new entrants who are willing to methodically lean into this market with all its uncertainty.

Visual Quiz Builder (VQB)

Our first acquisition is a SaaS product for ecommerce merchants to create interactive quizzes called Visual Quiz Builder. These quizzes serve to recommend products and educate customers, and importantly increase merchants’ conversion rates while collecting valuable visitor (or “zero-party” as some people like to call it) data that is getting more valuable with rising customer acquisition costs and the issues around privacy with third-party data.

So, why did we pick this for our first acquisition?

  • Industry tailwinds: Despite ecommerce going through an adjustment after its torrid growth in 2020-2021, best-in-class SaaS companies helping merchants improve their conversion rates and AOVs in an economic way are continuing to grow rapidly (50%+ annual growth rates).

  • Market dynamics and size of the opportunity: We see the opportunity to grow this 50x if we execute well and current conditions persist. However, the total size (and growth) of the quiz market within the ecommerce vertical is sub-$1B and it hasn’t attracted large amounts of venture capital. Even with horizontal tools moving into the sector, we believe that this isn’t a winner take all market and there is scope for several profitable vertical SaaS companies to provide value to their customers.

  • Scope for quick wins: from top of funnel initiatives to user onboarding and overall user experience, we see huge opportunities for improvement that should serve to increase new users and reduce churn.

  • Product: VQB’s customers are small to medium businesses and there is massive scope for product-led growth in the initial stages of our ownership (what we enjoy) before switching to a SDR-led enterprise growth strategy.

  • Potential for becoming a platform acquisitions company: From survey companies in other verticals that could utilize a similar tech stack to other conversion enhancing tools in ecommerce, there are many opportunities to tack-on synergistic companies in this domain.

We haven’t decided if building in the open is quite our groove, but we will certainly share our learnings and insights as we embark on this voyage. We found the micro-SaaS ecosystem to be incredibly welcoming when we decided to take the dive and we hope to give back and be a part of the community for a long time.

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