The Wise Exit

Cashing Out Mergers & Acquisitions (M&A) Podcast | E25 | Matt Watson

00:00:05:05 - 00:00:27:12
Todd Sullivan
Welcome to the Cashing Out podcast, where our fellow founders share real stories and offer honest advice around selling their companies to some of the top acquirers in the world. My name is Todd Sullivan, CEO of Exitwise, where we help business owners create the exits they deserve. On today's episode, we have tech expert, entrepreneur and founder of three successful tech companies, Matt Watson.

00:00:28:01 - 00:00:48:23
Todd Sullivan
As a technical and product focused founder. Matt has a unique talent for balancing technology and business goals and knows what it takes to sell his business when the time is right in his first successful exit. Matt built the largest automotive focused CRM platform in North America called VinSolutions, and he sold it to AutoTrader for $150 million in 2011.

00:00:49:14 - 00:01:10:09
Todd Sullivan
After selling his second technology company, Stackify, Matt is now focused on building out his current software development firm full scale leveraging all of his experiences. Matt is also the host of the Startup Hustle Podcast, where he shares insights, tips and stories from his own entrepreneurial journey and from some of the most successful business leaders in the world.

00:01:11:00 - 00:01:30:18
Todd Sullivan
In today's conversation, we talk about being open minded to either raising capital or selling your business to enable the next stage of growth. Matt also shares how important it is to understand how your earnout is achieved when you are no longer making all the decisions. I hope you enjoyed my conversation with Matt Watson.

00:01:34:22 - 00:01:57:19
Todd Sullivan
Matt, thank you so much for joining us today. I was really excited to think about this conversation and all the things that not only you can give as a technical founder of businesses, but you've sold two businesses. So I know our fellow founders are going to get a ton of advice and great stories out of you, but also your you're a really accomplished podcaster.

00:01:58:01 - 00:02:06:02
Todd Sullivan
When you decided that you wanted this time slot, I had no problem bumping Mark Cuban. So we really appreciate you being here.

00:02:07:01 - 00:02:09:05
Matt Watson
Yeah, well, I would have too.

00:02:09:05 - 00:02:18:20
Todd Sullivan
Thank you. Well, let's see. Let's let's jump in. Right. You've built a couple of companies, but let's start from kind of those early days, like what brought you into entrepreneurship in the first place?

00:02:19:13 - 00:02:36:16
Matt Watson
You know, I grew up as a very young kid working with my parents at the flea market. So I'm about where you live if there's local flea markets. But here in Kansas City, there's one at a drive in and most people don't remember what the hell a drive in is. But you know where you drive your car and watch a movie on a big screen, right?

00:02:36:16 - 00:03:03:18
Matt Watson
So for whatever reason, at the drive in, they had a swap shop, they called it every weekend. And I went out there with my dad for almost ten years every single weekend and slept in the car the night before to have our place in line. And and he sold all sorts of weird stuff. And I would go around town with him and buy stuff a garage sales and help him and like so I like had that work ethic at an early age and helped him and I guess maybe that helped fueled my entrepreneurial spirit.

00:03:04:03 - 00:03:09:20
Todd Sullivan
All that's great. So was this your dad's kind of primary source of income or a hobby on the side? Okay, this is it.

00:03:10:05 - 00:03:23:02
Matt Watson
Now, this was the main. The main thing. Yeah. I mean, he made a few hundred dollars a week doing it, and that was enough to is like he worked on the weekend and like one day a week, you know, buying stuff, wholesaling stuff, you know, going to the garage sale or whatever.

00:03:23:06 - 00:03:52:23
Todd Sullivan
You know, I think we grew up maybe similarly in that my dad was an entrepreneur as well sewing clothes, so his mom actually sewed tennis dresses. And I, I found one on eBay. It's like 70 years old and just bought it. And then my dad, you know, followed in her footsteps. And so I grew up going to all of the kind of the manufacturing facility, which is just like a row of sewing machines and seeing him get the order and then produce, you know, a bunch a bunch of tennis clothes, t shirts, sweatshirts.

00:03:53:08 - 00:04:04:20
Todd Sullivan
So, yeah, similar, right? We get influenced by our parents. So what made you kind of jump in, say it's time to start my own business? You go to college first. What was your story? Well, I think.

00:04:04:20 - 00:04:29:06
Matt Watson
I was just opportunistic. I went to college at DeVry University, which is a nontraditional tech school. But you get a bachelor's degree for computer information systems. It's computer programing, basically. And about halfway through that, I got my my first real job. But I was even before that, I was always just very opportunistic. I did worked on some other projects on the side for people.

00:04:29:06 - 00:04:45:05
Matt Watson
And I was just very opportunistic, you know, And my original thrust into this as I was while in college, I was working at Sears and a car dealer came in to buy a computer. And just like everybody else who comes in to buy a computer, ask them, you know, what kind of computer do you need or are you going to use it for, etc..

00:04:45:05 - 00:05:12:13
Matt Watson
And you told me I had a little database that tracked everything for a car dealership and some software developer wrote it. But he's worried that the software developers are crazy and they're going to run off and blah, blah, blah. And so I just told, well, maybe I can help you. And like, that was it. I just started helping him and I spent the next 2 to 3 years rewriting this guy's little database, which was a microsoft Access database, and rewrote it and built a relationship with him.

00:05:12:13 - 00:05:34:19
Matt Watson
And, you know, fast forward to where then solutions started. The my co-founder had been working for AutoTrader.com, going around, taking pictures of cars to upload them to autotrader.com, but was looking for a software developer to help automate some things and simplify what he was doing because it was kind of a side hustle for him. He wasn't supposed to be doing that for AutoTrader.

