228. Crisis Coverage w/ Jim Douglass – Pandemic Effects on B2B SaaS and Healthcare — Total $ Invested, Multiples, and the Exit Environment

228. Crisis Coverage w/ Jim Douglass - Pandemic Effects on B2B SaaS and Healthcare -- Total $ Invested, Multiples, and the Exit Environment
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Jim Douglass of Fulcrum Equity Partners joins Nick on a special Crisis Coverage installment to discuss Pandemic Effects on B2B SaaS and Healthcare — Total $ Invested, Multiples, and the Exit Environment. In this episode, we cover:

  • Background/path to venture.
  • The thesis at Fulcrum.
  • Investments since COVID — Anything additional you need to see or changes to process to get to investment?
  • B2B SaaS — impacts to existing contracts and funnel opportunities thus far?
  • Recently, we had Byron Deeter at Bessemer on the show talking about why this is the seminal moment for Cloud and b2b SaaS companies, do you share that excitement with Byron or where do you stand?
  • Previous downturns have had a deeper and longer term effect on growth stage (volume and dollars) then the earliest stages –  what are your predictions for the near term and mid term on growth stage investing?
  • How do you and your partners think that investment multiples will be affected?
  • What about the exit environment…What have you been seeing in the current exit environment and how do you think it will be impacted over the next 12 months or so?
  • I believe the entire team at Fulcrum has experience as an operator — How does this impact the way you work w/ portfolio companies?
  • Substantive changes to operating plans?
  • Healthcare Services framework and approach to investing?
  • What actions are you seeing CEOs take and/or what are you encouraging they take in order to maintain operating culture in this distributed work environment?
  • “3 data points”
    • Independent of the COVID situation, let’s say that you are approached by a B2B SaaS company that is currently doing $5M ARR, has a 5:1 LTV/CAC Ratio and MoM growth is trending at 10%
    • Catch is you can only ask for 3 data points to make your decision.
    • What 3 questions and data points do you ask for (can not ask for P&L, Operating Plan, Cohorts, etc… need to be specific data points)?

Guest Links:

Transcribed with AI

Intro 0:03
welcome to the podcast about investing in startups, where existing investors can learn how to get the best deal possible. And those that have never before invested in startups can learn the keys to success from the venture experts. Your host is Nick Moran, and this is the full ratchet.

Nick Moran 0:22
Jim Douglas joins us today from Atlanta. Jim is a partner at fulcrum Equity Partners. Fulcrum is a growth equity firm investing in high growth, SAS tech enabled services, healthcare services and healthcare IT prior to joining fulcrum Jim served as Chief Executive Officer at vestia and also visionary systems. Jim, welcome to the show. And tell us a bit about your background and your path to fulcrum.

Jim Douglass 0:47
Yeah, so I started my career in public accounting, and was there about seven years out of college and then left to go to be the number two finance guy at a public health care company here in Atlanta, like that it was growth in m&a, but had the opportunity to go to a company called CheckFree, which was a hot just gone public company when I got involved with it in the 90s. And it today as the dominant provider of online bill pay for banks, it’s been sold to Fiserv, the great exit. And from there left to go to run a couple of actually three different software businesses, one in credit decisioning analytics, one, which was a voting platform for online delivery of proxies and voting, and another one was in the loyalty space. Two of those worked and one didn’t. And that was the online voting one didn’t work. But I enjoyed working with those kind of three to $5 million companies initially. And growing up and having and, and racing for the exit two times, we were able to do that. So when I get sold, the last one, I was looking for the next company to grab and grow with the park with really a founder because I’m never smart enough to start one of my own. So go help somebody else. And a fulcrum was looking for another partner. And I mean, today, what I do is exactly what I’ve been doing for the past 15 years or so, which is I help businesses grow that are typically three to 10 million in revenue, I just don’t manage the people. So it’s the thought process is exactly the same. You’re thinking about the same things. And no, it’s not easy. It’s hard, just like running a business, but I really enjoy it.

