A couple of things did not happen since our last update, which led to an important decision for Sidenote.
\nFirst, we didn’t acquire another business. From the start, our stated goal was to buy ca. $150k worth of ARR to cover our operating costs and small (but reasonable) salaries for both of us. However, we couldn’t source enough deals that fit our investment criteria and ultimately close them. We got very near to it a couple of times but those opportunities fell through, for different reasons.
\nSecond, portfolio growth is currently flat. The main reason for that is the kinds of products we acquired—tiny, in competitive niches, stable revenue, and without much work on them prior to the acquisition—require a lot of work to drive growth; we started by adding basic feature parity with competitors and optimizing some steps in the funnel but what they really need is more distribution channels. There are only so many hours in the day, and I prioritized the deal search and evaluation process (a nearly full-time responsibility) over growth work.
\nThese 2 facts meant that our underlying thesis was invalidated (at least partially). Our acquisition criteria was conservative (preferring boring-and-cheaper-but-flat over growing-but-expensive-or-too-recent). This led to realizing that:
\nUnnecessarily burning capital while we solved these issues was not an option. So, it was decision time, and this is where we landed:
\nConsidering the first two points, we concluded that Alfredo was the essential one. He’ll remain as sole operator and I will move to a passive role from now on.
\nWe believe that making the product strategy entirely focused on distribution is the right call for both our products right now. They’re the kind of “barnacles on a whale” SaaS tools that build on top other platforms, and we see multiple ways to expand their feature-set in this direction. From experience, we know that traffic coming from platform marketplaces is high-intent, even when it’s not high-volume, so our expectation is that this will drive qualified top of funnel growth and have a material impact on revenue. We’ll try this on a single product first, and take it from there. If this doesn’t work, we’ll see.
\nPersonally, though I would’ve loved to continue as an active part of Sidenote (that was the plan), I don’t see this outcome as something bad. I learned a ton from this experiment, and I’m excited to bring this background to a full-time product position I’ll be taking on soon.
\nThat’s it for now. Next time, you’ll be hearing from Alfredo.
\n", "date_published": "2024-10-30T00:00:00Z" } , { "id": "https://sidenotehq.com/blog/sidenote-2-sheet-best/", "url": "https://sidenotehq.com/blog/sidenote-2-sheet-best/", "title": "Sidenote #2: Sheet Best", "content_html": "New year, new product[1].
\nWe’re excited to say that we just acquired another product, but just to screw with our internal coding system, it shares the same initials with our first one. It’s called Sheet Best, and it’s a tool to create REST/JSON APIs from Google Sheets.
\nAs we’ve mentioned before, it’s taken us a lot longer than we originally anticipated to find the right products for us. Given our model, the financials, subscription and product metrics are only part of the picture. The scope (“surface area”) and operational needs of the product also have to be small enough that we can take them on ourselves, even after accounting for its near-term growth opportunities. That’s proven to narrow the field dramatically.
\nSheet Best was previously owned by the fine folks at XO Capital. We’ve followed their journey for some time, and when we saw that it was available, we knew it ticked many of our boxes. You should also read their perspective and history with the product here.
\nSo here we are. We’re eager to move entirely into execution mode and with this one on the books, we can now say that we’re looking to add just one more product in the $50-$60k ARR range to close our initial portfolio. If you’re selling, we’d love to chat.
\nWe know, it’s been a while since one of our updates but we’ll catch you up soon enough 🙂 ↩︎
\nAnother late “monthly update” that had to be combined with next month’s. We spent quite some time in May & June working on a couple of deals that ultimately didn’t pan out. We were hoping to share a combined 2-month update with something like “sorry we’re late, here’s why though: [insert deal-closing announcement here]”–but turns out we’re just late (with a couple of lessons learned).
\nOur first little app is still humming along nicely, with cash returns in the same range as before. It’s growing slowly in the right direction, led by improved trial-to-paid conversions (that we can now say are from the onboarding tweaks we did). Although we’re doing better on active subscriber growth, we still need to do better on a revenue basis. Most conversions are in the lowest subscription tier, and there’s a lot of work to do around expanding usage beyond the initial installing team to help drive revenue growth.
\nWe’re now working mostly on new features, which feels great after nearly 3 months of (essential) cleanup. There’s still tech debt, sure, but it can now be balanced with stuff that’s valuable to our customers. It’s starting to feel like we’re getting closer to a more normal product release cycle.
\nAs I mentioned at the outset, we worked a lot on a couple of deals we wanted to close, but couldn’t. There were different reasons (and lessons) with each. Here’s what happened.
