The Servers Were in a Closet

Happy Thursday. I was done with this week at approximately 8:12pm on Monday, so happy we made it to pre-friday. 

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Was in Nashville over the weekend. Great town, great live music, but the beers are $11. Also got a little chilly Saturday. Should have built a fire.  

A few months ago I got pulled in to help with due diligence for a private equity deal that involved a large international sports company. 

Yes, I am going to be extremely vague throughout this entire thing because the deal was very private. 

During the latter half of the due diligence I was doing, I was looking into their technology stack. Through this I found out that the company still had physical servers located in a closet in their UK office. This meant US employees had to VPN into the servers. And no, I wasn’t doing this work in 2005, this is actually how some legacy companies still function. To give them credit though, they are in the process of moving to a cloud-based system. 

Because I had a lot of product building experience in this industry, my job was essentially to look at the data and the product to determine inefficiencies in conversion funnels, opportunities for improvements, and how we could increase bottom-line revenue through product enhancements. 

I learned a lot about legacy products, how these companies operate, and what buying them looks like. Pretty busy with work this week, so this is all I’ll talk through today and keep it short. Next week we will get back into the antics.

On Product 

First things first, and I will kick this metaphorical horse far past when it’s dead: Product is all that matters when it comes to B2C software companies. It also matters in B2B companies, but Salesforce is worth around $300b, so I continually get proven wrong here. 

Sidebar on Salesforce for a second: If your product is so difficult to use that companies who use it have to hire someone solely to help set it up, maybe your product isn’t that great. Just my take, but $300b market cap so I’ll shut up.

Anyways, when it comes to B2C companies, especially legacy ones that have been around since the early 2000’s (like this one), you need to constantly be iterating on your product. If you don’t, it is going to be hard to attract new users.

In the case of this company, the product was scrambled. It wasn’t set up in a way that made sense in 2025. Their funnel to paid conversion was 6 steps, when it easily could have been 3-4. This means they were making it harder for users to purchase and give them money. I identified two points in the funnel that could be eliminated and probably lead to a 10% higher conversion rate. 

In B2C, you need to invest heavily in making your product the best on the market. I think Vlad Tenev of Robinhood put this beautifully:

“We wanted to build a product that was so good, you would be at a disadvantage using another product”

On Operating 

This company we were looking at was started in the late 90’s and is still very dependent on human labor and a sales process. The product they are selling though doesn’t need a human-driven sales process. I’d guess around 60-70% of the time a consumer is buying products from their competitors the transaction is just happening online.

When you are looking at a legacy company that has been around for decades, there are going to be some old methods that may be holding back the company. Just because someone has been doing something the same way for years, doesn’t mean it's the best way to do it (i.e physical servers instead of cloud-based). 

On Buying Companies 

Funny enough, I don’t think we are actually going to buy the company. Which is just usually how these things go (or so I’m told). Everything can look good, you can see the opportunity, but then one little thing (in this case an EU law) prevents the transaction from going through. 

Nonetheless, this is a great time for private equity firms and other investors that are actively purchasing companies. Technology has moved faster than ever in the past few years and it has allowed for people to move more efficiently and faster than ever before (if you remember last week, this is Moore’s Law). This is a dream for investors who want to buy companies, increase valuation by 25% in a year, and then sell it back off. 

For me, if I were to buy a company nowadays, I would look mainly at the product and current users. Can the product be substantially improved? What is the net revenue retention? How many customers are repeat purchasers? I believe that simple improvements on product and conversation rates could easily equal a 10%-20% increase in bottom line revenue. From there, improving operations and building new verticals would be where I would go to get a healthy rate of return from the initial purchase. 

Final Note 

Wanted to share this experience somewhere more formally. Probably not the most educational or opinionated newsletter, but you can expect that back next week.