Nick Moran 2:33
And it was fulcrum, an investor in any of your earlier businesses, you know, how did you wake up with that team?

Jim Douglass 2:38
They weren’t, but I knew Tom and I mean, I knew Jeff and Frank. I knew Frank the best I’d known him, you know, he’s been an investor in another fund in Atlanta for years. I’ve met Jeff before. And Tom and I were at KPMG together, but we never met. And so the attraction was there. Half of our fun half of what we do is b2b SaaS, are tech enabled services. And that’s kind of where I spent my career. Most of my time.

Nick Moran 3:07
And where’s the entry point for you guys? You know, is there like a average ARR range? That is typically when you like to engage?

Jim Douglass 3:15
Yeah, you know, that three to $10 million recurring revenue? You know, we’ll look at the bookings momentum of something. And if it’s 2 million and yes, booking 750, a quarter, then the new AC annual contract value. That’s pretty much a $3 million company. You may I know the math, but it’s going to be shortly right. So all about the bookings momentum, but we so we started looking at him really strongly in that kind of million and a half 2 million range and to make sure we get to know him. So that good shape, we’re in good shape when it’s time. Got

Nick Moran 3:47
it. Got it. Have you guys made any investments since? You know, the COVID crisis broke? Now

Jim Douglass 3:53
we haven’t we haven’t one at the finish line. And we just paused because we didn’t, you know, we use? Yes. Imagine early March, and the markets are falling apart. And literally, we’re supposed to close in two weeks. And we’re just like, we have no idea. We were actually the pricing wasn’t so bad on this one. But we just had no idea what was going to happen. So we said, look, we love your business. But we just need to pause for a quarter here and see where things settle out. And then we’ll come back to it. So we’ll come back to it. You know, he was going through what everybody else is going through to right sizing his business for the new environment. So it’s not, he’s not going to need the capital. He thought he was going to need near term. If he if we gave it to him, he wouldn’t have done anything with it.

Nick Moran 4:35
Good, good place to be in. But we’re

Jim Douglass 4:38
we’re really looking forward to getting back in at the second half of the year. We’ll definitely be an investor in the second half of the year. If there’s if there’s good things to get opportunities. Is

Nick Moran 4:48
there anything additional that you feel like you need to see in this environment?

Jim Douglass 4:54
No, I mean, do you think you’d go into it? Well, yes, I think you’d go into it. Well, With a different perspective, right, everything is going to have a different growth rate that would have had for the next 1218 12 to 24 months, right? It doesn’t mean it’s, it’s a bad business, you just have to adjust your, your your thinking to what that business might be worth for that growth for that growth period. So I think, you know, it’s like all of our software businesses, they’re all still growing, they’re just not gonna grow as fast as they were before co star, right? It doesn’t mean they’re bad businesses, you just have to adjust the amount of capital they’re consuming for the reasonable growth that they can achieve. And, and that makes you look at a business differently. So,

Nick Moran 5:42
you know, speaking of that, without naming specific names, as you look across the b2b SaaS portfolio, what are you seeing in terms of impact so far? You know, when it comes to existing contracts, as well as funnel opportunities?

Jim Douglass 5:57
Yeah, well just say on the most companies in their scenario planning, we’ll talk about enterprise and beat and in SMB separately, because they’re two totally different animals on the on the enterprise side, you know, most people cut their bookings plans by the for the year 25 to 50%. Yeah, they had they, most of them had good first quarters, because the last few weeks didn’t screw it up. But you know, the second quarter is going to be ugly. And maybe the third quarter will be a little bit better for so. So they’re still growing, but you know, kind of cuts in that range. Retention on the enterprise side, it takes longer to see it. So right now, we don’t see that material change on the retention. But I you know, I don’t think we have enough months behind us to tell right Chairman, on the SMB side, you see it immediately, with its beauty, the SMB business, you sell something every day and you lose some you can lose something every day. So in both you we have a couple of SMB businesses, but those they’re still selling ones doing quite well actually through it, but the other ones selling doing okay, but selling last, and then both of them, you know, their their gross retention, their gross churn is probably got five that, you know, they were there in the 20 25% Gross now they’re closer to 30. And, and will that another thing you do is it just has to shake out. So you got to take time to see is you give customers temporary pauses and recurring fees to kind of get the hang on and come back. And you have an opinion on how much that’s going to come back. So time will tell whether that that churn rate is any worse, but it definitely is ticked up a little bit on the SMP side. You

Nick Moran 7:48
know, it seems like a number of our pork COEs have contracts that are tied up in procurement almost indefinitely. I mean, do you see or expect sort of an impact to sales cycles and things just extending out?

