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July 30, 2024

Acquiring pool cleaning companies

Inside Splash

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Inside Splash: Acquiring pool cleaning companies

In this episode, we dive into the billion dollar pool market.

Today, we’re excited to have Jeremy Yamaguchi, founder of Splash, a new venture that buys and operates pool service companies.

Jeremy’s journey started with building a marketing agency, followed by founding two home services companies, Golden Shine and Lawn Love. Now, his mission is to build the first national brand in pool cleaning.

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Show notes

Timestamp

00:00 Introduction

00:59 Jeremy’s background

03:00 Challenges of scaling

07:56 Upgrading the pool cleaning industry

15:10 VC strategies and profitability

18:27 The next steps

resources

Links

Jeremy Yamaguchi’s LinkedIn and Twitter

Splash LinkedIn

Show notes

Transcript

[00:00:00] Jeremy: Why pools? The short answer is because it is one of the last verticals in home services that's of venture scale. It's 10 billion a year. 7 billion of that is weekly recurring revenue. It's non cyclical. It goes through every macro environment. And it is yet to be eaten by private equity, mostly because there's no scaled assets to go by.

[00:00:17] Kaz: Welcome to Zypsy Spotlight. I'm Kaz, co founder of Zypsy, a design and investment firm that supports startup founders with brand building expertise.

[00:00:25] Kevin: In this episode, we dive into the billion dollar pool market. Today, we're excited to have Jeremy Yamaguchi, founder of Splash, a new venture that buys and operates pool service companies.

Jeremy's journey started with building a marketing agency, followed by founding two home service companies, Golden Shine and Lawn Love. Now, his mission is to build the first national brand in pool cleaning.

Let's deep dive in. We're your cohosts, I'm Kevin.

From building his first company at 16 to scaling home services companies, we'll discuss Jeremy's journey and share how he seizes business opportunities.

[00:00:59] Jeremy: Was born and raised overseas, Japan, Southeast Asia, East Africa, and immigrated to the U. S. as a late teen. Landed in San Diego. Immediately started building my first company and I've been building, scaling and exiting firms for functionally my entire adult life ever since.

Was always entrepreneurial as a kid. Did a lot of ill fated and briefly pursued entrepreneurial enterprises and efforts as a early to mid teen. But the first kind of real company I started at 16 began building websites for friends and family, and then scaled that into a kind of web dev and ultimately growth marketing agency that I grew across Southern California for years.

And that was going well, I was certainly at the age of, 18, 19 and making far more money than I ever anticipated. But I ultimately realized I was limited by the number of hours I had in a given day, right? Like I was bounded by, how much I could build per hour. And there's an upper limit to that.

So I was always looking for something that had a little more scale to it than a pure consulting style model and found that opportunity in 2009. I went to go book a housekeeper and realized that this entire home service vertical, specifically housecleaning, but really all home service categories for the most part where at the time, very offline, very low tech, your only existing options were, Molly maids or Mary maids on the large franchise side.

Or Craigslist or Yelp and calling a bunch of random people and, super variable quality on, that side of the equation. And even the big players, no one was really using much in the way of software to run their businesses. So I realized there was an opportunity to go build what was essentially a vertical marketplace in house cleaning.

And, started that in 09, ran it for about three and a half years, bootstrapped it across Southern California, sold it to a private equity fund in my. Early twenties, took a week off, started law and love. And I've been running that for eight years ever since. Didn't set out to be a home services guy, but it's now almost 15 years of building at the intersection of home services and software and have spent a whole lot of time developing a very acute set of skills to bring to bear on this sort of opportunity.

[00:03:00] Kevin: Next Jeremy talks about the key challenges of scaling Lawn Love and how those insights guide his current role at Splash.

[00:03:06] Jeremy: Lawn love was a, what we would call a managed marketplace model. Essentially it wasn't like a thumbtack or a Yelp where it was purely Jen and we just, through the customers over the fence to the service providers and, hope for the best. We owned the entire experience end to end.

So we plotted out the property. We had a army of folks overseas. If you're fill out a quote on long love. com in the two minutes it takes to complete that process. We'll measure the front yard, side yard, backyard, root perimeter, driveway length, create a full structured blueprint of your property, and can give you a quote for service sight unseen that's as accurate as if we were physically standing in the front of your house.

And then from there, we book the job. We pair you with a pro behind the scenes. We manage the completion and delivery of that service end to end. If there's a problem and a promo is over your sprinkler head, you call us, we pay for it. We, Collect payment at the end, ultimately disperse payment to the pro.

And it was very much like a, in the weeds, manage this thing, soup to nuts model. But it was a marketplace and you're right that one of the clear kind of differentiators between the splash model and the lawn love model. Is that in splash, we are buying W2 style pool cleaning companies and operating them through a W2 approach.

