Radically transparent social media scheduling firm Buffer, which does stuff like publish its staff salaries and publicly detail its company revenue, has announced its first major acquisition — buying social media customer support tool Respondly for — wait for it — an undisclosed amount…
Why the lack of transparency on the deal price? Buffer co-founder and COO Leo Widrich says he would like to have published that too but Respondly wasn’t so keen on being quite so radically transparent. “And we don’t want to force our views on others,” he adds.
Buffer has actually bought another startup before but Widrich dubs that a tiny deal — characterizing this as its first proper acquisition, given Respondly had raised money; has customers (59), including the likes of Slack, Pocket and Stripe; and is taking revenue.
So, first up what is Respondly? The startup launched in April 2014, co-founded by engineers Tim Haines and Phil Cockfield who spied an opportunity to stand out in the social media customer support space by keeping things simple and applying strong, minimalist product design to focus and streamline customer support teams’ workflow into a shared inbox.
While, up to now, Buffer has focused its energies on the social media publishing side — offering tools to users to schedule their social media marketing missives and analyze performance, with nothing to help companies wanting to respond to incoming customer communications generated by social media.
So Respondly’s product adds another string to Buffer’s bow — one which Widrich’s says its customers had been asking for.
“Time and again people would come to us and say… I would love for you to also help me with the other side of social media — the monitoring and the replying, and the community work and the customer service. The reactionary part, instead of the publishing and the analytics and the forward looking part,” he says.
“We didn’t want to just get bloated and pack as many features as we could into one place and make it like it can do everything — we always wanted to be more focused than that, in terms of how the product feels and what it does… However it was a good point — it was a very important part of people’s social media and so we kept going back and forth, what shall we do — shall we go and build something like that? Is this too early? Are we going to stretch ourselves too thin? All these questions that you might ask yourself.”
Despite a degree of customer demand, Buffer was not actively looking for companies in the social media response segment to acquire at this point in its history. Nor was it actively planning to build something itself. At best it was mulling over the opportunity. But, as chance would have it, Respondly came knocking — with Haines making a direct approach as he and his co-founder looked for a new home to park their startup. Why were they shopping Respondly now? The way they tell it, it’s a feature not a standalone business.
“The next step for Respondly’s growth is figuring out how to get it into as many hands as possible, and for us, partnering with a larger company like Buffer has a tremendous upside for quickly expanding Respondly’s impact,” says Haines, when asked why the team decided to seek an exit at this point, rather than carrying on developing Respondly themselves.
“Buffer are experts in the domain, have a perfectly complementary product, and are well known for their transparency and integrity. They also have 45,000+ customers who already see the value of investing in great social media tools, that they can introduce Respondly to.”
“Respondly has customers who love the product, and depend on it every day. The paying customer base is growing, but not fast enough to continue running Respondly as a stand-alone venture backed business,” he adds. “When we weighed it up, it made rational sense for everyone involved – the customers, the investors, Buffer, and the Respondly team to sell the product to Buffer.”
From Buffer’s point of view, while the call from Haines was serendipitous in terms of meshing with what some of its customers were asking for, the decision to move ahead and make an offer to acquire Respondly boiled down to conducting a cost/benefit analysis of whether it was better for Buffer to build the feature itself or buy Respondly outright and obtain an off-the-shelf product plus a swathe of customers in one fell swoop.
The assessment process involved modeling the buy or built scenarios using some good old-fashioned spreadsheeting, says Widrich — a “very difficult” process that inevitably involved a lot of guesstimates and extrapolation. An exact science this is not (see also: VC).
“We built this spreadsheet and we modeled these two scenarios — one is build, one is buy. And so the build scenario we would say ‘okay, today is December 15, if we were to start building this today’ — which we weren’t even in a position of even starting it at that point… but you need to make some assumptions. So say we were to start building this today, we don’t have the team right now, so we need to start hiring and build this team — or take it off from other teams and start building this first version.
“And so it takes us maybe two months to hire a full time team. And, say, maybe five to eight people. Then we have that team, and after two months they start building it — then we say if we’re fast we can get a first version out say within four months. And so that means six months from now we might have the first version that we can slowly start to introduce to certain customers. Obviously that first version will be very minimal, so it will take up some time to ramp up.
