The Anatomy of a Startup Acquisition with Cacheflow's Sarika Garg | E2028

Introduction and Overview

• The journey of building a startup has been a wild ride, with both good and tough experiences, and a lot of respect is given to every founder because it is a tough process (0s).
• The focus was on building a big company and doing it right, which involved a lot of listening to the market and prioritizing go-to-market and product (9s).
• The market has shifted since 2021, with companies now dividing software into "nice to have" and "must have," and software founders need to ensure their product is a "must have" (25s).
• The startup life involves going slow and then seeing scale, which can be surprising when it happens due to enough people finding out about the company and word of mouth (43s).

Current Market Conditions and Recent Deals

• The current startup and venture capital worlds are experiencing a lack of liquidity, with poor exits from the startup world, as shown in a chart detailing the enormous wave of startup activity in the exit markets in 2020 and 2021, followed by a decline (2m6s).
• Two recent deals have been announced, including CRA's purchase of Traal Security for $162 million and HubSpot's purchase of Cacheflow, a startup that had raised 10 figures while private (2m38s).
• Sara Garg, CEO and co-founder of Cacheflow, has 20 years of experience in B2B SaaS and is on the show to discuss the deal and help other founders understand the market today and how deals get done (3m31s).

Cacheflow's Origin and Mission

• The Genesis idea for Cacheflow was born when the founder was blown away by the seamless Tesla car buying experience, which led to the realization that B2B buying experiences could also be transformed in a similar way (4m2s).
• The founder's past experience with car buying had been terrible, involving dealerships and negotiations, which made the Tesla experience stand out and sparked the idea for Cacheflow (4m20s).
• The founder believes that the B2B software buying and selling experience is broken, with a lot of time wasted on negotiations, contracts, and manual processes, leading to deals slipping from one quarter to another (5m29s).
• The salesperson's experience is also affected, with struggles to put together quotes, proposals, and contracts, and difficulties in tracking what's happening on the customer side (5m33s).
• The billing experience is even worse, with manual processes and nuances that need to be figured out, leading to wasted time and potential errors (6m5s).
• The shifts and changes in the last 5 years have made manual processes a major problem, with the need for more efficient and digital solutions for quotation, billing, and payment collection (6m24s).
• Cacheflow aims to address these issues by providing a digital solution for the configure price quote (CPQ) space, subscription management, billing, and other related products (7m0s).
• The goal is to move away from pen and paper, and even from digital solutions like DocuSign, to create a more seamless and efficient experience for B2B software buying and selling (7m7s).
• The average mid-market company uses around 130 different pieces of software, resulting in a significant amount of paperwork and wasted time for departments relying on software to perform their jobs (7m27s).
• This complexity affects both the buyer and seller sides, necessitating simplification for a more efficient experience (7m59s).

Cacheflow's Solution and Value Proposition

• Cacheflow aims to address these issues by providing a digital solution for the configure price quote (CPQ) space, subscription management, billing, and other related products (7m0s).
• The goal is to move away from pen and paper, and even from digital solutions like DocuSign, to create a more seamless and efficient experience for B2B software buying and selling (7m7s).
• The average mid-market company uses around 130 different pieces of software, resulting in a significant amount of paperwork and wasted time for departments relying on software to perform their jobs (7m27s).
• This complexity affects both the buyer and seller sides, necessitating simplification for a more efficient experience (7m59s).
• The idea of simplifying software buying and selling experiences can be compared to the Uber model, where both the driver and passenger experiences are streamlined (8m7s).

Cacheflow's Funding and Growth

• Cacheflow was founded in early 2021, and by November 2021, the company had launched its product (8m32s).
• The first seed round of $6 million was raised in September 2021, with a post-money valuation of $26 million, led by GGV's Glenn Solomon, along with Pelan Ventures and the Nath3 Futures fund (8m50s).
• At the time of the seed round, Cacheflow was still in the process of developing its product and had not yet generated revenue (9m15s).
• The company's female founder did not experience the reported 2% chance of funding, instead having a positive experience with investors who believed in the product (9m25s).
• A seed plus round of $10 million was raised 15 months later, with a post-money valuation of $60 million, and Glenn Solomon joined the board while Crystal Hwang became a board observer (9m51s).
• At the time of the seed plus round, Cacheflow had built its first product version, designed with customers, and was beginning to sell it in the market (10m17s).

