Tony Cappaert Transcript

My guest in this episode is Tony Cappaert. Tony started his career at Microsoft before co-founding a CRM software business for real estate agents called Contactually. The company was acquired by Compass in 2019, where Tony serves as head of lead generation. As we’ll see though, Tony is a busy man. He also founded a cabin rental and management company called Blue Maple and is raising a fund to invest in self-funded searchers. Tony and I talk in depth to that niching down Contactually to target real estate brokers, his thoughts on pricing and why every company underprices, why they sold the company to Compass, and his view in the search fund world, including what he looks for in prospective searchers as a former operator.

If you ever want to reach out Tony to talk software, property management or search funds, please don’t hesitate to send him an email at [email protected] Thanks for coming on the podcast, Tony. Sam Rosati gave a really glowing recommendation of you. So I’ve been excited to chat with you for quite awhile now. I would love to first hear about your background in Contactually and how you’ve built your businesses and what you’re working on now and all this other stuff.

First of all, thanks for having me. I’ve listened to your podcast for a while now, especially as I’ve been getting more into the search fund world, and it’s always fun to get to know the guy behind the curtain. Anyway, it’s been cool getting to know you, and I appreciate Sam connecting us. Briefly, I’m sure we’ll dig into some of this, my career has largely been in software. I started my career at Microsoft, I was only there for a few years, and started a SaaS CRM business called Contactually. We were a CRM product for realtors and for real estate brokerages, we helped realtors get more referral businesses, basically.

Then just grew that business over the course of eight years and sold the business to Compass in 2019. Compass is now the largest independent real estate brokerage in the US. We just IPO-ed this year. I’m still with the company and run our lead gen for Compass, which is an exciting ride to sell your business and then have another bite at the apple and go be with the business through IPO. And then in addition to also my Compass and real estate work, I’ve really been focusing on two other areas. One, I started a small vacation rental fund and a sister property management company where we have purchased cabins and cottages in the DC area where I live, and we turn them into vacation rentals.

It started as a passion project and it became actually a really nice cash-flowing business that I think has a lot of opportunity for growth. And so I’m very excited about it. And then I also got, I like to say reacquainted, with the search fund world, and I’ve been a particularly small fund to invest in primarily self-funded search deals. We’re on pace to do about 10 a year writing checks of 75, 100K. And that’s been also a really interesting world. So I’ve put my hands on a couple different pots, but I like to paint it with a blanket of real estate and SMB, is the flavors that are most interesting to me at the moment that I’m digging into.

Yeah, it sounds like you’ve been busy for quite a while. I’d love to hear about starting Contactually. You said you started at Microsoft while you were working there?

No, no. So I was at Microsoft in Seattle for two years and I had this moment… And to answer your question, it started in DC with two other guys in 2011, but that came about when I was at Microsoft. I think a lot of folks who work in a big company, they get this feeling of like, regardless of what you’re doing and regardless of the company, sort of like you’re a cog in a giant machine, and I felt that way. I did a 180 and joined a nonprofit in DC when my girlfriend at the time, now wife was going to go into law school in DC. So we moved here and I pretty quickly realized, “Okay, well, doing the whole nonprofit thing, I’m not more passionate about that either, so let’s figure this out.”

I met these other two guys to via Jeff. We were all in a similar stage of life where we had like the startup bug. We really wanted to maybe start something, we all got along well and complimented each other well, and we eventually became Contactually. So yeah, that started in DC.

Did you have the real estate agent focus from the beginning or is that a niche that evolved as you went through the business?

No, we were not focusing on real estate at all. And in fact, there’s a common theme of people who start a software company when they’re younger and then they maybe go and they start their second or third. There’s the steam of, “Man, if only I had known then what I know now, we would have been so much more successful.” I certainly feel that way now. We didn’t know anything when we started Contactually. The whole initial product was, most of us, certainly I am not particularly great at staying in touch with people over time. So the software idea was, let’s build software that will remind you to follow up with people in your network and will prompt you to do so if you haven’t. That was the nugget of an idea.

And that’s not tied to any one industry, that’s pretty agnostic. So we called ourselves this relationship marketing engine, kind of these nebulous concepts. And realtors that are coming to us, because if you ask yourself, “Well, who needs to stay in touch with their network?” It’s people who get business from a network, who sell to their network. And realtors are consistently trying to stay in touch with people they know, past buyers, past sellers, so they can get more referral business, get more repeat business. And there’s a ton of realtors. So yeah, they came to us and it took us years to eventually actually focus the business and say, “You know what, we’re going to build for realtors. And you know what, rather than calling ourselves this like relationship manager thing, we’re just going to call us a CRM.”

Realtors are calling us a CRM, we are a different CRM, but we’re still a CRM. That’s what we set out to do years in. And from there, the rest of history. We really did double down on this space. We sold to tens of thousands of realtors. 40% of the top 100 brokerages were our customers. It became our bread and butter, but it was almost an accident.

