When Paolo DiVincenzo and Tim DeBone came together to form Raleigh’s Basis State, DiVincenzo knew there were many good SaaS startups out there, but not all of them were at a scale that would attract venture capital investment. Basis State helps these SaaS companies still find a way to thrive.
DiVincenzo has worked with Internet-related startups since the late 1990s. He said he was sucked up into the Internet startup world, loved it, and decided to never leave. The first company he founded, Exactly LLC, looked for ecommerce startups that had become unprofitable, acquired them and made them profitable again on a common platform. This experience guided him to join forces with DeBone, who has experience in SaaS company finance, to launch Basis State eight months ago.
“I got a lot of experience making unprofitable companies profitable and managed them for their cash flows, so that’s really where the idea came about,” said DiVincenzo, who started working with SaaS companies six years ago. “A lot of the same tenets held. So while some of these companies weren’t necessarily on a high-growth venture track, oftentimes they had decent underlying financials and I could get them profitable and usually find them a strategic buyer once they were on solid financial footing.”
Basis State, which has onboarded two companies in the adtech and edtech spaces, found its name while DiVincenzo was in a meeting.
“I was describing the idea for the business and this was even before it was a business, and I said one of the strategies is to get the company to its ‘basis state,’” DiVincenzo said. “That was a reference for just basically getting it to its elemental value proposition, and so it’s stripping away anything that’s detracted from that.”
One startup under Basis State’s guidance creates and manages IEPs (individualized education plans) while the other is a reporting tool for web publishers and intermediaries to harmonize reporting between major ad exchanges. Still looking for one more startup to join Basis’s State’s operation and management this year, DiVincenzo said they look for SaaS models with some revenue that are not growing at a rate that would merit re-investment from investors that also have technology assets.
“We simply take over management, and then our immediate objective is to get them profitable,” DiVincenzo said. “Then with everything we take on, the longer-term goal is always to sell it, most likely to a strategic acquirer, another company that’s interested in the asset.”
Buying The Concept, Not The Company
The ownership of the companies Basis State serves stays with the current owners, DiVincenzo said. Currently completely self-funded, DiVincenzo and DeBone spent time designing the way Basis State works under the premise that if you’re dealing with sub-scale smaller assets, you can’t invest in every transaction.
“You can’t invest a ton of effort, time, resources, and money into negotiating custom deals, into creating unique legal paperwork every single time,” DiVincenzo said. “So Tim and I have really been spending a lot of time designing an approach that we think can scale, so that we can take on these smaller assets in larger numbers without a ton of friction.”
The fee for Basis State is completely performance-based, taking a percentage of the revenue and the eventual outcome (likely an acquisition). DiVincenzo hopes to prove the Basis State concept of preserving value for these SaaS startups, mainly with businesses in the Triangle before moving more regional in 2020.
“One thing that’s really bothered me over the course of the past several years in kind of seeing the VC model converge around this ‘go big or go home’ approach is that you have a lot of value being destroyed in smaller companies,” DiVincenzo said. “They have an interesting product that has some revenue, and that simply gets wound down to zero. We’re trying to preserve some of that value and make sure it ends up in the right hands.”