Jim Douglass 8:02
Yeah, definitely. I mean, if it wasn’t out of procurement, you know that by the middle of March, it didn’t get out. Right. There are a few things that get got out, but not much in it that’s why I think the second quarter does really got to be tough for people. But what I’ll say is we you know, last week was past couple of weeks have been bored. We weren’t a lot of board meetings. And there’s also it’s not as bad in our some of our enterprise companies as they thought it was going to be things are continuing to man. But then we went through some pretty, we knew q2 is going to be ugly. So far. It’s not as ugly but it’s still up. Yep. Yep.

Nick Moran 8:46
Have you guys done any cloud or, you know, infrastructure investment on the enterprise side?

Jim Douglass 8:53
We’ve done DevOps, okay. We haven’t done any hard work on this stuff. We do manage security services. We’ve done a couple of different way the fishing business, fishing security business out of Charleston called Fish labs, a fantastic business provides the service to all the banks and various other industries, really, really nice business. We’re partners with LLR. Now in that business, we’ve acted originally, and they came in, to recap around to help us buy business. That’s an interesting space right now, because phishing attacks are going nuts in this nothing like a good crisis for a new threat vector, seriously. And so then, another one of ours that we actually sold in sight. Majority of the DevOps side is a company called QA symphony. That we’ve merged with tricentis. And that’s now a big 100 million dollar plus recurring revenue, DevOps company So we would definitely look at DevOps. We’re actually looking at a couple more right now. And we definitely look at security infrastructure. Good, good.

Nick Moran 10:08
Yeah, we we recently, I think last week had Byron Dieter from Bessemer on the program. And he was, he was talking about how now is the seminal moment for cloud, b2b SaaS cloud companies. Are there certain categories or areas like DevOps, for instance, that you guys are really leaning into, because of everything that’s happened.

Jim Douglass 10:30
So DevOps, we continue to like, the, on the payment side, payment infrastructure. So we’re, we’re payment meets workflow and business to facilitate payments, like just traditional merchant processing. It’s kind of baked, right? It’s a big scale game, right. But now, embedding current payment capabilities in corporate infrastructure, or corporate software, is there’s there’s, it’s great on the SMB side, and it’s great on the enterprise side. So various, various things that opportunities there. Security, still, obviously always a good space, people can never get enough of it. And then compliance, compliance systems, we’ve been in a number of we were in a third party RISK COMPLIANCE business, we sold that insight as well. We’re still investors in that one, it’s called prevalent. And we so we can look around that, that whole risk and compliance and getting it kind of marry in dollars with it data at the hands of the CIO, CIO and CISO. So they can understand the trade off between security execution, risk and cost. And I’ll throw in a fourth insurance. What can I just did, in really aligning that because people just insure, and they have no idea whether it really is insured or not. So there’s a lot going on in that space. I know there’s a bunch of rambling ones, but that’s,

Nick Moran 12:05
you know, previous downturns have had a deeper and longer term effect on the growth stage with volume and dollars than than they had on the early stages. Do you have any predictions for near term and mid term impacts? This growth stage of investing?

Jim Douglass 12:22
I mean, just what how investors will look for impacts on rounds.