Yeah. I’m fascinated by businesses that decide to niche down into an area that maybe appears smaller than being a more general business. But niching down actually opens up the business to a lot more growth. And I’d be curious, was there a tipping point where you realized, “We can actually be a better, larger, faster growing company if we niche down into what feels like a smaller space at first, but can actually grow into a larger company?”

First of all, I 100% agree with that sentiment. I think it feels, as a founder especially, you have these grandiose ideas, “I want to build this big business that’s going to impact so many people.” And you truly do see this vision why everyone should be staying in touch with their network, for example. That feels big, but by keeping it not focused on a given target, people don’t themselves, like customers, users don’t see themselves in your marketing and messaging. And so I love the phrase, always the bridesmaid, never the bride. That’s where we were. Agents would come to our website, and they would be like, “I’m looking for a real estate CRM.”

And they just show up to the Contactually homepage and it would be like, “Relationship manager for anybody.” They just wouldn’t see themselves in that messaging. And so the conversion rates were poor and the product, frankly, wasn’t as strong, because we also weren’t trying to solve the needs of a specific customer base, we were trying to build too general of an audience. So the tipping point I think was when we consistently started hearing… We were asking people who weren’t converting, who weren’t upgrading from their free trial why they weren’t.

And realtors were about maybe 25% of our signups and customers, so it wasn’t the majority, but we kept losing and people were saying things like, “Oh, I’m looking for a CRM and you’re not a CRM.” Or, “I’m looking for a real estate CRM, you’re not a real estate CRM.” So when you hear that enough, you’re like, “Well, but we are. We’re basically that.” We’ve decided to pull the trigger and do it. And it wasn’t maybe super intuitive because it wasn’t the majority, but it was the plurality, it was the biggest group. And we just bet that if we did this, that the dominoes would follow and this would help us tighten, and it definitely did.

And I guess the last point on that is, we didn’t actually lose the customers who weren’t real service that we had. You would think if the messaging changed dramatically, it would turn those people off, it didn’t turn the existing customers, and we still got a good chunk of non realtors who would sign up and pay for it. But that was like the icing on the cake. The real cake was, “Okay, now we own the real estate universe.”

Can you talk about how you actually niched down the business? Did you change the marketing messaging? How did you change the actual product? What was involved in that change?

It was primarily marketing and messaging. I was going to say lipstick on a pig, but then that implies that we have this pig of a product, but no, it was like, honestly, the veneer. So that was the bulk of it. But there were product changes too. So for example, there’s two things that come to mind. One are product changes. Take leads, for example. A lot of agents spend money on sites like Zillow to capture cold leads. And if an agent’s doing that, they want those leads to be able to flow into their CRM, so once they’re in there, they can nurture those leads over time, either every once in a while, they’ll get prompted to follow up with the lead manually, or you can add them to like a drip campaign.

And so that’s a feature set. We would never have integrated with the Zillow API to pull those leads in automatically had we not been building a real estate CRM because it’s obviously a real estate feature. So that’s one. But the other I think is by focusing then on real estate and starting to attract more of that interest. We started as an individual product where individuals were coming to us and signing up and buying. But once you were focused on this specific space, A, we became known in the space as the real estate CRM, more and more agents at brokerages were coming to us and buying the product, which then naturally started to open the conversation up to brokers starting to come to us.

And eventually, we built an outbound sales team to go to them to say, “Why don’t you buy this for all your agents?” And those brokerages can be hundreds if not thousands of people, and so that also was a pretty big step function for us in the business to go from the SMB world where the average sale price, maybe is 1200 bucks a year, the natural churn in SMB is high, it’s like three to 5% a month, which sucks. We can dig into that. And then the mid market world selling to brokerages, those average contracts were 30, 40, 50K, as high as 300K, and the churn is net negative. It’s very rare that we would lose a logo, but they would actually add seats or we would be able to increase the price over time.

So it was much more attractive, and had we not focused on real estate, we would have never, I think, done that.

Yeah. Can you dive into that more? You talked about churn a little bit and how you wanted to dive into that a little bit more, but I would also love to hear how switching from almost like a B2C business to individuals to more of an enterprise software type company, can you describe that transition a little bit more?

Yeah. I think most founders who don’t know what they’re doing, which we were, you build for yourself or you build for what you know. And none of us had sold to large companies, and so it just felt intuitive to sell to individuals and sell to SMBs. And that’s where we started, and that’s where we started for years and years. What’s super hard about that is the churn piece. There are tons of individuals, and what’s super nice about selling to individuals and SMEs is that you’re paying with a credit card, and if your product is pretty good, at least it looks good. And we did have a good product and it did look good and we had good marketing messaging.

We had a decently high conversion rate. I want to say it was 20 to 25% from the trial to paid, and we attracted hundreds of trials per day. So that worked great about the SMB world, but the churn, it was this beast that you just could not get from under. And it’s pretty well understood that SMB churn is like four or 5%. It’s at three to five, three, four, five. Five is the average, and I think we ended up around 4% monthly churn. Remember, that’s a monthly. So every year, you’re losing like around half of your customers. And as you get bigger, that just becomes such a weight and drag on the business, that frankly, when I think about businesses I’d want to start again in the feature or businesses I’d want to invest in, I’m really skeptical of SMB.

