Chit Chat Stocks - SharpSpring (SHSP) | Deep Dive

Episode Date: June 17, 2021

SharpSpring is a cloud-based marketing technology company. The company offers marketing automation, web tracking, lead scoring, and automated workflow. Listen in as Ian, Brett, and Ryan dive into what the company does and where they could grow from here. Enjoy the show! Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Follow Ian and check out his work on Twitter: https://twitter.com/IanGrayLive Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to our Youtube Channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Email us: [e-mail] Timestamps Company Background | (2:29) Industry | (6:40) Management & Ownership | (7:58) Valuation | (11:27) Earnings | (12:42) Balance Sheet | (14:44) Our Analysis | (17:43) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. All right, welcome in. This is the Thursday Deep Dive episode. We have Ian Gray on the show. As always, we're talking, what? Oh, Sharpspring. Sorry, forgot. It's a company I hadn't heard of

before. Ian, how'd you find this company? I think you were saying before we recorded, it was just kind of something that popped on your Twitter timeline and you kind of got fascinated in it. Yeah. Yeah. I'd seen the ticker pop up a few times on my Twitter timeline. And once I see it pop up two or three times, I'll pop it into a Yahoo finance and take a quick look at it. And I thought it was worth taking a look at and for us to talk about on the podcast today. Yeah. And then, you know, we see it's at a, we'll get into it, but it's a software company at a reasonable valuation that kind of gets us excited. We'll kind of see what everyone's thoughts are on the business, but it should be a fun one to talk about a little more fun than

something trading at, you know, 30, 40 times sales. But Ryan, do you want to talk about 7investing, our sponsor, before we get into it? Yeah, they are our sponsors and you can get $10 off your first month if you use our code. They are our friends. They just, I mean, you guys probably listening to this delayed because we kind of pre-recorded this, but recently they had their June recs. So there were some good ones. There were some meaty ones. oh yeah great analysis as always and they're adding video uh to the end of them they do long vimeo long video yeah yeah exactly exactly another use case for that uh i think that episode will be coming out before this but either way they have the video for the subscriber call or

maybe it's not even the subscriber call i think it's the internal team call where the analyst pitches it to everyone else so you get that video along with it at the end of the analysis us really great insight into how all these guys think, how they do valuation, how they do everything. Super exciting. Yeah. And the value proposition for 7investing just keeps going up and up. So use our code CCM to get $10 off. Art, Ryan, do you want to introduce Sharpspring? Yeah, Sharpspring. So I'm going to use a little bit of tech terminology here, tech jargon. It provides a B2B SaaS platform for marketing automation. So basically it's a single dashboard or central hub that allows companies to monitor all their marketing and sales activity. And it's

designed for small and medium-sized businesses, but they sell primarily to marketing agencies, which are resellers. And there's some agency-specific features that they have on their platform, which are apparently a little different than some of the other competing products like HubSpot or whatever Salesforce is. But basically, the platform consists of three different products. There's Sharpspring, which is their core dashboard, which I just talked about. And then there's Sharpspring Mail+, which is a less comprehensive subset of Sharpspring. So you can subscribe to that solely. And that's basically used for email marketing only.

And then there's Perfect Audience, which is like an add-on feature to the core marketplace, which is for retargeting customers. And so I'm going to give an example here to help paint a picture of what the platform actually does. So let's say a marketing agency partners with Sharpspring, and they have, I think, 2,000 different agencies that they're partnered with. That agency buys a license from Sharpspring. So that's how Sharpspring generates money. And that includes three extra licenses to sell to their own clients. So then I use Dunder Mifflin here for the example. Let's say that marketing agency reaches out to Dunder Mifflin and says, do you need help digitizing your sales and marketing process? Do you want help kind of finding new clients? And Dunder Mifflin says, yes, the marketing agency will then, among other things, recommend using the Sharpswing platform. And so that includes all sales and marketing workflow. So emails, inbound collections, generating leads, converting those leads to sales, recording them, setting goals, tracking progress, working on stuff together.

