Liquid Web CTO - Joe Oesterling

(Joel Beasley at 00:00:00) Hello, my friends. Today we are talking to Joe, the CTO at Liquid Web, and we discussed the advantages of bringing in a subject matter expert, when it makes sense to build versus buy, and we dive deep into the financials that all CTOs should know. All of this right here, right now on the Modern CTO Podcast. Here we go. This is the Modern CTO Podcast.

(Joel Beasley at 00:00:33) Hey, Joe.

(Joe at 00:00:35) Joel, nice to meet you. What's up, buddy? Living the dream.

(Joel Beasley at 00:00:40) Dude, me too, man. How are you?

(Joe at 00:00:42) Good. I'm in Atlanta, so hopefully we're not interrupted by some thunderstorms today.

(Joel Beasley at 00:00:49) Yeah, we're down in Florida. I saw some rain clouds our way.

(Joe at 00:00:52) Where are you at in Florida?

(Joel Beasley at 00:00:54) Like an hour south of Tampa.

(Joe at 00:00:56) Okay. Yeah, yeah.

(Joel Beasley at 00:00:58) I actually just got a message yesterday through our website. Somebody in Atlanta nominated me to come speak at some event. I was like, wow. Yeah, so I might be in Atlanta soon.

(Joe at 00:01:09) Yeah, let me know if you make it up here.

(Joel Beasley at 00:01:12) I saw that you guys, like, I was reading about what you do and what's the tagline? You're the most friendly people?

(Joe at 00:01:21) Humans in hosting.

(Joel Beasley at 00:01:23) I love it. Did you come up with that?

(Joe at 00:01:26) No, our talented marketing team came up with it. The history of Liquid Web was historically really playing off the fanatical support of Rackspace and created heroic support, but we felt like that was limiting to really what the magnitude of the impact that we have. And so the most helpful humans in hosting. We help you during the sales process, during the migration process, and always through support. So we love the broadening of that journey.

(Joel Beasley at 00:01:58) So how did you end up there?

(Joe at 00:02:01) So background for me, real quick. Computer science undergrad, great post CS degree at IBM, and then did an MBA at the University of Texas. Great post MBA degree. I like to say at Booz Allen Hamilton, which is one of the world's most talented management consulting firms. A couple of IT leadership positions in between, and then a 15-year run at a company called CBeyond, which the CEO of our current company was the CEO there. He and I and another woman who leads our Managed Application business unit built an organization up from zero revenue to about $500 million in revenue before going public and then ultimately selling it. CBeyond was one of the leaders at providing telecommunications services to small businesses, both voice and data, and ultimately mobile services. And then toward the end, cloud services like cloud PBX or traditional cloud server. So after selling the business, we were, you know, classic, what do you do next? And, you know, let's get the band back together and do something. And we looked at a number of opportunities and found Liquid Web, which was up for sale. The founder owner had been in the business about 15 years and was looking to exit and find his next career pursuit. And so we bought the business and used it as a platform for growing both organically and inorganically.

(Joel Beasley at 00:03:31) Oh, nice. So you were one of the buyers? Like, you got together with who?

(Joe at 00:03:37) So the CEO of CBeyond, Jim Geiger, myself, and a woman, Carrie Wheeler, all worked together at CBeyond. We partnered with a large private equity company called Madison Dearborn Partners in Chicago, and we bought Liquid Web in the middle of 2015. Time flies when you're having fun.

(Joel Beasley at 00:03:57) And what's your primary business at Liquid Web?

(Joe at 00:04:01) So we like to say, obviously, being the most helpful humans in hosting is our primary business. But specifically, we target what we'll call the web professional space, and I can define that in a second, with hosting and software solutions to really enable them to host websites, e-commerce stores, or applications that are making money on the web. And they differ a little bit from what I'll call the lower end of the market, which is typically dominated by GoDaddy or Wix or Weebly or brands that we've all heard of that really are chasing the consumer and what I'll call SMB brochureware business that are typically folks that are spending $10 a month on hosting. So that's kind of down market. We're in the middle market, and I'll come back a little bit on the middle market. And then the high end of the market is what we all know as what I'll call the born on the web companies that have huge consumption of hosting or the enterprise or mid-market that are typically spending tens of thousands, hundreds of thousands, or millions of dollars a month, as we're looking now at some of the financial S-1s of some of these companies that are going public. We're in the middle. Our customer tends to spend hundreds or thousands of dollars a month, which indicates to us that they're making money on the web. They tend to be organizations that have less than five employees and less than a million dollars in revenue. So really the small S of the SMB.

(Joe at 00:05:35) The key is every dollar that they tend to spend on technology is to design and develop that site, store, or application. And so when it comes to making that real on this thing we love to call the Internet, they really want to find a managed hosting provider, someone that will help them because I'm sure you know in the technology world, nothing's more frustrating than saying my site's hacked or it's slow or it's down, and the hoster's saying it's not my problem, it's the application problem. And the application person says, no, it's a hosting problem or it's a caching problem or dot, dot, dot, dot, dot. That's where what we found in our 20 years of really going after the SMB segment is where SMBs really value service the most. They obviously want a good product at a good price, but service is typically paramount in terms of creating strategic differentiation. And we'll talk about it as we go through this, but we've been trying to buy companies in the space. So we probably looked at over 100 different companies, probably more than that, probably 150 in the last four and a half years.