“So then we went further and we said ‘okay, how do we go from the six months, we start with zero MRR — so zero monthly revenue for that product — and then how fast do we think we can build the revenue out, and build the feature set and also hire more people into that team.’ And so we extrapolated that out. So we start with zero and we started thinking okay within the first month we can probably get to $5,000 in MRR, and that already feels very significant because we probably need to get 100 paying customers in the first month or something like that. Which is in itself, really tough. And then we model that out further.
The goal we set ourselves was how long will it take us roughly to get to $100,000 MRR. And the conclusion that we’ve come to in the build model is that would be half way through 2018.
“The goal we set ourselves was how long will it take us roughly to get to $100,000 MRR. And the conclusion that we’ve come to in the build model is that would be half way through 2018. So after we launch it it would probably take us 18 months or six months from now when we launch it it will take us another 18 months roughly to get to $100k MRR. And the way we came to that was we looked at Buffer’s own data that we had — how long it took us to get to that number, and factoring in ‘okay we’ve gotten smarter since then. We know more, we have a customer base we can market to so we can probably do it a lot faster.’ That brings us to this time period of — I think — April 2018,” says Widrich, talking through Buffer’s thought process on the build option.
Another factor it assessed here was associated cost. “Every person that works on that [respond product] team is cost, especially the first six months when we don’t even make any money from that,” he notes. “We’re just basically burning money. Say we have eight people, each cost roughly $120,000/$100,000 a year and so for six months say that’s $60k per person times eight. So that’s like $480k just for the first six months of development.
“The investment, I think we came to, is probably close to I think $1.5M to $2M — and that assumes we will eventually get to $100k MRR… That may never happen. We may never get traction and we just wasted a bunch of money, so we may never get that money back.”
On the buy opportunity side, Buffer’s model considered development cost savings and the risk reduction element given Respondly is an existing product with some customers — off-setting all that against the cost of the acquisition (whatever that is) — so not only the six month dev time it had estimated it would need to make a similar product itself but also some of the initial marketing and traction costs, given that Respondly’s existing customer base would reduce the launch risk as Buffer wouldn’t need to start the business from scratch.
“We said when can we get $100k MRR with the buy model… and so we modeled that out and said ‘okay now is December 15, if we go live with this in January it means six months from now — which we would do in the build model — now we already save six months and we get paying customers and we already have paying customers.’ We also factored in the risk factor — the risk factor goes down, because the likelihood is if you have some paying customers you will keep getting some paying customers is much higher than if you have nothing and you make a bet that you will get at least one paying customer. So the risk from zero to one is much higher than if you already have some.”
Respondly being a relatively mature/feature-rich product was a highly attractive factor for Buffer, adds Widrich. “It would have taken us a long time to add those features. They’ve been working on this for two years, non stop… And to us that was really special because we feel like we could put all the marketing behind it and yes we will keep improving the product of course, but they’d built such an amazing foundation that it’s almost like a ramp that we could just jump off,” he adds.
“And so in this model we assumed that we launch in January and we can get to $100k MRR by the end of 2016. That was our intuition… And we would probably stop losing money half way through 2016 — and we would only burn, I think we figured out roughly, $300k to $400k… So now we’re in a position where we feel like ‘wow, this is actually an amazing place to be in where not only could we save a lot of money — and we wanted to go after this opportunity anyway — but at the same time we are also able to take away a lot of the risk. So there was this compounding effect of that… Therefore the buy option was a lot more attractive for us because of the less investment required from our side plus the lower risk.”
Of course all that thinking is dependent on the value of the acquisition — which again we don’t know. But clearly the size of Buffer’s offer for Respondly undercut its internal calculations on how much it would have cost it to build a similar product itself. (And the associated risks of launching something new — including competing with Respondly (there were other offers on the table for the startup, although Buffer’s offer was apparently the highest.))
So given Widrich’s explanation we can assume the price tag for acquisition was relatively close to the projected cost estimate for building the product itself — aka between $1.5M to $2M. It’s also safe to assume it certainly didn’t exceed Buffer’s own valuation — the latter raised a $3.5 million Series A round itself, back in October 2014, at a $60 million valuation (when it was also profitable and reporting monthly revenue of $400,000 — although Widrich now says it basically breaks even every month as it reinvests in the product).