And then you can also monitor like how email campaigns did. All that stuff is all under one dashboard. And so Dunder Mifflin or the end user receives pricing from the agency, which is totally up to the agency. So the agency is the customer for Sharpspring, but then obviously the agency is reselling. There are a few end users that go straight to Sharpspring instead, but I think it's like less than 5% of their overall customer base. But is that kind of a good foundation for what they do? Does that make sense? Yeah, it makes sense.

Okay. And then a little bit about the history. Rick Carlson founded Sharpspring in 2012 with the help of the current CTO, Travis Witten. And they built it because they saw a hole in the market. And so here's what Carlson said. He said, this gaping hole in the market has become more and more apparent to me over the years of managing SMBs. We'd be spending hundreds of thousands of dollars on outbound marketing activities to

drive leads to the sales team, but we'd have zero visibility into what was working and more importantly, what wasn't. So we started looking at the analytics in a different way and developed a whole different approach to tracking results. The transformation was nothing short of stunning. Within a month, we were able to cut our costs per lead in half. And within three months, sales were up 80%. So they had a pretty successful start right from their founding.

And within two years, by 2014, they kind of caught the eye of a company whose ticker was SMTP. I'm not sure what it stood for. And they actually ended up acquiring them. And then SMTP, over time, changed its name to Sharpspring. And Sharpspring basically became their whole business. They changed their ticker as well. So that's kind of how Sharpspring went public. And then I believe the SMTP part of the business was sold off. I apologize if that's wrong. Sometimes there are like historical passages about microcaps that aren't real or it was like painted from one person's picture.

There isn't a whole lot of information because it's a microcap, but that's sort of the basics of the founding. Yeah. And what you need to know is now the majority of the business is under that dashboard process. I'm sure we'll all get into it. But yeah, that is the majority of the business now. I'll hit industry and competition. I mean, global marketing automation as an industry is not very large. It's at about $4 billion in spending a year, expected to grow at about a 10% CAGR through 2027. Now, these are just third party estimates from all those, you know, those research firms, stuff like that. But Sharpspring itself, as you might expect, has a more bullish view. They think the industry can get to 16 billion dollars in spending by 2025. We'll see. That would be some rapid growth, but that would also be very good for Sharpspring. And then as with a lot of SaaS companies, there are big and small competitors as the product itself. You know, it takes some upfront investment to make, but you can make a lot of copycat products out of this. There's HubSpot. That is the big one. They are definitely the largest pure play competitor. I'm sure as a company, their size, they have different products as well, but their market cap is $20 billion.

dollars. So they're a lot bigger than Sharpspring. And that's someone that's a potential acquirer of this company too. Salesforce has a competitor. Adobe has a competitor, but it's a lot smaller. Mailchimp has a competitor. And then there's some pure plays that are private, I believe, called Acton and ActiveCampaign. Those are other two pure plays. So quite a few competitors out there. Ian, you want to hit management and ownership. Yep. The founder, as Ryan mentioned, is Rick Carlson. He remains the CEO and president today. He worked in internet security prior to Sharpspring. And so he had a lot of experience dealing with a SaaS business and trying to find marketing options for it, which is where this idea was born out of. And in addition to that,

probably understands the security piece of this pretty well too, and understanding where the market might be going relative to security and privacy. That's just a speculation on my part, but he's, he's been around this industry for a while. The CTO is also a founder and they also have a CFO who's been with the company since he was hired away from the accounting department of Purdue, which was his alma mater. The CFO was only about 30 years old. And so he, he, he's a pretty young. And like I said, he didn't have a whole lot of experience being like a CFO role before this. He was working as I think their head of accounting or their controller or something in that nature before being promoted to CFO. That's an area where we might see a new CFO come in at

some point if this starts to become a larger company and starts to approach that billion dollar market cap. That's speculation on my part again, but you just never know. A lot of times as these micro caps get bigger, I've seen it a number of times that they bring in a professional CFO who's been around for a while and jumped around to a lot of these different types of small cap companies. So something to just keep an eye out for and probably shouldn't be concerning if you see that happen. The company has, there's about 16% insider ownership, so healthy, healthy insider stake. And then there are a couple of related party transactions, mostly related to some convertible notes that were issued a couple of years ago that were issued to a company or that

were um held by a company that was owned by the ct by the founders by the cto and the ceo um it was about eight million dollars in convertible notes those have been converted at this point um and it doesn't look like they'll do that again i you know that's a little bit concerning not a huge deal i guess um but it's given it's almost like giving themselves stock based compensation that's a little it's a little bit of a backdoor way to do it yeah it might have It might also be attributed to the merger giving themselves some sort of ownership if the SMTP or whatever ended up having a whole lot. Yeah, it could have been connected to that as well. I guess that's, if you're interested in this company, something to investigate for sure.