I would never seek to invest or acquire a business that had naturally high churn because I just know how much of a weight it becomes in the business. So I think those were the reasons why we started to ask ourselves, “Well, how can we make this enterprise sale work?” And it was a natural segue for us. The fact that we had all these agents that were already in these brokerages, it was a little bit of like a land and expand model, we would call it. We would have the agent presence, we would sometimes ask them to refer us to their broker, or we would just go to the broker top-down and say, “Hey, look, we’ve got all these agents. Here’s their performance data. Here’s how much their commissions income has increased in the past year. Here’s how much the referrals have increased.”

So we would use a lot of real data, and that was a big eye opener for the broker, and then it really just became a conversation around, “Well, what could the adoption be if we sold it to their brokerage? And what would be the value to the brokerage?” Etc. We can dig into more of that if it’s an interest. But I would say, if I did it all over again, we would have started very early on selling proactively to the brokerages because it’s just a much more attractive business. And while it’s harder to close those customers, once you’ve got them, it’s a golden, you very rarely lose them.

Can you share more about some of these impactful moments that you had as you leveled up your business and it grew and you added different functions or key employees? Can you talk about some of those leveling up events

I’ll give the guideposts or the end points so we have a sense what we’re talking about and then speak to the more specifics. We started the business in 2011, started charging for initial customers in summer of 2012. At the time, it was not in vogue to charge right away. If I remember, we were asking ourselves… A bunch of VCs pushed us at the time like, “You guys should be like LinkedIn, just get a bunch of users and figure out the monetization later.” So we didn’t charge.

And then when we sold the business in 2019, we were 70, 80 employees, tens of thousands of individual customers, and I forget how many brokerages, but maybe three, 400 brokerages. 10 million ARR, that’s the annual recurring revenue. So those are the end points. In terms of step functions, along the way obviously charging for the first customer, a big step point. The focus on real estate was a big one, as we talked about, and focusing on CRM versus trying to define a different category, it really opened up things for us. I would say before we moved to the enterprise, we also did a lot around…

We touched on this, maybe implicitly, we were saying, going from SMB to enterprise, but if you can increase the price of your product or service that you’re offering, that is a really great way to drive growth. This tactic we employed, which I really recommend, unless it’s in situations as we took. One, the actual product itself called the Professional Plan, we asked ourselves, “Can we introduce a new plan just by introducing some content, so giving you templates or giving you things that were prebuilt?” So we didn’t change the feature set, we just pre-wrote a lot of templates and content and baked it into that plan.

We sold that as a new plan at double the price point, we called that the Accelerator Plan, actually the Real Estate Accelerator Plan, and it overnight increased our average price point by like 50, 60%, because now half the customers were buying this middle price, A, because they were buying a solution. Everyone wants a solution, no one wants a feature. So we were selling like, “Oh, this is going to be how you can roll this out and have all the best practices and everything’s set up for you.” And we called it the Real Estate Plans, except it was like, “Oh, if you’re a realtor, a serious realtor, this is the one for you.”

And so I think for both of those reasons, going back to that bridesmaid and bride concept, it was like, customers saw themselves in that, they sell the solution, not the feature, and they’re like, “Yeah, I want that all day long.” And so I think that was a big step function for us and it’s one I think a lot of businesses can employ. I’m a big proponent. You’re almost always undercharging, assuming you have a valuable product, so just really drive the price up and customers will pay. And then the enterprise stuff we talked about.

That’s product perspective. Just briefly too, key hires along the way. We hired our first senior executive, was a woman, Alexandra, she was VP of marketing. That’s when we were young, and I think different execs that we hired along the way just helped us professionalize in general. And I wish we would’ve invested earlier in hiring experienced people because it really did help us step up our game. Those are some of the major thoughts. I’m sure there are others that I’m definitely glossing over, but those are some of the bigger ones.

Well, let’s just talk more about pricing too, I find that particularly interesting right now. So you’ve mentioned increasing your price through adding additional products. Did you ever just increase the baseline prices for your other plans as well?

Definitely. To my earlier point, I’m a big believer in everyone’s always under pricing. That middle tier plan that we had, I think it started probably at 15 bucks a month, ended up at 50, over several years. We experimented with naming convention, we shortened the trial as well. If you’re a SaaS business listening, there is no reason for you to have a 30-day trial. If anything, it just encourages people to not take it seriously early on, and instead we shortened it to 14 days.

For our product, it was shorter than that. There was a bunch of setup to do in the first week, so it was hard to make it shorter than 14, that was a big move. And I think seven to 14 days is appropriate. But yeah, we just increased the prices over time. Where we ended up was, Professional Plan at 50 a month, Accelerator Plan at, it was either 100 or 120 a month. And then obviously we would default to annualize. It would show you annualized pricing, it would default to that, and then you could obviously flip to monthly if you wanted.