\nIf StandupBot was a size “S” deal, this would’ve been an “L”, and it unfortunately died during due diligence. The product ticked most of our requirements and it was a great fit for us. It had a couple of risks (which we knew before presenting our LOI and going into diligence):
\nThese were hairy but we decided we could live with them as long as we could jump into the product and start de-risking the investment from “day 1”[1]. The product could (and should) support additional platforms, and there were some packaging / pricing experiments we believed had the potential to lower churn. If we could start doing stuff within weeks of onboarding the asset, we could take on the risks.
\nDuring technical due diligence however, we realized it would take us months (instead of weeks) to feel comfortable doing any kind of change to the product without fear of screwing something up for its current customers. The code wasn’t in the shape we expected and needed it to be. In isolation, we could’ve dealt with this over time, but with the other two risks on top, there wasn’t much headroom on that front. This put it over our tolerance threshold.
\nIt was a real bummer for all parties, and something we want to avoid in the future.
\nWe’ll need to be even stricter with risk assessment before presenting our LOIs in the future. We don’t expect to find perfect deals, but for us, it looks like we found our risk ceiling (for now). When evaluating a business, our guiding rule could be to ask ourselves:
\n“What needs urgent work? Is it…”
\nWe can only handle two, at most. If the answer is more than 1 before an LOI is presented we should pass. We should assume that we’ll find additional hair during diligence.
\nKeeping with the t-shirt size analogy, deal #2 would’ve been an “M”. From a portfolio perspective, it would’ve been a great combo (along with deal #1): we would’ve closed our starting portfolio with S, M and L businesses[2], which is a nice distribution. We were going to partner with a friend of ours on this deal; he’s long wanted to get into this investment space and deal #2 was a great fit for him as an operator due to his background.
\nNow, this deal had some risk around the tech stack (which was overly complex) and the product needed a lot of work in different areas (particularly at the top of the funnel). This said, it had very low churn and nothing was urgent, which would’ve allowed us time to work through the issues.
\nAlas, we couldn’t reach an agreement with the seller and decided to give up when we realized that we couldn’t get to where they wanted.
\nThroughout our acquisition process we always try to keep in mind that although we don’t intend to sell the assets we buy, we don’t want to lose that optionality. That means staying within reasonable bounds of what we believe is the asset’s fair market price. Everything else staying constant, we want to reduce our risk of losing money if we must sell an asset for whatever reason. So far, so good.
\nBut in this case, we opened some doors during negotiation that caused some confusion and mismatched expectations about where we were willing to go in terms of structure. We learned that we have to keep things simple – getting too creative with deals at the size that we’re aiming at can cause unnecessary misunderstandings.
\nAs we head into the summer, things will slow down for us to take some time off with the family. Outlook stays the same though.
\nOn the product front, we’re feeling super motivated to execute on our strategy. The road ahead is getting clearer, and we love it.
\nOn the search front, nothing to do but to persist. We’re still looking for a couple of assets to round out our starting portfolio. We know they’re out there, but they need to be for sale and hit a fair number of our requirements – this has proven to be much harder than we expected. At least we’re learning a ton along the way and it feels like we’re getting much better at assessing opportunities.
\nOf course, it’s never that simple. We’ve learned that already. ↩︎
\nSizes of course relative to our dimension–any of these is actually an XXS, or you know, a sidenote, in the broader tech market ↩︎
\nBy the end of April we started feeling much more confident around our first product’s codebase (three months into owning it). We know what to build or revamp in the short term. We’re also seeing some positive trends, but it’s way too soon to tell–that’s the thing with metrics and tiny products: we need to consider the law of small numbers when anything moves up or down.
\nStill a single-asset “portfolio”. We’re actively searching, but good opportunities that fit our model continue to be scarce. Dealflow is our #1 challenge to take the next steps towards our vision for Sidenote. On the upside, at least the math is simple to do.
\nApril was a bit better than March (see next section for possible reasons). MRR grew ~4% month-over-month (which is half our current target) and the business yielded ~2.5% monthly cash-on-cash.
\nGoing forward, now that we’re more comfortable working on the asset, we expect our focus and responsibilities to be more clearly delineated, with Alfredo handling most of the tech side of the house and myself working on marketing and growth.
\nWe’re stoked about what we’re doing and everything we want to do. The hard part is coming to terms with what we can effectively do within our personal and business model constraints. We need to be patient and intentional. Slow and steady wins the race.
