Latest / Exit Algorithms / Run Due Diligence on Yourself Before a Buyer Does | Dev Shah (#104)
Transcript
- Pete Vera, Exit Algorithms: Welcome to Exit Algorithms, the podcast where we decode what it really takes to unlock growth, streamline operations, and prepare your business for a high-value exit. I'm your host, Pete Vera, and today I'm joined by Dev Shaw, founder of Pocket Fund. Dev has closed seven acquisitions and had two exits before the age of 24, and now supplies deal flow to private equity firms and search funds. Alongside several other ventures he's involved with. Dev, excited to to have you here today. Welcome to the podcast. Dev Shah: Thank you so much, man. Thanks for the invite. I'm excited for our conversation. Pete Vera, Exit Algorithms: Yeah, same here. why don't we start off? Do you mind sharing a bit about your your background and and business journey? Dev Shah: Awesome for sure. So try not to go on too much of a tangent, but just to give the audience some context. So I'm born and brought up in India, right? I went to US for my undergrad. So I was at this college called Claremont McKenna. it's like an hour away from LA. and ⁓ I I had my first always known that I wanted to kind of be an entrepreneur, kind of, you know, do my own thing, have my own business. it wasn't the the startup culture ⁓ very popular in India. Usually people, you know, everybody big wants to become like a doctor or an engineer or kind of take that safe path. So I think like getting ⁓ to that in the US really helped me a lot and kind of introduced me to a lot of different worlds. and that's when I first came across acquire.com. which is I'm sure many people will recognize it, but for those that don't, it's a website where people can buy and sell online businesses, right? So this can be like a SaaS business making a million dollars ARR all the way to a mobile app making like a hundred dollars a month. Right. So there's a massive variety Acquire. And I just came across Acquire and buying and selling businesses is not popular at all in India. Right. So I I was just kind of mind blown initially. I was like wow this is this is really, really cool. And I just really went down the rabbit hole of acquire.com. And ⁓ yeah, fast fast forward a little bit. bought my first business on Acquire for $4,000. that a very scary decision for me to make. I think I probably spoke to like a hundred probably like close to like a couple hundred sellers before that first acquisition. then from that first acquisition, that ended up going really well. So we were able to reinvest all of the profits into buying about six to seven, like yeah, it was basically acquisitions that we did, right? And out of which we sold two of them. ⁓ We're running two of them, like ⁓ we're still making revenue from them and running them. And two of them we shut down. because honestly, were just businesses that like Chat GPT now just had them as features. ⁓ but yeah, all of them were like. Pete Vera, Exit Algorithms: ⁓ yeah. Dev Shah: Online businesses, newsletters, SaaS, mobile apps. and yeah, since then ⁓ we sold our main business, which was Source Lee AI, for low six figures. So it was a really interesting exit from four thousand dollars to low six figures. And ⁓ sold that business about a year ago now, and since then been main mainly working as buy side advisors. so working with various private equity firms. search funds, VC back startups, individual buyers, so yeah, ⁓ a a variety of kind of buy side mandates. Pete Vera, Exit Algorithms: Yeah, awesome. yeah, and and you've grown a a pretty big following on on the social channels as well. It's very ⁓ very impressive. yeah, you've been able to do so you know, so young. I I'm curious, is there any anything you would have done differently looking back now on on your on the ⁓ the businesses you sold that how was that sale process and prepping for those exits? Dev Shah: No, that that's a great question. I I I think definitely there's a l a lot of things I could I would have done differently. I think that first of all buying six businesses in the span of like a year or year and a half, even though they were small businesses, was not the right approach, right? I should have focused on the one that was clearly like kind of like our champion, right? ⁓ so I think I would have probably changed that. But that being said, kind of what through the process of buying six different businesses is what really helped me realize that I enjoyed that process a lot. Right. so that kind of led to us now becoming a buy-side advisory firm. So yeah, I think hindsight is always, you know, difficult to say, but to simply to maximize that exit, I would have definitely just focused more, you know. And I think also understanding who I'm gonna sell it to. Right. Cause I didn't really have much of a clue when I first started, right? And I think