A few weeks ago, XO Capital cofounder, Danny Chu shook hands on a mouth-watering business sale on Acquire.com.
He’d acquired and resold his startup, WorkClout, for almost three times what he’d bought it for about a year earlier. He’d also completed the entire sale process, including due diligence, in a blisteringly fast thirty days.
Why was Danny able to move so fast? Well, he’s had a little practice.
Danny is a serial startup scaler who previously exited one bootstrapped startup called NoteNinja. He also worked as COO at a Y-Combinator (YC) startup called FirstBase. In 2021, he teamed up with online acquaintances, Henry Armistead and Andrew Pierno, to create XO Capital, a company that buys and grows startups (they call it “micro private equity”).
After getting their feet wet acquiring startups on Acquire.com (and even selling two businesses), the XO team met a tantalizing opportunity at the beginning of 2022. It was a YC-backed startup for quality-checking manufacturing processes called WorkClout.
The founders were selling the business to a buyer who planned to scrap its assets. WorkClout’s founders wanted a reputable business to buy their assets and continue servicing their customers. Danny and company took the opportunity.
At the time of its acquisition, WorkClout already made six figures in annual recurring revenue (ARR )with only 13 enterprise customers. However, a few months in, Danny realized WorkClout was much more work to maintain than he thought.
Enterprise clients required lots of attention. Sales cycles to onboard new business typically lasted six months or more. Danny created a plan to quickly double revenue from existing customers and then leverage it into a big-ticket exit on Acquire.com.
Danny used every trick he’d learned from selling and buying other businesses on the Acquire.com marketplace. He chose to vet buyers by being brutally honest about the complexities of his business until he had a shortlist he knew was serious about the acquisition.
Here’s how Danny and his team of expert startup scalers secured a quick exit and vetted buyers for a niche and difficult-to-run product.
How Danny Turned Scaling Startups Into a Business
Danny believes his entrepreneurial spirit started from craving a real skill. He’d spent most of his early career working in B2B sales but felt he didn’t have enough skills to show for it. “I envy people with a specific skill like writing or coding,” he says. “Being in sales, it was hard for me to say this was a significant skill.”
In 2016, Danny bootstrapped a live note-taking and recording startup called Noteninja for two years. Two years later, in 2018, he sold it to SalesLoft for an undisclosed sum (an NDA protects the details). He realized taking startups from zero to one might be the skill he thought he lacked.
“My skill is solving people and system problems,” he says. “These are things like building a team and developing a sales process.”
For the next four years, Danny worked as a consultant for companies trying to bootstrap from nothing to something. By 2019, he’d become the COO of a YC-backed startup helping businesses incorporate and run in the USA. Around this time, Danny noticed an interesting trend in the early-stage startup M&A space spearheaded by none other than Acquire.com’s own Andrew Gazdecki.
“Andrew spent a lot of time building content about bootstrapping and selling businesses. Then he created one of the first places to build businesses around buying other businesses,” says Danny.
Danny met his two cofounders, Andrew and Henry, through Indie-Hacker communities on Twitter. They bonded over a mutual love of buying companies and growing them.
Acquire.com (then MicroAcquire) had launched earlier that same year. Danny and company bought two small SaaS tools called Sheetbest and ScreenshotAPI. They took both from $500 to $5,000 in MRR in just two years. Eventually, they united to create their official business, XO Capital, in 2021.
Finally, in early 2022, they also happened on another interesting acquisition resulting from a YC startup’s asset sale.
Buying WorkClout
WorkClout was originally backed by venture capital firm and startup incubator, Y-Combinator (YC), in early 2021. It earned lots of fanfare (as most YC startups do) but was eventually sold in what the M&A industry calls an “Acqui-hire” – where a business buys a company for its management team rather than the product.
WorkClout accepted the offer for its initial three founders from real estate marketing company, Luxury Presence, in January 2022. While Luxury Presence desired their acquisition’s management team, they had little interest in WorkClout’s tech or customers. Like most founders, the WorkClout team valued their customer relationships. They made good revenue too. Even in 2019, they were making a reported $100,000 in ARR.