Nick Moran 12:27
Yeah, like, you know, is deal volume and deal dollars going to adjust significantly down and you know, how long of a duration? Is your expectation that it will adjust down? If it does? Yeah,

Jim Douglass 12:44
so we’re actually having a lot of banker conversations right now just understand, you know, our ecosystem of bankers that like to sell our businesses and see the small deals that we like to start with. And then there’s, there’s so we’ve been in this world of three to $5 million revenue company grows to grow into towards 20. But bigger, firm GMI. Inside LR frontier, you name the firm comes in and recaps it, you know, sometime between the 10 and 20 million because it’s growing, that the 75% right there. That’s what they’re after. The odds the offered the valuations are so high, it was a no brainer for the entrepreneurs or even us to say, Sure, well, sell at that valuation takes them off the table and roll with you. And that’s what we did twice with insight and deals. And I think those recaps, the valuations won’t be probably as great. So that may create fewer of those recaps and more growth rounds in the near term. Yep. So people go and want to exit now. I’m gonna give it another year or two. So I’ll just want a smaller growth. We’re here to buy that. I hope that’s true. I don’t mind holding on with the businesses longer. We’re really in a market where the Goodwin’s, honestly would go almost too fast. If that sounds like a stupid statement, but you understand what I’m saying. And so I don’t mind holding on to the good ones longer and, you know, more growth rounds is good for growth and that for us for our stage.

Nick Moran 14:19
Yeah, what do you what are you seeing with regards to multiples so far? I mean, it’s probably a little early to really know, but I don’t know. Do you have some guidance, their expectation? Yeah,

Jim Douglass 14:30
it’s too early to tell. But you know, I’m asking that question in every dialogue. And I’m actually loving this zoom thing, because, you know, we have we’re having just great dialogues, whether it’s with, you know, lawyers or other all the constituents in our ecosystem that drive deal flow. So we’ve gotten a lot of information in the past, including ones like you know, or investor groups may have a in DC area or various areas. The common thing I keep hearing is the deals that are getting done Everybody wants a little feel good discount, and it feels it sounds like the things I hear 20 25%. Now, there’s not many data points. So this isn’t Jim Douglas saying the markets reset, it’s a bit lower. But that’s the common one that, you know, there’s something about it that pushed it over the edge, a little bit of this cow, a little tight, little more investor friendly, friendly security, for those participating preferred or whatever it happened to be. Those are the ones that are getting done that you hear about.

Nick Moran 15:32
What are your thoughts? Or what are you hearing from your partners, service providers, bankers, etc? With regards to the exit environment? You know, is this, I guess, both on the acquisition side, and as well as the IPO market? Do you have thoughts on what the next 12 months might look like?

Jim Douglass 15:54
Yeah, I think it’s gonna be, you know, the IPO market, I’m not as equipped to comment about other than, you know, markets are doing quite well, especially in technology. Right, right. I, the technology businesses have held up really, really well. It’s nothing like a recurring revenue business to prove its value in a downturn, right. As long as it snaps back, and we don’t hit the attrition issue. So what, on the on the exit side, the bankers all know, it’s going to be a slower exit environment for the next 12 months. No doubt about that. On the on the investing side, gross side, I think it’s gonna be by definition, it should be better. You know, these businesses would need more growth capital now, because they went through a downturn. The ones that are even more successful at it in it might not like the exit values now. And they might want a growth round to take it out a year or two longer. So it ought to be a good growth investing. I don’t think it’ll I think that there’s got to be fewer majority deals, whether it’s full exits or majority recaps. Yep.

Nick Moran 17:06
Yep. I believe that the entire team that fulcrum has experienced as, as an operator, if that is the case, you know, talk to us a bit about how you and the rest of the team work with the portfolio companies that you invest in?

