Darrell Lerner was sitting in an office with an employee looking at various business ideas. He had just sold an early-stage Facebook dating app that at its peak had 100M users. His family and friends were so excited about his success that they gave him $1M of their own money in exchange for roughly 25% of whatever Darrell planned to do next.
As he looked at different ideas he kept coming back to wanting to do something with pets.
As he considered the online dating world he had recently exited, he thought about creating a platform for people to “match” with pets they could adopt. He realized he would need a critical mass of users in order to make the site viable.
He hired a programmer and a paid search specialist. The programmer tapped into animal rescue groups around the country and found a way to pull those listings into one centralized location. The paid search specialist helped create Facebook ads and landing pages around the concept of a “pet adoption database.” Between 35-37% of people were willing to volunteer an email address at the end of that process. That was the proof he wanted of customer demand and he started building the platform and app which would become known as AllPaws.
Darrell was familiar with the costs of advertising due to his experience building on the Facebook platform and as such decided to monetize the site that way. He partnered with a company that had quite a few pet-related businesses but before he could close a media deal with them, they were acquired by PetSmart. The people that Darrell was speaking with before the sale stayed on and decided to move forward with some ad deals, including with PetSmart itself.
Darrell wanted to leverage the highly-specific data that his platform provided into great ad deals so he personalized the approaches. To win Royal Canin’s business, he created a breed-specific landing page that prompted the owner (with coupons) to consider Royal Canin’s type of food for the breed they had just adopted. He also won PetSmart’s business in a similar fashion, offering a number of coupons as well as a link to the closest locations to the customer.
What these welcome messages were, at a deeper level, was an attempted capture of the customer at the beginning of their pet journey, before habits, patterns, and preferences set in. This is known in the industry as the “point of market entry.”
People loved the app.
AllPaws had 1.5 million registered users, 1 million unique website visits a month, and was known as the “Tinder for pet adoption,” ranking in the top 100 for all lifestyle apps in the App Store. But despite these stats and all the good press, most people assumed that a pet adoption business was a nonprofit, hence there was no real investor interest, which is what Darrell was looking for to get to the next level.
While Darrell and his team had rapidly gotten to $1M in annual revenue, mostly on the backs of advertising, the possibilities for growth plateaued and Darrell decided if the business wasn’t going to get much, much larger, he wanted to move on.
There was no app to help him find a broker, but he wanted one who had some experience with pet businesses. He found one and made it clear that if he could get at least $3M for the business, he would take the offer. But to keep his brokers highly engaged, he took the unusual step of offering a higher commission for each level above that $3M number. The more the sale price ended up being, the larger percentage his brokers would get.
Darrell had cultivated relationships with different writers, particularly one at Forbes who he had consistently pitched stories to before. The writer hadn’t bit on any of them before, but when he shared the ability to capture a customer at the point of market entry (and that they were already doing this with PetSmart), the writer saw a good angle. That article actually got acquisition interest from both PetSmart and Petco, but since PetSmart owned the company that Darrell had many advertising deals with, they exercised a right of first refusal among similar companies and went against a food brand that was a holding company for many different brands, not just pet food.
Both companies gave indications of interest that were north of the $3M range that Darrell was targeting. Ultimately, PetSmart won with a higher bid.
Darrell was required to be an employee for one year and specifically asked not to have to travel, as he was in New York and PetSmart was in Arizona. There was a $1M holdback tied to the completion of this term. Despite this “no travel” clause, Darrell got an email shortly after the sale that asked him to “be in on Monday.” Darrell knew that the way he responded to this would determine his relationship with the company for the next year, so he called to check in and found out they just wanted him to come down and take a look at the company sometime in the next few weeks. That was fine with Darrell. He made plans to do so and averted the crisis.
But Darrell also had to let go of the fact that this free app was just one more weapon in PetSmart’s toolbox. It wasn’t a priority for them. If something was broken, it wasn’t fixed immediately, the way it would have been when he was the owner. He had to let go and “not care.” He ended up finishing his time at PetSmart, receiving the remainder of the sales funds, compensated his investors, and did what he might have done after his first business sale: take a break.
As we always do in these case studies, we share some important takeaways:
- Strike while the iron is hot. Darrell just came off an acquisition and before he even had an idea he had taken investment money and hired an employee.
- Take some time off. While there’s something to be said for Darrell’s approach, there’s also the value that is missed by so many in taking time off. There was nothing to prevent Darrell from coming up with a great idea while he was on vacation instead of sitting in an office with money and pressure to come up with the next big thing. Don’t feel pressure to immediately move into a new business.
- Validate your business idea. Darrell invested just a bit of money upfront with Facebook ads and landing pages to validate customer interest. Existing businesses can do this as well for new products or services they are considering.
- Cultivate relationships with the press. Darrell’s Forbes relationship led to a story that ended in a sale. Not bad!
- Know your number. When Darrell realized his business had topped out with his resources and connections, he came up with a number for acquisition and used that to guide his process.
- Bribe your broker. While we are always focused on getting our clients the best possible number for their transactions, we’re rarely going to turn down even bigger commissions if that’s what they structure into their deals! All joking aside, Darrell’s idea showed his level of motivation and that’s a big determining factor in getting to a successful transaction.
Are you thinking about buying a business or have you hit that revenue wall that Darrell hit and are considering selling a business? Give us a call!