How to Acquire Startups to Exit Your SaaS

Alexej: In this episode, we will dive into the 17-year journey of one of the top EdTech SaaS businesses in the UK and its exit. My name is Alexej and I help SaaS founders scale. Welcome to episode number five in the SaaS Minds series. My goal is to interview 52 amazing SaaS founders by the end of the year. 

My guest today is Simon Hay, the Founder of Firefly. He started selling the Firefly software into schools when he was in school himself. 17 years later, and also two bolt-on acquisitions from himself, he exited to a US strategic. It’s a fascinating story. So let’s dive in right now.

Hi, Simon. How’s it going?

Simon: Good morning. Good, thanks. Thanks for inviting me on.

Alexej: Great to have you here. Cool. So for our listeners and viewers, just a bit of context. You are the Founder of Firefly, one of the success stories in the UK. You built that business over 17 years and we’ll dig into, you know, your building it while you’re in school, bootstrapping, then raising funding, and then basically exiting. At exit, the business had close to $8 million ARR. And you’re probably, safe to say, one of the leading players in software for schools in the UK and, and maybe even globally, right?

Simon: Thanks. It’s a nice summary.

Alexej: Cool. All right. So, well, let’s dive into it then. Tell us about the founding story. I think it’s very different to most founders because you started the business extremely early and then managed to still do a PhD at, at Cambridge and work at Goldman Sachs while you were building that business. 

Simon: Yeah, we have this unusual genesis story, though, I think that’s probably common to a lot of founders, is that we created this business to scratch our own itch, you know, to solve a frustration that we felt pretty deeply. It’s just that that came a little earlier. I remember when I was at school being fed up having to cycle in when I was supposed to be on study leave to pick up notes or hand in work or ask questions and surveying this chaos of revision notes on my bedroom floor and thinking there had to be a better way.

And I was the kind of geeky kid who thought it would be more fun to write that better way than to actually file the notes and do some work. So it sort of started out as revision procrastination, obviously got a bit out of hand. We thought if we could make it easy for teachers who weren’t IT experts, didn’t really want to be, to create and curate and share content with us, we might break this vicious cycle where there wasn’t anything there, so nobody was looking, and nobody was looking, so there wasn’t anything there.

This was like ’99, 2000, so the internet was really starting to take off in every aspect of life except for school. So we built this thing, and by the time we were doing A-levels, we were being pulled out of lessons to fix things and answer questions and explain how it worked. We both went off to university together and at that time our school was dependent on it, and they asked us to carry on supporting it for them, which we agreed to do.

Various other schools saw it and said “this looks much better than anything else that I’ve seen, can we have one too?” And we gradually built that business as a sideline, like you say, through various degrees, real jobs. Though it got to a point where we were both ducking off the trading floor to answer calls from schools, which was obviously not a long-term sustainable way of operating, but did mean that we were pretty sure that we were on to something by the time that we quit our jobs to do it full time, you know, we’d done a lot of that really risky product-market fit bit before we were trying to put food on the table.

Alexej: How many people did you have when you quit your job? And if you remember your monthly revenue number, what was that roughly?

Simon: Gosh, I don’t remember the revenue number, but it would have been, you know, maybe a couple of dozen schools or something like that using it. And we did have some employees before I quit my job to, to do it full time. We wanted to kind of prove to ourselves, if nothing else, that this was a scalable business, that we weren’t just selling Simon and Joe consultancy. So in those early days we…you know, the beauty of the SaaS model was that we could drive around the country, sell a couple more deals, and that gave us the revenue streams to know we could afford to hire another person, and we could kind of wash, rinse, repeat that cycle over and over.

So, you know, in those early days, we, we all got very familiar with the motorway network of the UK. It was all very founder-led sales and schools are pretty traditional, at least as far as their purchasing decisions go. So trying to persuade them to take a chance on a tiny startup led by a couple of guys who were barely out of school was challenging…but success begets success, right?