Jim Douglass 17:25
Yeah, well, first of all, when we’re really we’re in diligence, we’re, you know, we’re obviously doing all of our typical diligence on the company, but we’re also trying to figure out the team and the founders of the business. So they people we want to partner with, and they want to be partners, because I don’t want to just go to board meetings, right? I want to run, I don’t want to run a company there. So you don’t want it but you want to be, you want to be involved, so are our companies, I’m talking to my CEOs, several times a week, you know, we’re typically involved in things pretty involved in the business, or, you know, at least every couple of weeks. So we’d like to find those people that that truly like to partner, you know, we do have a lot of operating experience. And that just hopefully means we know more of what not to do. And we’ve had some successes. So we kind of know a few things to do and, and we want to be able to, you know, share and help and help those out. Those guys succeed faster and help with that basic knowledge. And then like everybody else, you know, we’ve got relationships, and yeah, it’s like this downturn. Now when it was coming. I was like, it didn’t. I won’t say it didn’t faze me, but unfortunately, is third time I’ve been through it. So it’s like, you kind of know exactly what to do. And, and, and you’re able to confidently guide your your partners through it. And, and know that, you know, asking somebody to cut and cut is hard to do, but it’s just like, it’s gonna be fine. You can always add back. You know, it’s like it, you have a level of confidence when you’ve done things that I think helps and really, really tough times. And we’re not ones to think we’re not ones to freak out like things. Things never go up into the right and the straight line, right? It’s always a series of ups and downs. I’m a big believer and your highs are never as high as high as you think they are. And your lows are never as lows that you think they are. And so we just try to live with live like that. I think it comes through and we’re talking to prospective companies we like they can immediately tell by the questions we’re asking and how we think about businesses that were more than spreadsheet jockeys. So

Nick Moran 19:39
you know, this is probably the wrong time to ask this question. But do you ever get the itch to move back to the operating side? Are you pretty comfortable, you know, at this stage, being an investor only

Jim Douglass 19:50
I do that. I do have those moments where I go, that’s a business I wish I’d been in front of when I was running businesses. But now I really enjoy it. I do I think I, I finally labeled its business add some book by being able to work on a bunch of different things that kind of solves that problem. And, and I enjoyed the variety. The other thing you learn a lot about, you know, I never thought I’ve learned a lot about healthcare services businesses I never knew, because I’ve just never been around and, and believe it or not, some of those things, help you think about your SAS businesses. And definitely the other way around. I mean, SAS businesses are typically well metric or we get them their health care businesses haven’t always been ours are now because we, we cross pollinate our health care in our SAS teams and our CXO conferences, and the healthcare executives are standing back there and go, Wow, I don’t have anything like that. How do I do that? Right. So it really, it’s fine, that part’s fine.

Nick Moran 20:58
Is there like a framework you use to kind of size up the healthcare services market and think about the different subsets and categories within that, that you want to specialize in? Or, or focus on? Yeah, so

Jim Douglass 21:11
we’re in I’m not the healthcare person. So but I can tell you, generally, Jeff, do all that. But we’re typically looking at businesses that help lower cost, and keep people keep people from getting in the hospital or getting out earlier or lower cost in the hospital setting. So we’ve been successful in home health and hospice, some of the, you know, that’s on the getting outside, we’ve been except helpful. And then overarching on all that as multisite health care. So we, sadly, we had a wildly successful addiction treatment, business, and fun to that’s a just a huge issue. And there’s good actors and bad actors, we haven’t had a really good one. And, you know, truth be told, and fun three, we had a bad actor, and we got in trouble in that business. And that business didn’t do well. So you got to be careful there. But multisite healthcare, we’ve been in in all sorts of outsourcing businesses from staffing to er staffing to anesthesia, staffing, to billing, kind of everything around the healthcare ecosystem, but those are typically we look at those businesses, like I described, our SAS is kind of three to 10 million Arr, our, our healthcare businesses would be EBIT da generating kind of a million on the low end and 10 on the high and their platforms for organic and acquisitive growth. So we’re, we want to take a one to $10 million EBIT dot healthcare business and grow it to you know, 20 to 30 million in EBIT da, and we’re trying to buy them at four or five or six times EBIT, da. And when you get above 10, you’re usually getting in the right markets getting double digit EBIT, da multiples, so we’re getting returned to our investors through growing EBIT da through multiple expansion. And, and that’s been that’s been good for us. You have to be careful in healthcare, though, because you have to be fairly maniacal about understanding the pricing environment. Because anything in healthcare that has good pricing and good margins is just a target for CMS, which is Medicare, Medicaid, which drives Medicare. And so that we spend a lot of time on that to make sure we’re being careful.