just knowing who or having some idea who I was gonna sell it to would have helped me maximize that or exit multiple. Pete Vera, Exit Algorithms: Sure. Yeah. Yeah. Beginning with the the end in mind, right? And no knowing knowing who you're gonna sell to and and what you want out of that. yeah, that can go a long way in exit prep. yeah, and you know, you work with a lot of buyers, a lot of high level buyers. ⁓ what are some of the things they they look for in businesses that for potential acquisition? Dev Shah: Mm mm. Yeah, so think that right now the way you have to look at buyers is that you have to segregate them like according to what their criteria are, right? Whether they're a strategic buyer or a financial buyer. Right. So most of the buyers that we've worked with have been on the financial side, but we have still worked with strategic buyers, right? Strategic buyers are very unique. It based on their strat what strategic reasons they're looking to acquire, right? Whether that's for data, ⁓ that's for a certain tech, a certain market that they're looking to break into, right? There's different reasons, but identifying that reason and understanding because If they're a strategic buyer, they probably are a larger company, right? Which probably has certain KPIs or certain like, you know, incentives that the ⁓ leadership team is working towards, right? So understanding that, being able to identify that, right, and then aligning your business, right, with being able to say, like, hey, look, you're looking to grow by X amount or break into X amount of countries, right? These are probably KPIs that they have. By acquiring my business, you are getting to cover multiple of those, right? So that usually doesn't sweeten the deal for the business, but it actually makes it more likely to happen because the decision makers themselves are like, it it really helps weigh that decision. But then if you go ⁓ for financial buyer, it's usually just very straightforward, right? Does it have like, does it fit their certain bands, right? Of revenue, And then they'll have like bans for let's say They want a certain number of net revenue retention, right? Or they want a certain like minimum like they have a certain maximum churn that they look at, right? So understanding those numbers, right, and making sure that you know not only do you fit those numbers, but ⁓ maybe better for you to have a little bit less revenue, right? But actually having like solid retention, right, within that revenue. so yeah, just understanding like what these Buyers are looking for usually have. But yeah, I think obviously the the most obvious ones are profit and revenue numbers, but I think often buyers really think about like who is the other person that I'm going to be working with, right? Who is on the other side of the table? What kind of relationship do we have, right? can I trust them? Because buying a business is just the first step. Right. And I think the smartest buyers realize that. So they want to work with somebody that, you know, ⁓ they think will be reliable as they continue to take that business forward. so I th I think it's a variety of things, but very often like the most important are of course like the underlying numbers, right? And then the the person sitting across them at that table, right? Whether you can form that relationship with them or not. Pete Vera, Exit Algorithms: Yeah. absolutely. Yeah, you gotta you're ultimately it's it's most of the time it's a it's a partnership ⁓ or at some level, you know, they'll be involved post close the seller. So it you gotta you gotta be able to, you know, wanna have a beer with them, right? Sit down with them and ⁓ yeah. What do you see as, you know, some something ⁓ that's it a a clearer, ⁓ this is a this is gonna be a great Dev Shah: Take the Exactly. Exactly. Yeah. Pete Vera, Exit Algorithms: potential acquisition. you know, is it do they have a certain their financials in a certain order? And and like what what are some of the, you know, the the best deals that you you you see out there? Dev Shah: Yeah, so I think I think honestly th very often like ⁓ don't know how to present their business to a buyer. Right. So they will just like they'll just create like a profit and loss and then a basic overview, right? And they they won't really go much deeper than that, right? ⁓ so I think like having a comprehensive deal room, right, and certain like segment research, right? Understanding who are your client segments, right? How long have they been with you? how how like how b if it's B2B, then like how many employees are at these companies, right? like understanding like are you a priority software or not, right? because like ⁓ i i if seller is not finding these things out themselves, they won't really know where they stand. Right. And I think for a lot of sellers it's easier to not know