(Joel Beasley at 00:06:37) So when you're looking at these companies to try to buy them, is that something that you spend a lot of time doing, or do you have a team dedicated to that?

(Joe at 00:06:45) No, I spend about a third of my time actually on what we'll call corporate development. So looking for opportunities to add folks that'll either complement our managed hosting business, which we can define, our managed application hosting business, which we can define, and then we've recently started up what I'll call a software side of the business that, again, is trying to bring software solutions to these web professionals to make them more efficient and effective in the sites, stores, or applications that they're creating.

(Joel Beasley at 00:07:19) So I'm curious. I want to dive a little bit into the M&A stuff because I'm just a fan of that topic. So when you're looking for these other companies to buy, what is, for lack of a better term, what is your sales process look like? And I'll give you some examples. So we have a leadership company, and we've had some of the bigger leadership companies that are in the top 10 in the world reach out and say, hey, we might be interested in making an investment in you. We want to learn about your product and things like that. And I've been like, but I think it's a pipeline. I think what they're looking for is they know their segments in their business, and they're trying to see if a smaller company in the market could fit in to one of the areas where they don't serve their customers. Is that how you guys look at it?

(Joe at 00:08:09) Yes and no. So, you know, it's like everything in life, it's always more complicated than it would seem on the surface. So let's talk about M&A, and we can talk about it from a proactive perspective, and we can talk about it from a reactive perspective. And what I mean by proactive is us going and looking for targets and initiating conversations, right? Folks that we think fit with our business, and I can define fit. Or reactive, which is someone that's trying to shop a business, whether it's a broker or an investment bank that is saying, Joe and team at Liquid Web, you guys should look at this asset. So on the proactive side, actually, let's talk about what's common and then we'll talk about what's different. So what's common for us is we are, and I always encourage any company that's going to go into the M&A track to be very militant about your focus because there are more companies to buy and there's more companies that are for sale than hours you have in a day. So you have to be very focused around M&A about what is it you're trying to do.

(Joe at 00:09:15) And so for us, at a high level, we break that down into two different buckets. But there's common themes across those two buckets. So the common themes are we're militant that it has to be the same type of customer that we're serving today. So we'll call this web professional again that I defined earlier. So that's number one. Number two, our calling card is service, right? The most helpful humans in hosting. So we don't want to acquire a software asset or a hosting asset that has a terrible service reputation because that would not be aligned with our overall master strategy. So those two things kind of provide a North Star for us.

(Joe at 00:09:56) The two different types of acquisitions that we look at are what we'll call straight customer acquisitions, which is you have customers that are using the same hosting products or software products that we are providing to our customers. We'll acquire those customers onto our platform. We likely don't need your people. We don't need your systems. We don't need your technology. So that's a strict customer acquisition play, which is not uncommon in the service provider space, whether you're thinking telco or hosting or other managed services. And that's really a scale play, right? Just getting more scale so I have more revenue so I can spend more on marketing, more on development, and scale does matter in service related industries. The second type of acquisition is what we'll call capability. So you're targeting a similar customer to us, but you have a product that is different from our product. And we've done a number of both kinds of acquisitions. And so in that case, you have a service offering that is complementary to what we provide. It provides an awesome upsell cross-sell opportunity to our base or provides a, well, another tagline that we like to use a lot in addition to most helpful humans in hosting is that we have a product for every web professional project. And so for us, we're constantly, and as a CTO of the organization, I'm constantly looking at opportunities where we can be true to that in terms of what are other capabilities that we're seeing that web professionals need that we could acquire or develop internally that would provide that capability.

(Joel Beasley at 00:11:42) Yeah. So my background is product engineering. And while you're talking about this, it's like if you have a team that's already built a product for them to either port that product or rebuild it, it's so much faster the second time after you do something the first time. And so I used to think, like, oh, why would they buy that and then not use the technology, but they just have the team rebuild it on their platform? Then I realized, oh, okay, because, or why wouldn't they just do it internally, right? Why would they actually purchase that company to come build it inside of theirs? And then I realized, oh, it's because there's so much domain specific knowledge. You could just do it incredibly fast.

(Joe at 00:12:23) Yeah. The whole build, buy, or partner framework is the one that we use all the time in terms of is it faster for us to build it? Typically, it's always going to be cheaper to build it, right? But time to market and relevancy to market are key. And partner typically is a hard thing to do unless, you know, you just see a small fraction of your customers that are going to use it because the economics don't work, at least in the, especially in the SMB space. It's really hard, small business space. It's really hard to make the economics work if you've got to feed, if that revenue has got to feed two organizations. And so it typically becomes a build versus buy. And you look at buy and typically the number one criteria tends to be execution risk, right? I like to say with time and money, any technologist can accomplish anything. The question is, what's your appetite for risk? And so you might spend more. We've done it several times where we've spent more to reduce execution risk. But I will also say that the advantage you get when you do an acquisition is that you also get customers and revenue. Rarely have we done or considered, I'm sorry, we haven't done any, and we rarely considered any acquisitions that were so early stage that the viability, you know, eliminating that execution risk, was not possible because they were so early. Because then it becomes really, okay, if they're just getting started, then our execution risk in terms of go-to-market is a lot less.