Nick Moran 23:37
You’ve spoken a bit in our dialogue in the past just about the focus on talent. And I’m kind of curious, you know, when you’re evaluating a startup for investment, do you have a different talent lens, when it comes to maybe the healthcare companies you’re looking at, versus the SAS companies and just kind of in general, this is such a tough, tough topic to kind of, really put your finger on, but what is it that you’re looking for, in the talent in the leadership team that gets you really excited?

Jim Douglass 24:12
You know, kind of, so people that are just passionate about and passionate and humble, right? They know their space, they’re passionate about it. They’re and yet they’re humble, and they’ll listen and they’re, you know, they’re just, they’re lifelong learners, they want to learn. And that that’s what, that’s what really creates a successful partnership. You know, we can’t, when you’re in the passion to drive and succeed and businesses, you know, it’s exhausting. It’s like deleting that patient need to lead to be successful as a as a big job. And so you got to, you want to back people like that and have a true understanding of their space and their craft. However they got there, whether they grew up in it or they learned it or I don’t care, but you want to make sure that If you believe that God and and then, you know, they’re humble enough to say, I don’t know everything, and I want to build a team that’s better than me to manage me and I want to listen to my investors or whoever else I can bring to the table to help me succeed. I know that’s a long winded way of answering your question, but that’s that’s kind of what we look for people.

Nick Moran 25:18
And it’s uniform across the different types of businesses. Are there specific things in, you know, the health care’s see CEOs that you look for that might be different than maybe the technology Sasa? Yeah. Well,

Jim Douglass 25:32
the health healthcare in general is a lower margin business. So you definitely need a one, one or the team needs really strong financial guidance, because, you know, some of those businesses are 30 35% gross margin, so you gotta rub some nickels and make sure you’re, you have a really good operate. And they take more, there’s bigger scale businesses, they take a larger operating scale, we also do some in logistics, which is similar like we have a last mile delivery business out of Austin, Texas called drop off. It’s actually more similar to our healthcare businesses from what you need, the kind of management I think you need. Where’s the SAS businesses? You know, their high margins, there’s only it’s just headcount, right? For the most part, it’s that

Nick Moran 26:20
it is your marginal cost. Yeah,

Jim Douglass 26:22
it’s not as hard to in the systems even though you want him to have good systems, the systems are much more important to get straight early on in the healthcare business. And in the, in the software businesses, even though we want to, we want to have good ones. Yeah, you can afford to be less math oriented, I guess, and a CEO and a SaaS, business and net operating. And then you can in some of the healthcare businesses, right,

Nick Moran 26:52
right. Yeah, you had mentioned earlier in the interview that you’re enjoying, you know, the Zoom chats, I’m seeing sort of, kind of a variety of reactions to this, you know, like these, these CEOs and founders that are adapting to remote culture. For some, it’s great for others, you know, it’s been a challenge for the entire team. Have you seen any specific actions that your CEOs are taking that sort of encourage, you know, positive operating culture and specific things that leaders are doing in this, you know, distributed work environment that’s been thrust upon us? Yeah, just think you

Jim Douglass 27:33
can’t take it for granted. You know, people like to engage and they like to be part of a team and they want to be feel camaraderie. So even we even started a daily stand up to just kick the day off. Just I think we actually just started it today. And it was just, it’s just amazing how just makes you feel different when you get going. Kind of going. Okay, what are we working on day, a few things we needed to talk about across us. We’re a group where we meet once a week, historically, we go do our own thing, right? Office is half full half the time if that is people are out and about. So our our companies are doing daily stand ups they’re doing you know, fitness, online fitness together. They’re doing I’m doing online fitness with my wife now, which is awesome. It’s like so you can do it. I see