Something to investigate a little bit. I took a little bit of a look at it and didn't see something huge. Also, the company was fairly small and they had presumably made some money from the merger a number of years ago. And so they may have wanted to get an injection of capital into the business, need that $8 million. And so thought, who better than us? We'd rather just do it ourselves. But anyways, that's just something to keep in mind. They also had, I think, like the CEO's brother-in-law or maybe it was the CTO.

One of their brothers-in-law worked for the company for a little while and made some money, but it didn't seem to be an unreasonable amount of money. It was, you know, $100,000 a year or something like that for a sales position. So it seemed reasonable. Yeah, we're not bringing him into the executive team right away. Right, exactly. And I don't think he still works for the company either. So, yeah, it's definitely not a huge red flag or anything like that. No, no, definitely, definitely not.

I'll hit valuation quick. Market cap from when I was referencing it is about $163 million. So, again, not even a small cap. This is definitely a micro cap. Ticker is SHSP. Enterprise value is going to be slightly lower. They have a little bit of cash. Tough to tell, you know, your valuation metrics might be a little bit different, but they're not really at a point where they're returning cash to shareholders.

They are still burning cash a little bit, pretty close to breakeven. Price to sales is about 5.4. Price to gross profit is about 7.2. So strong margins, as I'm sure Ryan will get into, been hovering right around breakeven. So cash flow and bottom line, you know, metrics or valuation metrics aren't really showing up yet. And if they do, they're not really an indicator of the long term profitability of the business. There's about 11 percent of embedded dilution in options and RSUs outstanding if they all get exercised. That is not going to happen right away. But if unless the stock tanks and it's way below those strike prices,

which I assume since the stock's been well over the last few years is a lot lower than where shares are currently, you know, that dilution is most likely going to happen over the next few years. So that's going to be a headwind, but not a crazy amount. We're not looking at like 30, 40% dilution here. Ryan, do you want to hit earnings? Yeah, they had just over $30 million in their last 12 month revenue. And their 2020 revenue grew at 24% year over year. I think it accelerated there in the first quarter, but they had 76% gross margins in the quarter. I think they're striving for between 81 to 83% over the long term. And they had $7 million in operating losses over the last 12 months, negative $3 million in

operating cash flow. They are spending a lot of money. And they've talked about this. They're trying to use this as sort of an investment period. And they've spent a lot on S&M. But they finished the first quarter with over 2,000 agency customers, 500 direct customers, and 10,000 total businesses across all platforms or across all products. Like I said, they have those three different products and some of them are sold independently. But then their 2021 guidance was expecting 34 to 36 million in revenue. And they started, as I mentioned, really ramping up that sales and marketing spending in January. Their long-term targets are to have a hundred million annual recurring revenue and 20 to 25% operating margins. They put that in their investor

presentation. Something else that I just kind of find funny about microcaps is that they like celebrate the most weird things they're like we we made an investor presentation guys like check it out yeah that's actually it was good though it's like 40 slides uh if you want an overview of the company i think they have an audio to go along with it if you want to listen to that although it's like it's about an hour long that's probably the best way to get introduced to this company uh besides this besides yeah it's just you overlook it uh with bigger companies you're like oh that's required but then with microcaps like we you know someone wrote a letter the ceo wrote a letter. It's not required. Like some companies just don't, I mean, Nelnet, Berkshire

