Q&A with Attila Hardy, Array Capital: Making Money in Ecommerce SaaS

Hot on the heels of our recent co-op, I sat down with Attila to talk about: the origin of his M&A boutique Array Capital; how to get started in ecommerce SaaS M&A; and who you’d be competing with. Finally, we had a go each at answering the question you’re all asking yourselves: how’s this going to end?

Attila’s backstory

Attila started out in private equity, investing in mid and large cap businesses across Europe, predominantly in the financial services space. He’s always maintained a side hustle though. At one point he pulled the plug on the PE career and went full time with his ecommerce venture. He was off to a good start, quickly scaling to a 7 figure revenue and a staff of 20. Unfortunately, ecommerce is a story of changing fortunes. It’s an unforgiving space. You’ve got working capital to deal with. You’ve got import duties to deal with and the VAT. The final blow was the change in the Meta API, which Attila’s business had been built on.

Undeterred, Attila decided to stick with ecommerce, but pivoting into a less asset heavy vertical. Not being a developer, he couldn’t fathom building a software product from scratch. So he picked at the next best thing: building a mini software conglomerate. The idea was to pool together some money among the frieds, no outside investors, and buy a couple of bootstrapped businesses. This didn’t work out in the end as Attila’s partners balked at the risk profile.   

There was a silver lining. Attila got to parse through a lot of marketing material from sell-side brokers. What struck him was the subpar quality of much of the content, and the poor light in which it cast the businesses being sold. Thus Array Capital was born!

Different types of buyers in ecommerce SaaS

On the smaller end of the market, sub $300K ARR, the buyside landscape is very diverse:

• Recently exited entrepreneurs. They aren’t content with passive investing. They are used to running teams, they yearn to be in control

• Well remunerated tech / product professionals, like Big Tech engineers seeking a smoother entrepreneurial on-ramp – as opposed to the dreaded “cold start”

• Finance people looking to pool capital, search fund style. Club together $500K to $1M in equity, lever it up. They don’t have software experience, but they are drawn in by the recurring income. Also, they tend to be adept at spotting margin improvement opportunities, which abound in these types of situations

As you cross the $1M ARR mark, you start to see small cap and lower mid market PE firms. The more mainstream PE firms prick their ears at the $5M+ ARR mark. The broadening of the buy-side landscape directly correlates with the realized multiples, as this excellent study by Aventis Advisors shows.

Top tier rollups will share these four qualities

Firstly, the size of the pie keeps growing – in lockstep with the underlying GMV. Each year, more than a thousand new apps appear in the Shopify App Store. Because of that, and the robust SaaS unit economics, new rollups will continue to emerge.

At the same time, most of the existing rollups will be hitting the 3-4 year mark in the next 12 months. At that point, investors will want to assess their returns. Lenders too will want to see a path forward. What’s the refinancing plan? The businesses that will pass that checkpoint successfully will exhibit a combination of the following qualities:

• Developing lucrative ancillary revenue streams, such as payment commissions or cost recovery fees, that slot it nicely with subscription based income. Conversely, we’re seeing companies build recurring revenue on top of transaction based income

• Being focused. Pick a niche – an area you’re genuinely passionate about. Find a “hero product” and build the M&A pipeline around it. Build your team’s expertise in a small number of verticals

• Path to selling to enterprise – or at least intermediaries with a better retention provide and lower CAC compared to SMBs. Two examples would be agencies and accountants

• Scale necessary to support a meaningful HQ; and ultimately visibility and credibility for capital providers. Just look back on the Amazon FBA space where the largest consolidators are emerging the strongest. Whereas second and third tier players are struggling to stay float. Some haven’t even managed to fully deploy the capital.

Looking to buy ecommerce SaaS? Tips to get you started

• If you’re not a technical person by background, team up with an engineer. Make him/her your CTO. Taking over a badly written piece of code can be a very unpleasant experience

• Target applications built on a tech stack that your CTO understands

• Understand that SaaS investments aren’t same as, say, real estate investments – which can be managed in a relatively hands-off manner. Don’t be fooled by the margin profile: the Shopify ecosystem is fiercely competitive. You have to constantly speak to customers. Add new features. You have to be passionate about the asset for a long time after closing the deal!