And then we always had this Enterprise Plan that was like $500 a month or something stupid, where it was just to anchor to make the other prices look cheap. Very, very few people ever picked it. And even when we sold to brokerages, that was just not shown. There was a whole separate pricing dynamic for them. But I think having a very high price to anchor to make their other prices look low, I think it was, why not do that? It was really, I think helpful.

You’ve said this a few times now that everyone’s under pricing. Can you dive into that a little bit more?

Yeah. I think it’s the same mindset, you view yourself as the buyer and you’re like… Well, I don’t know. How much software do you pay for that? It’s like $100 a month. I don’t pay for a lot of personal software that’s $100 a month.” And so I think people, especially first time founders, call it in their 20s and 30s, I think do this a lot where they don’t, I think fully empathize or fully understand the buying behavior of their customer. And the reality is if you’re in a B2B context, if you assign a product that is helping business grow or helping the business in some way, the price they’re willing to pay is reflective of the value that you’re providing the business.

And assuming you have a product that’s adding value, the value you’re bringing to the business is almost certainly thousands of dollars. It’s going to be higher than what you’re charging, and business owners have in general, a lot more flexibility of what they’re willing to pay. They might not like it, but if it’s valuable, they will stick with it. Now, obviously you can caveat everything I just said with like, it depends on how competitive it is, etc, etc. But I just think that’s true in general. And I would rather charge a higher price and have to work with far fewer customers than the other way around, because of churn because of just support costs and customer success costs, etc, it’s easier

Have you found any processes that help someone arrive at what their optimum price should be? So if you’re starting a business from scratch, how do you figure out where you should price?

Yeah, that’s a great question. I don’t know that I have a super intelligent answer for you. I will say, I think his last name is Campbell, Patrick Campbell, he used to price intelligently. I love their content. Patrick and I have spoken a few times about pricing and whatnot. And I think similarly about the world, I think what I shared so far is reflective of what I think is best practice. I think it’s more art than science. I think I would do basic customer development around, what are you doing today to solve this problem?

A lot of the times, it’s, they’re not really paying for anything, they’re using like Excel or they’re doing nothing. But start to get a sense of what they’re doing today. And if they’re paying for anything, that can help identify price. Start to think about, why would they seek a solution to this? What is the real pain point of this problem that they’re having today? And if you can start to, as they’re outlining it… I’m just going to pick a hypothetical example, in our world Contactually, I really hate it when I helped someone buy a home a couple of years ago and I saw that they listed their home with this other agent, Bob Smith.

And that has a value. If it’s a million dollar home, that’s $30,000 in commission that the agent just lost. And so that’s pretty easy to quantify if they’re telling you, “Hey, because I’m not following up with people like this buyer that I helped buy a home a couple of years ago, every time that happens, it’s worth $30,000 to me.” While they won’t probably be able to articulate it. In those terms, you can have a conversation and guide them to give you the info you’ll need to be able to then do that math.

And if we went to an agent and said like, “Hey, just use Contactually. And if you get one more client, it’ll make you $30,000.” That feels really salesy and gross. But implicitly, that is how your customers will be thinking about an investment in like a B2B tool. And then the question is just, do they believe that you’re going to actually deliver on that for them? And how can you demonstrate that you truly will deliver? It becomes the natural question. That’s why I think about determining pricing. But across the board, you can see how, if the reality is that one new client is going to lead to 30,000 in business, you have a lot of room in the price. And only thing that’s really angering down is probably what the competition is doing.

And so, especially if you’re offering a solution to a very small niche area where there isn’t a lot of other competitors, I think you have a lot more leeway and a lot more freedom. The last point I’ll make on this is, I love businesses where they’re pricing across multiple axes, where it feels relatively cheap to start, and you’re going to spend a lot more money as you use it more/get more value. So as a company, we started using with our property management business called Textline. And Textline is like a group texting solution. So we text our guests about stuff at the property and they text back, and all of our guests support people can access this one central thing.

The base plan is 50 bucks a month. Okay, great. It seems pretty cheap. And then that gives you a couple of people can use it. And then beyond that, there’s a price point for at each additional agent. And it’s like, “Ugh, that’s annoying, but okay, now we’re at $100 a month. And then it’s pricing per text. It’s like a fraction of a penny per text that’s going out, but it feels super cheap, but over time, once you’re scaling like thousands of texts a month, now our bill with them is like $300 a month or something. And it’s like, am I happy that I’m paying that much a month? No. But is it very valuable to our business? Yes, and I will continue to do it.

And that I think is a very clever way of pricing against value. If you can get that right, I think is really, really good.

That’s fascinating. Can you walk through your sale to Compass and how that process started and went?

