Ep. 195 - Why Code No Longer Drives SaaS Value in the AI Era

Welcome to the Stats Backwards Podcast, where we reverse engineer the success of fast-growing StAS firms and explore strategies CMOs and CEOs are using to drive their businesses forward. Welcome to StAS Backwards, a podcast that helps SaaS and AI CEOs and go-to-market leaders accelerate growth and enhance profitability. Today's guest has been on both sides of the founder journey. Tim Schumacher built SEDO.

com into the world's largest domain marketplace, ran it for 10 years, sold it, and eventually co-founded SaaS Group, a founder-friendly acquirer that has now bought nearly 20 bootstrap SaaS businesses and scaled them to over 100 million in combined ARR. What sets Tim apart is the philosophy. And because he's been a founder himself, he knows what it feels like to decide when to sell. Today we're talking about what's driving founders to consider exits right now, what buyers are looking for, and why AI may be the biggest wild card founders have ever had to price into that decision.

Hey Tim, welcome to SAS Backwards. Hey there. Thanks for having me. Yeah, I'm really excited about this episode.

I think it's every founder's aspiration to find the exit. So I'm really excited to dig in on that. But before we do, please tell us something about yourself and your company that we can't find out on LinkedIn. Well, maybe because something between the connection of the things.

Like on LinkedIn, you find that I've done a ton of angel investments. And then you also find SaaS group. And kind of the two things actually have something together. And I think it's something that a lot of entrepreneurs have in common.

Is I was getting tired of angel investments because, like, for one, they were crazy priced. And for others, I could never really kind of influence things. And as an entrepreneur, I like to get my hands dirty. And that was actually one of the main reasons why I started SaaS Group.

I see all those wonderful businesses. They're all a couple million AR. And like founders want to do something else, but there's really not much of an exit market. And that's what we started at SaaS Group for to buy companies and take them to the next level.

Well, I think it's also interesting, you know, at the angel or very early stage investing, the odds are really bad. I mean, more of those companies are gonna, you know, cease to exist than succeed. But you get to about 2 million in ARR, you've started to figure things out. So it's probably a pretty fertile place to be investing.

Yeah, absolutely. And those businesses are great. They are real businesses, they have really nailed product market fit. So they have a future, but then often founders get bored.

Founders are like, you know, I want to go back to this zero-to-one phase. I want to get back to actually figuring out product market phase. I want to get back to building. And that's a very legitimate thing.

It is. And also scaling, different skill sets each step of the way, right? What gets you up and running and up to one or two million is not the same thing to get you to five. Very true.

I want to dig into some of the topics we prepared for today. And the first is, you know, I hate to call it obvious, but you know, AI is definitely pervasive in our business now. And when we talked before, you said that AI's created, you know, a new kind of fear among SaaS founders, not only operational anxiety, but an sort of an existential question. Well, you know, will the business exist?

And that's something that didn't really exist two years ago. So tell us how that is manifesting itself in DealFlow. Do you think it's rational or is this an overblown topic? Well, I think it's actually both.

I think for some businesses it's it's very rational. If you have a SaaS business that's basically just the UX layer, then you got away with that for the last couple of years, AI will kill you. If you have something with a real moat, real data, you're vertically integrated, then I think AI will not replace you in the next couple of years. But to be honest, we all don't know.

And that's the thing, is like as a founder, usually you have all your eggs in one basket. You have this one company, it's usually like 90, 95%, sometimes 100% of your net worth. And then you get nervous, and I think rightly so, because you really just have. And so we're yes, we're seeing this in the deal flow.

We're seeing it first of all all the questions I get all the time. I get a lot of questions these days, oh, you know, is SAS doomed? What about this SaaS eucalypse, all of that? And I've never gotten this question before.

It's like it just came up, and we're seeing this in our deal flow. We're seeing founders who are like, you know what? I always thought SaaS is going to be risk-free. I'm actually second guessing this, and they're thinking about exiting for that reason.

