Transcript:

So one of the key things I'll say that we learned at Hidden Levers when we built that platform initially was portfolio stress testing. Scenario-based portfolio stress testing is what we were bringing to the table. So, we didn't know who our audience necessarily was, and it was sort of trial and error to discover that, oh, financial advisors are the reason this can be a SaaS product for them. Unlike, say, a high-net-worth individual, they've only got a finite number of assets in portfolios and accounts. So, how often do they actually need to stress test those? Well, with financial advisors, because they're running a book of business, there's always someone new to work on. So, this software can have repeated use and value.

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Welcome, everybody, to the Alternative Universe. This is a show for financial advisers, alternative fund managers, and those who want to navigate the diverse landscape of alternative investments and explore opportunities that lie beyond the ordinary. Today, I'm honored to have a former colleague and mentor of mine on the show. He's a four-time founder with two bootstrapped exits and is the current founder and CEO of Fractional Work. Welcome to Alternative Universe.

Yeah, thanks for having me, Steve. I'm really glad to be here.

I'm really glad to have you on here. And, coming onto the show, we have an audience. We work with financial advisers. We work with fund managers across the spectrum, and then, obviously, there are a lot of investors out there as well who are involved in private deals. I think that you come with a very unique background, not just currently where you're at. So, I'm excited to hear your story and share that with our audience, not just as an operator, but also as an investor, and someone who's built multiple businesses. So, why don't you start out by introducing yourself and telling us a little bit about how you got here?

My name is Praveen, and until pretty recently, I guess, I spent most of my career between fintech and finance. About 20 years, where that started actually, so coming out of school, this was into the bubble, so lots of folks will remember that particular from an investing perspective. So, I graduated in '99, right into the heart of it, you know, fever pitch. I started at a job where the idea was to go into was to help a big company do e-commerce and realized real quick, wait, this isn't going very fast at all. Big companies move so slow. So, I quit that first job in like six months, and you know, I was like, well, now's the time, you know, let's try to start a company. So, the first company I started was actually a primitive version of what you can do, of course, like in Google Docs or all these platforms today, where you can collaborate on documents online. But this is like again 1999, IE5 if anybody remembers that for browsers and Netscape Navigator and stuff like that. So, in that old school era, just trying to make it so that two people could see a document at the same time online, and then, you'd say it's like a Word document, say it's a contract or something like that, well, you could drop sticky notes with your comments, and the other person would see that through a browser, and that was kind of cutting edge at that time. Wow, absolutely, 25 years ago now, it's crazy. But anyway, I mean, let's face it, that tool is still widely used.

Yes, that tool and that technology ended up getting bought by a company called Infolinks. Funny story about that position, actually. This is old school enough or long ago enough that when you pitched and at that time, this was like, I was pretty recently out of school, didn't know anything about bootstrapping versus venture capital, like how do you, what are the paths to starting a company? We figured like everybody that what do you do? Well, you go and you build something a little bit, you get a little bit of traction maybe or at least you've got a product and you go pitch angels and VCs. So, that's exactly what we tried to do. Well, one of those pitches was a fax, and it was a fax to Edison Ventures, East Coast VC at the time. And so, I remember, you know, we didn't hear back from them. We're like sitting here faxing out, you know, pitches. But, they actually saw it, and they put us in touch with some of their portfolio companies. And one way or another, through kind of those contacts, it fell into the lap of Infolinks, and we ended up getting acquired in early 2000s. So, now, NASDAQ, I mean, now this sounds like a small number, but NASDAQ 5000 was a big number at that time. So, months before actually, not months before actually, the acquisition closes in June of 2000. And actually, the peak was in the earlier part of that year, like March 2000. So, the wheels are falling off now, the market. But, what we're told in this M&A transaction is, yeah, Infolinks is going to go public in like weeks. So, let's jump on the train. And we're excited, we moved to New York to start with Infolinks to help them build the next generation version of their platform and bring in, you know, some of the tech and the ideas that we had.

Yeah, it's super interesting. And, you and I were talking before the show here, but, you know, Infolinks still is deeply embedded and plays a vital role just in deal making in general, which, you know, in the public markets, we're used to a lot of infrastructure to support that at scale. In the private markets, no one is unfamiliar with how broken it is, how fragmented it is, how many point solutions you're expected to bring together. I mean, any deal, you're not going to run into the same tech stack twice, right?

Right, right. And so, Infolinks is still very much a vital player now, now owned by SS&C, right? As used as a data room, for sure.