It comes with a customer for a few years, maybe a year and a half, two years. And I think, I’m almost certain, this is public information, there was an arrest warrant, but yeah, they were a customer, they were white labeling Contactually. The Compass CRM that they were offering to agents was actually just a re-skinned version of Contactually. So they were very familiar with our engineering team, we were very familiar with them. We thought highly of them, they thought highly of us. And that was a conversation that kept percolating a few times over the relationship.

And then eventually, we’ve been working on the business for eight years, we were growing quickly, like 40, 50% a year, but we were not doubling every year, a lot of traditionally venture backed companies. And so we were like, “Well, when’s the time to sell?” And we were at that 10 million mark I talked about, and that’s the point at which there often is a lot more private equity interests and your options of M&A start to expand quite a bit in the SaaS world. And so we hired a banker, we were shopping around knowing that we had Compass as an option as well. And ultimately, Compass was the best option.

We had several offers, and several probably had we pushed the negotiation further, maybe even could have been more financially lucrative, at least in the short term, but we felt like, where did we want to end up as a team? And frankly, what did you want the narrative to be? What did you want the outcome to be of this thing you’ve built for almost a decade? And we just felt strongest about the Compass story and where we were going. And ultimately again, two years later post IPO, clearly that was a good call, but I wish it was more sophisticated in that. On the one hand, you kick yourself as a guy who hired a banker, paid the banker to do the [inaudible 00:26:53] in the process, and then you sell to the same person who you already knew.

That feels dumb, but I think had we not done that, we would have always been asking ourselves, “Oh, was there a better option out there?” And there wasn’t. Ultimately, there was not. And so I felt very good about it at the end of the day.

Can you describe more of the reasons that you decided to sell? So what prompted your thoughts around selling the company?

I wish I could give you a really articulate answer, and I don’t know that I have one, but building anything for eight years is a long time. That’s part of it, which is, I guess I’ll only speak for myself, and I think I probably felt this between the three of us started the company, Jeff, our third co-founder and CTO, he actually left a couple of years earlier. And so it was just Zvi and I. And I think between the two of us, and we can talk about our founder relationship and whatnot, if you’d like, but between the two of us, I think I was probably itching more than he was, “I want to see what’s next. This could be one step in my career, I don’t want to be doing this for 20 years.”

And like, what is the natural time to sell, maybe now as I understands? I don’t know if I have a good answer for you, but I was open to it, our board also because of the idea that we weren’t like this rocket ship of growth, we were like, “Hey guys, have you thought about it?” They weren’t pushing us, but they were pretty certain that we weren’t going to be the next Google. They were open to the idea and the fact that we had the Compass relationship as a good alternative where we might as well try this process and see where it goes.

Now, the one thing I will say is everything I’ve just shared, there wasn’t like a burning thing that was driving us to necessarily “run a process” to see what it would look like. But once you start the process, emotionally, you become very invested. I think very few companies run a process to sell their business and then don’t actually sell the business if they can, because it takes a lot of time, it takes a lot of energy. You start to count the dollars and like, “Oh, what could it be?” And it became an inevitability at some point, versus just like, “Let’s see how it goes.” And again, ultimately, certainly the right call for us, I think as a business, the right call for me is to be personally. But yeah, there wasn’t any one obvious thing. So I wish I could give you a better answer, but I don’t know if I have one.

No, go for it. That’s great. Can you talk more about some of the thoughts you had as you were in the process of starting to sell or look for someone to buy your company? You mentioned counting dollars is one of them, but I can imagine you also were thinking, “Wow, I could do this. Now, that I have all this time from selling a business, or if I’m not working in this business all the time, there’s room for me to do other hobbies or start other businesses.” What did you start thinking about?

All of the above certainly. There’s the financial reality of it, and what can the financial, like the fact that you have a lot more cash in the bank fan, what does that do in terms of your optionality? So there’s that element. There’s the time element. So the goal when we sold the business was we were almost certainly going to have to stick with the acquirer for some length of time, but what could that look like? We’re going to have new roles in this company, speaking of Compass in particular, where can we help Compass drive even further growth? That was exciting, but it was also…

Look, there’s a big difference between being the guy responsible for a company versus being someone just an employee for a company. And I experienced that firsthand, once they got the Compass, it’s like a load off your shoulders. So that was a piece of like, “Okay, with less focus, we got to keep the ship afloat, what else could that mean?” There wasn’t like an idea or a thing that I knew I wanted to do next, but it allowed me to start entertaining what could be next. And frankly, that’s when I started talking to folks who were doing search phones around like, “Why would I want to do that? Or why would I invest in that?” It was where those initial ideas started.

It was honestly all over the place. I think the other part too, I’ve been having this conversation saying from my perspective, but I couldn’t help but think like, “Well, what is this going to mean for our team?” One of the things that I look back so fondly of the whole Contactually experience was we just really built an amazing team, an amazing culture, and if you go on Glassdoor, I think we have very high reviews and people genuinely not only really liked hanging out with each other, but really cared about each other. And there’s examples where we’d have a sales rep who would close a deal and being like, “Well, you know what, so-and-so actually helped me out on this, we should really split the commission with them.”