Nick Moran 28:22
a peloton behind you. Yeah, that will

Jim Douglass 28:25
she was doing some training with their friends. I was like, Sure, I’ll do that with you. And, but, and immediately, my CEO of my business and drop off was telling me they’re doing it on online fitness for their teams. And I was like that can see how easy that would be to do. Right? It’s just another zoom. It just happens to have a mat and some weights. And so I think you have to be forthright and proactive about doing those kinds of things, cocktail parties, at the end of the day. Just make it fun. You know, people want to have fun and they want to be engaged. And I think you can get the exact productivity. But if you don’t engage, then I think you’re you’re just waiting for productivity at all. Yep,

Nick Moran 29:11
yep. 100%. So I’m gonna I’m gonna put you on the spot here with a question called three data points inspired by Taylor Holliday. But I’m gonna give you a hypothetical, not a real situation. But aside from COVID, let’s put that aside for a second. Let’s say you’re approached by a b2b SaaS company that’s currently doing 5 million of ARR. They have a five to one LTV to CAC ratio. And let’s say month over month growth is trending at 10%. The catch is you can only ask for three data points to make your decision. What three questions and what three data points do you ask for?

Jim Douglass 29:53
Yeah, so the first one is kind of product and use case because I clearly am going to understand the product and how to use right. So when I, when I can walk through a use case I get the, you immediately immediately grounded on the why, right? Why is this work though? The second one is, and maybe I’m combining two things here. So I’m just being accused me of cheating, no cheating, pricing and Tam. So for that use case, I understand what they’re buying for what the use cases now what are they willing to pay for it? And what’s that Tam? So get so I can put those two together? And then the final one because you had everything else in there you want to know is I don’t care how much they’re growing, but I don’t Okay. What’s What’s the retention grant? What’s the retention? Because retention drives valuation so much in our space that you can’t not know that right? You gave me the the 8% growth on a 5 million recurring revenue and the cash really good. So that’s clearly the retention. When was the was the other one?

Nick Moran 31:01
Would you rather see retention for a recent cohort? That’s kind of, you know, hit the right time marker? Or would you rather see net retention, you know, since the beginning.

Jim Douglass 31:20
Net since the beginning. If you gave me one just net because I you know, we invest in SMB businesses that have 25% Gross churn, and that’s a little low. Even enterprise, I’ve got a enterprise business, it’s 85% 15% gross, but it’s probably 110 120. Net, right? I mean, that’s what usually net can only if nets good grows can only be so bad, right? Once you’ve looked at a bunch of these nets, if you’re impressed by net, you’re not going to be disappointed by gross.

Nick Moran 32:00
Right, right. And then on the pricing point, let’s assume tam is sufficiently large, right? On the pricing point, doesn’t matter if it’s, I don’t know, 50 bucks per seat, and there’s just, you know, huge, huge volume of seats across customers, or if it’s, you know, 510 20,000 bucks to see, and there’s fewer customers, does that matter?

Jim Douglass 32:31
Probably not, to me, I mean, if it seat based, you give me the suitcase, and that just tells me it’s it’s a good land and expand right might start a few seats and expand. And I we actually actually like this. One of the things that I’ve been burned by as you know, businesses growing too fast selling more sounds like a high class problem, but you know, out kick in their coverage on selling bigger deals, and they can actually show value for there is this whole time to value thing, once you’ve been smacked in the face by that one time, it only takes one time, right? Your your retention falls off overnight, when you’ve out kicked your coverage, you have turned issues you can imagine. So it takes a while to solve it. So I’m actually a big believer in the land with small deals and making sure you have opportunity to expand how that looks. So yeah, we definitely study the heck out is

Nick Moran 33:31
that? Is customer success? Is that a part of like your diligence process and something you’re interested in? Kind of hearing the the process, the approach the the mindset, on behalf of the leadership?