Assembly AI - Sponsor Message

• Assembly AI is a platform that builds speech-to-text AI models, allowing users to turn voice data into new product capabilities with just a few lines of code and voice data, and has the industry's lowest word error rate with 30% fewer hallucinations (11m13s).
• The company has helped various businesses, such as V.O, which generates captions for video editing tools using Assembly AI's speech-to-text models (11m24s).
• Over 200,000 developers are building apps with voice data using Assembly AI, and new users can get 100 hours for free by visiting assemblyai.com/twist (11m53s).

Cacheflow's Success Factors and Product-Market Fit

• Cacheflow's progress has been significant, with the company focusing on building a big company and doing it right by listening to the market and adjusting its go-to-market strategy (12m31s).
• Three key factors were crucial for Cacheflow's success: a huge market, a strong team, and a great product, with the company building a team of 30 people with relevant backgrounds and ambitions (12m45s).
• Cacheflow iterated on its product over the last two years, resulting in a product that users find easy to use, with a seamless code-building experience (13m33s).
• The company has achieved product-market fit, with customers calling other customers to inquire about Cacheflow's buying experience, creating a flywheel of word-of-mouth growth (13m59s).
• Cacheflow believes it found product-market fit about three quarters ago, with repeatability in the market and customers coming to the company through word of mouth or organic means (14m19s).
• The company used LinkedIn ads to achieve repeatability in their sales process, and after seeing this success for three quarters, they decided to scale, which is when HubSpot reached out to them (14m35s).

Importance of Personal Networks and Hard Work

• As a founder, personal networks play a crucial role in getting early deals and contracts, especially when the product is mission-critical and requires trust to be built with potential customers (15m1s).
• Founders often have to rely on their friends and investors to get started, and then build trust through references and market presence over time (15m13s).
• Being a founder involves a lot of hard work, including cold calling and making sales happen through brute force, rather than just attending conferences and giving talks (15m53s).
• The company's founder went underground for two years, focusing on sales and building the business, which ultimately led to success (15m58s).

Cacheflow's Growth Trajectory and HubSpot Acquisition

• During the three-quarter period when the company felt they had achieved product-market fit, they were growing very fast, with a 350% year-over-year growth rate and around 100% quarter-over-quarter growth (16m18s).
• The company's growth was driven by the increasing need for their solution as businesses scaled from 20 to 200 employees, at which point the paperwork and sales processes became too complex to handle manually (16m48s).
• The company's sales team also needed boundaries and guidelines to ensure a consistent customer experience, which their solution provided (17m18s).
• At the time HubSpot reached out, the company was already planning to raise their next round of funding to scale their business, and the timing of the outreach was almost perfect (17m54s).
• Initially, there was reluctance to talk to HubSpot due to a desire to build an independent company and potentially go IPO, but after discussions, it was found that HubSpot's vision and ambition aligned with the company's goals, and the distribution of 300,000 customers was also a significant factor (18m5s).
• The culture of HubSpot was also a key factor, with the CEO, Yamini Rangan, having a similar vision for the space, and the company's thoughtful approach to building the business (18m45s).
• HubSpot's customer base ranges from 2 employees to 2,000 employees, and 50% of the company's customers are also HubSpot customers, making it a good fit (20m11s).
• The acquisition was not a result of a strategic plan, but rather a VC introduction to the Corp Dev person at HubSpot, which led to initial conversations (21m0s).
• The company's focus is on cash flow, which is still in the SMB space, and not necessarily upmarket, as the term is relative and can vary depending on the context (20m1s).
• The Corp Dev team at HubSpot did not have a prior line on the company, but rather the introduction was made through a VC, and the initial conversation was not a result of a well-thought-out plan (21m3s).