It was a very special team. And so when we were thinking about selling as well, it’s like, I want to make sure folks are taken care of financially, but also with their new roles and whatnot. And a lot of that was tied up in a lot of the thinking too. But at the end of the day, you can’t get too caught up in any of it because it’s also uncertain, and you truly don’t want to let yourself get on this fantasy world of like what could be, because it may not be. It may not be the case that there actually is a good acquirer at the end of the day or when you want to sell to, and you don’t want to be told so deflated that the business starts to spiral out of control.

It was tough emotionally in some ways, ultimately it was okay, but it was not a great experience at the end of the day. When I reflect on it now, selling a business is emotionally taxing, period.

Yeah. I completely agree. That’s definitely a common sentiment. You mentioned search funds becoming more of an interest, how did you dive into that world a little bit more?

Well, it really didn’t come about until the vacation rental world. So again, just a timeline perspective, we sold the business, my wife and I, we love the outdoors. We like camping and hiking and all that, we’ve get two little kids. And so we’re like, “Let’s buy a cabin in the woods.” So we did that in West Virginia. And when we weren’t using it, started renting the cabin out because I was like, “Why not?” And I liked the idea of like trying to figure out the whole Airbnb thing. And to make a long story short, it did very well. We were able to rent it, doing it sort of half-assed, not really investing a lot of time.

And I was like, “Huh, I bet if I tried to figure out what are best practices, we could probably do even better,” which we did. And then it was, “Huh, if this one’s going well, why don’t we just pull our money with some friends and buy a bunch more of these?” And so that experience actually turned me on to the search world because it was like, “Wow, buying these vacation rentals and this property management business that we essentially had to build in parallel with it to manage all the cabins, and turn the guests, and all that. It prints money.”

Property management for a rental like that, the revenue model is percent of gross revenue. You just take a percent off the top, and for vacation rentals, it’s like 15 to 30% off the top. So it’s pretty lucrative if you can keep your expenses low, and I was like, “There’s got to be other businesses like this that are not particularly sexy and have pretty predictable revenue stream, high in margin, not a lot of competition, etc.” And I’m describing frankly, a lot of the types of industries that searchers are interested in. And I started talking with a few friends, Steve Wrestler, who I know a lot of folks know.

He and I both live in DC, we knew each other through the tech community here. And he was like, “Hey, you should really check out this world more.” And started to poke around and I was like, “Yeah, there’s something here. There’s a lot of really exciting, smart people who are looking to buy businesses. And I don’t know that I want to buy another business yet. So I’ve got a day job, we’ve got the vacation rental thing, but I would love to partner along with some of these folks. And if nothing else, learn about a lot of different industries, but also I think there’s could be real financial upside as an investor.

And so it kind of was a circuitous path through the vacation rental world, but it’s been fascinating. I’ve truly enjoyed it, learning about all these different industries and getting to know all these really cool operators, it’s definitely fun.

You also mentioned a fund. How much of that can you share?

Yeah. On the search fund side?

Yeah.

Happy to share everything. So the fund is called Blue Maple. Blue Maple is like this, I don’t know if holding company is too grandiose of an idea, but Blue Maple is both the vacation rental business, so staybluemaple.com. You go there, that’s all our vacation rentals. And then Blue Maple is also the fund name for this investment stuff we’re doing in search funds. My thesis in general was I want to build a portfolio of investments across a lot of different businesses and a lot of different deals. The reason behind that, a lot of people cite that Stanford article about the performance of search funds historically.

For those who haven’t taken a look, Stanford Track does a really good job of tracking traditional search funds, meaning folks who have raised capital from investors to go and find a business to acquire, and they acquire the business, they operate it and they look to exit. And Stanford has actually tracked the performance of those search funds, there has been like 400 of them over the past 30 years, and what are the outcomes been? And the TLDR, the outcome of their study was 25% of those search funds returned less than one X for investors. Another 25% return one to 2X and then top 50% did to two, two plus. And obviously the ones at the very top were 10X-ers.

But what I took away from that was like, “Well, hell, if you’re going to only do a couple of investments, you could very well easily end up in the zero, one, or one to 2X. So you could easily pick some duds that don’t do so well. It’s like angel investing in the startup world, you don’t really want to just invest in a couple of things, you want to build a portfolio. And in order to do that in a search fund, you can’t write five, 10K checks. You’re just not going to get a seat at the cap table, you need to be able to write bigger checks. And so it naturally led to this conclusion of, “Okay, we might as well form a fund.”

And so the target was modest, $2 million fund, we’ll write 7,500K checks across, call it 20, 25 deals. And a bunch of folks in my network, largely from the software world, other cell phone and search investors got to know them. And ultimately, we pulled our money into this fund. Pretty quickly, found there was a lot of interest in that. And for the course of like three, four weeks, hit the two million mark, and now we’re at just about three million. And perhaps we’ll bump that up a little more if there’s interested folks who could be really good value add. But yeah, well, now we’re essentially doing the same thesis just with a slightly bigger group of capital, and allows us to invest in some more deals.

