Sunday, August 7, 2022

The Holding Company Playbook

Despite success as a serial founder, Ryan discovered an atypical path to dramatically improve the speed and odds of making home run investments. Now he’s taking that playbook to the masses and democratizing SaaS investing - This is Ryan Bettencourt.

Ryan Bettencourt

CEO at Legion

Hey hey!

Today, Berkshire Hathaway is valued at $649 Billion. Just 1 share is priced at a cushy ​​$440,000.

In 1982, that same share cost you $420.

That, my friends, is the power of compounding.

Warren Buffet is THE master at identifying companies that can compound substantial amounts of capital and absorbing them into his holding company, Berkshire Hathaway.

Today's guest is also building a holding company. Albeit it has 2 big differences. First — all of them are in the technology sector. And the second is that anyone can invest in it.

Like Buffett, Ryan Bettencourt, Co-Founder and CEO of Legion Works relies on hiring CEOs to run his portfolio of businesses, enabling his team to focus on acquiring additional companies to grow the portfolio.

Here's a closer look at how Ryan finds, acquires, and grows these companies through a series of playbooks he’s developed. 

Let's get after it!

 

In Today's Expert Session: 

  • Meet Ryan Bettencourt, CEO at Legion: Despite success as a serial founder, Ryan discovered an atypical path to dramatically improve the speed and odds of making home run investments. Now he’s taking that playbook to the masses and democratizing SaaS investing - This is Ryan Bettencourt.
  • Introducing Legion. Is - A Case Study on Holding Companies: In this case study, Ryan guides us through the strategies and tactics that Legion uses to build, acquire, and grow high-growth SaaS companies.   
  • The 5 Risks To Solve Before Investing Into Any Company: While every company is unique, there are 5 fundamental risks every company has that you need to solve.
  • How To Start A Company On Second Base: Here’s Ryan's proprietary 7-step process to build outlier companies. 

Guest: Ryan Bettencout, CEO at Legion

Video Length: 50 minutes

1996 to 2019 - Building Expertise Through 10,000 Hours & 10,000 Iterations

Ryan Bettencourt, CEO at Legion

Like most entrepreneurs, Ryan started as a jack of all trades, exploring wherever his creative instincts took him. He started a streetwear fashion brand. Built a competitive soccer club from scratch. Even worked in the wine business. These early days taught him the basic challenges that are uniform across industries and creative endeavors.

After cutting his teeth in the marketplace of ideas, he started to get serious. He was the founder and CEO of Thirteen Consulting, which helped U.S. and European high-growth businesses in the start-up phase. Then he went on a creative binge. 

Kidzui. Saban Brands. Cursive Labs. Spoutable.

Spoutable

All start-ups with the requisite successes and failures.

He co-founded Starfish Labs, LLC with his wife during this time. It was a start-up skunkworks where they organized various consulting and creative efforts.    

At the time, Ryan didn’t know it, but maxing out these opportunities would reveal a throughline of challenges that all start-ups seem to face. Identifying a framework to meet these problems would serve him well in the days to come. 

2019 to 2021 - Joining HelloBar and Developing His Growth Playbook:

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Before Legion, Ryan worked with Neil Patel, well known digital marketer, New York Times Bestseller, and CEO at Niel Patel Digital, his digital marketing agency with over 750 employees.

When Neil acquired the tech company HelloBar, which focuses on lead capture and conversion rate optimization, he wanted to bring in someone he knew to help grow the company. Out of all the contacts in his Rolodex (which probably has UN General Secretary António Guterres in it), he called Ryan. He had a straightforward request. Grow the company.

Grow the company Ryan did. When he took over the reins as CEO in January of 2019, HelloBar had no revenue growth for . . . wait for it . . 7 years! Gurus constantly gush about the power of momentum. It is a glorious thing when you have it. The flip side of that coin is the calcification of a business. Once stuck, most stay stuck.