00:05:35:02 - 00:05:56:13
Matt Watson
He was just supposed to be selling the advertising and the dealership was supposed to take their own photos. But of course this was 2003 and car dealers didn't have digital cameras like anybody else. And that same car dealership connected the two of us. So that relationship that I had from building that little database for that dealership is what ultimately led to meeting my co-founder.

00:05:56:14 - 00:06:18:14
Todd Sullivan
Oh, that's fantastic. I get really excited when businesses get started because a customer need an actual customer need is identified and the your your building towards a customer. Right. So making that individual or that business really happy with your solution and then you can expand from there. But can you tell more? I think it's such a great story of your your co-founder, right?

00:06:18:14 - 00:06:26:21
Todd Sullivan
Like wanting to just do a better job and in order to do a better job, right. Has to break out side with what his role is and take these photos.

00:06:26:21 - 00:06:47:03
Matt Watson
So, you know, he was working for AutoTrader magazine. So remember back then, it was, you know, and all the grocery stores and convenience stores. Right. You have AutoTrader, the magazine. And back then, weirdly enough, AutoTrader.com was still new and was free. So for the car dealers, they didn't even charge for it. Now, you fast forward to today, and that's like $1,000,000,000 industry.

00:06:47:08 - 00:07:06:03
Matt Watson
And the magazine is dead, right? The magazine was gone, you know, ten or 15 years ago. So, yeah, he was going around trying to get people to move and do the dot com stuff because that was part of his incentivization as being a rep. But he couldn't get the dealers to take the photos. Right. And so he that became like a side hustle for him.

00:07:06:03 - 00:07:24:13
Matt Watson
He'd be like, Hey, I'll charge you a couple hundred bucks a week. I'll come by and I'll take the photos for you as long as you'll also sign up for AutoTrader. And, you know, I get my commission and stuff, right? So, yeah, we were just trying to solve a problem. Like he had a legit problem, saw the problem and was trying to solve it, and I was just the guy that could help write the code.

00:07:24:13 - 00:07:40:00
Matt Watson
I was the you know, you look at Zuckerberg and the Winklevoss is like, I was the Zuckerberg and he was the Winklevoss, right. And I was just a guy. And I at the time I was 22 years old. I knew what I was doing, but I was just opportunistic back to what we mentioned earlier. Like I'm just a guy looking for something to do.

00:07:40:00 - 00:07:42:20
Todd Sullivan
Yeah, not bad being just the Zuckerberg though. That's pretty good.

00:07:43:06 - 00:07:44:05
Matt Watson
Yeah.

00:07:44:05 - 00:07:50:16
Todd Sullivan
So? So, all right, this is a side hustle. At some point, it becomes a real business. What's the trigger?

00:07:51:07 - 00:08:11:00
Matt Watson
Yeah. So it started out he had like 15 or 20 clients lined up. He was going out and taking pictures for. And I started building the software, built a little database to track cars, track inventory, put all the pricing stuff in, and then basically syndicated that data to places like AutoTrader cars dot com, you know, different things like that or their websites and stuff.

00:08:11:00 - 00:08:30:02
Matt Watson
And they also printed windows stickers and did some other things. But I, I was working at that time at a medical laboratory. I was like the lead software developer and we started getting some, you know, traction, a little bit of revenue with this little business that I convinced my boss that I would work 6 a.m. till noon every day.

00:08:30:09 - 00:08:50:08
Matt Watson
I cut my hours to 30 hours a week and then I would go home in the afternoon and work basically till bedtime every single day, hustle and trying to make this work. And I did that for probably a year, a year and a half or more like, you know, working on this as kind of a side hustle while I still had a full time job because I couldn't we couldn't afford to pay myself.

00:08:50:08 - 00:09:03:02
Matt Watson
And then eventually I quit. But it was probably a year and a half plus before I was able to to take at least a salary that I could accept. I was still a lower salary than my job, but be able to do it full time.

00:09:03:02 - 00:09:23:13
Todd Sullivan
Yeah, it's amazing to me. These entrepreneurial stories, they start with so much hustle and then it's perseverance, right? It's never give up and you're willing to sacrifice. You know what you want. You're going to take a smaller salary a year later, right? You figured out how to get there. Okay. So the year goes by, you've jumped in full time.

00:09:23:13 - 00:09:33:11
Todd Sullivan
It seems like you have a suite of of products that you're offering or maybe it's all bundled in as one product. But why are you winning at that point?

00:09:33:11 - 00:10:08:07
Matt Watson
Yeah, we were we were in the early days of helping car dealers move to digital marketing, right to online, we'll call it e-commerce or whatever. All those. Exactly. E-commerce for automotive. But all the online presence of all of this. Right. And there were other people that were doing it a few different places. Ultimately, what really was the big trigger for us was we decided to move into doing the lead management kind of CRM side of it, and that was in like 2007 probably that we we kind of made that kind of pivot and that was, you know, like the third, fourth year into the company.

00:10:08:16 - 00:10:24:19
Matt Watson
Now we were successful, we had revenue, we probably had a couple of million dollars in revenue or something like that before Then I remember the exact numbers were, but, you know, we were successful and we were making money and stuff, but we saw the opportunity to do the the lead management CRM side of it because that was still in its infancy like.

00:10:25:01 - 00:10:41:18
Matt Watson
So to explain, it's like if you go to AutoTrader.com and you smell a lead, what happens to that lead? Right? It goes into some database where they they track all the people that submitted a lead and follow up with them and email them and all that kind of stuff. Right? So that kind of technology is fairly common. These days.

00:10:41:18 - 00:10:59:22
Matt Watson
There's lots of CRM systems that exist, you know, Salesforce and HubSpot and all these things. But back then there were some products existed, but they weren't designed around email. They weren't very good at emailing like so you couldn't email like a brochure of a car, things like that, like photos of a car. They couldn't they couldn't email. Photos of a car like that was a foreign thing to these things.