(Joel Beasley at 00:14:04) Yeah. Like, I like how you defined your mindset. Your mindset of you could build anything with enough time because I've always, like, when people say, oh, a time machine is impossible. I'm like, well, is it? Do you have a few million dollars? Like, we can give this thing a shot. We can at least move the ball down the field, you know?

(Joe at 00:14:23) I agree. I agree. There's a lot of problems that with the right time and money are definitely achievable.

(Joel Beasley at 00:14:29) So what type of technologies are you really excited about working with?

(Joe at 00:14:35) Well, today in our space, I'll talk a little bit about what we're doing from a customer perspective, and then I'll talk about things that are kind of more behind the scenes. But from a customer perspective, and I know you're probably seeing this yourself, but simplification always dominates the landscape and especially the small business landscape. Everybody wants something easier, right? We went from command lines to Windows and the Mac, right, a graphical user interface. And it's surprising to me, you really have to go back about 10 years ago. And in the hosting world, folks were really using command line interfaces or what I'll call old school control panels to manage their servers and their hosting. And what happened about 10 years ago is the advent of what we'll call managed applications. We call managed applications, but predominantly, it started with managed WordPress where hosting companies were giving individuals a SaaS-based or really intuitive user interface to manage one or multiple WordPress implementations. And so you could build, launch, and manage a WordPress implementation with a user interface that my mom could understand, not a control panel that I put in front of my computer science son who's at Georgia Tech and is like, what is this? So it's something that's more intuitive and easier to use. And more importantly, it abstracts the data center. It abstracts the server. It abstracts a lot of that Internet infrastructure complexity. So as the end consumer, whether I'm in a small business or I'm what we'll call a web creator, a designer, developer, small digital agency that is helping create that site, store, or application for the business owner, it abstracts them from all of that technical detail and allows them to really focus on the site, store, or application.

(Joel Beasley at 00:16:31) Like, what technology specifically? Like, I don't know.

(Joe at 00:16:35) Good. Keep probing because sometimes I lose track and...

(Joel Beasley at 00:16:39) Like, I want to get nerdy here, man. Are you doing anything with R&D? Like, give me something. Give me something juicy. Like, what do you got? What's making you excited in the morning?

(Joe at 00:16:49) Yeah. So let me finish the customer, and then I promise to come back to the internal. So the customer stuff that really makes me excited is building this SaaS-based user interface that really takes hosting companies beyond just providing a good server and good storage and good bandwidth. But it really takes the hosting companies like Liquid Web, and we're using Nexus as the brand for all of our managed apps.

(Joe at 00:17:15) But take them to the next level, which is provide capabilities like image compression or, with this really cool capability we call Visual Compare, which in the WordPress, WooCommerce, and Magento space, there's a litany of third-party plugins or extensions. And we have a capability that takes a copy of your site, puts it down in the staging environment, applies that extension, looks, you know, does visual compare in an AI world, and then also looks at some logs and says, I'm 99.99% sure that this plugin update did not break your site. I'm going to go ahead and apply it to production. And if I do find something that's an issue, I'm going to halt that plugin update and send you an email and say, I couldn't automatically upgrade your site because I found an issue when I went to go apply this plugin. How would you like to proceed?

(Joel Beasley at 00:18:12) Okay. Now we're cooking. Yeah. Now you're excited to get it. Yeah.

(Joel Beasley at 00:18:17) Did you guys design that?

(Joe at 00:18:19) Yeah. We designed that with WordPress. We designed that for WordPress. We've, yeah. It's obviously extendable to WooCommerce since WooCommerce is really a plugin for WordPress.

(Joe at 00:18:28) And we've recently—are in the process—supporting that to our managed Magento customers. So really cool capability. We call it, you know, an upgrade-free or a painless upgrade process and automation, which really—what's really exciting to me, Joel—is it gets a hosting company into the value-added software and service space and not just a, what I'll call dumb compute, dumb network, dumb storage, but we're providing value-added services on top.

(Joel Beasley at 00:19:00) Yeah. Like, it takes kind of like the commodity space. Like, you know, how much am I paying for this bandwidth or service? And now it's like, oh, you've got what? You know, that sounds like it could eventually even be like a spin-off or something.

(Joel Beasley at 00:19:14) But so tell me, I want to know, like, how did this come up? Like, did an engineer come up to you and say, you know, like, hey, I had this idea? Like, how did this actually materialize within the organization?

(Joe at 00:19:24) Yeah. Great question. So I mentioned that the managed WordPress space started about ten years ago, and our journey started about three years ago. And so we hired one of the leading authorities in the industry, Chris Lema, on the in the WordPress space. And when we started to say, okay, you know—I think when I was hiring Chris about three years ago, Chris said, we're a little late to the WordPress space. And I said, okay, Chris. So, you know, put—you know, you're one of the smartest brains in this space. How are we going to differentiate? And this was one of the key features that Chris came up with. Since then, a number of companies have duplicated that process.

(Joe at 00:20:02) So we're working on our next rounds of innovation in that space, which are really going to focus around workflow management. You know, really, we take for granted in more mid-market enterprise the ease in which we build infrastructure to move from dev to test to production and then back down that stack. Right? And worry about how do we're going to do a database. I don't want to—I don't want to bring data down from production into dev and all of a sudden send a bunch of customers emails. So that whole dev workflow process, approval process, migrating code, content, data across different environments up and down the stack is a problem that we're going to tackle in the first half of this year.