It is an interesting thing. And the thing you mentioned about moat, I think is so important. In fact, I wrote a Substack on it on the fact that MOTAS are really what make for goods. And proprietary or manufactured data or uniquely gathered data is, I think, super important in being able not only to defend yourself and your SaaS experience, you know, your SaaS business, but also if you're going to layer on AI, you have to have great data from which to yield new insights.

So I think the data point can't be overstressed. I want to ask you about kind of the marketplace, you know, is this a good time to be selling or reinvesting in your business? And, you know, AI is definitely, you know, reshuffling the deck with winners and losers and creating new, you know, totally new businesses in many cases. So these founders that, as you mentioned before, you know, thought they had a good bet have some uncertainty.

So, how should this unsure founder, this person who's not sure what the future holds, think about the sell versus stay decision? You know, is there some guidance you can give listeners on how to assess their current situation? My guidance would be to actually start with a why and start with a personal situation and not try to time the market. I mean, the first and foremost, like people are an entrepreneur and they have a life.

And it's most important to really think about is do you enjoy running this business? Do you want to really pivot this business to an AI business? And if you do, and you know, you don't maybe have a family with a house, you know, you want to build or something like that, then it's totally fine to all risk it and do it. And there's nothing wrong with just continuing it.

But of course, if there are other demands, if you're like, you know, I built this for years and I really want a couple million behind the firewall, then well, then I think the life decision really dictates that. And then I think the timing is right because it's actually something where, yeah, a couple businesses will fail, but I think it all starts with a why. I mean, if I think about why founders are coming to us, to SaaS group to sell their business, most of them there's some life-changing thing.

Either they get bored or they get divorced, they get in a fight with their co-founder, they have children and they want to spend more time with a family. We've had everything. We have had people who are like, you know, I'm bored with tech, I'm gonna start culinary school in New York City. We had it all, and all of those reasons are super legitimate, including the one is like, okay, I want to have a couple million behind the firewall and then do something else again, because it's just, yeah, life is just gonna be a lot easier with a few million in the bank.

And if that reasoning resonates with you, then I think I would consider selling if I were founder at this stage. Because there is a likely chance, or not a likely chance, but there's a reasonable chance that your business will fail just because of the AI transition. So wow, there's a lot to unpack there. It sounds like the bootstrap founder is maybe a little different than the venture-fueled founder, right?

This is an extension of themselves, it's a lifestyle business. This is a really personal decision more than just a math decision. And that's the great thing. As a bootstrap founder, you hold all the cards.

Like you're not dependent on a VC on some fun lifetime, on being in a hamster wheel while some VCs want you to really kind of do this next round and go all in. You actually can choose and you should choose, but you should think really hard on what kind of what motivates you in life, first and foremost, and then kind of go into the business timing and all the details. But really, it all starts with a life question. I also love the advice not to try and time the market.

I think that's true in any place where there's true market activity, almost impossible to time, you know, the sale or purchase of an asset, an equity, a house. I mean, you it's very difficult to be accurate in assessing high or low in a market or even the ultimate direction of the market just a few days from now. So I guess if you want to sell, anytime is a good time to sell, right? Absolutely.

And if you don't want to sell, you just continue whatever happens. Well, yeah. I mean, if you decide for your own reasons, you own this business, right? You know, you're strapped, you yourself or you with your one or two or three partners, you get to chart that course without over overthinking the market timing.

Yeah. One of the things that I first learned about your company that, you know, was a question for me is what makes these businesses attractive for sale? You've bought almost 20 companies, so you get to see a lot of deals beyond obvious metrics. You know, what's getting you excited now for deals that you're seeing versus the stuff that you're passing on?

Like, where's the decision point really anchored on? Yeah. I mean, what gets us excited is just a great product, first and foremost. Something where we're like, oh, you know, we might be even users ourselves, or we are potential users.

We really get it why people choose that product over another one. Sticky customers, high NDR, high GDR. So none of that is really kind of a surprise. All the metrics I think all SaaS founders are looking for, low churn, high growth, and so on and so forth.