that. Right? You can look at the high level numbers and dream up ⁓ valuation right but the buyer is gonna really put an x ray to your business right so you should try to do that to yourself first right do this initial due diligence right get a sense of what is what is actually within my business right how would a buyer look at this and then you can often s like address these kind of skeletons in your closet yourself right or kind of Like tell the buyer that, hey, look, like these are things that we've identified, right? Because then the buyer's gonna trust you so much more, right? They're not having to go on like a wild, you know, chase to try to figure out where are the problems. You're kinda showing it to them right off the bat, right? And then they can accordingly evaluate you. This might also be a bit of like a biased view because obviously I am often the one evaluating these businesses, right? And having to go on that chase to figure these things out. But very often we're figuring things out about the business, right, that the seller themselves did not know. Right. Whether it's like a technical debt issue or it's something about a customer of theirs, right? Or about like the cohort data that they have. so yeah, not just like looking into ⁓ business, but obviously in order to be able to do that, you have to have proper and visibility on your business yourself. Right. So I think very often sometimes just setting up that tracking and visibility is the first step for a lot of sellers. Pete Vera, Exit Algorithms: Yeah, I agree. That definitely great great advice. you know, the clearer you can demonstrate the the cash flow, the profits, yeah, the revenue quality, the better more higher multiple you'll be able to command when when you go to exit, right. Dev Shah: Exactly. Exactly, exactly. Like the I feel like they should approach it in a sense that like, hey, if I have an amazing business, the buyer is gonna be willing to pl play pay a premium multiple. Right? think the way they often approach it is that like, look, this is what we built and this is the multiple we think it's worth. Right? But I I think going deeper and like really like showing all of the potential flaws, right? Acknowledging them and then showing like the growth story or the potential that the business has, that is often like a much better like buyers receive that a lot better than if you just paint a a great picture, right? Cause then they're just gonna be like a little bit suspicious, like what is what like it's too good to be true. Right. So what are the skeletons, what are the potential negatives? Yeah, and I've of I've I've seen buyers like reject businesses because they're just like this is just too good to be true. It's like not even worth our effort. You know, and and and like and I may not understand because they might have certain domain knowledge and expertise, right? That I don't have. Right. So then we go with what they're saying, right? In terms of like this is probably too good to be true. But I think that sellers often don't really th realize that that's how buyers think. Pete Vera, Exit Algorithms: Yeah, absolutely. Yeah, it's definitely important to to put yourself in the buyer's shoes. ⁓ Dev Shah: Exactly, exactly. That that's a skill, honestly. I think it's really important. Pete Vera, Exit Algorithms: Yeah. ⁓ you know, you you bought a business r ⁓ really, really cheap and grew it and then and then sold sold it. You know, it I love that story. Do you mind sharing a little bit about that journey? What were some of the things that you did to to grow that business? Dev Shah: Yeah. Yeah, of course. So I I think for for that I'll have to take you back a little bit to when I was so I I bought the business ⁓ my junior year in college. it was I was an internship at I at this company in Hawaii. So I was working remotely from there for two months. And I I I was obviously I was on acquire.com well before that meeting with Different types of sellers. I probably met like a couple hundred sellers before finding that final deal. I had I think 10 LOIs that I had sent, right? Around five due diligences that I had done, but then I realized like they're not saying something or this is overvalued or I'm not the right person, right? So this final deal honestly went by happened very quickly because I found the business, it was around $500 MRR. Right. And it's a business called Sourcly AI. So it was a student AI tool. which I don't know, have you used Google Scholar? Pete Vera, Exit Algorithms: Have it. No. Dev Shah: So it's basically it's a mean, any college student will probably be using it, but ⁓ can find like sources, right? So you can put in like, let's say you can the way most of the students were using our tool is they would input the essay, right? And then we would it could find sources, right? For like, hey, like this paper, that