(Joe at 00:20:26) I love that. And a similar one is what the industry calls application performance monitoring, but I'm going to call it more server and application monitoring for this discussion. Really, what's always been lacking in a hosting world is—traditionally, we'll tell you your server's down or your server's up, and we may tell you a few more things like you're running out of disk space or you're running hot on RAM or CPU, but that's really the extent of it. We believe in the managed application world, and we'll take it over to the managed hosting world too because it's still very relevant. We'd like to tell you which SQL queries are causing your website to be slow. We'd like to tell you, here's pages that you're serving that are getting that are getting 404 notifications. Basically, how can we as a host—we have this powerful set of data. How do we turn that data into information and give it to you proactively so we're highlighting issues for you rather than the normal—the normal process in hosting goes like this, which is I see an issue. I probably check a lot because I'm the application provider and I try to figure out if it's mine. I can't figure it out, then I call the host. And we're in reactive discovery mode all the time when production, you know, my end customer experience is failing. We want to be that—we like to—I like to call it we want to be Smokey Bear. We want to put out fires before they before they occur.

(Joe at 00:22:18) And I know I'm dating myself with that reference, but I'll do it anyway.

(Joel Beasley at 00:22:23) No. All right. So I want to back it up because, have you ever been to a No Fluff Just Stuff event? No. Okay.

(Joel Beasley at 00:22:31) I highly recommend them. They're like the anti-comp—it's like imagine a conference without vendors, and you pay for a ticket and you go. And instead of the sessions being 30-minute, like, PowerPoint presentations, they're 90-minute deep dives with, like, hands-on practitioners. Right? Wow.

(Joel Beasley at 00:22:49) They're—it's quite possibly the most amazing thing. I just went to my first one in December, like, two months ago and got to experience it. And I was just blown away. They have a tour. They're in, like, 20 different cities throughout the year.

(Joel Beasley at 00:23:02) They bring these, like, expert—Anyways, so definitely shout-out to them because I was standing in line getting food. Right? And I was having the conversation of exactly the problems you were talking about about taking data down from production because you've got all these hooks and you want to make sure that, like, emails don't get sent or cards, payment tokens don't get charged. There's, like, a million things to think about.

(Joel Beasley at 00:23:27) And, you know, I've been building applications forever, and and there's, like, each one's sort of unique and the problem progresses. And, so when you told me you were working on that, I was like, yes. Because, being able to push data through those workflows is is super, super cool. And so I like that you brought that up and that you guys are working on that.

(Joe at 00:23:46) Yes. What's amazing to me is, you know, WordPress powers one-third of the Internet websites. Right? And WooCommerce is, you know, its growth curve and adoption curve is almost on pace, if not slightly ahead of WordPress from an e-commerce perspective. And Magento is—even with all of the press and rightfully so for Shopify, Magento still has more installs.

(Joe at 00:24:11) Those technologies are fascinating open-source projects, but the one downfall of being community-sourced open-source projects is the things that we tend to think about that are typically more ingrained in commercial solutions isn't there. And so that's why hosting providers—it's an opportunity to step in and fill the void so that you can create that, you know, what we'll call environment management or environment workflow management system because an individual designer, developer, digital agency can't do that. So that's why we're excited about—we love to solve problems for thousands of customers rather than just tens of customers.

(Joel Beasley at 00:24:58) Yeah. I also want to highlight your Chris Lema move. Right? And the reason is is because I get a lot of people that reach out from the show and they're like—they really like it because they can they can listen to people like you and sort of adopt your mindset. Like, you can read a book and adopt the mindset of the author with their voice.

(Joel Beasley at 00:25:15) Right? You can extend it and—it's like a superpower as humans have, but we don't talk about it a lot. Like, we can emulate these other people's personality profiles just by listening to them. And your mindset, or—I'll back up and say one of the things I've been talking about lately is CTOs and their ability as executives to actually look in the marketplace, figure out what problems they're having or what areas their business is heavily dependent upon. And then finding a subject matter expert or some sort of, you know, name in the space and then hiring them. Essentially, like, hiring people that could mentor them in that subject or that could be the expert at their—and that's a move.

(Joel Beasley at 00:25:57) That's like an executive move. It's a thing you can do, and people actually reached out to me on LinkedIn. Like, well, I had no idea I could do that. They're like, I always read this guy's, you know, books on Ruby or books on this topic. I had no idea I could ever just, you know, look them up.

(Joel Beasley at 00:26:12) They're alive, and they're—they're often doing consulting, and you could give them an attractive enough offer to get them to come over to your company if it if it makes financial sense. So I want, like, I want you to, I guess, unpack that a little bit. When was the first time you realized you could do that? Or, yeah, what inspired you to do that?

(Joe at 00:26:31) It's a great question. You know, early in your career, especially folks, you seem like you have a similar profile to me. Right? The Type A personalities. Right?

