EP 1: Jacob Garlick, Managing Partner at Abraham Trust
James Mackey 0:00
Hi, and welcome to Episode 1 of scale by Design. Today we are joined by Jacob Garlick. Jacob, welcome to the show!
Jacob Garlick 0:20
Thanks so much for having me, James, how's it going?
James Mackey 0:23
It's going really well. And we're so pumped to have you here with us today. And before we jump into it, we have a lot of great topics to talk about. I was hoping you could just tell everybody a little bit about yourself.
Jacob Garlick 0:33
Sure, I'm the managing partner of a private equity firm, called Abraham trust. We also have a pretty heavy venture arm that does Venture Capital Work into early-stage businesses, as well, where 50/50 between the venture deals we do and full-on private equity buyouts that we do.
And my background started in mergers and acquisitions, primarily doing due diligence on behalf of a multifamily office. I spent the first few years doing that. And then I had an opportunity to join a small software startup called M helpdesk, the CRM for field service companies, plumbers, electricians, landscapers, carpet cleaners, and IT repair, and we replaced their clipboards with iPads. After we were lucky enough to sell that business, I went right back into M&A as an advisor and started investing my own money along with CO investors. And that led us to a track record that allowed us to open up a full-blown private equity fund.
James Mackey 1:40
Nice, you've definitely been busy. And it's crazy.
Jacob Garlick 1:45
Yes, it's been quite the run and an absolute blast.
James Mackey 1:50
So you still have so much of your career ahead of you. Which is what I find so impressive is that you've done all this at a pretty young age as well, and gotten to where you are so early in your career. I've really been impressed, kind of following your journey and seeing what you've been up to over the past couple of years.
Jacob Garlick 2:07
Thank you, James. Yes, it was a pretty wild ride at 23. Adam's help desk really put us in a position to be where we are today, almost a decade later.
James Mackey 2:16
For sure. One of the things we wanted to talk about today was just how you think about the future and how you think about creating crafting and understanding a vision for the future. And how that kind of plays into creating great product companies. Can you tell us a little bit about your philosophy there?
Jacob Garlick 2:34
Yeah, absolutely. It's a great subject. And in fact, as an investor, you play a different role than the CEO of a company who might be pretty heavily challenged by the day-to-day operations of a company. And so as someone who gets to spend their time most in strategy, being the investor, we spend a lot of time thinking about the future of the companies we invest in, as well as the categories we want to invest in. And what we do then is to agree on what future we liked the most.
We start looking for businesses that are pursuing those future leaders that are pursuing that future. And we're either going to invest in them or acquire them depending on the stage that they're at, and then give them the resources they need to grow.
Something that's important to recognize for our firm is we typically do not retire leadership. In other words, if your goal is to sell your company, and then exit that business, personally, we're not a very good fit for you.
We're typically providing liquidity for the founders of the business or the executives who run the company or the shareholders, but also hoping to spend the next five to 10 years working with you to continue to grow the business, we're very much looking to partner with great leaders. And what we have found is finding an alignment on a particular outcome of the future is a phenomenal way to kick off an investment strategy or partnership with the group because having an aligned vision of the future keeps you on the same tune as you encounter challenges, hit new opportunities, decide how to allocate capital who to hire, and it trickles down throughout the rest of the business that lends itself quite well to the product roadmap, ultimately. The products you choose to create, and the services you choose to roll out all stem from the direction in the future you're trying to create for your customer.
James Mackey 4:41
So as an investor, what's the best way to do that? Is it more so that you identify industries that you feel have the most opportunity for I suppose innovation, which is a buzzy word, but you know, in terms of just looking for the best opportunities there, how do you go about doing that with your firm?
Jacob Garlick 5:01
It's probably the thing we spend the most time debating. Is how to pick an investment strategy across a number of categories. We are an industry agnostic investor.
In other words, we do not have any specific swim lane that we are beholden to, right, whereby you have some venture funds that are a series A consumer-focused technology investor.
And then you might have a private equity firm that's looking to acquire large-scale logistics businesses, we don't have those restraints. And as a result, that type of freedom comes with tremendous responsibility, zeroing in on what we're going to invest in this year. As a result, picking the future that we're after allows us to have a North Star.
And so the North Star for us, each year may adjust itself by way of we make a bet in a particular category last year, and now we have a platform for making subsequent investments in that space. And so we're now looking for a new Northstar and a new emerging market that we might be interested in investing in.