Vanta - Sponsor Message

• To clear compliance checks, companies need to have standards like SOC 2 in place, which ensures customer data safety, and without it, they may struggle to land big deals and operate at the highest end of the market (21m31s).
• Vanta makes it easy for companies to get and renew their SOC 2 compliance, with customers becoming compliant in just 2-4 weeks on average, and automates compliance for GDPR, HIPPA, and more (21m51s).
• Vanta can save companies hundreds of hours of work and up to 85% on compliance costs, and offers a $1,000 discount at v.com/twist (22m14s).

Series A Planning and Market Positioning

• The company was planning to raise a Series A round, likely in the range of $10-15 million, to push the business to the next level (22m31s).
• The goal of the Series A round was to get enough funding to make a significant push to the next level, rather than just raising a small amount (22m43s).
• When preparing for the Series A roadshow, the company planned to highlight its unique story and strong numbers, as well as address potential weaknesses, such as being an AI-enabled company in a market dominated by AI-first startups (23m8s).
• The company struggled with positioning itself as an AI-enabled company, but ultimately decided to focus on its unique value proposition and leverage its AI capabilities to drive growth (23m57s).
• Despite the challenges, the company was confident that it could raise the Series A round if it hadn't been acquired by HubSpot, thanks to the support of great investors (24m32s).
• The company was aware of the shifting market landscape, where AI-first startups were gaining traction, but believed it had a strong enough value proposition to succeed (24m42s).

The Acquisition Process and Rationale

• The decision to sell Cacheflow to HubSpot made sense in many ways, as it allowed the company to scale its vision (24m51s).
• HubSpot's Corporate Development team initially reached out to Cacheflow, and the conversation started with a friendly and human approach, which made the founders feel at ease (25m1s).
• The process of getting to know each other and discussing potential partnerships or acquisitions took around two to three months, with the conversation gradually narrowing down to a potential deal (25m35s).
• The initial conversation with HubSpot was broad, covering topics such as potential partnerships, acquisitions, or building something together, before eventually focusing on a deal (26m1s).
• From HubSpot's perspective, acquiring Cacheflow early on made sense, as the company's value would have been much higher if it had raised an A round and grown for another two years (26m10s).
• For the founders, saying yes to an exit earlier than planned was bittersweet, but they saw it as an opportunity to take their vision to a bigger platform and achieve their goals faster (26m27s).
• The entire team, including the founders and investors, were thrilled about the acquisition, seeing it as a chance to accelerate their vision (26m38s).

Investor Support and Market Dynamics

• The investors, including Glenn, Crystal, and Pelon Ventures' Chad, were extremely supportive of the acquisition, which was surprising given the relatively short time frame (27m22s).
• The investors' support was likely due to their need for exits to show returns on their investments, as venture capitalists require some exits to demonstrate their performance (27m45s).
• Founders may end up taking an earlier exit due to various factors such as culture, product, goals, and a significant amount of money, which can change their direction (28m12s).
• Investors can be founder-friendly when making decisions, prioritizing the team, vision, and cash flow, which is beneficial for the startup (28m37s).
• Regulatory risk and antitrust concerns can be a significant overhang in the market for mergers and acquisitions (M&A) or going public, but this deal shows that such concerns may not always be a barrier (28m52s).
• Antitrust concerns were not a significant issue in this deal, possibly due to the smaller size of the startup, as such conversations typically occur in much larger deals (29m19s).

Runway - Sponsor Message

• Founders should ask themselves crucial questions, such as understanding their hiring plan's impact on burn rate and knowing their startup's current cash situation (29m42s).
• Runway is a product that helps startups handle their finances by connecting accounting, HR, and data sources, enabling accurate financial modeling and real-time reporting (29m57s).
• Runway's features allow any department to use it, not just the finance department, and it offers a personalized demo and a special offer of 3 months free (30m48s).

Cap Table Diversity and Exit Strategy

• Having a diverse cap table was essential, and the early exit fulfilled the goal of cutting the Na3 Futures fund into the cash flow journey, which is a great exit for the fund (31m26s).
• A fund has 125 women invested, with a committed capital amount that is not disclosed, and it participated in the seed round but not the seed plus round of a startup's funding (31m47s).
• The startup's exit after 3.5 years is considered fast, with no other companies achieving a similar exit in the same timeframe (32m19s).