Buffer’s latest MRR is $663k. It had raised $400,000 prior to the Series A. And had just over $2.5M in cash in the bank as of last month (yes it publishes its bank balance too). Widrich confirms the acquisition was an all-cash deal. So again, we can pretty safely assume the Respondly acquisition price-tag was closer to $2M than $60M given how much cash it has to hand to fund an acquisition. (For its part Respondly had raised $1.78M, according to CrunchBase.)
“[The price of the deal is] obviously the key piece to all of this,” he adds. “It’s something that has to fit — we can’t sort of run ourselves into the ground with an amount that would kill us. For us it became something that an amount that we felt was reasonable and that they were comfortable with. One of the things that we’re always keen to do — because we’re so transparent — is to lay out our way of thinking about this and say look we don’t want to screw anyone over here, we don’t want to try and squeeze out every last dollar from you.
We do some crazy things that people probably advise people never to do in an acquisition.
“The way we approached the interaction with Tim was to be as open and as keen to lay out our way of thinking with him. ‘This is what we feel we can pay’, and we show him our bank balance. We do some crazy things that people probably advise people never to do in an acquisition. But we feel like that’s the best way for us and also to have him build trust in us — that we’re not trying to play games here, but we’re just approaching this in a very rational way. And that helped us to get him on side as well.”
None of the Respondly team will be joining Buffer, so this is a pure-play product acquisition not an acqui-hire. Widrich says it’s assigning nine people to work on the Respond product as it takes it over from Respondly. It’s ramped up seriously on the staff front this year, growing from around 25 employees at the start of the year to almost 70 now.
So how did Buffer assess the risk of integrating an existing product into its existing business — and doing so without any of Respondly staff on board to smooth the transition? Calculating that unknown inevitably involved a lot more conjecture.
“We’ve taken a growth rate and we’ve taken certain numbers we think this new product can grow into and we have then applied a risk factor — sort of like decreased the growth rate based off a certain risk factor we think is existing,” says Widrich. “To give you one example, one risk is say for example Twitter. Twitter’s API and their approach to developers. What if we buy Respondly and then next day we get cut off from their API so we can’t even provide the product anymore?
“That’s something we should factor in. And some of those big ticket items are really hard to calculate but the best way we’ve found to do this is to apply a percentage and say ‘hey actually let’s decrease all of this by 25 per cent to account for unforeseen things that may happen that throw us off and mean that we need more time.’ That’s the best way we’ve been able to do this.
“And if there are very specific risk factors that we can already identify — obviously we can’t look into the future — for example that we’re dependent on a platform like Twitter or that.. say something else changes in the market. We can think of Facebook working on their messenger tool, turning that into customer service — and that can be a good thing or that can hurt us. So we’re trying to list some of those things that apply and say let’s be more conservative about our forecast. So that we have some slack in terms of the numbers that we want to hit or we can get to.”
Respondly will be rebranded as ‘Respond by Buffer’, and relaunched in January with a new per seat pricing model for new customers vs Respondly’s current tiered pricing. Widrich says existing Respondly customers will likely be grandfathered on their existing pricing — at least for a while — while new customers will be pushed to the new pricing (either $35 per seat or $70 per seat for the pro version). There will also be a freemium option for low volume users.
He’s not definitive on whether existing customers should expect to be locked into Respondly’s pricing forever — but he does at least say as much.
“The most common thing to do in SaaS is to grandfather them. To have them pay the existing prices for as long as they’re with us. Since it’s such a drastic change we might, after four or five months, approach them individually — get on a call… and say ‘hey we’re thinking of rolling you over to this pricing, we think this is more fair, this scales better for you in the long term as you also add more users, here’s how it’s going to look, here’s how it’s going to work, how do you feel about that?’ That’s the conversation we want to have, and that’s the approach we want to have.”
Below is the internal memo that Buffer sent to its staff announcing the acquisition.