James Mackey 6:18
I love it. And you know, this is all really great, very high-level strategy but I would love to hear a little bit more about it. Could you give us real examples?
I mean, at M helpdesk, for instance, the company that you grew and ultimately exited? I would love to hear a little bit about it.
Could you walk us through that process? Like, did you know that vision from the very beginning when you just had a prototype and just the founding team? Did you already have that vision of the future intact? Or is that something that there were iterations of over the first year or two of speaking with customers? Tell us a little bit about that process.
Jacob Garlick 6:55
Yes, that's a great example to dive into to get down to the more tactical details.
So M helpdesk was founded prior to my involvement with the business. The guys who founded the business were two Lockheed Martin engineers, and a former home services executive, who had been at it for a number of years prior to my arrival.
And so they had developed a really best-in-class solution. Initially, just trying to tackle ticketing, specifically for IT repair shops, and they were still using pen and paper, even though they were offering an IT service. They're managing their business, the pen and paper, and Excel spreadsheets. And what was interesting is it became clear that plumbers, electricians, carpet cleaners, and HVAC, all had the same workflows and IT repair companies, even warranty work providers whereby someone was going to be dispatched into the field to solve a problem. And so that became the first what I would call act, one Northstar for M helpdesk was to replace that clipboard with an iPad and give them the ability to manage their business from start to finish, take a finger signature, take credit card payments, synced to QuickBooks, the whole nine.
They had 5000 freemium users when I joined the business, and the challenge that they were encountering was that hundreds of businesses were signing up for free trials at the time every single month, and none of them were converting.
And so, act two of the business where my involvement came into play, was creating the business's voice for the customer. And actually creating a customer service experience. For those free trials, contact them, demo the product, help them onboard once they've decided to purchase, and give them a phone number to call if they had zero customer interaction. Prior to that point as a mandatory part of the sales process and onboarding process. It was very reactive ticketing support.
So all of a sudden, 40% of people who were demo purchased, right, and after we onboarded them, we had a less than 10% churn on an annual basis. We had single-digit churn by the end of it by the time we sold the business. We were in the single digits for annual attrition for someone who had been on our platform for more than 30 to 60 days. And that was a really big deal.
James Mackey 9:42
In terms of adding in that more so that customer service layer and thinking about obviously optimizing the product toward what's really going to help the customer, how much of that was more so just you kind of seeing the vision of like, this just makes sense, right? Do people need these things in order to do their job more effectively? Or was it more of like, was there a customer feedback loop that enabled you to make the changes?
Or did you just kind of independently decide, okay, this is the direction the product needs to go?
Jacob Garlick 10:13
Yes, so I'd come from a background in sales and marketing, specifically in Portfolio support in the M&A work that I had been doing. And it had become extremely obvious that a customer feedback loop was going to be critical in making the decisions on what to use our developers' precious time and resources to build.
And, so it wasn't very long before, we had maybe nine out of 10 products that we were rolling out or features we were rolling out on our monthly or quarterly releases that were coming directly from our customers. In fact, they could suggest a new feature. And then if you were a paying customer, you can upvote up to five different product features. And, that would make it to our dev team and our CTO. And that's what we would build, you got to listen to your customers.
We found that there were really two product roadmaps that were very critical and important to our success. One was the sales roadmap for the product. And the other was the customer success roadmap for the product. What do I mean by that?
It's best illustrated by my 75-year-old mother, or she's about to be 75, I should say. My mother, the past three cars that she's gotten, demanded that it had GPS, okay, demanded it. And of course, you can't just buy a car GPS, it's a whole additional like four or $5,000 package that comes with the roof and a better sound system, whatever it is, she never uses it. It collects dust, all three, but you know, this time, she's gonna buckle down and really use it.
But here's the thing, the car dealer could not make that sale, without offering a model with a GPS system in it, she would not buy it without, okay? My mother, by the same token, cannot physically drive a car unless it has parking sensors. She has depth perception issues. As a result, she also cannot purchase or use the vehicle, unless it has parking sensors. Both of those features were critical for that car dealership to make that sale to my mother.
The same thing applied to us at M Helpdesk. They were features that our sales team was encountering as objections over and over and over again. For example, does your technology have XYZ features? Does it have the ability to do parts tracking, and inventory management, these things were constantly coming up. So we would build them out and quite frequently, it would lead to us having a smoother sales process. But we found that our customers weren't really using these tools.