is the most famous one. Just drop the 10Q, no press release, no nothing. If some other companies stopped doing that, they would be like, whoa, whoa, whoa, what's going on here, guys? Where's our adjusted earnings per share number? Ian, do you want to hit balance sheet and liquidity to wrap up the first half? Yep. The balance sheet has about $27 million in cash as of the most recent quarter, about $13 million in debt, which is mostly leases, about $10 million of that is leases. They've got about a $2 million, a $1.9 million line of credit with a 5% interest rate on it. So the interest rate for a micro cap was actually relatively good in my mind for a line of credit like that. And they have a little bit more, I think it can go up to $2.5

million. So if they needed a little bit more liquidity, they've got some availability there to increase their debt. And then they also took out a PPP loan, which again, talking about micro caps, they actually had a PPP loan. It's due for about $3 million in 2021. It looks like their PPP loan was not forgiven. And so they actually have to pay it back in 2021. And like I said, it's going to be about $3 million that it's due in 2021, but a net cash position, not a ton of debt, a little bit, but nothing, nothing crazy. And then the other thing I noticed on the balance sheet is they had some deferred revenue jump up a lot in 2019. And I couldn't find a good explanation for why that was at about three X in 2019, a little more than that. And they did

mention that they acquired some of it from perfect audience. And so perfect audience may have had more deferred revenue. They also could have, this is just my speculation, but they could have increased the amount of annual contracts in that year or change the way they were accounting for yeah um like i said i couldn't find a lot of good information on that and so that's worth doing a little bit of digging into but then that number has been more reasonable the last uh in 2020 basically stayed the same and it looked to be staying the same into 2021 and so if that number started to grow a lot you might be concerned that like an outpaced revenue growth you might be concerned that they were having to heavily incentivize people to sign up for their offering

that doesn't seem to be what's going on here but i thought uh worth pointing out and maybe worth looking into a little bit more. And then the last point I'll make is they raised about $14 million through an equity offering in December of 2020. So fairly recently, it was about 10% dilution approximately at $15 a share. And currently the stock is under $15 a share. It ran up a bunch in the intermediate or in the between times, but it's under $15 a share today. So it looks like a reasonable time to raise some money um and really strengthen the balance sheet and got them to that net cash position yeah it's interesting that they did this i think we were looking at corsair gaming uh that was with uen right where they did something like similarly very good you

know we said that the cfo is young kind of a first time role that's something to watch out for if a company's growing rapidly but so far that seems like a very smart move uh to do a share offering out there especially if they're still burning cash um all right well i think that's gonna do it for the first half let's take an ad break and then we'll get back cox panoramic wi-fi includes advanced security to help protect all your connected devices you'll get real-time alerts oh like this one so you don't have to worry about malware or when your kid downloads a song from a shady link and now all your computer can play is red color red color where are you all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must

be enabled in the panoramic wi-fi app restrictions apply all right welcome back next up we have product experience anecdotal evidence ian you have anything with this i mean it's b2b it's kind of tough so yeah no experience for me with this okay ryan anything i watched a like a 30 minute product demo um and it it feels kind of sales forcey i guess you could say it's something where it looks like it would take time to get acclimated to the software it's not like super intuitive there's a lot of different places that you have to like know where to go i could see marketing departments basically spending their entire day on this platform though yeah that's kind of what their pitch is right yeah basically okay yeah i mean i saw i was trying to scroll

through some reviews. Luckily, with a lot of these B2B software companies, there are good online reviews. And Gartner, I think it was like 600 reviews too. So it's likely that this wasn't something that, you know, a lot of companies kind of play the game where they may be juicing their own reviews. It's, you know, it's kind of just the game a lot of these companies play. But with all those reviews, it seems like, you know, they're legit. And sorry, I always forget this think sharp spring had the highest rating out of all the competitors by far just a quote on here uh someone said powerful and affordable hub spot alternative a lot of stuff with the same sentiment so it seems like they're stealing market share from hub spot and you know users love the product

so that's always a good sign something you'd have to more investigate though uh but i think that's great um yeah they did say they were stealing clients away from hubspot as well it i'm just resistant something feels weird about okay we have way less customers and we charge lower prices like i'm not sure that's well okay i think it comes back i think it comes back to the core architecture that the software that's that the um sharps ring is built on that's something they brag about where hubspot is built on apparently according to sharps ring yeah they're competitors that HubSpot is built on worse software, and that's something that is really hard for them to fix.