(Joe at 00:26:39) You learn, hey, hard work begets success. Right? But then as you make that journey from individual contributor to manager and then from the manager to leader, you realize that you can't scale. Right? And, you know, I think there was a powerful point probably about 15 years ago when a leadership—I was kind of my first foray into senior leadership, and a leadership coach said, listen, Joe. Life will be easier if you hire smarter people than you to work for you. And it was really—that sounds so simple and it's a little bit contrite, but it truly is the case. Right? Which is if you can hire folks that really in that area are way smarter than you, then your ability to create more value in the organization really can focus more on the integration across organizations or—I'll say it a different way.

(Joe at 00:27:34) I'm able to spend a third of my time today, which I love to do, on M&A. I couldn't do that if I didn't have the folks working for me today that are effectively running the business. And I know this is a little bit aside, but four of my direct reports came through M&A. So the—yes, you can go hire people, but you can also go acquire some companies where you go, whoa.

(Joe at 00:27:57) That person is incredible. And really, you know, three of the four came to us because of the, you know, their technical superior depth when you looked at, you know, their impact, you know, not only in the part of the business that we acquired, but you said, oh my gosh, that can make a huge impact for us.

(Joel Beasley at 00:28:20) And and now—and thank you for sharing that. And now I want to talk about your monitoring that you mentioned. Right? I'm over here taking notes. All right?

(Joel Beasley at 00:28:27) Because you say so many good things. I'm like, I want to address them all. So—idea that was right through my head. So when you say, you know, this page load is slow, what—like, is there a button there that's like, fix this and they pay you to fix it? Or, like, what's the action that they can then take from that analytic?

(Joe at 00:28:48) Yeah. I think I think Gen 1, it's going to be turning the data into information. I think we're probably going to be a ways away, you know, and I say a ways away, it goes back to time and money. We'll be a ways away from the, what I'll call, auto, auto-correction. Right?

(Joe at 00:29:05) I mean, there's some things that you could correct, but there's some things that we can't correct. We're not in—you know, we don't have access to customers' code bases, so you can't go in there and start changing SQL queries. So I think a lot of what we'll do—I mean, things that enter in our domain, like, some of this, you know, what I called server and application monitoring, the servers we do control. So there's some things that we can look at and really distill more what's going on in the hardware side of it more even more comprehensively than we do today. Those, we will probably provide to a monitoring group, and they'll do manual correction.

(Joe at 00:29:45) But, really, that thing gives us a blueprint like anything else. Right? That's a business process that becomes a blueprint for I'm doing this activity over and over and over again. So why don't I create some artificial intelligence? I hate to overuse that word, but why don't I create some automation that does that?

(Joe at 00:30:04) I discover this, I do that. I discover this, I do that. And so I think really in the first half of the year for us, and frankly, I think it'll probably take us through the first three quarters of the year. I'll be really happy if we can be in the—we've taken this massive amount of data that we've collected. And this is—all this data collection we deployed in Q4 and we're doing it in Q1.

(Joe at 00:30:29) If in Q2 and Q3, we can take that mound of data collection and sift through it and turn it into information and provide it internally for the things that we can control and externally for the customers, I'll be extremely ecstatic. And then really in Q4 and and really into 2021, I think that can be the next game changer for us in terms of, you know, who would want to leave Liquid Web Managed WordPress in a world where we're making your upgrades painless? We are mining every bit of data and telling you what—you know, proactively dealing with all the infrastructure issues and then telling you where we see application or database performance issues. Why would anybody ever leave? Right?

(Joe at 00:31:13) I mean, we're painting a scenario where if you left, you would lose a lot of capabilities, especially if you—if the workflow capability is there. All of a sudden, we get these robust set of capabilities that you can't get somewhere else. It'll be a good time at Liquid Web and Nexess when we are able to bring those capabilities to market.

(Joel Beasley at 00:31:35) Yeah. I mean, I think about times that I left services, and, um, it's really like you either don't need it at all anymore because, Mhmm, you failed to run your business. It's gone. Or you switch because of some feature that you have to have, like, something that's critical because it's a lot of work to switch or because of a massive price decrease.

(Joel Beasley at 00:31:58) I think the prices have kind of, like, all leveled out pretty well. So it's—I think it's going to come down to, like—like, I wouldn't switch unless there was, yeah, like, a huge price difference. And even then, we're paying so—like, it's that's so not expensive that I don't know. Even if somebody was like, it's 90% cheaper, I'd be like, but the amount of time it would take me to move my stuff would—it would take me five years to recoup that cost if I value my time the way I do. Right?

(Joel Beasley at 00:32:28) Or some feature that you have to have. So as long as you keep up with those features and you keep them happy and you keep that service being the differentiator, then really, I guess, you would focus on the part of the market with, like, the people who are coming online, like, the new customers entering the market.

(Joe at 00:32:45) Correct. I mean, we use this in the hosting world. I know we use a lot in Liquid Web. We use this phrase called people make decisions typically in moments of pain. Right?

(Joe at 00:32:54) My site's down. My store's down. I'm hacked. You know, this last support experience, you know, sent me into the, you know, stratosphere, with dissatisfaction. So that's the pain side.

(Joe at 00:33:06) Right? The gain side, though, is really is really the the biggest secret in hosting that most people don't talk about. Liquid Web, no different than I would probably say 95% of other hosting companies. 50-plus percent of additional revenue comes from—in a monthly basis—comes from our existing customers. Why?