paper, based on like the ⁓ and the topic and stuff like that. so that's what the tool was being used for. ⁓ It a Terrible website, just terrible branding, ⁓ pretty shoddy code base and everything. I found the business they were asking around ten thousand dollars. I kind of like, no way, this is not worth like two times ARR. I lowballed them at four thousand dollars. they didn't get back to me. I didn't hear for them from them for about a week, and then after a week got back to me, they accepted the offer. And so things move pretty quickly. what I think is probably the most relevant to mention is that I bought my first software business without knowing how to code. And still don't know how to code. So I think that was the main challenge for me, right? So it was at five hundred dollars MRR. So it had some some money to around with, right? ⁓ sorry, ⁓ yeah, monthly recording revenue. Pete Vera, Exit Algorithms: MRR can you explain for Yeah, for listeners. Okay, yeah. Dev Shah: So MRR is basically like it it had 50 people paying $10 a month. No, sorry, it was $5 a month. So it had a hundred people paying $5 a month. Right? So that that why that's why it had $500 in monthly recurring revenue. And it was like a subscription, right? So it was like the you subscribe to Netflix, right? So it was a subscription business model. So I knew that if I'm buying this for $4,000, like At at least, like, you know, some of these hundred people ⁓ stay on, right? And I'll be able to recover my money at the very least. it was only like a three-month-old business at the time, but it didn't really have that much churn in those three months. So that's why I felt that this was the right target for us. initially, I think the first thing I did was just revamp the landing page, right? Revamp the marketing. so I think that that was like the initial thesis for why we bought the business. and I think it was just honestly, ⁓ I there a amount of luck involved, right? I'm not gonna sit here and say like, hey, like I bought it at four thousand dollars, like I knew it was like a a master stroke right from the start, you know. I knew I would sell for six figures. I I really the first month I was I I genuinely was just convinced that as long as I don't lose money on this, I will have learned a lot and that's what I'm going for. Right. So I just didn't want to lose money and I just wanted to learn, right? So I just started out, redid the landing page, redid like the social media pages, the branding, stuff like that. Started out with very gorilla marketing, right? So Reddit, Twitter. Pete Vera, Exit Algorithms: Mm. Dev Shah: and LinkedIn. Right. So I would use my own channels. And obviously because I was a college student at the time, right? also I it was during the summer period. So I had a bit of like like about a month until school started again. Right. So I was able to just like just kind of set up a good base. ⁓ Right. fortunately at that time Reddit marketing wasn't as popular as it is right now because this is obviously like two and a half ⁓ three years ago now, Reddit marketing wasn't as popular. I was pretty good at that. ended up getting hundreds of thousands of views in just the first three months on different different subreddits. and then from that we started reaching out to influencers, and influencers started reaching like interacting with us. Right. So then we we had a couple influencers from YouTube and Pete Vera, Exit Algorithms: Nice. Dev Shah: Twitter that posted about us. those videos like still get views. because educational content is very how do you say like evergreen, right? It's not like ⁓ here's what happened last week in academia. It's usually like here are five tools you can use, right? Or here's how ⁓ I create research paper, here's my research paper process, stuff like that. So it's kind of content. So Pete Vera, Exit Algorithms: Mm-hmm. Okay. Dev Shah: That along with Reddit worked so I don't know if you know, but like SEO ⁓ a lot of search results from Reddit. Right. So then ⁓ like posts that I made on Reddit started ranking on SEO for like how do I create a research article? so it was like a very scrappy kind of way. So initially it was just me for the first three months. and then I started bringing on like a small team. So Pete Vera, Exit Algorithms: Mm-hmm. Right. Dev Shah: Fortunately coming from India, I was able it was pretty easy for me to hire people in India. Right. So we were able to kind of keep the costs low. and yeah, slowly we in 12 months grew the business from $500 in monthly recurring revenue to over $5,000 in ⁓ recurring monthly recurring revenue. And yeah, then we the business a couple of months Pete Vera, Exit Algorithms: Wow, awesome. Yeah, th thanks for giving that detail. I th I think it's really useful for, you know, b other business owners. I haven't have maybe haven't thought of some of those