You…no one wants to be the first and it’s the same when, you know, I see the same thing now trying to bring products to new markets. You know those Attenborough documentaries where all the penguins are huddled together on the edge of the ice shelf, sort of looking in to see, wondering if there are any sharks. And as soon as someone is brave enough to take the plunge, everybody else is willing to follow. But they all sit there looking at each other, hoping someone else will go first. 

Alexej: Yeah, interesting. That’s cool. And then I guess you decided to actually raise the funding round with the British Growth Fund being your first lead investor. I believe that was 2015 or ‘16, because we actually looked at that space back in my family office days and backed a competitor of yours. And then suddenly the news broke that Firefly, out of nowhere, raised that round and is really overtaking everybody else. A, why did you decide to leave your funding round that late? And then B, I guess, how did your life change after taking that money?

Simon: Yeah, I mean, I think we, we bootstrapped for quite a long time. You know, we got up to probably 30-something people by the time we raised our first external capital. And, you know, we were fortunate to be able to do that. As I say, the, the way that the kind of SaaS businesses work often does give you that, that possibility. 

The reason we changed, I guess, and we could have kept on doing that forever, you know, we were growing steadily and profitable, but I think we recognized that it was a increasingly globalized market and that came with both opportunities and threats, you know. It meant there was potentially a much bigger addressable market to go after, and you could build a bigger business than we’d at first realized. But equally, there weren’t very many barriers to prevent somebody bigger and better funded from overseas from coming and eating your lunch.

So we decided to raise money in 2016, basically because we thought if we were going to do this we really ought to accelerate. And we raised four and a half million which was led by BGF Ventures with Beringea, which at the time I think was billed as the UK’s largest EdTech Series A, which probably says more about the nascent state of UK EdTech at that, at that point.

But it definitely felt like a, a pretty significant moment, and, and a big step change. I remember standing on stage to announce that to our clients and there was a kind of mixture of people who were excited about what this might mean in terms of our ability to invest in product and so on, and people who were actually quite anxious about “what is this going to change…the DNA, the culture, what made us choose you guys in the first place? Are you suddenly going to be focusing on growth at all costs to the detriment of your existing customers and so on?” So we had to kind of reassure people on that front. And I hope customers did see the benefits of being able to invest quite significantly more in, in product and engineering.

Alexej: So how did your life change from bootstrapped entrepreneur who probably doesn’t need to report to any board or directors to suddenly having probably a BGF person and a Beringea person on your board, right?

Simon: Yeah, so we added two investor directors as board members, and actually they were both really helpful, but we had created a board before that. So the, the last time we kind of went round this loop and thought, “should we raise money now?”, we decided we’re not necessarily cash constrained, but it would be helpful to have some external perspective and some challenge and advice from people who have been there before.

So Joe, my Co-Founder and I actually decided to establish a board back when we were still bootstrapped and we invited two independent non-execs to join that, which meant that when we did come to raise money, it wasn’t perhaps quite such a rude shock as it might have been going from kind of zero to a full…kind of board expectations.

We’d, we’d been easing ourselves into that. We were already in a rhythm of having monthly board meetings and dashboards and reporting packs and this kind of thing. And it also meant that the new investor directors were slotting into an established board with an established way of working rather than getting to dictate how that ought to be, which wasn’t the intention, but I think in hindsight was probably quite helpful.

Alexej: Yeah, that’s, that’s definitely helpful. And then, let’s touch on the other part of your funding, which is debt funding. So you raised £10 million in total, and that was all equity. And then you also did some of that funding. Could you maybe explain when did you raise the debt funding? And… 

Simon: We did venture debt with Silicon Valley Bank, may it rest in peace….basically after each of those equity rounds. And clearly venture debt providers like to kind of piggyback on equity rounds, that gives them quite a lot of confidence from the due diligence work that equity investors have done and also from the equity cushion that, that they’ve got. 