Sharpspring is younger, and it just has, you know, I don't know any of the technical terms. That stuff's a little over my head. Ian, have you seen anything on that too? It's kind of maybe something they were bragging about. Is that an advantage they might have or something? A little bit, and maybe I'll dive into my competitive advantage here. So I will say that they do try and make that comparison with HubSpot,

and they seem to see it as a favorable comparison in two ways that one they respect what HubSpot's done and they think wow we can really look at all this room we have to grow given what HubSpot's done we can go do the same thing if the market's big and it's untapped for the most part and then on the other hand they say and we're even better than HubSpot right because their tech isn't as good and then my competitive advantage I don't you know this is a competitive space and I don't really have a competitive advantage other one other than what you and Ryan are going to talk about. But given their size, I think it's fair to say that they're probably more nimble than something like HubSpot or Salesforce, that they're able to kind of pivot, implement new things,

test new things, test things out without it affecting their entire customer base. Negatively, like some stuff on HubSpot might. So if anything, they may be a little bit more nimble. I hesitate to say that's really a competitive advantage, but they're definitely trying to position themselves as the younger brother who's going to eventually overtake the older brother yeah that makes sense that makes sense um ryan what do you have for any of your competitive advantages yeah i don't think there's any huge competitive advantage um and sometimes that's just the nature of being a micro cap and being the younger company you don't have like that scale advantage or more capital or anything like that but i guess they are designed for

agencies um and they have special features apparently on their platform that are agency specific, but that's not necessarily an advantage. I just say it's a differentiator because I don't think it'd be that hard for HubSpot or Salesforce to build or acquire something that does something similar. But so I'm going to pivot to a segment that we considered since I don't really have anything good, which is what does success look like for this company? I would say success in this scenario is, and they have a huge addressable market, like they talked about, pivoting away from selling to resellers and having an intuitive platform that is sticky and they can sell right to the end customer. Yeah, there's a lot of moves they've been making. I guess I'm going to talk

about that highlights from low lights where they're trying to do that. Historically, it seems like there were some things they could do or that they hadn't been doing that would make it a lot easier integrations, pricing tiers, stuff like that. But yeah, that makes sense. What do you have? I just have the low cost provider part. Again, part of this comes back to the architecture that they're built on, but it also gives them advantage when they scale. Because if their pitch is to be the low cost provider and they can still have 20 to 25% operating margins, then when they're scaling, it's going to be tough to compete with them. Even if you're

someone like HubSpot it's a tough line to pull or it's it's a tough like you know you got to lean into like all right we're going to be the lowest cost as possible but we also want to generate profits I mean I don't know we'll see what happens with them um and if that pitch works out but that could be a competitive advantage but overall yeah with this micro cap they don't have a they don't really have a moat for sure about uh future growth opportunities yeah one thing that they've mentioned recently that they're working on is multi-tiered pricing and they see it as an opportunity to gain more market share by allowing customers to choose the features that they want and need rather than a one-size-fits-all solution and so it'll expand their market and the customers

that they can actually attract because basically every other competitor offers multi-tiered pricing so they're following the model of everyone else in the industry and i guess this is another one of those micro cap things i think where it looks to a lot of people from the outside looking in why don't you already have multi-tiered pricing? Everybody does it. Obviously it works. That's the way to go. But I assume just with a small team, they said, let's keep it simple. Let's have one price. Maybe they even convinced themselves that it was some sort of competitive

advantage that it's simple and all this type of stuff. But it looks like they're growing up a little bit and going to this multi-tiered pricing schedule. That's going to open up the market to them and be able to let them attract more customers. Yeah. The first, or I was checking out their pricing on the website. And I think it differs for, you know, agencies or if you're a large company or something like that. But I believe it was like three, four hundred bucks a month was their lowest, their only price right now.