A few months after the sale, the founders of WorkClout quietly connected with Danny and his cofounders on Twitter (all three had been writing extensively about their business of buying and scaling businesses). After some back-and-forth, they sold their assets to XO Capital at a discount off-market. The unlocked revenue from WorkClout added enough funds to allow Danny to quit his day job and join XO Capital full-time as COO.
A Tough Sales Cycle
In Andrew’s words from his blog, “WorkClout lets businesses who make physical products inspect them for defects. One of our customers builds engines. They use WorkClout to inspect each engine before it gets shipped off to make sure it passes all the tests it’s supposed to.”
Almost immediately, Danny’s people and systems skills were taxed to their utmost on the 13 large clients that paid for WorkClout. Six months in, he realized it was too much work. Sales cycles could take over a year. While the XO team could grow revenue from existing clients, WorkClout’s almost white-glove service was incompatible with their product-led scaling model.
“The benchmark for us was how much time it was taking,” he says. “I operated the portfolio and it was taking up too much of my time since we have five other companies. Our portfolio is made of small microSaaS companies with a single feature. This one required demos, onboarding, new features, and more. With the rise of AI and ChatGPT, we wanted to make some bets in that space but didn’t have the spare time.”
But the XO team didn’t want to throw in the towel and simply recoup their losses. XO Capital was about making profitable exits. Danny created a plan to quickly double revenue so they could at least exit for more than they bought it for.
Danny says finding ways to add revenue to their existing clients was relatively easy. A salesman and a people person, Danny spent the first six months after acquisition getting close to WorkClout’s clients. This allowed him to see exactly how they could expand each client’s revenue.
“We were afraid that the transition and handoff would disrupt their customer base,” he says. “From the start, we tried to be very transparent about who we were and what we were good at. I spent every day talking to our customers and getting them to trust us.
Danny noticed WorkClout was being used at large companies by small teams. That meant they could grow their business within these companies. “The land and expand model is big in the manufacturing space and seemed appropriate for WorkClout,” he says. “These businesses may have warehouses all over the world. I just found some untapped opportunities to sell them more accounts on WorkClout.”
Four months later, the team at XO had done what they set out to do and doubled WorkClout’s revenue. It was time to sell.
Selling on Acquire.com for a Speedy Exit
Perhaps the most impressive part of this acquisition, almost more so than doubling WorkClout’s revenue, was that XO closed its sale in just 30 days on Acquire.com.
The acquisition would have closed even earlier, but the XO team tried to hire a company to help them find a strategic buyer first. “We ran the process for three months and spoke with many big competitors, but the timing wasn’t right,” Danny says. “They usually had to talk to their boards, which could take a long time.”
After two months with no bites, the XO Capital team listed WorkClout on Acquire in parallel and immediately started talking with buyers: “Acquire does a good job of having a built-in prospect pool,” says Danny.
Because the XO Capital team is experienced buyers and sellers, they did things right in the marketplace from the start. For example, selling the business at a high point rather than a low one. “Showing a little inflection point where we’d grown revenue before we listed was big,” says Danny. “People are wary when the graph is falling while you’re selling.”
Danny and his team knew that WorkClout had three disadvantages that could complicate its sale: It was in a niche industry (manufacturing) with hard-to-manage accounts and long sales cycles. They decided to be as upfront as possible about these issues to minimize time wasted with uninterested buyers.
“There’s a lot of operational risk at businesses like this,” says Danny. “We let people know we had a high concentration of money in a few contracts and a lot of work upfront. In the end, there were two to three people with software and manufacturing experience we thought would close.”
Once they’d shortlisted buyers, it was a snap to finish due diligence because they’d gathered much of the data when buying the business a year ago.
Overall, the XO team was happy they chose to sell on Acquire. “We worried that we were too specific, which is why we went down the strategic route, but there are some crazy niche things on Acquire. Looking back, we probably should have listed it on Acquire first.”
Danny’s most important advice to sellers? Be as open as possible as early as possible – especially about your weaknesses.
“As buyers, we often would get a lot of incorrect information and financials,” says Danny. “I think knowing your weaknesses and warts as a company is most important. To get through to the qualified buyers, you want transparency.”
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