00:11:00:10 - 00:11:26:15
Matt Watson
So we were one of the first ones to like really do that and do a fantastic job at it. And we just killed it. And the recession actually helped us tremendously. So talk about raising capital and stuff. We try to raise money in like 28, 29 during the recession, but that was a terrible time to raise money. But the recession helped us tremendously because all these car dealers stopped spending money on traditional media.

00:11:26:15 - 00:11:45:06
Matt Watson
They stopped advertising and newspapers and TV and magazines and all this stuff and focused more and more on the digital side. And we were right there and we had a product that could save the money. So they might have had a an old, expensive CRM system they were paying a lot of money for that, didn't do email, did very well, didn't do digital marketing related stuff.

00:11:45:17 - 00:11:54:09
Matt Watson
And so we had a better, faster, cheaper product that was cloud based with no contract. And it was we were just in the right place at the right time and we just crushed it.

00:11:54:19 - 00:12:16:13
Todd Sullivan
It seems like you did. There were competitors that where a dealer had to sign up for multiple competitors to get everything what you were offering. Yes. And then you just said no contracts, Right. That's probably had no con. That's pretty unusual, right, in automotive. So you get to really try you out. You see the real benefit as a customer in the product and then you've got them hooked.

00:12:17:05 - 00:12:35:17
Matt Watson
Back then, you know, a lot of these bigger companies, it was more of an enterprise sell to buy a CRM system, right? Like, oh, you buy a server, you install it on site and you pay $40,000 for the software for a three year contract. And then the problem was our competitors would take those contracts, they would factor them and sell them off.

00:12:36:06 - 00:12:54:00
Matt Watson
Right? If you ever been around people that do that, they would factor the contracts and sell them. So then our competitors had no revenue at all and then we literally put one of them out of business because they had no recurring revenue. They had to sell like these contracts every month and factor them and then sell them. That was like the drug that they have to keep living on.

00:12:54:15 - 00:13:06:10
Matt Watson
We bought one of them out of business completely because they had no recurring revenue to fall back on. But that that whole, you know, server based, you know, big contracts, all that, that all died, everything went to SaaS. We were on the forefront of the.

00:13:06:16 - 00:13:27:03
Todd Sullivan
Oh, that's fantastic. Okay, so you continue to grow the business that was around 0708. You grow nine, ten, 11, you sell to AutoTrader and in 11, Right. Can you talk to me about what what was the kind of the key to getting that started? Who approached, who did you hire people Were you looking to sell? Yeah.

00:13:28:04 - 00:13:48:07
Matt Watson
So I would say from like 2008, nine, ten, 11, we basically doubled year over year, almost every year, somewhere around like 80 to 100% plus growth year over year over year in employees and revenue. So when we sold in 2011, we had about 35 million a year in revenue. And so we kind of work backwards from that on where we were.

00:13:48:16 - 00:14:05:23
Matt Watson
So in 2008, 2009, we we wanted to raise capital because the company had never raised any money at all except for like 100, 200 grand that some of us had kind of thrown into it. Like no major kind of funds. Sure. And we really needed to raise money because we were growing were growing fast, but we were highly undercapitalized.

00:14:06:09 - 00:14:31:04
Matt Watson
You know, we didn't have money for servers and all that kind of stuff because Amazon was like not that existed then. And we also couldn't train people fast enough. Like we literally couldn't do anything fast enough at all. So we we looked at raising capital but really struggled with it. We eventually got we tried to raise some mezzanine financing and we hired a CFO to come in and help do all of that.

00:14:31:04 - 00:14:53:09
Matt Watson
And he led the effort to find a deal that was a mezzanine deal. And then he finally brought it to us and they wanted like 12 or 14% interest plus we had to give up equity in the company and Oh, no. Okay, Yeah. So we killed the whole thing and they basically said, fine, like six months went by you what you like, You were in your office for six months talking to all these bankers, but all this bullshit, let's just start the process over.

00:14:53:14 - 00:15:13:15
Matt Watson
So we basically just started the process over, but this time went more towards the private equity side and the VC side, and that was probably the very end of 2010. We kind of restarted that whole process and again, we originally went into it thinking we were going to sell 30% of the company or something like that, right? Like we want to raise 20, $30 million or whatever.

00:15:13:23 - 00:15:25:11
Matt Watson
We would take some secondary capital, put it in our pockets and then use the rest of it to fund the growth. Right? Like that's how we would use the proceeds. And yeah, started, started that whole dance.

00:15:25:22 - 00:16:05:00
Todd Sullivan
That's great. There's a bit there, Right. So maybe let's jump back to the, the growth rate. I think a great lesson in growth rate is that when you actually went to sell your business, you were doubling year over year over year. And we love our sports analogies. And so founders should know that it makes a lot of sense if you're trying to kind of maximize your ROI, your return on that investment that you're making selling a business in the fourth inning instead of the seventh, eighth or ninth, where you've got a lead, you put runs on the board, the heart of the lineup's coming up, you're selling that future, that those future cash flows and

00:16:05:00 - 00:16:27:00
Todd Sullivan
buyers are really willing to pay for it when you're at the end and the growth rate is really starting to tail off, that becomes so much less interesting to buyers. So, you know, when you're going to market with all of that, right, you've got that growth rate track record. So that's fantastic. What's interesting is you started out going after debt rate to fund growth and you just ran into those roadblocks.

00:16:27:00 - 00:16:33:05
Todd Sullivan
You reset and now you're saying, okay, let's look at what equity can get us selling our equity. And you said.