In eighteen months, Ryan was able to triple revenue and make HelloBar profitable. The key?  He did not have to prove the idea or product. The market had already spoken. It just hadn’t had the opportunity to speak loud enough. All Ryan had to do was figure out how to move it forward.  Once he did, he realized his approach could work not just for HelloBar, but for any start-up in the vertical. The question then became how to do this efficiently and at scale?

2021 to Today - Starting Legion And Democratiing SaaS Investing:

Legion

There is a constant debate: acquire or start up? Why can you not do both?

If a business generates revenue, it has already shown proof of concept. People are buying, and there is enough data to see that the product works. Everyone thinks it is always a resource problem why these businesses are not thriving. But Ryan found that the real issue is process and incentives. Creating suitable systems and putting the right incentives can restart a business's growth.  

That, my friends, is a recipe to be able to scale growth across a suite of ‘stuck businesses.’ Throw in a Regulation A structure to allow fractionalized investing, and you turn the holding company model on its head. 

With this in mind, Legion.is was born. The plan is simple. Find businesses that are not a good fit for venture capital because of valuation and return issues. Acquire it and add in the things that Ryan knows.

Time to go granular and look at the specific Legion.is tactics. 

At its core, Legion is a holding company that builds, acquires, and grows technology companies. They do that through an entity structure known as a holding company - where a single corporation owns majority interests in each company under the umbrella. 

The cool part?

As the underlying companies grow - so does the total value of the holding company. 

The Problem: Every Company Has 5 Huge Risks

Answer these 5 questions before investing in any company:

1) Is There A Market Opportunity? Startups are built to solve specific problems with a specific technology-driven solution. The bigger the problem. The bigger the market opportunity.

You see. Like a factory farm chicken, startups need to grow big…fast. To do that, VCs stuff them with cash. But unlike a factory farm chicken, software companies have uncapped potential - they can grow as big as the market opportunity allows.

But picking a big market opportunity is just the starting point. You also need to time the market correctly.

You can have a fantastic idea but be way ahead of your time. The entrepreneurial landscape is littered with business ideas that died unceremoniously because they didn’t time the market correctly. Here are a few examples: 

  • Sixdegrees.com was one of the original social network platforms out there in 1997. Named after the Kevin Bacon thought experiment, people just were not ready for it yet. It was not until MySpace launched in 2003 and some company called Facebook in 2004 that people began posting pictures of their food in earnest. Too soon, Kevin Bacon. Too soon.
  • Shift To Cloud Computing: You can also be behind the curve. Technology is moving so fast that some platforms have become obsolete before our eyes. Cloud computing unlocked a new dominant business model - software as a service (SaaS) and subscription models. This destroyed a whole slew of start-ups that were building on-premise solutions.

2) Can You Build A Product That Unlocks The Market Opportunity?  This part is critical. Not only do you need to know if you can build a product. But is your product the best way to solve it?

Let's make this tangible…

Here’s A Problem: Many companies are seeking a solution to turn their monthly subscriptions into upfront cash, so they can grow quickly without raising additional money from investors and selling more of their company. 

This is where things get interesting. Both of these companies solve the problem differently. But have VASTLY different valuations. 

  • Solution #1: FounderPath.com - This company created a lending solution that would give startups a line of credit with a long payback period based on their recurring revenues. This company raised $11M and is probably valued at $30M-$60M. 
  • Solution #2: Pipe.com - This company took a different approach. They securitized the recurring revenue of these companies and created a marketplace to sell them to investors looking for stable returns supported by recurring revenue contracts. Because their solution was more asset-lite and scalable, this company has raised over $300M and is valued at over $2B, making it one of the fastest growing companies in history. 

Same problem. Different solutions. Wildly different outcomes.