For the same reason, when you hit January 1, you decide you're going to eat healthier and exercise more. They felt that they were finally going to buckle down and get all their equipment under management and get barcodes. And that's a lot of work. But we built that feature because a good portion of them would eventually use it. But they definitely would not purchase unless they had the option to use it just like a gym, maybe needing a basketball court or a pool to get someone to sign up. They use it occasionally, but they really need the weights and the cardio.
On the product side for M helpdesk, our customers could not use our tool unless it had offline capability. The ability to work when they go into someone's basement or addict and lose connectivity. And as a result, the tool needs to still be able to function save data, update the work order, take images and then sync when it comes back online. A plumber that's never had an iPad before to manage their business isn't going to say directly to you. I need offline capability. Right? They're gonna say, we trialed your competitor software, and it doesn't work when I go to the basement. That's what they're gonna say. And so having a business team that can translate those business requirements into technical requirements and build the business case study for both the GPS and the parking sensors and has a critical roadmap for both selling and for keeping customers was the secret sauce to our success.
James Mackey 14:48
That's a really good analogy. I love that. That is awesome. It just makes so much sense.
So talk to us about the progression from there. I'm just really curious to know. So how long were you at M HelpDesk? And can you tell us a little bit about leading up to the exit? And what did that look like?
Jacob Garlick 15:08
Yes, absolutely. So my partners had been full-time in the business for a couple of years, almost six years roughly, between their part-time involvement and full-time embalm before I showed up. So, it took a number of years to be an overnight success. And they had a very mature technology before I joined.
And then I got in when they had all this organic demand, but very little sales acumen and that was my value add to the partnership. From the day I joined, to the day we sold, was just about a little over a year. And it was an absolute rocket ship of a ride. We onboard 1000s of customers every single month VR free trial, closed 1000s of paid users every month as a result and ended up being sold to HomeAdvisor. They took a majority stake in the business, they were the number one lead gen provider in the space. They're an IAC-owned company.
It was a really healthy partnership and fit for the business. And I don't know that I'll ever experience something so massively intense as a pressure cooker in such a short period of time, because most businesses do take a number of years to get to that point. I just happened to join right at that inflection point for the business, it was an absolute rocket ship of a ride.
James Mackey 16:36
It must have been pretty crazy. Just curious, like, what kind of hours were you pulling? Was it nonstop?
Jacob Garlick 16:45
It was absolutely incredible. It's the hardest I've ever worked, you know, that young 23-year-old energy, easily sleeping in the office, regularly pulling 20-hour work days, at least four or five days a week. And loving every single second of it! I was super hungry. I loved the people I was working with, I had great partners in that business.
And when you build a culture that is all super tuned in to the same focus of hustling, we had no venture backing, we felt like a bootstrap ragtag team of brothers and sisters in the trenches going into the battlefield every single day, it was incredible. We would wake up, I would be online by 7 am. And then we'd have an 8:30 sales meeting in the office at 9 am. We're on the phones serving customers, all the way until 5 pm Pacific, which we were in Virginia, so eight o'clock, then from eight to 10, doing the admin work, people would hang out and like after work and you know, have a good time, we were in a Wells incubator, at the time called fishbowl labs, they had, pool and ping pong, and some video games.
And so the team would hang out after pulling a 12-hour shift, which was incredible. And then I'd stay up till maybe midnight two in the morning, working through that day's reports. And figuring out what adjustments we may want to make all admin work happened outside of business hours. And then maybe we'd stay up because we had international customers as well come through, and I'd take any demos that the team wasn't around for. And then we did it all again, the next day, it was an absolutely incredible assembly line of people giving their blood, sweat, and tears. And that is what's required, especially at that early stage, right?
If we didn't make the sale, you know, someone's kids' tuition didn't get paid. And so that was serious pressure.
James Mackey 18:56
Right! And it's kind of interesting how in those early days, right, or when you're when even if it's not the early days in the company when you're hitting that inflection point, as you put it, it's still I'm sure you look back fondly on it, even though you're employing those crazy hours. It's like you're part of something so special, right?
Jacob Garlick 19:16
Yes, I mean, it was absolutely magical. Even when we were in it, there was virtually no material point that I can recall where I was unhappy about the amount of time I was putting into it. I mean, it was an attraction rather than a promotion. We were just magnetically charged to be there and work hard. And we're all after something together. It was intoxicating. Even if you walked into our office after hours, you could smell it on the room, you know, and we felt it was important to shower our customers with enough love that made them feel like they were dealing with a fortune 500 business. Right?