00:16:33:13 - 00:16:36:23
Matt Watson
The recession was over, too, like we were coming out of the recession as well. Yeah.

00:16:37:12 - 00:16:59:20
Todd Sullivan
And so you're you've got kind of two groups that you're looking at private equity and venture. So ventures really you still like here's a bunch of money and we think you're going to the moon and we're going to take minority share your business typically what anywhere from call it 15 to 30% of the business maybe 2025 is where they're thinking private equity typically is looking for to make control investments.

00:16:59:20 - 00:17:08:02
Todd Sullivan
Right. So 51% and some of the kind of growth capital can be minority. But what were you initially targeting.

00:17:09:22 - 00:17:31:22
Matt Watson
Was sound like 20, 30, 40% of the company and, you know, granted. So this was 12 years ago, you know, and private equity and DC definitely existed then. But private equity today is very different than it was then, right? Yes, right. It's very different now than it was then. Right. So back then it probably existed. People like KKR and stuff like that existed that did big, big investments.

00:17:32:06 - 00:17:46:12
Matt Watson
But today it's like super common. Like there's got to be like 100 times more of it today than it was then. So back then it almost felt like VC and private equity were sort of the same, like didn't really understand the difference. It was just controlling interest or non controlling and just like us and like we didn't really know.

00:17:46:17 - 00:17:55:19
Matt Watson
We were just talking to people who wanted to invest and we had a couple that wanted to buy 100%. You know, they were willing to buy 100% even, and it was like a true private equity 100% deal.

00:17:56:03 - 00:18:21:00
Todd Sullivan
Yeah, I you know, I just had a meeting with a founder that is thinking about, okay, we like to have some money, really to have some cushion to order more inventory because we're just growing really, really quickly and looking at debt and looking at potentially venture capital. And one of the big differences and I think it was the same, you know, when you were taking a look at it is, you know, once you take those private equity dollars, which would include venture capital, you're on somebody else's clock.

00:18:21:00 - 00:18:39:10
Todd Sullivan
Now, your job is to return their, you know, their money, plus, you know, a return on that investment over a period of time. Whereas the debt you can pay off and still say, hey, I'm on my own clock, I can run this for another ten years if I want. Did that kind of cross your mind when you jumped ship to look at Venture?

00:18:40:00 - 00:19:02:12
Matt Watson
I mean, at that time we were just trying to survive like the growth. You know, people always say they, you know, they want more business, they know what to do with and they want that problem. Yeah, yeah. And whatever. We had that problem and it was not fun at all. You know, like when you start, we would sign up like 50 to 100 car dealerships a month to use our product, but it required a lot of implementation, like installing.

00:19:02:12 - 00:19:20:23
Matt Watson
We had 50 people that that were trained on onsite a week of training where to build websites with important CRM data, like it wasn't a turnkey thing. It's not like you add a user on Twitter and then you just start tweeting like, I mean, it took like weeks to set up an account, right? So I mean, a whole bunch of people sign up and we can't install them fast enough.

00:19:20:23 - 00:19:37:18
Matt Watson
And then our sales team has taken phone calls all day from the people they signed up to months ago that are pissed off that we can't install them yet. Now they want their money back, right? So now I have a whole sales team that is all there. They're taking other phone calls from people that want to cancel and they can't sell anything because there's they can't install it anyways.

00:19:37:18 - 00:19:51:10
Matt Watson
Like it turns into a nightmare situation across the whole company. We were like just trying to figure out like, how do we grow this thing and like, keep it going. Like we needed fuel to put in this thing. We had a great thing, but we didn't have enough fuel.

00:19:51:14 - 00:19:59:19
Todd Sullivan
That's great. So now you're looking for a partner that provides that fuel or are you saying, Yeah, no, we got to get off. Got it. Get out. Got off the ship now.

00:20:00:04 - 00:20:25:16
Matt Watson
We were totally looking for money off of how do we grow this thing? Okay, so therein lies the story of, you know, we thought at that time our initial offers were, say, 70, $80 million. And one of my favorite things that ever happened in my life was that that process was fun. Like, we went to San Diego and San Francisco and were meeting with different people and doing the whole roadshow of all this.

00:20:25:16 - 00:20:47:20
Matt Watson
Right. And there became an expression between me and a couple of the other founders, you know, shareholders was I would just call them up and be like every day. Every day, because there was a better offer every day. Like, it was crazy. Like that was a joke. It was like every day, you know, it's like we talked to so-and-so and then we talked to so-and-so and they increased their offer by 5 million and whatever.

00:20:47:20 - 00:20:59:04
Matt Watson
And like, it was crazy because, you know, you start from 80 and then eventually we got over like 100, right? And so this is like every week or two we just kept getting better and better offers. And it was it was great.

00:20:59:04 - 00:21:07:00
Todd Sullivan
And let me understand. So these are offers to actually buy the company. They're not how we're valuing you to buy minority share. This is, hey, we want to own the best.

00:21:07:00 - 00:21:08:13
Matt Watson
It was both. It was both okay. It was both.

00:21:08:13 - 00:21:09:02
Todd Sullivan
So valuation.

00:21:09:02 - 00:21:21:00
Matt Watson
Yeah. It was like, oh, you know, we're sell or KKR or JMI or whatever, like different all these other firms or whatever. We had talked to you, right? And they're like, oh well invested in 80 pre, you know, 25 million or whatever the term.

00:21:21:00 - 00:21:44:17
Todd Sullivan
Sure, sure, sure. And so you're saying every day to one buyer that's saying, hey, we want to we want to get this done. And you're like, no, it's just it's going up. It's going up. You know, I love you said 70 to 80 million, right? So that's like two times revenue. I don't know what ever does look like at that point, but did that feel like that was close to what the industry a valuation would be is two times rep, I think.