(Joe at 00:33:29) Because their workload expands. My site, store, application is getting more users. I need more infrastructure. Or I have another workload that I'm firing up, and why would I go somewhere else? And so for us, you know, when we think about product development, obviously, we're doing it to retain our customers and we want that next workload to be on a Liquid Web or a Nexess platform.

(Joe at 00:33:56) But we also do it because that may help us in the rare cases where folks aren't in pain today, but we can paint a picture of all these capabilities that you could gain. Right? So my poster child for that is if I'm in WordPress today and if I'm a digital agency and I'm managing a hundred sites, and if I have to spend every Monday going through the upgrade of all these plugins and themes, and I spend a full-time resource, you know, at least a half a day, maybe a day applying these patches and updates and remediating issues, and that all goes away with our visual compare, that's a huge gain of efficiency. That person could have been billable towards a client project versus being internally focused and just keeping things running. And so I think how we can paint that you gain by having additional capabilities that make your organization—when I say your, the small business or the web creator's organization—more efficient, more effective because they're spending less time managing environments, less time trying to go figure out why something isn't performing, why it isn't performing like they expected, which is our monitoring solution or the visual compare.

(Joe at 00:35:16) Those three examples, you could clearly paint a really positive, here's why you should switch even though you're not in pain, because here's how much you could gain.

(Joel Beasley at 00:35:27) I like it. Now is there any association between Liquid Web and liquid templates?

(Joe at 00:35:32) No. Not sure I know liquid templates. I'm gonna look that up.

(Joel Beasley at 00:35:35) Yeah. It's just like a variable replacement, like a popular—I think it's like a popular open source project. I, oh, you know what? Actually, I think Shopify might have invented that, like, liquid templating language. But, or they just adopted it. But I'm curious.

(Joel Beasley at 00:35:54) How do you see, like, a Shopify? Like, what do they sit on your radar in your ecosystem?

(Joe at 00:35:59) Yeah. Shopify, in our mind, is really going after that same customer, that customer that spends hundreds or thousands of dollars a month. I think their entry price point is $29, and they've got $2,500 or more plans. What's interesting about Shopify, they've had just tremendous growth, which validates in our minds the e-commerce opportunity in the small business world. Right?

(Joe at 00:36:22) We all know as consumers that more and more of retail spend in the United States is moving from brick and mortar into online, but it's really come down to the SMB space, and we're seeing a lot more adoption and a lot more small businesses that have stores online, whether those are physical stores that are doing delivery or digital stores that may have content to download or subscription services, for example. But Shopify has kind of validated that SMB e-commerce is here to stay. What a lot of folks like about Shopify is it brings that SaaS-based, really intuitive experience to start a store. But on the flip side, like a lot of closed platforms versus the open platforms of WooCommerce and Magento, you're linked, you're locked into certain ways that Shopify does business. And so if you don't like how they do payments or taxation or shipping, you know, you have a finite number, in some cases, one option, versus in the Magento space or the WooCommerce space, there's—I like to say there's a plugin for every business, functionality in the WordPress, WooCommerce, and Magento space.

(Joe at 00:37:48) So you can or you can write your own or have somebody write your own. So you have infinite flexibility around your business. And so we're excited that it's provided validation. It's really the number one reason why we bought Nexcess middle of last year, was really to kind of jump with both feet into the, you know, what I call burgeoning e-commerce business space serving the SMBs.

(Joel Beasley at 00:38:16) So when you find a company you wanna buy, do you already have, like, your VC? Do you guys plan with your VC or your, you don't have VC?

(Joe at 00:38:25) You have—

(Joel Beasley at 00:38:25) You have PE?

(Joe at 00:38:25) Private equity. Yeah.

(Joel Beasley at 00:38:26) Do you plan with your PE? Like, okay, we have a market potential of this many dollars in acquisition, and then you go tap that money when you need it? Or, like, how do you orchestrate the relationship between, alright, I found this company, I wanna buy them, and now I've gotta get the money to do it?

(Joe at 00:38:46) Yeah. Great question. So we tend to create an M&A strategy, right, which we talked about before, which is we want folks that are targeting the same business with services as their calling card. And then that really kind of aligns us and our investors, Madison Dearborn Partners, which are phenomenal partners. We then go and find opportunities, then we bring it back. Right? And it's no different than any other business case, which is we wanna buy this company. Here's the customers they serve. Here's the products they provide. Here's the team behind it, if it's a capability hire. Here's their revenue, here's their profitability, here's what we think is going to happen post-acquisition in terms of revenue and profitability trajectory. And then here's why we think we should buy them, and here's what ultimately we think that acquisition will have on the value creation that we're trying to create from Liquid Web. And so I know value creation is used a lot in buzzword bingo, but let's make it real for a second. So Liquid Web, when we bought the company, was a little over $60 million in revenue on an annual basis.

(Joe at 00:40:01) In 2000—what is it? 2020. Jeez. I'm still having a hard time—February 2—

(Joel Beasley at 00:40:07) Me too.

(Joe at 00:40:08) 2020, you know, our revenues will be a little over $140 million. So our profitability has increased from kind of the mid-twenties to the low-thirties percent from an earnings before interest, tax, depreciation, and amortization. Sometimes people call it EBITDA. Sometimes people call it operating income. You know, I'm not an accountant—

(Joel Beasley at 00:40:30) Yeah.