But I think, you know, debt is a pretty useful tool in the right circumstances. It can extend runways, it can allow you to do things that you wouldn’t otherwise have been able to. In particular, for example, we acquired two other businesses, and because of constraints on how we were allowed to use capital from some of our equity providers, we couldn’t put any of that money towards M&A, but we could use debt to support that.

Essentially things where there’s a relatively well understood connection between spend now and cash flow later. I think that’s a really good and much more cost-effective, much less dilutive way of funding those. It’s obviously much less good for highly speculative investments where it might return a huge amount or it might fail completely because the money’s still got to be repaid either way.

Alexej: You mentioned M&A there. Did you, did you acquire anybody?

Simon: Yeah, so we acquired two other companies over the course of this journey. This was after our second equity funding round. And it was, I think, one of our observations was that EdTech was and still is incredibly fragmented. There were thousands of subscale companies, ourselves included, offering a bewildering array of overlapping solutions, and that put the onus on the schools to try and make sense of all of this and assemble a patchwork quilt of these things and try to integrate them as best they could, which was obviously frustrating for buyers, most of whom were doing this, you know, in morning break alongside their real job…was also frustrating for end users.

And I think the move to mobile really crystallized this because you can’t say to parents, “oh, just install these six different apps to keep track of your child’s progress at school”. So things were being thrown into competition that really had no feature overlap. But they’re kind of competing to be the one that, that schools would push.

And I think in parallel with that, we observe that schools are quite cautious when it comes to making purchasing decisions and rightly so, because children only get one shot at this. But it means that your cost of acquisition is high. It’s slow and expensive to win the trust of a new client, but once you have built that trust, they’re likely to be quite loyal to you if you serve them well, and they’re likely to want you to solve more pieces of the puzzle for them.

So our kind of hypothesis was, well, if you can…build a bigger portfolio of products it will be much cheaper to cross-sell additional functionality into your existing client base than to win new clients from scratch. And that turned out to be true. So we acquired some businesses that were growing steadily but had fantastic products that were very complimentary to our core offering, and took those to growing much more quickly by cross-selling them to our existing customer base. And over time, we kind of integrated a lot of that technology into bundles offerings. That worked really, really well. 

And actually I think that was what led to our ultimate exit because… we set out to find backers to continue a strategy along those lines. But of course, what works for us at smaller scale also works the other way around, and we ourselves could grow much quicker if we were part of a bigger organization with a large established client base that’s able to play our solutions into those client relationships.

Alexej: Yeah. And I think the sales cycle being so long in industry basically means that if you can leverage distribution channels of, you know, yourself or smaller businesses or now the PE-backed EdTech group in the US who acquired you, you will be able to scale much faster, right?

Simon: Yeah. Yeah I mean, you know, for us, cost of acquisition has always been high and sales cycles have always been long. And after 20 years in this industry, watching people much smarter than me try to crack that problem, I’m not convinced there is a silver bullet there. I think that’s, that’s pretty structural. So the question is, how do you make the most of that? And, you know, the flip side of that is that your lifetime value is also very long, very high. So, you know, investing money in cost of acquisition is a good trade, but it does make you very cash-hungry if you want to try and grow fast, purely organically.

Alexej: Makes sense. Makes sense. So let’s talk a bit about your growth channels and strategies. So when you had the funding in your bank, did you switch quite a lot from that founder-led growth and, you know, knocking on school doors to…what did you switch to? Was it some sort of organic traffic, SEO, PPC, I don’t know, like outside media, like, I don’t know, like marketing billboards, or what was it?

Simon: Maybe I should have tried some of those things! We built up a go-to-market machine following those, those investment rounds. And we went through the usual pain points in transitioning from founder-led sales to hiring account execs and sales leadership and so on. It was a pretty traditional B2B sales cycle. So we had a marketing team trying to generate awareness and we did lead scoring. When people reached a certain point, our SDR team would try and reach out and set a meeting with one of our account execs. So, so far I think, so traditional. 