00:21:45:12 - 00:22:07:18
Matt Watson
I mean, SAS valuations back then are totally different than they were now. Right? Right. And you know, looking back, it's like, man, we probably should have sold this thing for like over 200 million, 300 million, right? Like a lot more. But for us we owned 100% of the company. And so if you take $100 million and divide it like three or four ways, that's how it was getting split up and we were okay with it.

00:22:07:18 - 00:22:08:12
Matt Watson
It was a lot of money.

00:22:08:12 - 00:22:21:13
Todd Sullivan
Yeah, that's that's multigenerational. Well, that's fantastic. Yeah. All right. So. All right. But we all know, right, that the end number, 150 million to AutoTrader. Tell me, how did that how did that happen? Were they the lead dog the whole time?

00:22:22:22 - 00:22:44:20
Matt Watson
So that's a funny story. So there's there's two funny pieces of this I want to tell. So one of these firms made us a good offer, a really good offer. And my business partner at the time had this crazy idea. He's like, You know what? We're going to fly back out there. We're going to meet with them. And when I say this, I'm thinking of Silicon Valley, the HBO show where he goes around and he lays it all on the table.

00:22:45:20 - 00:23:05:07
Matt Watson
That's what this felt like. We go out there and he has the guts to tell them, like, Hey, we came all the way out here because we just don't understand why your offer was so low. Like, we just don't understand. They literally had made the highest offer before, okay? And he had the guts to tell them this. And sure enough, every day they got a better offer.

00:23:05:07 - 00:23:23:03
Matt Watson
The next week, numbers went up. It was it was like the craziest, gutsiest thing I've ever seen, but it paid off. The numbers just kept going up and up and up. So ultimately we came down to I think we had two or three offers to we had like one good offer that was going to buy, you know, 30% of the company or whatever.

00:23:23:03 - 00:23:42:03
Matt Watson
And we had two that were total buyouts. One of them was some private equity and remember who was and the other was a huge strategic in the industry. And so what was crazy is the CEO of that company who who owned all of it to billionaire. Yeah. Was a billionaire, one of the one of the top companies in the industry.

00:23:42:03 - 00:24:02:12
Matt Watson
I won't say the name, but he flew out with us and met with us. And this is a crazy story. He flew up, met with us, met with the team, did all these and did all the stuff in Kansas City. And is this and you can't see in our office and but we had we had signed nothing. And so he called his lawyer and said, hey, I need to get the loogie or whatever sent over and get it done and blah blah, blah.

00:24:02:20 - 00:24:20:01
Matt Watson
Collin's lawyer and his lawyer didn't do it. And at the end of the day he's like, okay, we'll follow up with the paperwork tomorrow. We'll get the LOI signed, all the stuff. And we hugged him like literally, I hugged the billionaire on the deal and but we never had any paperwork. We have nothing signed. And so we called AutoTrader that night and said, Hey, you know what?

00:24:20:01 - 00:24:40:04
Matt Watson
You've been busy. You acquired Kelley Blue Book and B Auto and all these other things. We know you didn't have time to talk to us. We're going to sell the company to X, Y and Z. And they're like, No, you're not. We will be there in 48 hours and you will wait for us. And we're like, okay. And then they came in and offered us substantially more.

00:24:40:12 - 00:25:02:18
Matt Watson
And in some sense, the other company that we almost sold to was kind of like the galactic empire of the industry. And anybody who's listening to this that knows the industry would automatically know who they are. Just from that statement. They were just like this terrible company that like everybody kind of hates and we didn't really want to sell to them, but we're like, they were making the biggest offer.

00:25:02:18 - 00:25:28:16
Matt Watson
And it's like, you know what? Whatever. I just will take the money and run. And so it was a breath of fresh air to sell to AutoTrader. And AutoTrader was fantastic all along the way. They were super. And so it's owned by Cox Automotive, which is Cox Communication and Ballpark and Manheim Auctions. And like they went on and bought like 20 different companies, automotive, they own all sorts of stuff that nobody knows what it is, but it's a huge conglomerate now.

00:25:28:16 - 00:25:36:00
Todd Sullivan
That's great. Now, can you tell me, did you have an M&A team, investment banking, M&A attorneys? Well, how do you surround yourself?

00:25:37:03 - 00:25:53:18
Matt Watson
Yeah. So before we started this process, we worked with a firm called Presidio that was out of San Francisco. And so, yeah, they helped run the whole process for us and they had done some deals automotive before, so that's why we had leaned on them. But yeah, they charged an insane amount of money to do it. It was crazy.

00:25:53:18 - 00:26:14:23
Matt Watson
How much they charged, but but yeah, they helped us prepare for it and do financial models and all this kind of stuff. And at the end of the day, you know, having a partner to help do that was definitely extremely helpful for us to help navigate all that kind of stuff. Deal, you know, every day, like dealing with the every day of following up with all these people.

00:26:14:23 - 00:26:16:06
Matt Watson
So it was very helpful.

00:26:16:06 - 00:26:43:08
Todd Sullivan
Yeah, you can get inundated. So it's nice to have somebody that's kind of hurting, hurting the cats. But, you know, whether it's today or back then, you had growth rate, you had profitability, you have exciting SAS, I can imagine. Right. Everybody is interested in buying a company like that and it can't be more true than it is today after going through and of the real bubble where profitability wasn't a big thing and not many SaaS companies can say that they're profitable.

00:26:43:08 - 00:26:43:17
Todd Sullivan
Well.

00:26:44:06 - 00:27:07:17
Matt Watson
So here's the best part of the story. So you look at like the rule of 40, right? Which is your growth rate plus your margins. We would have been off the chart because when we sold, we were making like $1,000,000 a month in profit or some shit. So we were doing 35 million a year. But you know, our we were probably making close to ten in profit and growing 100%.