So, I mean, for SMBs, it's really tough if you only have one or two paying that each month. Right. So basically for a small business, they have one option for what they can buy. And it just depends on how many users they have or how many contacts they have, basically. So the lowest option, if you have, I think, 100 contacts, maybe it was 1,000 contacts, is $400 a month. But then if you have 10,000 contacts, it goes up to, I think, $2,000 a month. And so it has scaled pricing depending on basically how much a company is going to use it, but no ability to change between what features they want and don't want so that they can lower or raise the price based on the features. It's only based on how much they're using it. So this will allow companies to pick and choose a little bit which features are most important to them and also hopefully get people in the system at a lower price and then be able to upsell them over time.

That makes sense. Yeah. Yeah. And I would this kind of leads into my future growth opportunity because I've been sort of a marketing intern, I guess you could say, at a medium sized business that was like reselling the hardware or Wi-Fi equipment. and I kind of had to live on these kind of softwares. And just having like a list of potential leads is not nearly as important as something that you've actually found interest from. And so when they acquired Perfect Audience in 2019, this is part of the thing that I like

and I hope they integrate it into their core offering and then maybe like a higher priced tier because this is for retargeting customers who were a confirmed lead. So it's not just like a random list of potential customers where you have to go out and cold call or give like a cold email campaign to. This is someone who's expressed interest

and it's like just an easy way to retarget them with an ad or an email or a follow-on sort of reach out. I think they could really easily embed this into their existing offering. Oh yeah, for sure. I mean, it's not like people probably can copy this too, but segmenting that, I mean, just a better value proposition for their clients yeah what do you have uh so they just got instagram

added as an integration for social media they were talking about that on the conference call it was apparently the number one most requested feature so i guess that's good also brings up though the downside of all these companies like sharp spring because google and facebook have total dominance of this industry and they really control who is getting access to what but Sharpspring is probably going to be fine. You know, it'll end up, it's not going to like, they're not going to kill Sharpspring. They don't care about Sharpspring,

but the control resides within, you know, these big tech companies. All right. Highlights and lowlights. Ian, what do you have for Sharpspring? For highlights, it starts with the revenue growth. I know I keep saying that, but a lot of these companies we're looking at that's just really exciting is the type of revenue growth they're able to generate. So Sharpspring has a five-year CAGR of 46%.

Will they continue to do that over the next five years? Probably not. That's aggressive, but they've definitely been growing revenue a lot in the past. I also like they have a lifetime value to customer acquisition cost of eight times. So basically, it costs them $1 to acquire a customer, and they get $8 out of them over the lifetime of that customer. And that actually improves, that ratio improves with the customers that stick around. They cite that there's a lot of customers that drop off, they call them low quality customers, basically, that drop off after the first couple of months that they tried out, and then they aren't actually interested in this service, and they immediately drop off.

And then it kind of, the level of customers kind of stabilizes, the retention stabilizes a little bit after that. Another highlight I will point out is that a competitor was purchased, and SharpString actually points this out themselves, that a competitor was purchased at 12 times sales by Adobe in 2018, which is a premium to what they're currently trading at. And I think the way that management's talking, it looks like they're probably looking for some sort of exit like that, where they can, you know, if they could get 12 times sales and exit the business after, you know, it looks like maybe they're targeting $100 million in revenue. And then hopefully selling out somewhere around 10 to 15 times revenues, which would be a significant premium from here if they could actually pull that off. And then HubSpot has shown a path to success in this route, going after those small businesses and being able to generate good revenue growth and a great business out of that. A couple of lowlights for me is just how competitive the market is with HubSpot. But as you mentioned, Ryan, earlier, Salesforce also has a competing product that they acquired. Adobe has a competing product that I just mentioned.

So there's a lot of competitors out there. And then it's also just a small company. And so there's all these risks that come up with it just being a small company. You never know. And I'd say there's some key man risk here, too, where if something happened to the CEO or the CEO decided, oh, I don't want to run this anymore. It definitely hurts the company. Yeah, that makes sense. That makes sense.

And with Salesforce, they have, they're in a ton of these, I don't even know if they're in agencies, but they're in a ton of companies, correct? I don't know much about CRM, but that could give them an easy selling advantage to just add this on. They're one, I forget what it's called. They're in like every company. Yeah. Bardox or something like that. Yeah, something like that. That could give them a really easy interrupt to just add this on as an extra feature.