But we’re pretty agnostic in terms of industry, and I think I’m looking at what everyone’s looking for, if not recurring, predictable revenue base, low customer concentration, and strong industry tailwinds, but particular sizes that are 750K to maybe a million and a half of EBITDA. So relatively small where the searcher is financing their own search. So self-funded search, and they ended up with a deal where they’re a minority of the capital’s coming from investors. And so we’ll come in with roughly 100K check is the thought. So that’s the nugget of the fund.

Have you been an operator yourself, what do you look for in the searchers you invest in?

A couple of things. One, it’s most basic sense. The reason that I think a lot of people get interested in search funds is because of that Stanford study I talked about, the average performance of a search fund has been like 27% IRR, even when you exclude the top funds. And so people salivate over this asset class on paper. The reality is that this is not like a spreadsheet exercise, these are like boots on the ground, nitty-gritty businesses. And I say that as someone who runs a vacation rental property management company, I know firsthand what it’s like when the toilets are flooding, I’m getting calls at 11 o’clock at night, it can be a rough world.

And so to answer your question, I think I try to assess the searcher early on or I’m like, “Do they fully get that? And to what degree are they comfortable getting in the weeds and all of the sleeves?” I think folks, this is a common trope, I feel like in the search world, but people who have had military experience or have been like officers in the military, I think are great leaders in that regard because they’ve managed folks who are in the field. I think it’s not limited to that, anybody who’s had more of an operational role or who have managed if not blue collar, but field workers, technicians, like those are really good, I think, proven leaders who often can do really well.

Then I’m looking for people like, “Do I feel like you’re trustworthy? Do I feel like you have a pretty good thesis of what you’re trying to do? Can you execute at the end of the day?” An investor years ago said, investors love to invest in lines not dots. Meaning, if I met you for the first time, I have no idea whether you can perform or not, it’s based on my impression, but if I meet you and you can demonstrate over time that you are doing what you say you’re going to do, and you’re delivering on your plans, that gives me a ton of confidence as an investor, “Oh, this is someone who can execute, who has their shit together.” I love people who can do that. That is a skill that not everyone has.

So those are some of the things I look for. And I’ve been fortunate in that there are a lot of really, really cool people, really high quality, high caliber people who are looking to buy businesses right now, and I’ve been having conversations every week with folks like that.

Is there any long-term vision you’re hoping to build with Blue Maple? Or are you just raise, “Let’s this fund, see how it goes?, see if we enjoy it, see if it works and we’ll just build from there and see if there’s something there”?

The short answer is I’m not sure where it’s going, but the more nuanced answer I think is, when I was first thinking about this fun concept, and frankly, when I was talking to other investors who ended up putting money into the fund, all of us were interested in the idea of, if you were meeting tons and tons of operators and investing in dozens of different businesses and industries, it’s amazingly really good insight into a bunch of different areas. And from that, I would expect that we are going to start to articulate thesis around, what are different business models or different market opportunities based on all these different investments?

And I could imagine a world where, I’m just making one up randomly, but where we say, home care. There’s an interesting opportunity in home care in this particular niche, perhaps we should build something there, we should do a roll up of several companies there, truly buy and operate a business, that’s where I could see this going. And so the fund, not only will it drive strong financial return, but will almost, it’s like paid learning. It’s like driving return, and we’re getting all those great learning, which I think is probably the bigger benefit. So we’ll see, I think it’s still pretty nebulous what I’m describing, but I’m really excited about where that could potentially go.

Absolutely. Moving on to some closing questions. What class would you teach in college if you could teach about any subject you wanted?

A couple thoughts. One, I think a lot of my class experience, I was MIT undergrad, and a lot of folks I was surrounded by were very analytical, very smart people, which was really special, but at the end of the day, it’s very academic still. There were a relatively small group of people who were maybe tacticians when it came to businesses and startups and whatnot. I think if I were going to teach a class, I would want someone to boil down, what does it look like to operate in more of a nitty-gritty way? It’s frankly, maybe to reflect a little bit, my answer is probably, I feel like my career has not been reflective of what I studied in school or what I feel like I learned in school.

I wish I would have had a more pragmatic or tactical education in my undergrad environment, and I would want to teach something like that. And so, I don’t know what that would be exactly, but even something to the degree of… Maybe riffing on this, I was listening to, I think it’s A. J. Wasserstein. He was on a podcast really, he does a lot of search investing, he’s a professor at Yale, focusing on entrepreneurship through acquisition. And he was talking about how folks, there’s like three types of passion that one can seek out.

And if you’re like going into a VC or startup, it’s a lot about product passion, everybody’s like, “I’ve got this idea, I need to see this fruition.” So I think people get that as a path. And then there’s a lot about purpose is your passion, I like care about X, Y, Z, cause, I’m going to build that passion. But he talked about a third of process passion, people who are passionate about process. And I think people who are wired that way, that are passionate about the act of building systems and processing businesses, there’s a lot of different ways to like build wealth and to be excited about what that looks like.