As I said, I don’t think we ever found a silver bullet to make that quick and easy and cheap. Self-serve I think has not been proven to work in, in this space. One of our former sales leaders said “the problem with selling to schools is that it’s an enterprise sales cycle at the end of which they write you a small business check”, which I think is quite a good description of the problem. 

I think there had been, yeah, there had been lots of attempts to do sort of self-serve, consumer-style, sign up with a credit card, freemium models, and I think that’s proven very, very difficult in what’s quite a traditional industry still. And certainly pre-pandemic we were having to pitch up physically multiple times to, to win deals. A lot of lead gen was still offline for events and things like that. So COVID was quite an interesting watershed because a lot of the ways that the whole industry was used to doing business just weren’t possible anymore.

Post that, I think quite a lot of the new way has stuck, which is positive. So most things now can be done online and schools are happy to do them online. But interestingly, a lot of the marketing channels that suddenly started working during the pandemic when everyone was stuck at home, stopped working when everyone went back to, to school again. And so, that’s kind of needed constant reinvention.

Alexej: Mm-hmm, mm-hmm. Interesting. So was there still maybe 20 or 30% of your, all your clients who came from one particular channel? Or was it really…super diverse and kept changing from time to time as well?

Simon: Yeah. I mean, recommendations was obviously the, the best route, particularly as we…well, in those early days, it was almost the only route you know, to start with, we were doing very little marketing or sales outreach. Then we started having a team of SDRs just calling schools cold and telling our story. And actually that was reasonably effective. Probably events was the single biggest channel for the kind of early-stage leads.

But I don’t think that there was sort of one key thing that, that really worked and unlocked it. It was always a mixture of different approaches, which…whose effectiveness varied over time. As I say, you know, during the pandemic, webinars were really effective. As soon as people were back at school, no one wanted to join a webinar anymore. Events have come back to an extent. But actually not to the same extent that they worked pre-COVID. So I think these things need constant monitoring and tweaking and indeed reinvention. 

Alexej: Mmm-hmm. Now, being acquired, do you see that Veracross has some sort of magic bullet around marketing? Or is it just because they have a much, much bigger marketing budget that it’s much more successful for them, I mean, for you…probably they…

Simon: Yeah, I mean there are definitely some, some lessons that we’ve learned from them about, you know, techniques and tactics. And I think that expert marketers have, have moved that game on quite significantly over the time that I’ve been, that I’ve been doing this. But again, I don’t think that, even they kind of knew the secret ingredient that suddenly makes this easy. I think it’s still hard work. It’s just hard work from a bigger, more specialized, more diversified team that’s able to execute on more different campaigns and more different channels simultaneously.

Alexej: Got it, got it. Cool. And so let’s maybe talk a bit about your exit process as well. So, how did it happen? Were you looking for an exit and talking to some strategics or did they approach you out of the blue and you didn’t even want to sell and you decided to sell? How did it happen?

Simon: Yeah. We…As I said, we’d acquired a couple of companies and that worked really well. And so as a board, we decided, well, I think this buy and build approach is likely to be the path to success, given the kind of dynamic that we’ve been talking about with, with cost of acquisition. So actually we set out to find a new investor to back a strategy like that, and who had the capital and the expertise to help make that happen. And we appointed advisors to help run that process and identify people. 

But as part of that process actually discovered strategic investors too, who were pursuing very similar strategies, but at larger scale. And, that ended up being quite compelling because, clearly, if you combine forces, not only can you execute on the things that we were originally intending to do, but there’s also this additional opportunity to grow faster ourselves by cross-selling our solutions to an existing client base. So you kind of get the benefit of cross-sell in both directions, rather than just in one that we’d originally been thinking about. 

And I think there was clear alignment of…not just vision, but philosophy and approach. We really liked all the people that we met and thought this is going to be… you know, good long-term guardians of what we’ve built and also fun to work with along the way.