00:27:07:17 - 00:27:14:14
Matt Watson
So I mean, we were off the charts on all those numbers and yeah, if we were selling today, yeah, the multiples probably would've been ten X or something.

00:27:15:02 - 00:27:34:21
Todd Sullivan
So Matt, what would you say to your fellow founder? Right. We get a lot of these calls. I'm making so much money every month. I don't want to sell for that number. Right? They're going into a process. They're making a decision to sell. And then when they look at that price, they say, Well, if I just do this for three more years, I'll get that same amount of money and be able to sell my business again.

00:27:35:05 - 00:27:37:07
Todd Sullivan
How would you respond to a founder like that?

00:27:38:07 - 00:27:55:19
Matt Watson
Well, honestly, I have a couple of thoughts there. And so one thing I always tell people, it's like, okay, if you sell the company, what are you going to do with the money that's going to provide a higher rate of return than what you're getting today? Okay. So if you're growing 40% a year and you know the company is successful and all that, you can just keep going and keep going.

00:27:55:19 - 00:28:09:20
Matt Watson
Right. So I get it. And, you know, I think about it that way. I also understand that you want to diversify. You're like, look, I have all my money in here. Or it's like, Yeah, I have 100 employees and I pay all them great, but I don't have anything like I can I don't have any money. I'm just reinvesting in.

00:28:09:20 - 00:28:23:14
Matt Watson
All right? Or you want to diversify and all these things like I get it. And it's also easy to get caught up like us. We're like, Oh, the company is worth $100 million. And we're like, Oh, if we just wait 12 months, we'll double in size. It'll be worth 200 million, and we wait again. It'll be worth 100 million.

00:28:23:14 - 00:28:42:13
Matt Watson
Like it's easy to get into that too, but at some point in time you just take the money and run. It's enough and enough money is enough money, or you get burnt out. You don't want to deal with any more. Like a friend of mine is in a stage now. It's like they built this great company. It's got 50 employees and they're like, They hate every single minute I'm in, they hate it.

00:28:42:21 - 00:28:57:05
Matt Watson
They're like, the company has outgrown them. And I was chatting with another friend this weekend, same thing. He's like, Oh, I love what we're doing, but he's like my co-founder. He's like, just not into it anymore. He's burnt out. He wants to do something different, but he doesn't want to step down. He doesn't want to wanted to look like that.

00:28:57:05 - 00:29:12:20
Matt Watson
And in there in that situation where it's like, Hey, maybe if you could buy the co-found or Owl or whatever, like I think everybody gets to the point to where it outgrows them or they're just done enough of it. And people always ask me like, Oh, what's it like to sell your baby after eight or nine years or whatever?

00:29:12:20 - 00:29:14:14
Matt Watson
I'm like, Dude, it felt good. Yeah. Oh, great.

00:29:15:02 - 00:29:38:11
Todd Sullivan
Yeah, I think we're in like, we're in a different generation, I think where previously the baby boomers, they built a company for 40 or 50 years and they sell at the end and they view it as their baby and they're definitely not maximizing or the majority are not maximizing because they're selling really at the end, whereas the younger generations are seeing, Oh my gosh, this is life changing money, I'm going to do this three more times.

00:29:38:18 - 00:29:57:20
Todd Sullivan
And what I'm really doing is buying myself time, right? I get to sit back, think about what's the next one, and be as excited to do the next one as I was on day one. You know, doing the one that we're selling. So, yeah, I never want to encourage a founder to sell a business just to do another transaction.

00:29:58:03 - 00:30:07:21
Todd Sullivan
But I think, you know, when it's time, when your heart's not in it or your, you know, your co-founders heart isn't in it, this is a career path that you can do multiple times.

00:30:07:22 - 00:30:28:21
Matt Watson
No. Two thoughts there. I mean, first of all, the valuations obsessed companies is just do. Yeah, like I would say, I don't say it's easy, but it's relatively easy to start a company that could be worth, say, $5 million or more. Now, I'm not talking like $1,000,000,000 company, but just $5 million, right? Grow it to a million or a couple million dollars in revenue with a little business.

00:30:29:07 - 00:30:52:04
Matt Watson
That's worth 5 million or more. Right? That's not that hard to do. It's not easy. I'm not saying it's really easy and anybody can do it, but it's not crazy hard to do these days. The valuations of all this stuff are absolutely absurd. What some of these companies are worth like. And then the other part of it is you talk about selling, it is if you're rolling over site.

00:30:52:05 - 00:31:04:22
Matt Watson
My second company I sold and there's something I mentioned to you earlier is you got to be careful like if you're if you're not taking all cash, if you're rolling equity on, you know, who is buying you. And all of that is a big concern as well.

00:31:04:22 - 00:31:24:00
Todd Sullivan
Well, let's before we get into the second one, I want to touch on what you just said, because it's it's really smart. We see clients that once they get to about a million of RR, right. That recurring revenue, there is a market out there under a million. There are some other ways of posting that business online and finding sales.

00:31:24:07 - 00:31:41:11
Todd Sullivan
But if you really want to maximize, we say minimum, get that 1 million. We did a transaction last year which was just about at that 1 million. We sold it to a public company and this kid after earnout, I say kid, anyone under 40, I think I call it kid now, but this guy is going to have $100 million, Right?

00:31:41:11 - 00:32:07:21
Todd Sullivan
So there is the insanity in that that can be created. Now, what I would say is if you can get to two and a half, 3 million of RR, the buyers come running because there's some point of getting to that million where you're kind of replatforming, getting the sales team into a different place to get to that 3 million of RR, You got kind of a real business engine behind it and that tends to pull even higher multiples.