You know when I joined Helpdesk, they were three partners and one part-time customer service rep. That was it. And when we sold the business, about a year later, we were still only 33 people. So it was, from our perspective, this massive scale-up, but we were serving 1000s of customers. And we wanted them to feel like they could call 24/7 and get someone on the phone and be showered with love.
James Mackey 20:26
I love that! And so now you've done it both right?! You've been an executive, you've scaled to a successful exit. Now you've been a successful VC and PE partner and running your own firm. I would love to get your thoughts on this. When you're looking at companies to invest in, can we talk a little bit about what you look for on the founding team? Wherever you want to start, I mean, I don't have a specific agenda there. I just more so like whatever you think is the most important are the things that you look for.
Jacob Garlick 20:56
Yes, happy to go macro and tactical. And I'll start at the ground level on the tactical side and sort of work my way up if you'd like.
We have a score, we have an acronym that we use on our first interaction with another human being, we call it our Scott score. Okay, it's an acronym. So S stands for smart. And we meet in every facet, you know, is what we're really looking for some type of unique industry expertise, or perspective around something, right? It's not so much IQ, but rather, why does this person feel well positioned enough to go endeavor to start a business or grow their business? Or keep playing in the space? We're looking for someone who when you talk to you, you're just undisputedly clear, unequivocally clear that you're dealing with an expert in a space, it is my experience that people who succeed really know their space really, really, really well.
The second letter in that acronym is C, which stands for connecting the dots. So if you really have this unbelievable insight into a space, can you then take that insight, and sort of logically connect the dots in a format that other people can then understand your insight? Right, where the opportunity is, just knowing it is not enough, but being able to connect the dots to an opportunity or a direction to go and make it clear for us?
The O stands for obviousness. So once they've connected those dots, does it instantly click? Is it clearly obvious that this is a no-brainer direction to take the business. In my experience, the businesses that struggle the most, do not have a very obvious, clearly laid out plan that makes a boatload of sense. It's rarely complicated and difficult to understand and then succeed.
If we look at the businesses that are sort of the Darling technology companies of our generation, let's look at SpaceX, it is very clear that they are trying to colonize Mars. Everything else they do is in an effort to get to that place, right?
Tesla is trying to create sustainable transport in a world that doesn't rely so heavily on traditional methods of power. So for us, we're looking for that just no-brainer decision and Help Desk was also very obvious, right? No more pen and paper, everything's digital. Thus, faster, no more double data entry, you have to remember people were calling in Hi, my light bulb was out, can you send an electrician out that someone was writing that data down, then they weren't going ahead and filling out a work order, then the electrician would come into the office, pick up like 10 clipboards write these work orders. And then go to the job, fill it out, give you a yellow blue red copy, come back, the admin would enter that into the payment system, get an invoice out, take payment, enter that it's paid, and then re-enter that data for like a fifth time into QuickBooks. It was obvious that that wasn't going to be the way they do it now that iPhones existed, right? So that was very obvious, right?
First, we have two T's. The first stands for attraction. So we're attracting investors, we do not invest in any business that is pre-revenue, although we will get quite close. And we do also spend a lot of time with early-stage startups that you know, executives thinking about starting a company and entrepreneurs that are maybe about to exit a business and start something new. But we do not, as a matter of principle or thesis, invest in those businesses. We think there are enough friends and family and so Are to seed capital to start-up companies that are doing a great job. Our goal is to help scale.
So we're looking for businesses that have a little bit of traction, and help desk would have been a great portfolio company for us. They have customers, they got stickiness, and they have product market fit. And now they have a clear path to acquiring new customers, and they know how to onboard them and keep them.
And then we're going to finance that growth, clear unit-level economics. Okay. And then, finally, trust, right, it's in our name, Abraham trust. But is this somebody that I can trust, and with my family, and with the board, and with other partners in the network, LPs, because if we're going to invest in your business, we're going to greenlight our whole network for you. And if I don't feel comfortable putting you in front of someone saying, Abraham Trust invests in us, and has that stamp of approval from us, then it's going to be difficult for us to help be a value add investor, we do not want to be a simple check writer. So we give a Scott score on the very first meeting, one to 10 on each of the letters in the acronym, and we're looking for really good grades.