Alexej: And how long did it take you from, you know, your first contact with the buyer to signing and closing the deal?

Simon: First contact was…probably over the summer and we closed the deal at the end of January. So whatever that is, seven or eight months, something like that.

Alexej: So summer 2022, right? And then January 2023?

Simon: Yes, that’s, that’s right. That’s right. 

Alexej: Okay. So six months, which was, I guess, partially some due diligence time, partially just because, you know, nobody needed it too desperately and there was a chemistry, right? 

Simon: Yeah, and everyone always says that, you know, they can go from term sheet to close in six weeks and it always takes three months. It seems to be just a sort of law of the universe that these things are never quite as quick and easy as anybody thinks. 

Alexej: Yeah. And then, so, how did the post-merger process look for you? So you’re now a VP at a parent…reporting into who?

Simon: So it was, it was really important to us that we actually could deliver on the benefits that we were promising to clients and to colleagues as part of this merger. As you pointed out at the beginning, you know, I’ve been doing this for a long time, more of my life than I haven’t now. So I’m probably unhealthily emotionally-attached, but I really do want to see it succeed. It means a lot to me. And so…I’ve basically said, “look, I’m happy to do whatever it takes to make sure that that integration is a success, that all of our teams can fit in well to the kind of global functional teams to help establish sensible regional leadership structures” and so on to help us get the benefits of the combination, right?

Everybody talks about two plus two adding up to more than four. But that doesn’t just happen. It takes work to make it happen and to reduce duplicated effort and to share good practice and to get people working across brands and so on. And also then in our case to start getting the cross-sell machine working. And, you know, there’s a whole piece there about taking products to new markets, bringing British products to market in America and American products to market in Britain, which needs quite a lot of localization work on the software itself and on the marketing and the way you talk about it and so on, because the old adage about two countries divided by a common language, I think is very true.

So there’s been plenty to do. But, actually a year in, I think that’s been pretty successful so far. You know, we all know the stats about what fraction of mergers actually work and produce the desired outcome. But I’m, I remain pretty optimistic. 

Alexej: Cool. Yeah, that’s excellent. Have you also acquired any other companies since yourself then as that buy and build strategy you also wanted to do?

Simon: Yeah, so the kind of Veracross group has continued to expand. We’ve acquired another business in Australia which again, comes with both great software products that are applicable to clients elsewhere in the world and a great client base who might benefit from many of the solutions that we already have in our arsenal. So early days, plenty to do. But I think we are, you know, increasingly proving that that model works and is scalable and repeatable. 

Alexej: Mm..hmm. Yeah. Fascinating actually. Yeah. Awesome, cool. Well, I guess the last question before we go into the quick fire is, could you share some critical lessons you learned on the way?

Simon: I think the biggest mistake that I made was trying to do too much at once, particularly post-Series A. You know, we were growing at 100% a year, we wanted to keep on doing that. That obviously gets harder and harder as the absolute numbers involved get bigger. We suddenly had a lot more cash in the bank than we previously had. And we thought, well, the way to achieve this is by going after lots of things at once. You know, and we tried to enter several new markets and launch new products and so on, and we just stretched ourselves too thin. 

You know, I think that the most precious…kind of commodity that you have as a startup that’s in short supply is your top team’s bandwidth. You can just only think about so many things at a time to the depth that you need to do them justice and execute on them well. And we spread ourselves too thin to the extent that we sort of did a mediocre job of a bunch of different things rather than really nailing one of them, and then moving on to the next. So I think if I went back and did it again, and I hope I have learned this lesson and, and sort of…adapted since, I would do more things in series rather than in parallel.

Alexej: Makes sense. Makes sense. Yeah, I was reading over Christmas a book called “The Essentialist”. Basically talks a bit of that, about that, how to focus and yeah, do one thing after another rather than too many things at once. Okay. Awesome. Well, let’s, let’s do a few quick fire questions then. If you were to pick a person to invite to this podcast/media series, who would that be?