Jim Douglass 33:42
It’s as important as sales ops. Wow. In our hearts, I actually because I’m just trying to I’m corny like this sometimes, like, I don’t want to miss let’s let’s talk about customer success before we talk about sets. linerboard means Wow, just to make it a priority. You know, it’s it’s that important. And, and to have a system for it, because I’ve seen, because now you have systems for it. Right? Like, I mean, Gainsight and was one of them that came out and then you’ve had some of the new entrants or some others. And that also in my mind, there’s there’s plenty of platforms in that space. Now you can buy platforms. And then if you’ll run these, take those platforms and run kind of embedded marketing cases inside your app to drive adoption and education. How to use the app. Yes, see, you can just see their improvement in retention so I’m not we’re maniacal about that. It’s because we’ve seen the success and especially in the SMB world. When when Customer Success systems first came out it was just a bunch of Excel spreadsheet measuring stats and making people happy with stats. Now Customer Success systems are like marketing automation systems inside your apple hasten to get your user to learn how to use it. Because if they use it, they’ll keep and

Nick Moran 35:05
it goes back to your point about retention and engagement. Right? Customer Success is great, then, I mean, I feel like I just saw one of those marketing emails from Zendesk today, on behalf of, you know, one of the customers that I are one of the products that I’m a customer of, and it just really helps to keep that engagement up and keep the value going both ways, right, more value accrues to me, then more value accrues to the company that I’m buying products from. Yeah,

Jim Douglass 35:33
we I believe in it so much. We’ve looked at every one of them and trying to invest in one I thought was gonna get we got out before. It’s good space.

Nick Moran 35:43
Love it. Love it. Jim, are there any resources, books, blogs, videos, articles that you found really valuable that you’d recommend the listeners.

Jim Douglass 35:52
I mean, I read a lot of stuff that I get emailed and things and that I think some of these sites that just have a lot on it, and they’re all the ones people already know. So this isn’t going to rock your world. But I make Sastre is because a lot of great content. When I’m when I want to some information on subject, that’s a place I’ll go siriusdecisions has a lot of great content. There’s a lot of individuals that do great. Great with blogs, but I think that when I’m thinking about something, I want to find something I think about those resources that have a lot of different a lot of different content on it’s

Nick Moran 36:28
great, Jim, what do you know, you need to get better at

Jim Douglass 36:33
you know, I’m gonna go back to the one we were talking about earlier, just, you know, go with your gut and, and move quicker. Just always work on how I could have seen that and acted quicker. And I did I portfolio companies will make a decision. And finally to we use example, our last mile delivery business, we finally pull it out of California. And when we’re looking at the decision, I’m like, all these places we can beat we can deliver and make good margin, why would we sit here in this regulation nightmare and keep doing this? Stop. And then I look at it and look at what we did. I mentioned prayer was like, why did it take us a year to do that? Well, we had a few customers that they really wanted us in California got and then pay for it right? This is like I that’d be my this it. That’s another one where I just look at and go, you know it and you let it sit there for longer than you should have. So I’m using that as an example. But it’s make decisions. Just keep making decisions faster, you can always reverse your decision.

Nick Moran 37:45
And Jim, what’s the best way for listeners to follow along with you and connect with you?

Jim Douglass 37:50
Yeah, so So my email and anybody wants CMMI is on our website. So go to our website and get it. There’s JD at fulcrum ep.com. And we’re always happy to listen to opportunities and meet new people in and around the investing ecosystem. So

Nick Moran 38:11
tracks down. Well, very good, Jim, we have a lot of similar co investors. But we haven’t found one yet. I’m going to make it my personal goal to get on a cap table here with you in the near future.

Jim Douglass 38:23
Let’s do it. All right. Well, thanks

Nick Moran 38:25
so much for spending the time this was a real pleasure. All right, thank

Jim Douglass 38:28
you appreciate it.

Nick Moran 38:34
That will wrap up today’s episode. Thanks for joining us here on the show. And if you’d like to get involved further, you can join our investment group for free on AngelList. Head over to angel.co and search for new stack ventures. There you can back the syndicate to see our deal flow. See how we choose startups to invest in and read our thesis on investment in each startup we choose. As always show notes and links for the interview are at full ratchet.net And until next time, remember to over prepare, choose carefully and invest confidently thanks for joining us