But kind of coming back to the AI thing is that actually does get us excited because like we're a portfolio companies. We have over 20 businesses now, and it's actually okay if one, two, or three, or four of them fail. That'll happen. And I, you know, I can see some businesses in my portfolio where I'm like, oh shit, I really don't know if they're gonna be around in five years.

Just the nature of what they're doing. And we're trying to pivot, we're trying to change things, but that's hard, but it's actually okay if, yeah, the few of them fail. We also have a few other ones where like, okay, I can see why they thrive in the times of AI. But then there's also another component, which is that transformation with AI, whether it is improving marketing, whether it's reducing hosting costs, whether it's changing pricing, all the levers we usually have, it's become a lot easier with AI.

So we can change things much faster. So, as much as AI from a business model standpoint is a threat, it actually, well, well applied on an operational level, AI is a real blessing. And with all of that together, we've actually increased our growth rates, we've increased our profitability over the last year. Even if we see a few businesses that are almost doomed to fail.

And then again, kind of coming back to the founder dilemma, we don't have all our eggs in one basket. We have essentially we have like 20 eggs, and if a few of them fall down and are going to be scrambled eggs, that's okay. That's pretty funny. But yeah, it makes a lot of sense.

When you were talking just now, you described sort of AI and go-to-market, AI and operations. Is it also impacting how you invest in product in these companies? Oh, yeah, we also invest into product. Generally, we like businesses that have a strong product and have product-led growth.

We try to shy away from enterprise, the enterprise sales, especially the ones where the founder plays a real important role because that one is hard to replace. But of course, we also invest in product, we invest into AI-driven products, and very often we also just bring a different type of sparing and coaching to the founder because as a founder, sometimes it actually gets lowly. Like you do your thing, you have your clear strengths and weaknesses, and you usually don't have, you might have other founders to exchange ideas with, but you don't have someone who's really top-notch, who's kind of exchanging ideas with you every day.

And that's really the beauty of SaaS group is that we're building this community of independent SaaS brands where a lot of people just also exchange ideas, best practices and work like with open books. And so every founder can see what works, what doesn't work, and that we believe just creates a just a very nurturing environment. Yeah, and you mentioned also that you share playbooks, right? So there's a lot of infrastructure that you make available to the companies that you acquire.

If you're building a SaaS company, here's some data that's certainly worth paying attention to. According to Kyle Poyar's research across 6,500 software companies, only about one in five ever reach 5 million in ARR. And just one in 10 make it to 10 million. Now, those are some pretty sobering numbers.

If you've got funding in a solid product, but you're still missing revenue targets, the culprit is almost always somewhere in your go-to-market. Now, maybe you're losing too many deals to no decision, and many times pricing hasn't changed and it's opened the door to competitors. And often sales and marketing are hitting their activity KPIs, but that's where the good news ends. Now, these are all solvable problems, but you have to know where to look.

And that's exactly why we built the SaaS Doctor's Go-to-Market checkup. It's a free diagnostic where we assess 12 critical components of your growth engine, from positioning and pricing to your sales tech and metrics. We'll come back to you with a clear picture of what's holding you back and what to prioritize next. No 80-page decks that you'll never implement, just a sharp, actionable read on why you're stuck and what needs to change.

So if your product should be growing faster than it is, check out the link in the show notes and let's talk. And now, back to the podcast. When we were talking just before about the reasons why people sell, and we we talked about like boredom, burnout, family, co-founder conflict. There are a lot of reasons why we might get to the point of wanting to sell a business.

I think when you're getting to that point, there's a lot of decision making and things you probably have to execute on to be able to sell the business. So, what are the mistakes founders are making that you see when they decide it's time? So they're getting ready to go. You know, where are they maybe not doing everything they should be doing or making missteps along the way?

Well, I would mention two things. One is really kind of on the prep work. I think there is prep work and you should take a few months of actually preparing for an exit. And I think that actually starts with making yourself redundant as a founder.