And that is definitely a big risk with Sharpspring, but we'll see. If they continue growing revenue, that threat may not be as bad as people think. Ryan, what about you? What are your highlights and lowlights? I like Rick Carlson. I thought the letter that he wrote to shareholders was well-written. And I think they set realistic goals for themselves. It's not this whole, sometimes you see overly optimistic.

100 million connected fitness subs. Yeah, just go look at a SPAC offering and then this will look great. but uh i guess my low lights would yeah it's a bit of a crowded market there is potential i guess for acquisition but i don't like underwriting something with the hope of acquisition like if if it's been expressed by an acquirer that's interesting but if it's being expressed by the if they're like we want to sell like someone come by us that's not always a good look um and then also onboarding seems like it takes a while and i know the client pays the onboarding cost because I believe they collect onboarding revenue, which is fine.

That's not a cost to Sharpspring, but it makes it a little harder to sell. So I think maybe this is what HubSpot's advantage is, but whoever has the most intuitive solution I think is going to win the market. And just by looking at that product demo for 30 minutes, it's not super intuitive. Yeah, but counter to that, the reviews are a lot better. so customers definitely like it more yeah well i mean they have a lower price so i guess that usually helps it set lowers the bar for expectations potentially i'll check out the gardener reviews they have they they seem to really like the features on there um but what

are your highlights my highlights strong eating economics i mean that's an easy one gross margins are really strong at 20 to 25 percent operating margins seem really realistic for their long-term goals honestly could be higher but maybe they're going to have a lot of snm spend over time uh value proposition is very strong versus the competitors like ryan and ian have mentioned and then those core cohort financials have been improving over time that's a good sign a lot of times companies can kind of manipulate those charts to make it look good no matter what But it's definitely not bad. They're moving in the right direction.

And then, like I said, you can definitely see a path to 20% plus profit margins, which at this current – oh, I guess we're getting devaluation later. It really looks not that crazy. Lowlights, though, I think the partnership strategy they're doing is underwhelming. Yeah, you know, there are microcaps, and maybe they're still developing the partnership strategy. But I was expecting a lot more from this because a lot of people that are, say, going to use Sharpspring are going to be on, say, like Shopify. They're going to be on Google. I don't know. They're going to be doing stuff on that as well. I think like looking at someone like Avalara, who is basically saying we're going to be on every one of these places. we're going to have you plug and play this, and we're going to focus on this. Really specifically,

they seemed a little off on that because one of their things on their product website was making a landing page. But I don't really think that they have any sort of advantage with that compared to Shopify, WordPress, Squarespace, or Wix. So that kind of threw me off. I was like, all right, I don't know about this landing page thing, but I think that's just a small part. and then lastly um ian you mentioned this but the multi-tiered pricing thing they were bragging about that seemed like that was an obvious thing that they should have done years ago but i guess they've been succeeding uh despite of it things move slower on microcaps yeah i guess yeah lower the expectation on the speed of stuff yeah which i guess that plays into more or less

interested uh for me which is i'm gonna go less uh i know it seems like both you guys are relatively interested in the business but the valuation it's obviously not crazy compared when relative to competitors but it's a micro cap there's like small actions have big risks for the business like one person can really affect it um also it's trading at sort of aspirationally like they're hoping for a hundred million revenue long-term at 20% operating margins. That's eight times operating profit. Yeah. I guess that's cheap, but once again, that's aspirational. So it it's not like a screaming buy for me.

All right, Ian. I'd agree with that, Ryan. I don't think it's a screaming buy here. I'm looking at it though. And I am going to say I'm a, I'm more interested. it's it's a tough one for me because i think i'm having a hard time i don't have a ton of conviction and their execution ability to get to 100 million i think if they can get to 100 million that that in revenue that this is a big winner from here and i think the market will reward it for that um for getting to 100 million in revenue especially if they can get up to 15 20 operating margins but i just i need to do a little more digging and a little more thinking

