SaaS Interviews with CEOs, Startups, Founders
958 When Founders Died, He Acquired $50m+ SaaS Company That Helps You Hire Smarter
09 Mar 2018
Chapter 1: Who is Mike Zani and what is his background?
This is the Top Entrepreneurs Podcast, where founders share how they started their companies and got filthy rich or crash and burn. Each episode features revenue numbers, customer counts, and other insider information that creates business news headlines. We went from a couple of hundred thousand dollars to 2.7 million.
I had no money when I started the company. It was $160 million, which is the size of many IPOs.
We're a bit strapped. We have like 22,000 customers. With over 5 million downloads in a very short amount of time, major outlets like Inc. are calling us the fastest growing business show on iTunes. I'm your host, Nathan Latka, and here's today's episode. Hello, everyone. My guest today is Mike Zani. He's the CEO of the Predictive Index.
He also runs a search fund called Phoenix Strategy Investments. He was previously the CEO of Ledco and ShapeUp. Prior to running companies, he was the 1996 Olympic sailing team coach, and he was named coach of the year in that sport. Mike, are you ready to take us to the top?
Yeah, I'd love to.
Gosh, Olympic sailing coach sounds way more cool than a founder or CEO. Why'd you switch?
It was a fantastically romantic life. But if you wanted to have kids or a family, it was not that cup of tea. What did your day look like? It was 330 days a year on the road. A lot of time spent in a rigid hull inflatable boat flying around chasing sailboats.
What is a lesson you took from sailing that you've now applied to your new company? And what is the company? What do you do?
You actually learn a tremendous amount from coaching sailing and high-performance sailing about people. You can find one bad egg on a boat can destroy a team spirit. You know, someone who questions your strategy at every turn, someone who's negative. And you just have to get those elements off the team. And that was something that...
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Chapter 2: What lessons from sailing does Mike apply to his business?
If you have a 100-person company, you might pay $10,000 annually for unlimited use of what is now a SaaS platform where you can assess everyone in your company, everyone who's applying to any role in that company. And you can use the tools not only for hiring and selection, but you're using them for understanding team dynamics and interpersonal relationships and coaching.
So you'll, you'll often pull up someone's information when you're, you know, working with them or giving them the 360 review.
Got it. And what, so I'm sure you have all kinds of different team sizes working with you, but if I forced you to pick an average, like what would you say the average customer is paying you per month or per year?
Yeah, our average ACV is 12,000. Got it. And how many seats is that typically? That's our average client. We have 6,100 clients. Okay. So there's quite a... quite diversity, uh, large diversity, but our average client size is, you know, a hundred, 150 employees.
And just to be clear, when you say 6,100, those are business logos, not seats on the logos, business logos, business logos. Got it. So, I mean, can I take the 6,100 times a grand a pop and assume you're doing about 6.1 million a month?
We are, we're doing, um, when we bought the company in 14, we were doing 50 million in revenue and we've, we've grown the company to 70 million, uh, when we're closing out forecast to close out on 17. Okay.
And what's that up year over year? What was December, 2016?
Uh, it'll be about 10 million of growth this last year. So we've, we've inflected a, uh, it was growing at about 8% for the last 10 years before we bought it. And we've, retooled the company. And this last year will be 34% growth.
That's great. Just to be, I want to make sure I got the number right. You went from 65 million a year ago to about 75 million run rate close out 2017. Yes. 60 to 70, 60 to 70.
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Chapter 3: How did Mike acquire The Predictive Index?
Or just two friends or what?
Just two people, two people in a, in a shared workspace, um, looking for companies to buy. And the only thing we had to our name was debt. We just got out of our MBA programs and And it was an opportunity.
People who invest in search funds are looking for these small market to mid-market investments where they don't have to pay a lot of, say, private equity or venture capital carried interest, where they invest directly. After we get the company under letter of intent, everyone comes in as common. And in our first opportunity, we didn't put any equity in. We just earned sweat equity.
But we did well with the first company, and we've taken some of our proceeds and bought other companies, and we've been able to put more and more equity into our subsequent investments.
Many of you know I am buying companies that I really, really like, and there's no quicker way for me to get to the bottom of what is happening on that website than using this tool called nathanlaca.com forward slash hotjar, H-O-T-J-A-R. It basically will give me a recording
okay when anybody lands on the website i'll give me a recording of where the viewer is scrolling and obviously does the basic stuff like heat maps too but i learned so much about where the users are scrolling and clicking on my site using that tool it helps me increase conversion rates make more money and grow those businesses faster and we'll have to see what happens with those businesses but i'm buying them i'm buying them very quick and i'm using nathanlaca.com forward slash hot jar for all of my website analytics
You can too. I work with them. It's totally free. You can go to nathanlatka.com forward slash hot jar. No credit card required. Again, use it as much as you want. nathanlatka.com forward slash hot jar. I'll see you there. For someone going, oh, wow, I want to copy what Mike did. That sounds really cool. I just graduated with an MBA. I know how this works.
I want to go find a business to buy and then manage.
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Chapter 4: What is the business model of The Predictive Index?
You approach high net worth individuals. Do you try and get like a capital amount? So 10 people say, yes, Nathan, we'll put a million in. So when you're buying, you're thinking, I had to go find a business to buy for 10 million bucks. And then it's just a phone call to these folks to write the check when you find the deal. Like, how does that actually work?
Actually, it's pretty well refined. There's been about 150 search funds run. It works in two parts. This is a search phase. If I approached you, say you were a high net worth individual, I'd say, why don't you put in $25,000 and there's going to be 10 of you. So we take that $250,000 to fund the search.
After we find the company, we go back to the same 10 people and say, we're going to buy this company for, say, $10 million. Five million of debt, five million of equity. Do you want to put in your pro rata $500,000 share? And let's just say you go, I love this company. If anything's left over, I want it. You'll have one investor who steps up and says, I love this company.
I want a big piece of it. Some will pass and say, I don't like it. And each one of them have different capacity. Some of our early seed investors, the only thing they had was maybe $100,000 to put in. because they weren't as high net worth as some of the others. So it really is a pass-the-hat model.
And as we've been successful, they've mentioned it to their cousins and business associates, and we've sort of grown our pass-the-hat pool from 10 to probably about 20 individuals. Interesting.
So when you do finally find the deal, um, you, when you say you didn't put up capital, but you earn sweat equity, do you, I mean, is that like 20% of the company is going to you guys on a vesting schedule, you and your partner for kind of magic growing it, running it. And the other 80% is going to the folks with the cash up. Is that how it works?
Uh, typically we structure it as a, as a profits interest. So what we do is we get everyone their initial capital back. And then, uh, we share, you know, a percentage of the proceeds and you hit on it. If we are under a 30% IRR, we get 20% of the proceeds. And if we're over a 30% IRR, we get 30% of the proceeds.
And 100% of profits go back to paying back investors first. You don't take a dollar out until that happens.
Well, not quite profits, cash on cash return. Yeah. If, if, In your schematic, this $10 million company, and you bought it with $5 million of equity, $5 million of debt. If you went and subsequently sold it for $100 million, you pay them their $5 million of initial capital back. And then the $95 million of proceeds is split ratably.
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