And I would love a class, I’ll teach class that walked through those different examples and the different models for how one can build a career, building purpose or passion around these processes around business. That stood up to me when I heard, I was like, “That could be really compelling, and I wish there was something like it.”

Yeah. I wish there was too. That’s sounds like it’d be a lot of fun. What’s the belief you use to hold stronger that you’ve changed your mind on?

I don’t know that I have a great answer for you on this, probably a couple of things. One, even when we started Contactually, I think I was still in the mindset of income is what drives wealth of like, “I’m going to put my time into this thing and it will get an income, but my time will ultimately translate into success of this business and will translate into wealth.” And I think by definition, if you’re an employee, whether you’re hourly or whether you’re salaried, your time is what’s translating to your income and your wealth.

And I think having sold now the business and just where I’m focusing a lot of my efforts now, I’m much more interested, I think my belief has shifted to, how can I set up my life in a way that will generate wealth where it’s not at all tied to my time? And I think that is what true wealth building looks like, is where you can divorce time from the actual like wealth accumulation of your income. And I don’t know that I had that view even a few years ago, even in the midst of Contactually, and maybe going back to like the class we were talking about, I wish I had that realization earlier.

It’s really not necessarily about how hard you work or how many hours you work that leads to professional and financial success. Anyway, that’s my takeaway.

Is that a mindset you can take and apply early on? Or is that something that you really can only do with a mature business where you now have some business established and now you can start pulling yourself out of it? How do you think about that in the context of a full business creation cycle?

That’s a great question. I’m asking myself the same thing now, but I do think if you’re starting from nothing, there is effort that needs to be put in, and effort correlates with time. That’s just by definition. If you don’t have a lot of resources, the one resource you have is your time. However, I think that mindset pushes you to say, “How can I get the most leverage with that time to drive the growth? And that may mean that you’re actually willing to sacrifice some of the actual growth in the business because you’re looking for more of the time back.

For example, what I’m currently used of thinking is, take the vacation rental fund and property management business, that is one that right now is a minority of my time, maybe five-ish hours a week, they keep that running. I’m kicking around the idea of actually raising a much larger fund to buy and operate another 100 properties. And that could be something that I lean into 100%, and that’s my baby and run, but I’m actually much more interested in what would it look like to hire a GM or a CEO to run that, and I’m the chairman of that effort, going back to that holding company example, that’ll be one company that I really keen on seeing grow, but I don’t want to have a much larger percent of my time be occupied by that company.

So that’s like a mindset shift where I think even just a couple of years ago, that wouldn’t have occurred to me to do something like that. I would have been like, “Well, I’m going to lean in and do that.” It may mean that for that business, it maybe won’t grow as fast or perhaps it won’t even be as successful because I’m not as involved like the founders are involved, but I think it does give me the opportunity to leave lots of other things, which I’m equally, if not more excited about.

What’s the best business you’ve ever seen?

Well, I’m a SaaS guy, so I feel like ultimately, that’s where my career… It’s hard for me to not think about software or SaaS businesses. And my answer is Twilio. And the reason I say that is, I first heard about Twilio back when we were part of 500 startups incubator back in 2011, 2012, and Twilio was one of the early investments then. Twilio is an API, so developers can basically build on like telephony and texting, and build out like texting and phone capabilities and their application using the Twilio API. And what’s so special about their business is their net retention, going back to the churn conversation.

They may lose customers, I’m sure they do lose customers, but their net retention is 140%, even now as a two billion era business, meaning that every year, they’re expanding their existing customer revenue by 40%. And the fact that they have kept that 140% over years, the last time I looked at it, it had been the case since the IPO five years ago. That just speaks volumes to that is an extremely tight product market fit, there’s clearly value being created there. Their pricing model is extremely strong, goes back to the Textline example, as the value is increasing, they are getting more and more, they’re capturing more of the value, and their market caps are reflecting.

I think when I last checked, I think they IPO-ed at something like $23 a share, or $28 a share, I forget. And now they’re in the hundreds, maybe it’s $300. It’s exploded in five years. I think it’s due to that retention piece. So I think it’s an amazing business. Frankly in hindsight, it touches on a lot of the ones we were talking about earlier, like churn and pricing and everything, they just nailed it across the board.

I love that pricing and churn discussion, that was really fun. Thank you so much, Tony, for sharing your time today, this has been so much fun. I love chatting and hearing about your business and how you grew it and what you’re working on today. This is a ton of fun. Thank you for sharing your time.

Yeah, thanks, Alex. I feel like I rambled through a lot of it. And frankly, it’s kind of a zig-zag journey, but I did, I did get that. Thanks.

No, no, rambles and rabbit holes is what we’re here for. So thank you for doing that. That was great.

Of course.

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