The Rule of 10 as a North Star Metric
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The Rule of 10 is an interesting “rule of thumb” metric created by Will Thorndike and his team at Housatonic Partners. If you are not familiar, Thorndike is the author of The Outsiders and has had an impressive career in private equity.
Here’s how he measures ‘The Rule of 10’:
Thorndike’s take on the power of low customer churn:
It really comes down to predicatable growth in real cash flow. Really great businesses are charectertized by predictable growth and free cash flow. If I look back on the best investments I was involved with, the predictability comes from that dynamic the tightness of the customer relationship, and the stickiness around retention rates.
Our guiding principles; the pursuit of free cash flow:
If there’s one thing we love, it’s free cash flow. In this high inflationary environment, there’s no better asset to own than a cash-flowing software or tech-enabled business. Businesses that have low ongoing capex and pricing power are well-positioned to perform well in an inflationary environment. Combine that with high margins and a high level of free cash flow, and you have a defensible asset in the event of a market downturn.
Churn is one of the first things we assess in a business at Atlasview Equity. High churn is a common deal killer for us. Luckily for us, the hunting grounds we play in (vertical software) contain many businesses with low churn. The last business we acquired had annual gross churn rates of less than 2%. They have customers on recurring billing going back 2+ decades!
The rule of 10 is an interesting concept, as it ties business quality (churn) with entry price (multiple). It’s a great metric to help you filter for high-quality business but still maintain discipline on the acquisition price. We’ve inherently used the “rule of 10” concept at Atlasview without officially measuring it. Low churn + reasonable EBITDA multiple.
We look for the following characteristics in our partner companies:
Industry: Software and tech-enabled businesses
Business Profile: Sticky B2B customer base
Size: Minimum $1m EBITDA or $5m ARR
Geography: The US & Canada preferred
Whether you’re a business owner interested in working with us, or an intermediary with a deal to share, always feel free to reach out and get in touch with us!
Even if your company doesn't meet this criterion, reach out anyways. We have a large network of buyers and will find a good fit for you.
Jay Vasantharajah sat down with Tony Hill of Trivest Partners, as part of a Q&A for their Independently Sponsored series. The interview covers Atlasview’s origin story, our firm’s value prop/thesis, and where we are seeing opportunities today.
Q: Any notable differentiators for the firm?
We are sector specialists. Our niche focus gives us both a knowledge edge and an operational edge. We know exactly what to look for in a quality software/technology business and how to add value, giving us conviction in driving returns for investors. It also enables us to move quickly and identify key risks efficiently.
We are a founder-first investment firm. We take great care of customers & employees and strive to be great stewards of the founder’s legacy. We set up the team with the right tools and resources required to maximize the business to its full potential.
We believe in transparency. We don’t just say that, we show it by openly sharing our playbook, our learnings and experiences via our weekly newsletter, Atlasview Insights. This way founders/business owners know exactly what to expect if they decide to work with us.
We choose quality over quantity. We know exactly what types of businesses we want to own and can add value to. This is evidenced by our 100% close ratio on all our signed LOIs. We stand behind our offers and plan to manage only a small concentrated portfolio of companies. This allows us to spend more time building each company and setting them up for success.
You can give the full interview a read: here
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Atlasview Equity is a private equity firm specializing in software and tech-enabled businesses. We combine patient capital with proven operational strategies to deliver predictable results for our stakeholders.
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