Advice for Founders on Sales and Preparation

• A key lesson for founders going through the sale process is to be transparent and authentic, without trying to posture or be someone they're not, and to maintain open communication throughout the process (32m40s).
• When preparing for a potential sale, it's essential to have a part-time CFO or a trusted financial expert to help with accounting and bookkeeping, as this can save time and ensure accuracy (34m25s).
• Having a part-time CFO can help with preparing financial statements, budgets, and plans, making the sale process easier and less rushed (33m44s).
• It's recommended for pre-series A companies to take a similar approach to accounting and bookkeeping, getting a part-time CFO early on to help with financial preparations (34m17s).
• Founders should focus on sales, product building, and team hiring, rather than spending time on accounting and bookkeeping themselves (34m38s).
• Being relatively organized and having a trusted financial expert can make the sale process easier and more possible for founders (35m1s).

Importance of Organization and Systems

• The company had clean and organized systems in place from the beginning, which paid off in the long run (35m11s).
• The tools used by the company included Google folders, ClickUp for managing code and bugs, ZenDesk for tickets, and HubSpot for marketing and sales, which helped with organization and efficiency (35m34s).
• The key lessons learned are to be organized, get the necessary help early, and be prepared for opportunities, as it's better to have all systems in place when an acquisition or other opportunities arise (36m2s).
• Many founders struggle with organization due to the chaos of building a company, and not having systems in place can harm their ability to exit early (36m18s).
• Founders have to prioritize their time carefully and make personal choices about what the company needs, and organization is a crucial aspect of this (36m35s).
• Prioritizing go-to-market and product strategies helped the company find product-market fit and hire the right people (36m50s).
• Being organized from the beginning is crucial, as trying to organize later can be messy and create "organizational debt" (37m17s).
• The concept of "organizational debt" is similar to technical debt, where messy documents, accounting, and internal operations can hinder a company's efficiency (37m30s).
• The company's organization and efficiency allowed them to achieve more with 30 people than they would have with 50 people if they were less organized (37m42s).

Integration with HubSpot and Future Plans

• The company will be joining the Commerce Hub portion of HubSpot, which includes payments and billing capabilities and was launched in 2023 (38m18s).
• The goal is to integrate with the Commerce Hub, which includes CPQ, billing, and payments, and then roll it out to the existing customer base, leveraging reach and the ability to hit more customers quickly (38m31s).
• The target is to have a large number of HubSpot's 300,000 customers using cash flow technology in the next two years, with an aggressive goal of having all of them as customers (38m54s).

Market Shifts and Buyer Behavior

• The market has shifted, with companies now dividing software into "nice to have" and "must have" categories, and software founders need to ensure their product falls into the latter category (40m0s).
• The shift in buyer behavior has led to a focus on value selling, with the assumption that the CFO, head of sales, and RevOps will be involved in the decision-making process (40m40s).
• The company has seen a replacement cycle happening, with customers switching from old CPQ technology to modern solutions that are cheaper, faster, and easier to use (41m42s).
• Companies are also looking for solutions that can help them grow, with a focus on finding products that can solve their problems and provide value (42m1s).
• The company has found repeatability in their sales process by crafting deals with the involvement of key stakeholders in mind, which has helped them find success in the market (40m55s).
• The market is experiencing a different era of software growth, with compressing net dollar retention rates, slower growth rates, and a focus on cash efficiency (39m30s).
• The company has seen changes in buyer behavior, with customers being more scrutinizing and looking for products that can provide value and solve their problems (39m49s).

Cost Savings and Efficiency with Modern Solutions

• CFOs are looking for more efficient tools, which has led to the discovery of better and less expensive products, often replacing legacy products with higher price tags and consulting costs (42m5s).
• Legacy products in the space often require hiring contractors for configuration, which can be costly, whereas newer products offer no-code solutions that can be easily configured and changed (42m31s).
• Changing pricing in legacy products can be expensive, with one company spending $80,000 in consulting fees to implement a new pricing model (43m6s).
• This experience highlights the limitations of legacy products, which can hold businesses hostage and limit their ability to make changes quickly (43m53s).