Yeah, that was the original view information, and you can see why. The stuff that we were building at that company I started, SmartWorkGroups, you know, collaborating online, well, what is a data room with that? So, that kind of lives on, which is cool to see. The other interesting thread, well, actually, you were mentioning sort of, you know, and of course, we're talking about, we're on Alternative Universe here, the news about Carter was interesting to me. I'm sure you must have seen that. So, there's lots of attempts to make private investments more accessible, and they sort of did a face plant with mining their user data. Now, I mean, the largest share of startups and startup shares, you know, are listed internally for those companies on Carter. So, Carter maybe did a face plant move by trying to make that public without really disclosing to their startups what they were trying to do.

"So when you're bootstrapping, you don't have a lot of money. Well, we crossed a point where we were selling and we had some revenue in the door, but we needed to get some integrations done. So, this is when, you know, I think TD, if I'm not mistaken, back when it was TDAI, they were our first integration. I remember I was like, 'Well, I don't have time to build this. We've got so many features to build.' And so, that was where the idea came up. Like, I knew somebody I had worked with actually at AT&T on a contract, you know, some years before, and I knew that he could do the work. You know, a guy by the name of Sahel. I was like, 'Hey man, do you want to work maybe 20 hours a week on this, on the side? I know that AT&T doesn't have you that busy.' And so, it just sort of organically started that way. And then, over the course of nine years roughly, he built like 25 integrations.

So, that was sort of the first person we brought in that way. But we realized, you know, why have a single-minded view about the nature of professional work? Like, does it all have to be 40 hours, you know, a week full-time job only? Or can we slice it, you know, and can we get maybe some amount of time from an expert in a certain area? You know, once it worked, once that test worked for us early on, we kind of did that with almost everybody that we brought to the table. Like, we would have them start, put their toe in, maybe they would still have their full-time job and work for us part-time for a little bit, and then make the leap across. And then, you know, you'll recall Steve, we did that on the business side as well, on the marketing side, like all kinds of roles. So, we definitely took that approach with the product development. Specifically, over 40% of our development team was fractional. So, we sort of recognized the value. Of course, you have to have an in-house team, like a core of that team and a CTO and all those things. But you can really augment and save a lot of money because senior engineers, senior folks in any discipline, but certainly senior engineers, are expensive. If we don't need all of that, or if we need a specific skill set, why carry all of that cost?

So, that bootstrapping mentality led us to that, and it works so well that post-exit, I thought, 'Well, what if we take this idea and try to scale it out to other organizations?' Absolutely not. I mean, and I think that there is a line there. There's a difference between fractional and engaging someone fractional, like Sahel, that relationship that we had there, building the very first integration, to an outside third party where we're sharing data, I believe. Correct me if I'm wrong, but I bet Sahel worked on the very last integration that was built and maintained by Hidden Levers before it was acquired. Yeah, he was there the whole time. Yeah, so right. Yeah, that's something that I think you're absolutely right. When folks think about, 'Oh, let's bring in a contractor,' it's usually like a project here, a project there, whereas we thought of this as being a long-term strategy for us. So, the tenure, I mean, obviously, in his case, it was, you know, call it nine years. There was another guy, Terrell, that we worked with. So, he was there for like five years at exit. But last I checked in, I think I talked to somebody to Ryan, and they said, 'Oh yeah, Terrell's still here.' So, we're now three years post-exit, so he's gonna lap us at some point. He will have had the longest tenure on the team, and he has had. He does all the work right beyond that. And hey, it works well. So yeah, that model of long-term engagement with the person was what we kind of, that's fractional as opposed to just being sort of a part-time contractor. And that difference between gig and fractional, I think there's a characteristic there that's really important, and that's domain expertise.

It becomes really obvious, especially when you're in a startup, if you've outsourced development and you lack someone internally who has the domain expertise, who can manage that, whether it's internal or external. You start to notice that when there's a lack of domain expertise, you create more work for yourself than you need to. So, having consistency in someone who can own a project or a pillar within a business is so important, even if it's part-time, but part-time with a long-term invested relationship where they're familiar with you, they're familiar with the problem you're solving, they get familiar with the customers you're solving it for. And there's tremendous value in that. So, fractional work, I feel like that is one of the things that can be so valuable from stepping into that lane. Yeah, and you know, in concrete number sorts of terms, I was kind of reviewing, and it was about a million dollars a year we saved. And there were a couple of prongs to that. So, one is, if you think about five senior developers, a million dollars a year based on give us an idea of size of business. Well, sure, you know, and at exit, our run rate was around eight million. So, very non-trivial. I mean, for a lot of companies, that would be their entire profit margin. Hidden Levers, you know, we took pride in the fact that we ran very profitably. So, an exit, we were, you know, just above a 50% EBITDA margin. But so, that's a substantial share of our profit base. Where did that come from? So, some of that was just the fact that instead of hiring a engineer full-time, and these are senior folks, meaning 10, 15 years of experience, sometimes more.