00:32:08:03 - 00:32:26:03
Todd Sullivan
The next kind of category that really defines bigger valuations is 10 million. So I would say it's great advice, right? If you know what you're doing and you've got a customer in hand to build a SAS product around and you think you can get to that million of RR, there is real options for liquidity.

00:32:26:03 - 00:32:37:19
Matt Watson
Well, and I would also say, though, just because you did this once, it does not mean you can do it again. So, you know, I had success the first time and then the second time was way harder, significantly harder, right.

00:32:37:21 - 00:32:44:17
Todd Sullivan
Like we got to jump into that. So. So VIN solutions, you knock one out of the park, you're going to go do it again. It's Stackify is number two.

00:32:45:03 - 00:32:45:18
Matt Watson
Stackify.

00:32:45:19 - 00:32:57:17
Todd Sullivan
Right. So tell me, what made you well, first did you do an earnout and then get out or do you just walk away after kind of like handing over a couple of months of handing over the keys? How did that work before? You're totally free.

00:32:58:01 - 00:33:15:09
Matt Watson
So it's kind of a funny story. So within solutions, we had an earn out, but it was only like seven month long and so true. So this is a story we got after Thanksgiving break. I walk in like, first we get a December, I go to our CEO, Mike, my main business partner, and like, Hey, Mike, we just sold the company for a shitload of money.

00:33:15:09 - 00:33:19:18
Matt Watson
I don't even know what all the terms were. I just signed hard, three copies, cash, the check, whatever.

00:33:19:18 - 00:33:20:10
Todd Sullivan
Yeah, Yeah.

00:33:20:16 - 00:33:36:08
Matt Watson
How long do I have to work here? Like, I don't even know, like, because. But our earnout was basically over the first week of December, right? It's like if we sell anything new, the revenues in January, if somebody cancels the fact in January, like earn out over and I was starting to itch about what am I going to do next.

00:33:36:08 - 00:33:53:09
Matt Watson
And I asked him like, you know, how long do I have to work here? And it was funny. He told me he's like, Matt, they abolished slavery a long time ago. If you don't want to work here, you don't have to work here. They don't want you walking around like a zombie every day either. So if you don't want to be here, you can just leave.

00:33:53:17 - 00:34:01:14
Matt Watson
So I was like, I'm out. And that was it. I was like, I'm going to go do this Stackify. I had this idea to go do Stackify, and that was it.

00:34:02:08 - 00:34:10:04
Todd Sullivan
It's all right. That's awesome. Take me through Stackify, You got the idea. You get up and running and you sold that business as well.

00:34:10:19 - 00:34:26:06
Matt Watson
We did. And so the original idea was, you know, I was the chief technology officer. You know, I was a tech guy, the product guy of and dealt with all sorts of issues with performance and scalability and, you know, all this stuff. And it's like, man, we need to build a set of tools to help software developers do this.

00:34:26:06 - 00:34:48:15
Matt Watson
And at the time I didn't really see like that those tools that existed. And so that was the idea was to go create that and started doing that in 2012. And that was so hard. Like selling to software developers is so incredibly difficult and that was the major learning of the whole thing, like just the go to market strategy.

00:34:48:23 - 00:35:11:19
Matt Watson
Understanding the go to market strategy is more important than the product itself. And I picked like the worst possible industry to try and sell something and do. But we we were successful with it. We grew, you know, we were on the INC 500 and all that kind of stuff and, and growing but we were competing against some bigger companies like New Relic and Datadog and Appdynamics and stuff, and that were all worth billions of dollars.

00:35:11:19 - 00:35:28:16
Matt Watson
But when I started in 2012, like they didn't really exist or they weren't on the radar, like I think they all started after I did, but they, they came out and eventually it became harder and harder before we sold the company. And then so we ended up selling it to a strategic that rolled it up as like private equity roll up kind of thing, basically.

00:35:29:00 - 00:35:48:14
Todd Sullivan
Yeah, I definitely want to learn about that sale, but I think it, it deserves to be said, right? Those competitors, they raised a bunch of capital, right? Oh, I could just throw so much money at marketing. They didn't care what their calc was. Right. And your I don't know if it's bootstrap, but probably using a lot of your own money and really conscious of profitability.

00:35:48:14 - 00:36:05:02
Todd Sullivan
How much am I going to spend to get this? Exactly. That is a game to play in. But it was fantastic that you, you know, got to a point where it was of real value to a private equity group. So you sell this business. Can you talk to me about that process? Did you get a new team? Did you go back to Presidio, the same group?

00:36:05:11 - 00:36:07:17
Todd Sullivan
You know what prompted the sale and who did you use?

00:36:08:01 - 00:36:28:02
Matt Watson
Well, so as you know recently, you know, and not really recently, I guess all the time, right? Entrepreneurs get random emails all the time about Yelp and some of them are crazy. You're like, I got this fund to buy one business and like all this kind of crazy stuff, right? So I usually ignore all of those. But I got a random email one day from somebody like, Hey, I'm working on behalf of this strategic.

00:36:28:02 - 00:36:43:07
Matt Watson
They're looking to do acquisitions in the space and I'm on back. What I usually do, I'm like, Hey, if you have a serious buyer, I'm interested. But if you're just like an investment bank that wants me to go run some big long process, like I'm not into that right now. And they're like, No, no, no. We have a strategic buyer.

00:36:43:07 - 00:36:59:12
Matt Watson
They're very serious. My okay, fine, I'll talk to them. And that was it. Like that was the whole process. We made the introduction talk to Metro, who was who we sold to, and you know, we worked out pretty quickly that it would work and made a deal. That was it.