Ideally, you have a business that is run by someone else, and you might still run it as a founder a few hours a week, but it shouldn't all depend on you. And that takes time, that takes a few months. You need to hire that person, that person should be properly onboarded, processes should be in place, and really transitioning from a founder-led to a manager-led company, including just generally getting your house in order, getting all the materials right, getting a data room, just making sure to tie up a lot of losends, I don't know, stop side bets, streamline the business, focus on core, invest a little bit in compliance, those sorts of things.

So just really getting ready for the sale. I would say, and a lot of founders don't invest enough time into that, and I think founders should. And the number two mistake is really kind of has something to do with the reasons for sale, and then also the time after the deal is that very often founders aren't clear what they really want to do afterwards, and the deal terms then don't really match kind of what they want to do. And what I mean with that is take a founder that's really burned out and wants to quit within a month or two, but then gets tied into an earnout, that's like miserable, and that earnout is gonna fail, everybody's gonna be frustrated.

And and likewise, if a founder is really actually just want to take some chips off the table but would like to continue the business, you want an earnout. You want something where you continue to have some incentives and really making sure that the deal terms, but also the type of buyer really mirrors what you want to do with your life after the earnout. And that might mean that you have to include strategic buyers or you have to exclude financial buyers. And I would really advise that founders think about this, and then it's also okay to sacrifice some valuation for that, because in the long run, you're better off.

And I think founders should really think hard about that. Yeah, it's really interesting. It's almost like selling a house, too, right? If you totally have a you have an offer on the table and it's gonna get you where you want to go, if it's not the perfect amount of money, but it gets you if you want to move on quickly, it gets you there.

I think you have to look ahead into the future more. People are really bad at that, I think. Yeah. Kind of turn back to the question of AI.

And when we were doing our prep, you talked about a company where two engineers, two AI engineers rebuilt an entire legacy system in like four months or so, and without actually hand coding anything. So that must have an impact on how acquirers are valuing or discounting legacy technologies inside the companies they're buying. You know, what's your take on that? Yeah, so what we're seeing is really that code, code itself does not carry a lot of value anymore.

Like data does, customers do, the right people, they are all of that has value and will continue to have value in the AI age. But code itself isn't worth that much anymore. And that we've seen in many examples. And yeah, the most prominent one was a business we acquired two years ago.

It was a legacy business, a 20-year-old company, which is older than most companies we acquire. A lot of them are kind of a bit more modern, but they had like a real legacy system, and it was maintained by over 20 engineers. And first, we tried some standard approaches, cuts kind of rebuild, but it would have taken years, would have cost millions. And with this business, we were almost because it was a bit of a fire purchase for us.

So for us, it was very cheap, but also the business was in a bit of trouble, and that was kind of the cool thing because we had nothing to lose with a lot of businesses. We pay a lot, it they're making millions. It's like we're also nervous, it's like we don't want to screw up that business. This business, because we were like, okay, what will happen, even you know, if we shut it down, it's like, okay, it was an expensive learning, but it's okay, it wasn't that much money.

And so we tasked two AI engineers who really wanted to do this, and they were like, give this to us, we're gonna rebuild this entire legacy system, move it to the cloud. So it was like a self-hosted on-premise solution with like super old data centers. And they were like, Okay, we're gonna move it to the cloud, and they did this. So they did not just rebuild the entire system, but also made this move to the cloud and did something where now we actually, with a few prompts, we can also add new features, all things that before would have taken weeks, if not months, in some cases.

And that was like one of the biggest aha moments I had in the last 20 years. Because if you've been like me in the software business for over 20 years, the amount of aha moments goes down, and AI gives me so many aha moments, and that was probably one of the biggest ones. So now actually, we do have an appetite for some more businesses that have some legacy code because we we know how to do it. I would say that's the buried headline in our interview is that the code having no value, but it does make sense, you know, customer loyalty, if you can maintain it, super high value.