and just kind of maybe maybe ask some people about the business too and competitors i just i'm i don't have a ton of conviction in them actually reaching that hundred million dollar in revenue number but it's i'm definitely more interested though yeah it's tough or go ahead ryan i would also maybe i'm just not used to b2b software but this felt like legacy software it felt not like the direction the world's heading oh can you elaborate i'm not really sure i understand it just the the dashboard itself wasn't super intuitive like long onboarding processes i think that's just businesses are starting to get away from that stuff it's something they want like an easy solution that they can embed right maybe i'm wrong you might be assuming they're i don't know

i think they're more going for functionality instead of looking like a pretty website since it's not really customer facing but i think that could be a concern you know if you're trying to go down to these businesses you know they want to plug and play thing you know maybe that's counterintuitive to what they're saying they're going to do you know you know i mean like all right if this isn't easy to do it takes a few days or months to get it going a business can't just sign up and start using it right does that make sense or am i or am i being confused yeah it's just and i think that goes go ahead ryan i was gonna say there's there's that quote that you brought up, you have to be 10 times better than the solution that's already provided. And having

lived on marketing solutions like this before with like that internship, it would, it takes so much for someone to up and switch that this, I don't think this solution is 10 times better than the competitors. It might be 10 times cheaper, but I don't know if it's 10 times better. Yeah. And then I guess, or go ahead. I was just going to say, I think that illustrates though, what they're going after is they are winning some customers from HubSpot, which I think proves that they're doing something right. But the reality is, is they're not trying to be 10 times better than HubSpot. They're trying to be 10 times better than no solution right now, because they're competing with a lot of small businesses or agencies that don't have a tool

like this yet. And so they're trying to now kind of attract all those people who have nothing, right, or just sending out emails or a newsletter or things like that, and are now getting a real tool to, to target and then retarget these customers. So I think it is potentially like it should, in theory, it's 10 times better than that, at least. Um, but what I was going to say is I think that this company is going to, um, obviously it's going to need to grow revenue and it's, it's trying to follow that model that HubSpot went after with, which is targeting these small businesses that really need this tool. And so, um, whether or not they can actually do that. We're yet to see, but I think they're moving in the right direction. And with the cohort

analysis that they give, we see that they drop, you know, they have a lot of customers that drop off immediately, which I think goes to what you're talking about, Ryan, that some of these customers get this product and they go, this isn't 10 times better. This is too confusing. There's a lot of onboarding. I don't want to deal with this and get off. But then after that, those customers that remain seem to be really high value customers and high quality customers for them. Yeah, it works in your favor after that. I think that does make sense with that curve that they bring on. What about you, more or less?

More interested. I think there is that. The low lights that you're pointing out, Ryan, makes sense about the embedded with Hubs out there. But I guess this would warrant more investigation. It seems like there is a ton of white space in this industry ahead. These are the models that companies are going to be using. I'm not in the industry. So it would take a little bit more research on my part, but definitely more interested, reasonable valuation.

I think there's a lot of chance here. I mean, you know, you might get a lot of share dilution, which would put a little bit of headwind on there. But, yeah, I think there's a lot to like about this company. It's called Run. Yeah, it seems like a good startup that hasn't been just kind of, you know, they've been almost profitable for a really long time. I guess it's been breakeven, you know. My thing is, if I'm going to endeavor into the micro-cap world, I have to feel super confident. That's more me, just my style, because it's more concentrated bets.

And I'm not super confident about this. Yeah, and then look at the valuation too. You might be like, oh, it's a SaaS company. It's trading at less than 10 times sales. That looks a lot more reasonable. But again, Ryan pointed this out earlier, micro-caps do have a lot more risk. Terminal risk. Yeah, like just that the business won't work out.

So you typically expect the valuations to be a little lower because companies that do have those higher valuations that are larger have ones that have proved themselves and have kind of established a moat. But what's our stock for next week? Okay, yeah, it's my choice here. So I'm going to pick Ubiquity Networks. Shout out to Simon Erickson. He said it on Twitter one time, and that's how I found it. Very interesting company. good capital allocation and they're within IT. So it'll be another tough one to understand,

but I think it'll be fun. So. All right. Sounds good. All right. That's going to do it for this episode. Thank you all for listening. Remember, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast. Again, thank you all for listening or watching. We'll see you next week.