(Joe at 00:40:32) Yeah. No. Net cash flow is different because net cash flow factors in capital expenditures. So when you go buy a server, you go buy an HVAC unit or a generator for a data center, you buy that asset and then you depreciate it over a number of years of the useful life. And so those numbers are—that's the D in EBITDA. Right? Earnings before interest, tax, depreciation, and amortization. So that is below the line, and then net income is below that. So think revenue, gross margin, call it EBITDA, and then net income.

(Joel Beasley at 00:41:12) And then you have the accounting world, and they all have their different—

(Joe at 00:41:15) Yes. And then you have are you GAAP accounting? Are you cash accounting? Are you accrual accounting? Yeah. There's a lot of—I've learned a lot about, you know, I have an MBA in training, but acquisitions have really amped up my understanding of the financial world, which is fascinating for me to really understand. You know, I was talking to a potential acquisition candidate who said, "Oh, no. No. We're doing accrual accounting." I said, "Well, I don't wanna say that I'm an accountant, but that's not true." And let me walk you through a simple example as to why that's not true, because when you sell a twelve-month subscription, you're amortizing it. I'm sorry. You're taking all that revenue in the current month. And if you were accruing that revenue, it should be one-twelfth of that revenue in the next twelve periods.

(Joel Beasley at 00:42:01) Now I have a question for you. Is there a difference—in my mind, GAAP and accrual are the same. Is there a difference between them or no?

(Joe at 00:42:07) No. No. GAAP and accrual are—

(Joel Beasley at 00:42:08) the same.

(Joe at 00:42:09) Largely the same. Think of GAAP as added accounting principles by the accounting firms to—you know, they're much broader than cash or accrual accounting.

(Joel Beasley at 00:42:23) Because I keep—we, our books are kept in, like, GAAP or, like—

(Joe at 00:42:27) You're calling it GAAP.

(Joel Beasley at 00:42:28) It's accrual. Right? Because we do the revenue, right? So I have—whenever I'm raising money, I'm out there, and it's amazing how I'll explain to these people who I'm raising money from how I keep my numbers. I keep a separate or, like, in the spreadsheet, I keep my cash flow accounting.

(Joe at 00:42:42) Yes.

(Joel Beasley at 00:42:42) Like, I'll—and that's separate from my GAAP or accrual accounting because I need to actually run the business. Correct. It's great that I said I recognized this much money in revenue this month. That has nothing to do with the cash that's in my account.

(Joe at 00:42:55) Absolutely. And by the way, kudos to you because I would say of the businesses that we've looked at, 98% live in a cash accounting world, but any acquirer of you or the like—like us that is what I'll call professional money-backed, right, which is either a public company, a VC-backed company, or a private equity company—they're going to do all of their accounting and insist all the accounting be done in accrual-based. And so one of the things that tends to be a big impediment during the diligence process is converting everything from cash to accrual, which for a service business and a recurring revenue business is not easy to do.

(Joel Beasley at 00:43:37) I know. Shout out to Will, my CFO. Yeah. Because—

(Joe at 00:43:41) You're in great hands, it sounds like.

(Joel Beasley at 00:43:43) Yeah. He's taught me just an incredible amount, and I'm always showing the investors. They'll say, like, I think we're doing, like, you know, $30,000 a month right now in recognized revenue. But then I show them, like, our deferred revenue schedule of, like, $400,000. And I'm like, because we made a bunch of sales. We figured out what we are doing, and we have a six-month sales cycle. We figured out what we were doing, and now it was just going to take a long time for that to catch up on our recognized revenue. So it makes valuations and conversations pretty interesting.

(Joe at 00:44:14) No. But in the time when it's right for you to sell, the buyers will love you and your accountant because you're an easier entity to do business with.

(Joel Beasley at 00:44:26) Yeah. And it doesn't scare them. I found out that, like, if you do show them, like, sales, they're scared. "Oh, no. Why did you get $70,000 in sales this quarter and you only did $20?" And it's like, calm down, because we're a startup.

(Joe at 00:44:41) Yes. Everyone loves recurring revenue. And if you can't be a hundred percent recurring in nature, accrual accounting converts it into—

(Joel Beasley at 00:44:53) you—

(Joe at 00:44:53) know, flat revenue. Right? And so everyone loves to buy a business that is stable and ideally up into the right. Right? And so if you can show that business, it's harder to do in a cash world, right, where you have lumpiness of sales that you're making. So that's why accrual-based businesses—avoiding all the accounting, the accrual-based way from a revenue perspective creates more predictability and just eliminates a whole bunch of drama during the acquisition process.

(Joel Beasley at 00:45:25) So, other than just doing it, which is how I learned. Right? Did you ever find any resources useful? Did you learn from any sites or anything when you—like, let's say we have CTOs listening or VPs of engineering, and they're like, I wanna learn how to read a P&L, or I wanna kinda learn what these guys are talking about with this accounting. Do you have any resources to recommend by chance?