We want eights, nines, or better on all of them. And sometimes there's room for improvement. And in my experience, it's very difficult to really get to know someone in one meeting. The best relationships I have are some of the longest relationships that I have the most experience that I have with someone, the deep stuff going on with them. So for us, we spend a lot of time getting to know people, which is unusual in venture, especially private equity, it's a little easier, we might meet you a couple of years before you sell your business to us. But in venture, you might be raising around right now. Right? And that's okay, we really believe in a relationship first approach. So that's the real tactic.
James Mackey 27:08
That was great! There's so much value in that. So thank you, I know everybody listening is gonna love that. So thanks for taking the time to just break that down. And so it sounds like a lot of entrepreneurs. It's the obvious part, like what you were talking about, like is this? It's like, are they really solving something that is going to be a big winner? Is it more on this, like the product solving a problem that's really worth solving? Or is it also on the go-to market side where they haven't really figured out? How to position it? Or who their ideal customer is? Or? I'm just kind of curious, is it more about product functionality and more about identifying the product market fit or something more on the go-to-market side? Could you explain that to us?
Jacob Garlick 27:54
Yes, this is why we spent so much time thinking about the future and the customer problem that we're looking to solve.
So it's much more frequent that we would identify an area we want to invest in because we're very clear on a problem that exists. And a future where that problem won't exist, because it will have been solved, we think about how it might go about being solved. And then we go look for a business that fits that bill.
So companies that we're typically passing on investing in, aren't a perfect fit, or close to a perfect fit for solving that particular problem, they may have a different difference of opinion on how to get there, and they may have a difference of opinion on how to go about solving that problem, specifically with their product. But for us, we're looking for very clear unit-level economics that doesn't rely on some type of interesting loss leader to get to where they need to be going. You cannot knowingly sell dimes for nickels, there's no way to make up for that in volume. And so we typically are getting involved at a point where that part's been solved for.
James Mackey 29:12
Gotcha. And you, curious, we hear a lot of VCs talking about, they're looking for firms that have multiple founders, that you know, they feel like just from a level of accountability, and then also just from a workload perspective, it just makes the companies a lot more likely to succeed, multiple founders.
From your perspective, is that true? Do you look for Okay, a go-to-market founder and a product or an engineering founder? Or is it all over the place? Some of them are, you know, companies with just one founder, others have teams of three or four. I mean, curious to get your thoughts there.
Jacob Garlick 29:47
Yeah, it's interesting. Our portfolio is made up of solo founders and leaders and other portfolio companies have 2, 3, 4 CO founder partners that are, you know, either all still with the business or some are critical to starting it and some left after that to pursue other businesses.
I will share from experience that my opinion on this is that one or the other is not necessarily more critical to someone's ability to succeed. In other words, I don't believe you will fail or succeed, because you are either solo or with a partner. I will share it as much easier to share in the constant nose grinding, bone grinding challenges that occur to build a business when you have someone shoulder to shoulder with you in the trenches.
I got to build Helpdesk with incredible partners. The real founders of the business, right? I was not a founder of that business. And having them by my side to go through it together, made a world of a difference. After we sold the M Helpdesk, I took 12 months to develop a concept and even raised a couple of million dollars for what I thought would be my next software company. In my background, it's easy to just give this sort of polished story of how I got to where I got, but there was a stint there before I jumped directly back into m&a and got back into private equity, or I thought I was going to start another software company. And I did that on my own from the beginning.
And it was absolutely brutal. And then I brought in a partner who was an absolute godsend a guy by the name of Rick, and Rick was there every day in the trenches with me and I had skill sets that I didn't have that were a nice balance for my areas of weakness, right, you have blinders on when you're building a company, you're really focused on getting to the finish line. And so that creates exposure and risk. And Rick and I, failed together.
And even that part of the process was a little less painful. We burned through all of our investor's money, all the way down to the point where we had to layoff the people that we had hired to help us with the business, the single most stressful day of my career up until that point, because of letting someone go at a successful business, typically, you've set expectations, you both know that they're not meeting those expectations and that they may be better off finding a position somewhere else. And they know what's expected of them. And no one's surprised if you do a good job, no one's gonna be surprised if you're gonna let them go.
When your business fails, you're letting go of someone who has given you all their blood, sweat, and tears, put all their heart and soul into it, do exactly what you asked for, and you failed to deliver what they needed to be successful. And as a result of your failure to hold up your end of the bargain and deliver a great product that is competitive, and customers love that they're being let go. That's brutal.