Simon: Oh that’s a great question. I might email you some suggestions rather than putting them on the spot by calling them out on the show and embarrassing them. 

Alexej: No problem. What’s a book you can recommend to other founders?

Simon: I’ve tried to mostly read non-work related books, particularly at kind of stressful moments, and there have been plenty of those, particularly going through the exit and so on. You know, I found it quite helpful to have separation and escapism to an extent in, in reading rather than, you know curling up at night with more on business and, and finance. 

I guess the one on….sort of startup specific things that I might say is Scott Kupor’s “Secrets of Sand Hill Road”, which I thought was quite a good primer on VC, particularly for innocents like me who came to that relatively late, and so it was a lamb amongst wolves when we were trying to raise our, our first rounds. We hadn’t had warm up and practice in, in smaller deals first. 

Alexej: Yeah. Yeah. Yeah. Did you read “The Power Law”?

Simon: No, but I’ve, I’ve sort of…got the precis. 

Alexej: Yeah. Yeah. I think, I think it’s similar, but I, I found it extremely fascinating as well, ’cause it really goes into the history of some of the biggest VC players in the US as well.

Simon: Yeah, exactly. I think understanding that is quite helpful context. 

Alexej: It does. Yeah. It does. Yeah. 

Simon: Be able to predict how people are going to, to react. 

Alexej: Yeah, absolutely. In terms of a business person, entrepreneur, who you admire, who is that?

Simon: I think I would choose now Sir Andy Hopper, who was my PhD supervisor but managed to combine a glittering academic career with being an extremely successful entrepreneur. I think he founded about a dozen companies including Acorn Computers, which span out ARM and various other major success stories. And also, you know, flew solo around the world in a single-engine aircraft and had various other big adventures. So I always admired him and seen him as a mentor, both on the academic and the commercial side. And as someone showing that you can blend a lot of different strands together in a successful life like that.

Alexej: Yeah, amazing. Amazing. What’s a SaaS tool you use but not many people know of? 

Simon: I think we’re quite boring and mainstream on this. The one little thing that we…that, that I really like, and that sort of makes a disproportionate difference, but is extremely boring is a tool called Flowrev that does- just plugs into your accounting system and does deferred revenue, revenue recognition stuff, which is one of those kind of boring but essential tools.

And to me, it’s a really nice example of kind of a point solution done well. It does precisely one thing. It’s a very boring thing but it’s totally critical that you get it right. It integrates well with, you know, the kind of bigger platforms around it and it’s just a great bunch of people with a great support team and service, which I think really matters on kind of mission critical stuff like that.

Alexej: Interesting. And then final question: best advice ever received?

Simon: When we were just starting out, when we were still teenagers going into this, someone advised us to get customers on subscriptions, which seems like, really obvious…thing now. I think a lot of advice is, is timing. But at the time most software was still being sold as a big upfront fee and then a much smaller ongoing maintenance contract. And that looked quite appealing, you know, particularly when you’re tiny and bootstrapping and cash strapped, the idea of getting lots of cash in the door upfront is, is very tempting, but it was very good advice actually to go for almost the SaaS model before SaaS became fashionable because having reliable, predictable future revenue streams…is obviously very helpful for, for lots of reasons, but in particular, allowing you to have the confidence to invest or allowing investors to have the confidence to invest. 

Alexej: That’s awesome. That’s awesome. Cool. Yeah. And that’s good advice. Yeah. Amazing. Well, that’s it. Thanks so much for the chat. 

Simon: Pleasure chatting. 

Alexej: Yeah. Amazing. Good. Have a good rest of the day then. Bye. 

Simon: Thanks very much. Same to you. Bye!

Alexej: Thanks for sticking around. If you want to see the show notes, please go to www.nuoptima.com/saas-podcast. Otherwise, see you at the next episode. Bye.