00:36:59:12 - 00:37:12:21
Todd Sullivan
So I think the thing we wanted to really touch on on Stack VI is the earnout portion, right? So you're selling into a private equity firm and you're taking a sizable chunk of your compensation in what role the equity is, how they call it.

00:37:13:04 - 00:37:20:00
Matt Watson
It was it was a mixture, right? It was a mixture of cash and equity and and or now, you know, like a lot of deals. Right. It was it was a mixture of different things. Yeah.

00:37:20:00 - 00:37:30:19
Todd Sullivan
Yep. And so can you describe that? Because I think that's a real black box for a lot of founders of what what is rolling my equity really mean and how much control do I have of my earnout. All of that.

00:37:31:08 - 00:37:52:11
Matt Watson
So that's the struggle, right, when you especially when you're small. So the mistake that I think that they made that we made is we were fairly small. We had about 25 employees and they had like I think like 50 to 100. I don't remember exactly. Okay. And they didn't leave us like as a fully autonomous business. They kind of absorbed us and we had to assimilate.

00:37:52:21 - 00:38:14:11
Matt Watson
And that was the challenge there is we sort of assimilated with them and they thought it was best to combine the support teams and the sales teams and all that stuff. And that did not go very well for us. That that that did not go great. And that's a struggle with these kind of acquisitions, right? Like if I had to do it all over again, I'd be like, Hey, we want to just be left completely alone.

00:38:14:11 - 00:38:24:22
Matt Watson
You support us, you know, you know, help fuel our growth and whatever. But unfortunately, we had to like all assimilate together. And then I think we just kind of got lost in the assimilation.

00:38:25:12 - 00:38:27:16
Todd Sullivan
And you how long were you there or how long did you have.

00:38:27:16 - 00:38:47:21
Matt Watson
Was you there? I was only there for six months or something like that. Like, okay, you know, I, I thought I was I thought I was going to stay and be like the chief technology officer of the combined companies or whatever. And ultimately, based on what they were doing and the forecast of growth and how they wanted to integrate and do all these things and whatever, I just said, I'm like, you know what?

00:38:47:21 - 00:38:57:22
Matt Watson
I don't know that you guys need me based on your plans. Like you can do this without me. I don't know. Going can provide a lot of value here, so I'm just going to let you guys do this thing and I'm out.

00:38:58:23 - 00:39:05:01
Todd Sullivan
Got it. Okay. And what would be your advice to your fellow founders in so based on that experience?

00:39:05:09 - 00:39:31:04
Matt Watson
Yeah. I mean, any time you roll in equity, just being careful of like almost like you have no idea what's you almost have to write it off and like, assume you're going to get nothing for it and you wish for the best, but the, the, the biggest feedback I have there is especially watching out for people that are doing private equity and they're levering it up with debt because the problem is you have a company if somebody buys you and they're covering it up with debt, they have like these huge interest payments that they have to pay every month.

00:39:31:14 - 00:39:51:15
Matt Watson
And so they can't really invest in growth like they borrowed a ton of money to acquire. You know, they have to pay back that loan. So they don't have like a bunch of capital necessarily to invest in growth. They're just worried about paying back the debt. And I would be super concerned for anybody that is going into those situations.

00:39:51:23 - 00:40:11:11
Matt Watson
But it all depends on your industry and your growth rate and all these things. Right? But unless you're just killing it and you're you're just growing like crazy and you're spitting off lots of profit, be really careful. I mean, if you're just like treading water or you're losing money or whatever, like the last thing you want to do is now like, oh, now you pay 100 grand a month in interest payments.

00:40:11:11 - 00:40:21:12
Matt Watson
Yeah, Yeah. You barely were making any money before, but it's okay now. You also have $100,000 debt to pay back, right? Like, whatever those numbers are, Just be careful, man. Yeah.

00:40:21:14 - 00:40:42:03
Todd Sullivan
You know what, Matt? It occurs to me, you know, you had your first exit, and, you know, you've got kind of multi-generational wealth at this point. You're an entrepreneur, so you go take another at bat. Why did you want to sell this one? I know there were had competitive headwinds, but was there something else that you were trying to achieve other than, you know, top dollar on this one?

00:40:42:23 - 00:41:02:05
Matt Watson
For me, I think it was the competitive headwinds. It's like this is brutal, is is hard. I just felt like the way this company was going to be successful was to be part of a larger strategic that could bring in the more funding, you know, And so the company that that we sold to was bigger than us and all of those things.

00:41:02:05 - 00:41:17:11
Matt Watson
Right? And so that that was the bet and the promise of like, okay, we're going to roll into something bigger. And that's why we would roll equity, right? Like we're going to roll some equity into this thing and, you know, hope for the best and hopefully in their stewardship, right, it can grow and be bigger and all that kind of stuff.

00:41:17:18 - 00:41:30:15
Todd Sullivan
That's great. Matt, Matt, thanks so much for this time. I really appreciate it. You have varied and on a lot of experience around building and selling companies and I know you're on to this third one. That sounds like it's a rocket ship already, so best of luck.

00:41:30:15 - 00:41:33:19
Matt Watson
I'm actually on to the fourth one for for another conference.

00:41:33:19 - 00:41:36:21
Todd Sullivan
So, yeah, we got to hear about that for sure. All right. Well, thank you, Matt.

00:41:37:05 - 00:41:37:22
Matt Watson
Thank you so much.

00:41:38:21 - 00:42:02:20
Todd Sullivan
Thanks again for listening to the Cashing Out podcast. For more founder exit stories, please subscribe to the Cashing Out podcast on Apple, iTunes, Spotify, or wherever you listen to your favorite podcasts. And please remember exercise dot com and the Cashing Out podcast are for entertainment purposes only. This should not be relied upon as the basis for investment decisions.