And I have to say, I don't know, if I could have failed without Rick, it may have crushed me. So from that perspective, I highly encourage, if not, you know, sometimes co-founders aren't around, right, and you're not going to delay starting your business just because you can't find a co-founder. But I highly encourage all of our executives to find true partners, so that they can go do this together. And that's the same way I feel about my fiance and life. Right? I'm getting married to a beautiful woman named Kristen. And I don't know that I could be on my game the way I am without her love and support and vice versa. You know, a little different.
James Mackey 33:54
Yes, it makes a lot of sense. And one follow-up question I have on the CO founder conversation. Are there certain criteria that you would recommend founders to go through when they're selecting a CO founder? Is there sort of like an interview process or top things that you look for in a CO founder? Because, I think one of the challenges I had in the early days when I founded SecureVision would just be overcoming that trust barrier of okay, am I really going to go into business with somebody else? 50/50. I mean, obviously, people do it successfully. Right. But I'm assuming for every successful partnership, there are probably 10 that don't work. I mean, I can only imagine maybe not that maybe that's a little cynical, but..
Jacob Garlick 34:45
I know it's probably more because most businesses fail to even get to early-stage traction.
James Mackey 34:52
Right. So how do you go about picking a CO founder knowing if somebody is the person that I want in the trenches with me? Is it just gut instincts? And? And okay, do they kind of complement you in terms of having skill sets that you don't have? Or is there something else that I'm missing here?
Jacob Garlick 35:10
Well, my approach to picking a partner is much the same as how I picked my life partner. And not so much the criteria. But the process and the stages that I've gone through, have served me well, in our portfolio. Well, I think you cannot rush it past its natural timeframe for progression.
What's your whole goal of a first date is to get to a second date. You know, that's really you can't tell someone everything about yourself on day one, you certainly shouldn't be proposing to them on the first day. And so as a result, you have to give an opportunity or a split hold a space, that gives you the opportunity to develop a relationship because that's the foundation through which trust in my experience is built.
And so it is very rare that you'll find two co-founders that met each other the day before they decided to start a company, right, it happens. But most people have some type of history together, or someone was recruited along the way, right? And that was a higher position, and sort of developed a relationship and partnership over time. And so that has been my observation. And certainly, there is more than one path that you could take to find a co-founder or a partner. But in my experience, it absolutely cannot be a process that is fast-tracked and has to develop naturally.
James Mackey 36:52
Right. And I think now that you said that, I think the majority of successful companies that I work with, and have worked with throughout the years, the co-founders usually worked together at a previous startup and they maybe weren't the co-founders, but they worked in that ecosystem.
They work in tech, they knew each other for several years. And then there were some times, it's like one of them was a co-founder, and one of them was one of the initial employees. And they co-found on the second thing, right? So, I see you're right.
I think, generally speaking, that probably has the highest success rate when you know somebody that trust is established. And then also you probably have worked with them in a similar environment. Right. I see. I would say that most of our customers. That's typically what I see now that I think about it.
Jacob Garlick 37:38
Continuity has been demonstrated over and over again, as a winning success factor. And I think that was really well demonstrated with the Dream Team that Michael Jordan was on, whereby their coach was really smart. For the first couple of practices, you know, he had a bunch of all-stars, just like Mega Magic Johnson, Charles Barkley, right, Michael Jordan, all on the same team. That's insane!
And so something he did is he brought them into practice scrimmage with a college team. And he kept them trading in and out and the college team mopped the floor with them. Just absolutely. demolish them.
And how could you have all these NBA legends get demolished by a college team? Well, that college team had plays worked out, they had played together for a couple of years. They knew everybody's position and strengths and weaknesses. They knew what their game plan was going in, you know, Michael was taking the ball up, and then he was passing it to Johnson, oh, wanted to be a ball hog. And they didn't have any plays to work down, and the coach was making it increasingly difficult by changing them out, rotating, subbing them in and out, okay. I will take continuity over, and success, a full track record of execution over a great concept or a group of hired guns any day of the week. Continuity and execution are so much more important.
James Mackey 39:17
There it is. I love that, Nick, we got to get that into its own little videoclip. Because that was great. For those listening, Nick's our VP of Marketing and producing the show behind the scenes, but that was a great answer. A shout-out to Nick. That was so helpful.