\n", "date_published": "2023-05-11T00:00:00Z" } , { "id": "https://sidenotehq.com/blog/update-february-march-23/", "url": "https://sidenotehq.com/blog/update-february-march-23/", "title": "Update: February-March '23", "content_html": "We decided to bundle February and March for our first portfolio update because there was a lot of boring stuff we had to take care of. We’d like to keep these updates on a monthly cadence from now on though. Let’s dive into it.
\nWe closed on StandupBot, our first acquisition, right at the beginning of February. Along with the asset, we also got a mix of excitement and anxiety for free: we were now officially in business, with a lot of work ahead of us.
\nThrough these first couple of months the business is flat on a MRR basis, due to churn being higher than our target (and its TTM average) since late Q4 2022. We knew that going in. Some of it is macro-related and some of it is product-related, and it’s our top short term priority.
\nWe’re averaging just over 2% monthly net cash-on-cash returns on our investment. It’s still modest for this asset class[1], but we were willing to go with a suboptimal valuation for our first deal because it was small, we’re playing a long game, and we really wanted to get started. We added yearly plans in March to improve the cashflow performance and we haven’t actively promoted them yet, although some customers have upgraded on their own (completely unprompted), which is great to see.
\nAlthough the transition went really smoothly and we haven’t needed much support from the former owners, we quickly realized that before executing on our product growth plan there was a ton of housekeeping that we couldn’t avoid. It took us nearly 7 weeks to get it done, although that is counting some unexpected sick time off[2].
\nThe biggest “gotcha” moment was realizing that you can’t just change a Stripe account’s company, if you’re operating from a different country than the one the account was initially set up in. The business was running from a US-based Stripe account and we don’t have an entity there (yet). You can request Stripe for a secure customer and credit card data transfer to another account in your country, but they don’t take care of migrating products, prices, or subscriptions. You have to do that yourself.
\nWe wanted to use this opportunity to move to a Merchant of Record like Paddle to get out-of-the-box tax compliance and simplify our admin operations. We reached out to their support team to see if they could do the customer and subscription migration for us, but by their answer it seems they only do that for larger businesses. Their proposal was for us to have all existing customers re-subscribe through their platform. All the work required to change the billing code to a different platform was already giving us pause — asking everyone to move made it a non-starter. Thus, we stuck with Stripe.
\nWe had to create a data migration script that re-created products, prices and subscriptions (with the same billing cycles), under our new Portugal-based account. That took time, but at least we can reuse it on future acquisitions.
\nNext up was updating the Stripe integration to use their Tax, Checkout and Customer Portal products so that we didn’t have to implement any VAT calculation logic on our end. Remitting taxes is still on us (unlike with a MoR), but at least we get calculation and other VAT-related data requirements out of our hands.
\nThe final bit of housekeeping we had to do was updating the app’s Slack marketplace information. It is very outdated and needs to reflect the app’s new ownership. I don’t want to get too much into the weeds here, but due to how Slack’s publishing system works, this also meant we had to update some parts of our integration to use more recent APIs in order to get the updated listing approved. Another big chunk of time here. We’re going through the review process and changes aren’t yet live, but we should get there over the next few days.
\nWhile all of this was going on, we also:
\nAnd that brings us to the end of March. On future acquisitions we’ll definitely err on the side of overestimating the amount of ancillary and cleanup work needed to take over a product.
\nIt’s been a mix of learning and necessary-but-not-growth-related work so far, so it’s only natural that the product’s baseline trends haven’t changed. We hope to start improving them as we get to focus on growth going forward.
\nWe’re also still looking to acquire a couple more businesses. Deal quality and volume seem kind of low right now (at least in our price range[4]). We’re constantly tapped into different sources, and we haven’t seen many interesting opportunities[5] over the past few weeks. We got close to making an offer on a business, but the seller wasn’t willing to move on their valuation. Keep calm and search on, I guess.
\nThat’s it for now. See you next month!
\nYet really great when compared with other instruments. ↩︎
\nDespite living 260+ km apart, our kids somehow manage to get sick around the same time, which almost inevitably means we also get sick a few days later. Oh, the joys of parenting! Seriously though, this is a major motivation for doing what we do: having a ton of flexibility to take time off to take care of our families or ourselves. ↩︎
\nThat’s an affiliate link by the way. If you become a Fathom customer, we’ll get a small commission (that’s our secret plan to get rich, but we do love their product). ↩︎
\nWe’re looking at businesses in the $25k-$150k ARR range at the moment. ↩︎
\nI wonder if this is just my impression or if others in this space are experiencing the same (let me know either way). ↩︎
\nWe’re super excited to share that we’ve closed our first acquisition and are now the proud new owners of StandupBot.