ideas for for growth being really scrappy. I love it. and okay, l last top Dev Shah: ⁓ we were very scrappy. Pete Vera, Exit Algorithms: Yeah. last topic here, Dev, is I want to touch on AI because I know you're you're deeply entrenched in in AI space, using it to build your businesses. yeah, I'd love to hear your your thoughts on on you know how do you properly use AI? how how are you personally and and professionally using it? Dev Shah: Definitely. So I think the first thing I'll take is like in terms of personal use, right? Cause I think that I've really gotten ⁓ a out of AI and I think everybody should be using it to optimize their own personal workflows. Right. So just just a random example. So I have this skill which is like meetings reconcile, right? So all it does that I have granola, that's my meeting ⁓ AI meeting note taker. So it pulls the meeting notes from the day, right? ⁓ from all the different meetings that I've had. It will recognize who those meetings were with accordingly give me the list of tasks, right, that we've discussed. And then it will connect to like so we have an internal tool that we've created called the task tracker. That me and my team use and it'll assign those tasks automatically. ⁓ so that's like a daily workflow that I run. besides that, I also have it connected to my Google Drive, to all of these different tools that are really helpful. So yeah, I I use AI a lot to generally organize my life to communicate better with my team, to help like give audit myself as well. Right. So I'll be like, what was the last week, right? Did I Did I get everything done? so yeah, I I kinda use AI like a mix of like a intern ⁓ along like a kind of performance coach along with like a secretary. so yeah, it it has taken like many weeks, if not months, of like, you know, different use cases and kind of like piecing everything together. But yeah, I think I have a pretty pretty good ⁓ workflow now with it. Pete Vera, Exit Algorithms: Yeah, yeah, that's a good takeaway too. You know, it it does it takes months to to train it and you know learn how to use it properly. It I think ⁓ there's still a lot of people that are just using it like a a search engine or yeah, the a generating, you know, s AI slop, right? It's still very much out there with the social media content and and emails. I get a lot of it email, inbound emails from people wanting to sell me things and it's like Dev Shah: Yeah. Yeah. Pete Vera, Exit Algorithms: Dude, I can just sell right away, right? if you take the time Dev Shah: It's so obvious. It's so obvious. You can recognize. So that's why so I actually use I have like a Dave voice skill. So everything that my AI writes and does like is with that like skill always. so I I think that really helps like, you know, just like certain nuances, certain words that you would use that like if you can give the AI like a bunch of your emails that it can learn and then when it replicates that, then it doesn't sound like AI. Pete Vera, Exit Algorithms: that's smart. Yeah, feed it. Feed it enough information to know how it how you sound. Dev Shah: Yeah. Yeah, yeah. Pete Vera, Exit Algorithms: ⁓ that's great. Well, David's it's been a a great conversation. Lat last last question for you. If you could leave listeners with with one piece of advice, one practical takeaway for growing their business with an exit in mind, what would that be? Dev Shah: Yeah. I would say a good balance of optimism and reality. Right. You should obviously be very optimistic about like and believe in your business, right? Quite frankly. and don't get that confused with like because as a founder, the way you look at your business and your baby, right, is obviously gonna be with a lot of bias. Right. So you should be optimistic and that's the way to like get million dollar and, you know, nine figure exits. But ⁓ you need to also be grounded in reality, right? And make sure that you're in touch with the right people that can give you that dose of reality, right? In terms of like what is missing in your business, what can be improved and how to really optimize for the highest multiple or the highest exit that you can get. Pete Vera, Exit Algorithms: Great advice. awesome, Dave. Really love this conversation. Where's the the best place listeners can can find you, learn more about you and your work? Dev Shah: ⁓ so it's Dave likes business, B I Z for Business, on socials. So on Instagram, Twitter, LinkedIn. they can also email me at Dave at PocketHyphen Fun dot com. but yeah, generally LinkedIn are pretty good places to reach out to me. My Instagram is very crowded, so Twitter or LinkedIn is the best, if not email. Pete Vera, Exit Algorithms: That's good. I'll leave that in the show notes. Thanks for your time today, Dave. Great conversation. Dev Shah: Awesome. Thank you so much for having me. This this was really fun.