Well, we're coming up on time. We have a few minutes left, I want to ask you. Could you just talk to us a little bit about the metrics? A lot of this is pretty straightforward stuff that everybody looks at, but nonetheless, like you would just be great to just do a kind of a run-through of this is, you know, this is I don't know if it's like growth metrics. You're looking at the top line ARR, the growth of that ARR gross margin. What are you looking for, you know, of net revenue retention, I mean, what are the core things that when you're looking at a product SAAS company that you're looking for from a metrics and a financial perspective?
Jacob Garlick 40:09
I think you would find our approach to tracking the success and performance of our portfolio companies both on the venture side and the private equity side, in the portfolio and their competitors, candidly, is quite straightforward and boring. by most standards. We are not looking for a creative KPI or metric or OKR, that defines our investment success, and that wouldn't be out of line with traditional business finance.
What do I mean by that? You can get yourself into trouble if you only focus on customer ads, or top-line revenue growth, or your ability to retain customers, even if that's the only metric that you focus on as a defining factor. You know, on the consumer app space that could be viewed as you know, daily active or monthly active users, right?
We see this all the time in the console in consumer products, or food and beverage, when you sell through the retail right number of skews sold per store per week, right? That velocity, that data story helps you land new accounts, any one of these can be important for the business, but if any one of them is singled out as the only metric to define success, you can get into big, big trouble.
And so for us, we are obsessing over unit-level economics. Show me how you can make a profit on a single can of water, right on a single seat sold of your software, and explained to me the customer acquisition cost against your 12-month payback period and your lifetime value. Right? And if and if you can't really clearly illustrate that we are going to spend a lot of time working on that. And getting to that clarity. Because, you know, revenue is sort of vanity. And profit is sanity. But cash flow is king. And it's kind of funny, you know, venture-backed businesses, especially put a high value on some of these vanity metrics. Because they've seen other companies successfully demonstrate an ability to fundraise off of them. And they're in for a rude awakening when it comes time to successfully exit the business build, grow the business, or raise another round of funding.
James Mackey 43:00
Well, I think that right, I mean, it seems like in Q4, particularly, we were seeing a lot of those insane valuations that are just purely based on ARR. Not even necessarily significant. ARR growth. It was like, from what, from my connections, there was, I was hearing about a lot of companies that were maybe around 1.5 to 3 million in ARR that were getting anywhere from 60 to 100x. Revenue valuations. Just based on that, and a lot of those same companies are now, unfortunately, kind of correcting course, it seems and, you know, we're seeing kind of like this tech bubble, and we're starting to see, I think, what is it like 17,000 jobs and tech startups? In terms of layoffs, right, right now, and that number seems to be I mean, I think Coinbase just announced earlier today, that another 18% of their staff is going to be let go. So we're starting to see a correction across startup's grow stage crypto
Jacob Garlick 44:00
Almost across the board. Almost.
James Mackey 44:03
Right. So, so curious to get your thoughts on what's happening in the market. I mean, as an insider in the VC community, what's going on in tech right now, and how deep do you think this is gonna cut?
Jacob Garlick 44:15
Every six months, we produce an economic outlook over the next half-decade specifically. And we think, in the next half-decade, the markets flat or down categorically by any metric, and that should change your thinking around your spending habits, your investing habits, and the product decisions you're making, right? Avoiding cash consumption, heavy product decisions for the business, finding a way to be a better steward with your capital, tightening the belt, and Bootstrap.
We believe it'll be more difficult to raise capital over the next 12 to 18 months as a result potentially further than that, it's very difficult to predict the future. But it is worth it to spend time forming an opinion on what you think will happen and then make decisions around that right, generally, up flat or down and going into what we believe is going to be a flat or down economy, businesses are going to have to focus on finding customers, serving customers in ways that are uncorrelated to market sentiment.
And so will we as an investor, right, there are certain categories that we can be investing in over the next half-decade, that don't have a correlation to whether the markets go up or down. And we'd also like to avoid inversely correlated businesses. And that's just our preference, other businesses find a way to make money that way. But we don't want a business that only does well in a down market, but rather, is less relying on up or down and more trending towards the future.
Let me give you an example. The price of deodorant may be up or flat or down five years from now, I don't know. What I do know is that more people will buy their deodorant on subscription digitally, and have it delivered to their front door. Five years from now, then do today, period, full stop. That's a fact. That's a future I believe in and see more people will buy their utility groceries, items, and consumer products on subscription online five years from now than due today.