## When Respondly met BufferRespondly’s awesome founder is [Tim Haines](https://twitter.com/TimHaines), who reached out via email a while back. I happily agreed to a chat—at that point, I didn’t quite know what the call might be about.We talked on the phone, and Tim shared that he was looking for a new home for the product and its customers, and that Buffer stood out as a great candidate. He mentioned that he believed we were experts in the domain, a great complementary strategic fit, and well known for transparency and integrity.I started to realize that this could be quite a perfect fit – Buffer has a strong brand and marketing, and also an existing large customer base with some likely overlap into this market.My hypothesis was that if the product was solid, then this could be a very successful acquisition. My instinct was that we could grow the MRR quite quickly. It’s a market we’ve long thought about moving towards, and we knew eventually we would do it.The Respondly product is very solid and feels pretty “Buffery” in its aesthetic and user experience. It also fits exactly how we would want to approach moving into this market – to have a separate product and ensure that both products remain simple.I chatted a lot with Leo, and emailed several advisors for advice. I asked some additional questions around traffic numbers and growth of the MRR over time.I got Sunil’s advice on the tech side and asked Carolyn to experiment with using Respondly for Twitter-based customer service.I chatted with several team members and also worked with Patrik to do some fast customer development around whether our customers were already also doing customer service and using a tool for that.## Build or buy?Everything was looking positive, so Leo and I thought about how we should approach it.I worked with Sunil to do a “Build or Buy” analysis, to essentially try to calculate the difference in the outcome of either building this tool ourselves or buying Respondly.We modeled reaching $100k MRR and the time it would take to grow the team we’d need to build this product ourselves. We also modeled how quickly we could start to generate revenue if we were to acquire Respondly, compared to building ourselves and taking longer, as well as having a less feature-rich product and therefore probably having a slower growth rate.We took into account the opportunity cost of not having a product in the market, and how much revenue we would generate during that time. Of course, we couldn’t pay too much because we’re growing fast as a team and need to have a good amount of cash in the bank as security.## Putting in an offerFrom here I put forward an offer to Tim that we felt was generous and fair, and could really be a win-win for both sides. (According to the terms of our contract, I can’t quite reveal the actual figure.)I shared our focus on marketing and customer service and how I think we could be a great home and next step for Respondly.This was an exciting moment, when I started to think – maybe this can happen! Tim said he’d get back to me in a few days.At this point, I was in Austin for a product creator mini-retreat, so things got fun for me with my schedule! I had a call with Tim and he shared the situation they were in:– They had received two offers from smaller companies whom they admired, ours being the higher offer, and were in conversations with some other companies about potential offers.– He shared that if we were to be the new home, he would be rooting for us and following along.After the call I chatted with Leo and Sunil. I felt that we could really focus on the fact that we could move fast. I jumped on a call later that same day.## What I shared with TimHere are the notes I made for that call, and are pretty much what I said:– First off, I want to say how awesome it is to hear that you’d like Buffer to be the company you move ahead with here. It’s humbling and exciting to hear that you resonate with our values and the way we’re running the company and would be rooting for us with what we could do with Respondly.– I’ve had a chance to chat with Leo on things and discuss what we talked about earlier and the current situation.– It’s exciting for us to think about moving fast here. As I’ve mentioned before, that’s definitely a part we can act on.– As I mentioned, we have to be mindful of our spending since we raised relatively little and that’s a big part of the culture of Buffer and the type of company we’ve become. We’re growing the team fast and so with that growth we need to make sure we have a good amount of cash as security.– We’d really be putting a lot of manpower behind Respondly and personally I think that would be fun to see where it goes.– I really want to come to something we can all be happy with and be super excited about moving forward and seeing what we can do with the product in the coming years.Later that evening, while myself, Jim, Marc Anthony and Kyle were sharing an ad-hoc, fun chat session on how we’d all reached this point in our lives, a new email came through from Tim with the subject line “Let’s move ahead”. It was high fives and hugs all around!## What’s nextWe’re beyond excited for the new year and to give you the chance to fully manage your social media engagement with Respond.It has been incredible to work with Tim (and the Respondly team!), and we’re so appreciative of his knowledge and expertise in the space. We’ve gotten so much help and support since the acquisition closed, and it has been awesome.