3) Are There Enough Customers That Will Pay You For It? While this is only one question, it hints at two critical things: 

  • Willingness To Pay (WTP): Does the product provide enough value that there is a strong willingness to pay a high price for the product? 
  • Market Size: “enough customers” quite literally means, is this a big enough problem to enough companies that you can build a sizable business selling to them? There might be 1 customer willing to pay $100,000 to solve a problem. But are there 10? 100? 1,000? You need scale to build a large business.

4) Do You Have a Team That Can Execute it?  A completely different set of skills is required to transition from pluck start-ups to every subsequent phase. Running around with your hair on fire as you pull your product out of the chaos works in the beginning. That's when you’re trying to find product-market-fit and understand the problem you’re solving, the pricing, etc. But raising money, dealing with regulatory compliance, and the grinding soulless administrative tasks across every business creates friction—that's when you need to begin to develop actual processes. 

5) Will It Scale? You need to know if there is enough margin in your product that you can profitably acquire new customers. Unlike venture-backed start-ups that expect to scale and will acquire customers unprofitably to get market share - profitable companies require an ability to generate revenue fast. This means that you should have a systematic approach to generate a profit from customers. 

The Solution: Acquire Businesses With Product-Market-Fit

  1. Set Up Your Criteria: Legions looks to acquire Marketing, Sales, and infrastructure software-as-a-service (SaaS) companies that generate between $500k and $1.5 million in revenue. 
Legion Portfolio

  1. Look For A Clean Capitalization Table: When identifying a few contenders, look for a clean cap table. They should have raised no money, or very little money. A lot of investors can make for a complex acquisition. To work, deal terms need to be small. This often leaves room for creativity when it comes to negotiation.
  1. Avoid High Valuations - Stay out of Silicon Valley. Valuations for companies there are totally out of hand. Look for tech pockets in foreign countries. Poland, Brazil, and India. Legion believes these markets hold a wealth of opportunities. Just having a U.S. partner alone can increase the valuation of foreign companies before you have even started running the playbook.
  1. Do Your Due Diligence: Examine the business through problems 1-5 above. If the company has revenue in the proper range, it has shown market opportunity, a customer base, and enough infrastructure to mitigate investment risk. When you find the right one, buy it. You get to start on second base.
  1. Plug In Centralized Resources For Immediate Efficiency Gains: Legion starts by cleaning up the admin and compliance side of the business. All businesses have the same type of admin burdens regardless of size. Because Legion is a holding company, they have built a group that handles all finance, accounting, and human resources. By centralizing this burden, you enable the company to focus on pleasing customers.
  1. Diagnose Resource Gaps…And Fill Them: Provide access and resources that the company did not have to take them through the next chapter of scale. It could be product, marketing, sales, or a combination of all three. 

Individuals must be incentivized appropriately and are accountable to a specific metric (e.g., Get 100 qualified sales meetings per month)

  1.  Learn The Art Of Funnel Mapping - There are 3 ways to grow a SaaS company: 
  • Get more customers
  • Get those customers to pay more.
  • Get those customers to stay longer.

To do this, look at the top of the funnel (client acquisition), mid-funnel (current customer expansion), and retention (decreasing churn). For each metric, you need to assign 1 person, make them accountable for that activity, and incentivize them to do it well.

  1. Rinse & Repeat - As these companies kick off capital, you can reinvest it into new acquisitions. This kicks off a flywheel - the more profitable companies under your umbrella, the more profits you can drive from the businesses, and the more companies you can acquire.  

Collaboration Opportunities:

Here’s how you can collaborate with Ryan. 

  • As an investor - You can invest in Legion and own a piece of this tech-forward holding company.
  • As a referrer - Do you know a business or someone involved in a start-up in the sweet spot of $500k to $1.5 million in revenue? If a deal happens, Legion will make sure the finder is compensated.
  • As an entrepreneur - Legion is always looking for talent to help aggressively grow businesses under the Legion umbrella. 
  • As an idea machine - Got a hundred million ideas but don’t have the resources to make it a reality? Pitch it to Legion, and you could partner on it together. 

I hope this got you thinking. See you next week! ✌️