So that means there's going to be a whole mess of businesses that benefit from that fact. And the increase in volume will translate to more revenue for them, irrespective of whether or not the price of that good or service is up or down. And that's what I mean by completely uncorrelated to the market.
What it's correlating to, is where consumer behavior and purchasing habits are going. So that's a place for example that we're looking at finding businesses to invest in and acquire is the businesses that support that fact, for example, in E-commerce fulfillment, pick pack and ship or three PL in the software's that back then, right logistics, especially.
For example, if you want next-day delivery right now, pretty much your only option is Amazon as a vendor, right? Or a merchant, right? If you want to provide that to your customers. Now there are a slew of startups tackling that problem and offering that solution. Hey, how would you like to not sell on Amazon, sell on your Shopify store and offer next-day delivery? Right, that bet that business will benefit from the mere fact that customers want that and may not be buying everything off of Amazon?
James Mackey 48:23
Right makes a lot of sense. I guess my last question just correlated to market conditions as well. I find your strategy very interesting. And it seems obvious to me that that's the way to go talking about this is that you know, is it clear and how much it makes sense? I mean, I think it's a good strategy.
Jacob Garlick 48:39
We try and live by a high Scott score, you know. And my partners, which again, so lucky to have I didn't form this opinion on my own, talk about co-founders. I have partners in our firm that we collectively are more valuable as a unit than we are as individual parts. And I'm blessed to have the most incredible partners in the business to help me form these opinions and speak.
James Mackey 49:10
For sure. What we saw in 2020. The last question, we are very just a minute or two left.
We saw tech get hit really hard when the pandemic started. I mean, everyone did. But I mean, just speaking at SecureVision, right? Like we saw a significant drop within a two-week period. So it was bad. Fortunately, there were still some customers that actually benefited in a sense from digital transformation. And some of them ended up having their best revenue year ever. But overall, there were obviously companies in tech that took a huge hit.
So what was interesting about tech though, is that it bounced back faster. So when a lot of the economy was lagging, it seems like tech was like a rock Catch up taking off again. Very quickly.
I'm curious this time around. Do you see tech rebounding quickly from correlating from the perspective of the greater economy? Do you think that tech is going to kind of bounce back faster than the greater economy? If there is? Now if it looks like we're going into a potential recession? Is it taking a bounce back faster, as it did in 2020? Or do you feel like it's going to be a slower recovery within tech as well?
Jacob Garlick 50:28
Well, I don't know that I'm in a position to make that prediction. But I can tell you the two lenses through which we'll be paying attention. On a macro perspective, you know, technology, by the mere way it's constructed, offers a level of speed to scale and contract, that is very difficult to compete with, in a, you know, call it hardware-based business or brick and mortar based business.
And so from that perspective, you can make the argument that technology as a category, if it's a technology-based business, they have a better shot at rebounding faster. I think it's more important, though, to go sort of block by block, and say not all technology companies serve the same customer with the same type of product. And so if you just broke it down one level and said SMBs, versus the enterprise SMBs, tend to purchase things faster, then the enterprise larger companies, and so maybe SMB technology, companies find it easier to pivot and scale in this ecosystem and this environment.
But that being said, even the category that they serve, right, the category that they serve, or the industry that they serve, may never rebound. Right? An area that we think is at risk for cat-like just categorically being different forever, permanently on a new paradigm is office space. A very serious percentage of employees are now permanently, partially remote, or fully remote. As a result, the pure amount of occupancy on a fully leased building is going to come down. And so I don't know, if you ever rebound from that if you still offer that same type of office space, you'll likely have to find a way to innovate.
James Mackey 52:29
Jacob, those are all very interesting insights and a lot for me to think through in our audience as well. I'm really excited to listen through this again, and just start to think through what you bring to the table today. So, unfortunately, we're up on time. I feel like I could continue to talk to you for hours about this stuff. And I always enjoy talking with you. And thanks again for coming on today. This was a lot of fun!
Jacob Garlick 52:50
It's my pleasure, James. Thanks for having me and happy to support your guys' vision for bringing this type of knowledge to the masses and your listeners. And it's a delight to be in the room watching you guys, you know, really create the magic that you do.
James Mackey 53:11
Well, it's a special moment in history. You're our first guest, I think it's pretty cool.
Jacob Garlick 53:15
I'm honored you asked me to do that. Thanks, Nick, for what you're going to do and for helping put together this show.
James Mackey 53:24
And for everybody tuning in. Thanks for joining us, and we'll see you next time.