So, those kinds of people, all-in cost, now you've got your base salary, but generally speaking, there's probably a bonus. There's probably, there may be some equity involved. There's of course benefits, there's vacation time, et cetera. And all the costs up, and it wouldn't it's not at all surprising to be around 200 grand for a senior person like that. And so, we are paying a fraction of that, oftentimes less than half. Because another thing that we found is that with these fractional roles, developers, not just developers, but anyone, if they've got sort of a main thing, and this is sort of, you know, their fractional sideline, they're willing to discount it if it's a long-term relationship. Because the same sorts of folks might be going on Upwork or some of these platforms to look for gigs. That's really frustrating for them, because they find a gig, then they finish it, then they gotta do another one, they gotta find another one, then they gotta find another one. And so, instead of that, having that long-term relationship enables them to sort of, you know, all right, yeah, I'm willing to do this for a little bit less. It's a sideline anyway. So, those savings came back to us as a company.

That was one big chunk of savings. And the other big chunk of savings was that because we had all these senior resources fractionally, we actually hired a bit more junior for our full-time in-house staff. And some knowledge transfer could happen there. Of course, there was knowledge transfer from the senior leadership of the team, like folks like myself. But even from these senior fractional engineers to some of the full-time folks we had. So, on both sides, we were saving money. And that's where you can get such a large impact. I mean, again, for a lot of companies, having a million dollars a year in profit on an 8 million run, that's the whole game right there. And you know, I bring this up, but I'm kind of leaning into it because obviously, you know, we're focusing on private markets here. And you know, not just building technology for private markets, and that, but also just, you know, fund managers in general. And then when I think of, you know, advisors who might be thinking how they're going to allocate to private markets in these deals. And Venture specifically has always had this mentality of growth at all cost, right? Like we talked about earlier, the money machine, you know, they're looking for the money machine that just barely got identified right, where they can stuff as much money in there as possible and get as much back out. And it's growth at all costs, and it's just, you know, scale the team and grow. But we're seeing that flip. We're seeing it flip right now in real time. And the model is leaning, I feel like the wind is at your back as far as the method of running a business. And now we're starting to see more and more in private markets, VC, early stage investors promote this type of operating and building a business.

We're even seeing valuation models and metrics change, focus more on profitability and margin and how quick we can get there. How are you going to use my capital to get to profit, not how are you going to use my capital to hire more salespeople and just bring in more revenue? Right? Yeah, you know, and of course, interest rates are a big part of that equation, you know, within markets and, and bringing folks, you know, bringing in present value needs to happen sooner rather than rather than later. I think there's that shift. Another shift, thinking like from an investment perspective in software technology, from thinking about the VC space, one change, say, from 10, 15 years ago, those early days of Hidden Levers, is that the cost of starting up has dropped. And that's been, that's nice for a lot of companies that are starting now. The cost of building technology has dropped just because the tools have become more advanced. Now you've got like low code solutions that are actually, you know, they're low code has been attempted sort of. And for those who don't know what these low code and no code solutions are, basically they enable you to sort of drag and drop, build software instead of having to write all of the code. And so, that's one prong. And the other prong, of course, is AI and ChatGPT and all of that. So, code generation via these tools. So, there's two prongs that are sort of making it lower cost. So, that's helpful. It's still non-trivial, but I think that there's some interesting things that happen with that.

One is that as costs drop to start a company, I think you see even more startups. It's easier to do. You know, it's lowering a barrier to entry, right? So, you see more startups attacking more different spaces and fields. It may enable, from an investment perspective, more small scale funds, more angel kinds of investments that where a company can raise, say, an angel round or what used to be called like a pre-seed round, like maybe they raise a couple hundred thousand, maybe a half million, maybe that's all they ever need to raise because the costs of creating software are lower. And to your point, Steve, that they're going after, after revenue sooner. And so, if they can get to break even, then now they've got an infinite runway and they can start to do experiments. Maybe they'll still raise more capital in order to build faster, but they have more options. No, I agree. And, and again, I think that you get more options if you can get to profitability, for sure. But there you still have to, once you've proved out product-market fit and you have a repeatable model, it really at that point, it does become a sprint. And so, you need to grow as fast as you can. And so, shoving capital into the top of that machine is extremely important. But you have more freedom if you, and you have way more options if you can get profitability and with a stable market, with that product-market fit on your way. And it lowers, you know, from an investor's perspective, looking for when considering, let's say, private tech investments, angel kinds of investments, having a company that's got some revenue, you know, and has got their business model figured out as opposed to here's the software and here's the PCT, here's the demo, but we don't actually know who the customer is yet.