Yes, proprietary data, you can always extract more and more value out of proprietary data. But if it only takes a couple of guys a few months to rebuild the application, I guess the code has become almost, you know, just the appetizer, not really the main event. Yeah. It's crazy considering I started my career in coding.

Absolutely. It's a little bit of a mind-bender. So, this appetite you have to acquire more companies like that, is there a playbook that you're gonna publish on what you guys did, or is it for others to discover on their own? Well, we we publish playbooks.

We haven't published that one, but we this is actually our goal. But we've published others. Like a while ago, for example, we've published a playbook where we acquired a business that was hosted on AWS, and the founder spent like a million on AWS a year, and we moved it to like some standard servers, still kind of in the cloud, but like Standard off-the-shelf servers and cut the hosting costs to like 200,000. So we cut it like 80% just because the whole setup was a failure.

And uh yeah, there are a lot of like those really cool insights we get from touching so many businesses. And we publish those things and we have our own podcast where we talk about those things. And yeah, so we're trying to be open with sharing some of our wins, but also some of our failures. And I want to dig deeper on the last point on the episode here.

You actually have a whole academy for founders, right? Helping them to get ready for the exit well before they plan to sell. What's the most important like entry points into the academy? Where would you point founders to you know the aspects of the content in the academy that'll help them most to impact valuation?

Yeah, so I think it's very often it's actually the cost side of things because you can have short-term effects here and they're often neglected. I mean, sure, we all know that, of course, revenue is the most important thing and revenue growth is important, and try to get churned down, and uh all of that is pretty straightforward. But I think what a lot of founders neglect is the cost side of the business. And so my advice would be, among other things, is that founders look into their hosting costs.

They're not given. It's like AWS wrongly configured, is you know, is a money pit. You need to really dig into this, and it's not rocket science, and especially with AI. You can basically tell AI, tell me why I'm sending too much money to AWS, and AI will fix it for you.

Same goes for marketing spend. Like we're seeing like people blowing hundreds of thousands, if not millions, on Google ads that lead to nowhere, looking at that, also optimizing some people costs, inventory costs, whatnot. Very often there's just a lot of inefficiency in businesses, and they of course impact valuation. So that's part of that getting ready is I think focusing things, cutting unnecessary experiments, those sorts of things.

And that really has a short-term impact on valuation. Then businesses are much better off doing those before selling than the other way around. Well, sure, you're almost doing the acquirer's business for them, right? True.

Yeah, you're doing the work that a savvy buyer would do right after the sale, right? Exactly. So you're raising the value, but also reducing the work the buyer has to do. And you're showing that it's possible because not everything is possible.

And of course, for an acquirer, if all that work has been done, you can pay more. Well, I think that's a great place to land our episode. Tim Schumacher, thank you so much for being with us on SaaS backwards. If people want to learn more about your company's SaaS group or reach out to you, how can they best do that?

Yeah, totally. Our website is SAS.group. My email is very simple, Tim at SAS.

group, reach me, connect me on LinkedIn. I answer every email. Sometimes my AI is faster. It answers the email for me.

But now, joking aside, there's always a human in the loop, but I have a draft for emails, but I still look over every draft and I answer via email. So yeah, I'm looking forward to hearing from you, uh, in particular from SaaS founders. That's great. Thank you.

And uh, if people want to reach me, I'm on LinkedIn slash in slash Ken Lempit. My advertising and demand generation agency for SAS and AI companies is Austin Lawrence Group. We're at AustinLawrence.com.

And you can subscribe to the SAS Backwards Podcast pretty much wherever podcasts are distributed, and also see full episodes in video form on YouTube. Hey Tim, thanks so much for joining us. Thank you for having me. Thanks for listening to the SaaS Backwards Podcast, brought to you by Austin Lawrence Group.

We're a growth marketing agency that helps SaaS firms reduce churn, accelerate sales, and generate demand. Learn more about us at www.austinlawrence.com.

You can email Ken Lempett at kl ataustinlawrence.com about any SaaS marketing or customer retention subject. We hope you'll subscribe and thanks again for listening.