(Joe at 00:45:45) Yeah. The number one I would recommend, especially if you're a CTO, that title by itself tends to kind of imply you're part of a bigger organization. And so I would, you know, you can definitely get your hands on some good accounting, you know, general textbooks. But I'm telling you, the most valuable resource is the accounting and finance resources that you already have a relationship with. Right? And so typically, you know, a lot of technology folks tend to see the CFO or the controller or the finance folks—I don't call them the enemy because they're trying to manage cost, but, you know, it tends to be an adversarial relationship. But if you can turn that into one where you're learning from them—and to me, I think most people that are in technology, especially in the leadership position, are in this constant learning mode. So if you, you know, I like to say, hey, there's no dumb questions, and I ask a lot of them, so I'm glad there's not. I think it's this mentality of I wanna learn. Right? It's really interesting, you know, in the technology world, like half the time, I, you know, I have no problem. Like, when you said liquid templates, I—

(Joel Beasley at 00:46:54) I don't know what that means. I'm not gonna try to—Yeah. Think my way—

(Joe at 00:46:56) through it. But a lot of people will do that outside of the technology world. They'll go, okay—

(Joel Beasley at 00:46:59) you know, you're saying EBITDA.

(Joe at 00:46:59) I don't really know what that means, but I'm gonna shake my head. If you don't understand something, ask because you'll find that it's easily understandable. And the beauty with accounting and finance is it's at the end of the day, it's just numbers, which, by the way, anybody that's typically strong in technology is strong in math. And so you tend to go, "Oh, I can get it. Walk me through a math example." Right? And so to me, my number one advice is tap into the resources that you already have. Right? If your company has got a controller or they've got a finance person or they've got an external accountant, tap into those folks and they're better prepared to tell you how to learn their craft than I am. And then don't be shy. Ask questions because you're gonna get exposed—in the last four and a half years here, I've gotten exposed to a lot on the financial and the accounting side that were brand new to me. And this mantra of there's no dumb questions and I wanna learn everything there is to learn has helped me, you know, helped me become really even better at my job because I've been able to spot, okay, that's gonna be a problem. I'm telling you right now, I can tell before I even bring in my finance and accounting folks, this is gonna be a problem. And so it just makes you even more efficient and effective at your job. And frankly, as you know, and being an SMB owner, your level of knowledge of a business is dramatically increased when you understand how cash is coming in and how cash is going out.

(Joel Beasley at 00:48:33) It makes you, makes you, as a technologist, it makes you enjoy sales.

(Joe at 00:48:38) Yes. Yes. Yes.

(Joel Beasley at 00:48:40) Oh, man. This is by far my favorite conversation on accounting and, like, numbers. And—

(Joe at 00:48:46) you—

(Joel Beasley at 00:48:46) know, and here's the thing too. When, like, the things that aren't talked about a lot, they need to be talked about a little bit more, especially when I'm getting questions about them and I don't have good resources. Now I have a—now I have an episode. Whenever somebody's like, "Hey. I wanna learn more about, you know, accounting," before I'm like, "I don't know. I'll ask people on a future show." And you should get, like, a sound bite or something, but you're incredibly knowledgeable. And so now I'm gonna point to this episode.

(Joe at 00:49:11) Great. Glad I can help. My, our CFO, Terry Flood, would be very proud of my limited abilities.

(Joel Beasley at 00:49:18) No. He'd be very proud of your growth because he's seen your growth. Yeah.

(Joe at 00:49:22) I agree. He and a couple of guys on the team have been very helpful in that.

(Joel Beasley at 00:49:28) Oh, man. I love—I wanna be respectful of your time. Thank you so much for coming on and hanging out. And we—first, a couple of things. I'm going to let you know when I'm in Atlanta, whatever the company that reached out to me the other day, when I'm going and speaking there. Secondly, do you know Bryson of Equifax? Yeah. Bryson Koehler. Yeah. Yeah.

(Joel Beasley at 00:49:47) Yeah. Okay. Because I was gonna introduce you if you didn't, if you didn't—

(Joe at 00:49:50) like, have him met him. Okay. Yep. Because—

(Joel Beasley at 00:49:50) yeah. You kinda reminded me of him, and I really enjoyed him.

(Joel Beasley at 00:49:54) And I was like, yeah, if you guys don't know each other, you should.

(Joe at 00:49:57) Yeah, he's a great guy. The Atlanta CIO, CTO space—even though, you know, we didn't get into it in this call, but we bought a business since in Michigan, so I'm on the road three weeks out of the month. But fifteen years that I lived in Atlanta with this business, the Atlanta CIO network has the best, in my opinion, the best CIO network. So if you want to get tapped into that, I know the guy. There's an organization called Georgia CIO Leadership Association that gets together on a quarterly basis, the top 50 CIOs, CTOs in Atlanta.

(Joel Beasley at 00:50:33) Oh yeah, that'd be great. Yeah, I did 60 cities last year out doing talks with CTO groups, CIO groups.

(Joel Beasley at 00:50:40) That'd be a cool one, and especially if you attend because that'd be a good—I'll reach out to them, or you can connect us with that person and Chloe, and then I'll submit my talk as a fifteen, twenty minute talk, maybe give it one of the meetings.

(Joe at 00:50:54) Yeah, that'd be awesome.

(Joel Beasley at 00:50:55) Yeah. This is great. I really enjoyed hanging out with you, Joe. Thank you so much.

(Joe at 00:50:59) Yeah, Joe, I really appreciate it. Great conversation. Thank you.

(Joel Beasley at 00:51:02) Talk soon, buddy.

(Joe at 00:51:03) Alright, bye.

(Joel Beasley at 00:51:04) Bye.