Growth, Competition, and Market Conditions

• The company's growth was impressive, but the competition and market conditions played a role in its growth rate, which was not as high as 700% per year (44m7s).
• The startup life is characterized by slow growth followed by rapid scaling, which can be surprising when it happens (44m16s).
• Customers using the company's product, Cash Flow, saw steady sales cycles, but with a slight lengthening in the last three quarters (44m57s).
• The implementation of Cash Flow helped customers increase their code-to-cash speed and make decisions faster by providing visibility into the sales process (45m16s).
• Overall, the market saw a slight decrease in sales performance due to more people being involved in the decision-making process (45m34s).

Transparency and Information in Business

• The importance of transparency and information in business transactions is highlighted, as it allows for better decision-making, eliminates friction, and saves time, which is in line with the promise of technology to make processes more efficient (45m48s).
• The example of the real estate market being opened up is given, illustrating how increased transparency and information can lead to better outcomes for all parties involved (45m58s).

Future Plans and Team Building

• The speaker's current role at HubSpot is discussed, with the speaker expressing their intention to stay at the company for a long time due to its aligned vision and great team (46m40s).
• The approach to building a remote or hybrid team is shared, with the speaker's company starting as a remote company and focusing on finding the best talent across different states and time zones (47m0s).
• The speaker's experience with remote work has been successful, with the company spanning across the US time zone, from the Pacific coast to the east coast (47m22s).

Conclusion and Angel University Workshop

• The conversation concludes with the speaker thanking the guest for coming on the show and congratulating them on the sale of their company (47m40s).
• An upcoming workshop called Angel University is mentioned, where the speaker teaches people how to become professional angel investors, with the next course scheduled for November 6th (48m6s).
• The speaker's experience as an angel investor is highlighted, with investments in over 400 startups, including successful companies like Uber and Robin Hood (48m17s).
• The Angel University course covers the fundamentals of angel investing, the speaker's personal philosophy, and a 13-point criteria for evaluating companies to invest in (48m50s).
• When evaluating startups for investment, certain criteria are used to determine whether to invest, including the presence of "pink flags" or "red flags," with pink flags being issues that can be cleaned up, such as a messy cap table, and red flags being more serious issues, such as a patent lawsuit (48m57s).
• The concept of the power law, also known as the Pareto principle, is important in startup investing, as it suggests that a small percentage of investments will generate the majority of returns (49m22s).
• Securing pro rata rights is crucial for investors, as it allows them to maintain their ownership percentage in future funding rounds (49m27s).
• Investor updates and information rights are also essential for investors to make informed decisions (49m29s).
• The Angel Investing Syndicate, syndicate.com, provides access to deal flow and is open to accredited investors (49m42s).
• The Angel University workshop is open to all investors, whether accredited or retail, and covers topics such as startup investing, portfolio construction, and securing pro rata rights (49m56s).
• The workshop is held twice a year, with the next class scheduled for November 6th, and all proceeds go to charity (50m9s).
• Investing in early-stage startups requires a different set of criteria than investing in public companies, as there is limited data available (50m28s).
• The Angel University workshop aims to educate investors on how to make decisions when investing in early-stage startups (50m22s).
• The workshop has inspired people to pursue a career in angel investing, with some attendees going on to become venture capitalists (50m57s).
• Having real-world experience in angel investing can be beneficial for those looking to become venture capitalists (51m33s).
• Being an angel investor allows for a flexible schedule, enabling individuals to spend as much or as little time as they want, whether it's 5 hours or 50 hours a week, without the need to adhere to a traditional office routine (51m59s).
• As an angel investor, one has the opportunity to meet interesting people from around the world and be a part of exciting startups (52m11s).
• Angel investing can be a thrilling pursuit, with the potential to hit big winners, but also comes with the risk of losing, making it an exciting experience (52m14s).
• Angel investing offers non-financial rewards, including the chance to see where the world is headed, meet inspiring people, and witness their plans to change the world (52m26s).
• Overall, being an angel investor can be a fun and rewarding career or hobby, providing a unique opportunity to be involved in startups and innovation (52m38s).