\nThe entire transaction went really smoothly, and we had a great working relationship with the (now former) owners. From LOI to funds in their account took 12 days. They were super open and helpful during due diligence, and everything was pretty straightforward. We wish them the very best in their future ventures!
\nAs to the product: it essentially ticks all the boxes in our criteria. There are a lot of opportunities for growth through better SEO, onboarding, pricing, and of course, new features—time to get to work now.
\nWe don’t feel comfortable with completely open books, so we won’t disclose the financials[1]. However, we definitely want to share our progress and learnings with the community over time—we’re trying to figure out a format that strikes the right balance for us though.
\nOh, we’re still searching for businesses to buy, so if you’re selling (or know someone who might want to), feel free to contact us!
\nFor now, at least. ↩︎
\nSidenote was created by Alfredo and myself. We’ve known each other and collaborated on-and-off for many years now, and besides having complementary skills and enjoying working together, we have a ton of things in common.
\nWe’re both married, with two kids around the same ages, and always try to put our family first. We each also have a long (15+ years) experience working in tech, an engineering background, and have worked as developers, product managers and more recently consultants and advisors. We’ve led large teams and helped our clients either make or save millions of dollars. We’re also entrepreneurial, and tried launching our own products from scratch, and failed (in different ways).
\nSo even if we learned a lot, as life went on, it got increasingly difficult to apply those lessons and have the space to start something from zero. Family always takes precedence, and when you’re already sleep deprived or worried making sure you can pay the bills, it’s hard to indie hack your way into a new product. We made our living helping others grow their teams and products and that’s where our focus was, and had to be.
\nAs things go, through a lucky combination of timing, personal savings and an exit from a content site that turned out to be very profitable, we were finally in a position to drop our solo consulting practices and officially partner up to launch Sidenote.
\nWe’re at an age where the opportunity cost of going through the process of launching entirely new products is not tenable for us. So now that we had a decent amount of capital on hand, operating experience on our backs, and looking to design a calm, profitable lifestyle that aligned with our values and long-term goals, we laid out a thesis. The gist of it being:
\nBy now you can guess where our name (and vision) comes from. We believe there’s plenty of room to create value on the margins: both in a broader sense (tiny products that are merely a “blip”[1] to others in the industry) and in a business sense (producing healthy cash flows).
\nWe want to create a calm, enduring, self-funded micro SaaS holding company. In other words, we want to buy, build, and grow, small cash-flowing SaaS businesses to hold and love forever[2], reinvesting profits into further growth. We think it’s the most viable, risk-controlled way to achieve our ideal lifestyle.
\nOf course, this ain’t nothing new. It’s merely a variation of the model that has been proven by the amazing people behind Verne, MicroAngel (Eyal Toledano), XO Capital, SureSwift, and many others[3]. We’ve learned so much from them and hope we can emulate at least some of their success.
\nShort-term (by June 2024), our sole goal is to have acquired (or grown into) ca. $150k worth of ARR, spread across 2 to 4 businesses. That’ll be the focus over our first 18 months.
\nThe aim here is to (a) cover our initial operating costs plus some headroom and (b) lower capital allocation risks (both through the size of any potential mistake, and through hopefully stronger portfolio resiliency).
\nAfter that, we will still need to grow that ARR number further to cover our target salaries, and even further[4] to accumulate more capital to reinvest into further acquisitions. That’ll be a balance we’ll have to strike over the first few years: how much we take out or leave in the business to keep growing it. After some time though, we expect we’ll be able to achieve operating leverage and get the flywheel going.
\nWe don’t know how this experiment will turn out, but we’re definitely excited about it! Make sure to follow along through our social channels (links below), or by signing up to our newsletter.
\nOr you know–a sidenote. ↩︎
\nWe’re still not sure how long forever means. Ideally, we’d hold products for many, many years, reinvesting the excess cash flow they generate. However, this is also about leading a calm lifestyle, and we’re not sure we can achieve that if we get to a certain scale. If and when that point comes, we might need to assess whether we exit from larger products and reinvest back into smaller ones. That’d be a great problem to have, so we’ll leave it for the future. ↩︎
\nSo many! This space is really exciting, with a lot of great folks doing really cool stuff and generously sharing what they learn. We hope we can contribute along the way as well. ↩︎
\nWe’ll share more on these goals as we make progress. ↩︎
\n