You know, there's a level of risk there, and then you really de-risk it a good bit when you've kind of got the revenue story in place and that's being executed against. Of course, it's still a high-risk investment overall, relative to say, public markets. The other thing that's been interesting to see or that is sort of like a big picture question that we all wonder about getting into the investment world for a second at this point, we have to call it long-term outperformance of mega-caps. Not even large caps, but mega-caps versus small caps and other, you know, we're using valuation metrics, this sort of winner-take-all aspect of the economy in a lot of these different markets has been interesting to see. So, we see that like the magnificence kind of, you know, effect. Now, I can't predict the future. I don't know like how valuations will change, but it seems like from a basic business principles perspective, some of these companies have monopolies or near monopolies in various areas. And so, they're very hard to unseat. Now, as technology evolves, maybe you get a shift.

So, all the VCs are chasing, essentially they're chasing the next company, well, the next OpenAI if we want to talk about short-term. They're chasing the next company that has the potential to unseat the big players. The challenge is that those are like, maybe they're not one in a million, but they're like one in a 100,000 or one in 10,000 companies. And so, for investors that are thinking about like, you know, investing in startups, in a lot of ways, rather than going after those plays that are trying to make some horizontal kind of scalable tech that will be the next Google or Amazon or Microsoft or Apple, those are lottery tickets. Now, if in your portfolio, you correctly view that money as lost the moment you buy the lottery ticket and maybe it pays off, great, that's the right way to think about that. But there are other tech investments that you might make that are substantially low risk because, again, they're operating companies that are either close to or on their way to profitability that are in niches.

For instance, the stuff that we spent the last decade doing, right, Steve? And then you're still building tech in the technology space that serves as a financial advisory business. That would be considered a niche in the sense that your Amazons and your Microsofts aren't that interested probably in building that solution. And there are lots of other niches like, I don't know, plumbing company tech. I'm just throwing random ideas out there, but there's, there's, uh, those are more likely to be defensible than the horizontal plays where the big boys want to play too. Absolutely. We, I did an interview with a small venture firm called 11 Tribes, Mark Phillips, and he talks about that. He talks about, you know, look at the likeliness of a liquidity event in the investments that you're making. And so, if you're always aiming for that next unicorn billion dollar valuation that's going to unseat a massive incumbent, even in large cap, if you focus, if we can focus more on, you know, companies that might have liquidation events and you get in early enough, and it's going to be a 30, 40, 50 million dollar exit, which can be great for the founders and it can be great for the early stage investors, right? And if you can help assist those, those base hits can add up rapidly. And that can make for a massively successful portfolio because those types of acquisitions happen all the time, right? Yeah.

Those are much more, you know, IPOs don't, they're much more common, especially right now. And, and others like, um, feeling Jason Lin and others have written about this, that up to around 100 million, maybe even a little larger than that, you know, in that 2020, 2021 era, but say in that range up to 100 million and maybe a little bigger than that, the acquisition space, the M&A space is active and continues to be active. But then there's like an air pocket where what does a $400 million, $500 million company do? Yeah. There might be an M&A opportunity or they might have to get a little bit bigger or a lot bigger. And then IPO because the IPO markets, you know, will vary in their tolerance of what today would be considered like a pretty PR small small cap when you're talking about a three, $400 million company. So, the IPO window may or may not be open for them. They may need to get triple the size. And we've seen that in the wealth tech space as well, that IPO is only possible for the largest players. And M&A is much more likely. Yeah, exactly. Exactly.

Well, Praveen, this has been an awesome conversation. I'm sure our audience is going to get a lot of value out of it. And I'll just make a comment and, um, for anybody interested, Pine builds and creates awesome content on LinkedIn. So we'll drop a link to your LinkedIn profile. Um, in the show notes here, but, um, you do a great job. I think out there of creating these little micro engagement tips and, and tricks for operators on how to run businesses. And I really appreciate that content. Appreciate you putting out there. So thanks. Well, thanks, Steve. Yeah, it's been fun. So, um, hopefully more folks will find us. And, uh, and, you know, if there's any interest, you know, if anybody is thinking about building tech, higherfr.com is, is the new business. Yep, higherfr.com and I think it goes for our whole audience out there, you know, you heard Pine's story, successful operator, and for our fund audience as well. Um, you're deploying capital and a lot of the time you're stepping into a partnership with these founders and, um, being able to guide them on the best way to, again, deploy the capital to grow their business. I think fractional work is, is that emerging. It's, it's really an emerging segment and great place to start. All right.

Well, thank you, everybody, for listening to this episode of Alternative Universe. Um, this podcast is brought to you by Mammoth Technology and produced by TurnCast. If you like the show, consider sharing it with a friend. You can subscribe to future episodes on Apple Podcasts, Spotify, or where you're listening to this episode right now. For more information about Mammoth Technology and Alternative Universe, visit us at Mammoth Technology.com. Everything discussed on this podcast is for informational purposes only and should not be considered advice. The participants may have financial interest in the companies discussed on the podcast.

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