And that's for a couple reasons, right? The first is one of the things that I learned at lawn love. And this was true for our business, but I think it's true for most labor marketplaces broadly is that you have an adverse selection of problem on the supply side with these sort of talent marketplaces.

And what I mean by that is, if you're an amazing lawn guy, you probably already have a packed calendar, right? Like you're saturated, you have more jobs than you know what to do with you you're generally pretty packed. So if you're coming to a Lawn Love and you're giving us 20, 30 percent of every dollar you generate.

Because you can't retain your customers. There's a reason for that, right? There's a reason you have some retention issues. So the game ends up being, either try to find pros who are minting into the industry, who are really talented, or maybe just moved and are like starting up a new book of business.

We had plenty of those on the platform. They were wonderful. And try to saturate their calendars as quickly as possible so that we can get as much work from these folks as we can, or try to take this sometimes variable pro with on and off quality issues and use software to smooth out the rough edges, help them evolve into a more consistent, version of themselves and use that to, to build a better experience.

But that only takes you so far, right? What we learned is all the incredible UI and like delightful interface and kind of slick product in the world ultimately doesn't matter that much. If you walk out your front door and your lawn's hacked up, right? So it's like quality in quality out provider quality is ultimately all that matters.

And that's a pretty durable challenge in these sort of labor marketplaces. It's a bit of a, they're like orthogonal properties, right? Like, how do you maintain quality while scaling hyper fast across hundreds of geographies is a deep enduring challenge that we, we wrangled with, but so that's 1 of the advantages of the marketplace model or that you get to scale super fast.

You have no capex. We had no physical boots on the ground and name these geos. They were ultimately all 1099 contractors. You get kind of labor or attacks are there. But the downside is that it's very hard to maintain quality because you can't legally control the manner in which they deliver the work, right?

That's a labor law violation. So you're working with a base of independent contractors. So you're not allowed to train and you're not allowed to control the delivery of their products or services. And so it is very much like flying with the wind. Your hands behind your back over like operating, without it, without an arm or two.

And so churn was high, like we had to replace our customer base pretty frequently because churn was just inherently high in that model, which meant we had to be very good at growth marketing to get to the scale that we did. And we were, but, conversely, if you do this in a W2 model, you can you can manage every element of the delivery of the service.

You can train to your heart's content. You have way less risk, in terms of poaching or disintermediation. There's just a lot to love about it. So plus like really the beauty of an M& A style approach is that you can grow across two attack factors, right? You're not just limited to SEO, SEM as a demand gen channel.

You can grow organically or inorganically to, to your heart's content. And unlike just a pure PE play where the entire kind of model is inorganic growth. We're not a one trick pony, right? Like we don't only know how to grow by acquisition. We can not grow by acquisition for years and still build an incredible business.

We organically grew lawn, love an average of 18 percent a month over month for 60 straight months in the face of a extremely high churn underlying business. Organic growth is second nature to us. We can do this all day long, but it's wonderful to have both levers to pull, both organic and inorganic as we need to.

[00:07:56] Kevin: Coming up, Jeremy believes the pool cleaning industry is ready for a tech upgrade and goes into his vision behind Splash

[00:08:02] Jeremy: Splash is essentially a tech enabled rollup in pool cleaning, right? Essentially the plan is let's go buy hundreds of small mama pop sized pool cleaning companies with, loving customer bases and durable operating histories and incredible leaders in them. Let's help improve these businesses over time and apply more software and build custom tech into them to allow us to operate more efficiently and build a competitive moat through building bespoke tools that solve for our specific idiosyncratic challenges.

And then let's hyper grow them via SEO, SEM and, partnerships and organic means that we have a lot of experience doing on the lawn care side. And do that to build ultimately what we think could be the first national brand in pool cleaning. And you, to your question of like, why pools? The short answer is because it is one of the last verticals in home services.

That's of venture scale. It's 10 billion a year. 7 billion of that is weekly recurring revenue. It's non cyclical. It goes through every macro environment. Once you have a pool, it's expensive to fill it in. It's expensive to let it turn green. And it is yet to be eaten by private equity, mostly because there's no scaled assets to go by, right?

PE has chased HVAC, it's plumbing, electrical, foundation repair, all these other categories, because there were 30, 40, 50 million, even of platforms to go after. And the nature of PE fund math is that you got to write big checks, right? And you also don't want to buy subscale businesses that take a lot of operating to actually get to You know a level where they perform independently and are more durable And that is what i've done for 15 years is operated in home services Building, you know using software as a lever.

And I think like I think that positions us pretty well to go buy a bunch of these, fairly small, but run businesses and help improve them and elevate them into a, a true national brand in the category. So there's more to it than that. We're not talking about all of the plans just yet, but that is the very high level of what we're going to be doing in this space.

And look, you look at every other home service vertical and it's got an 800 pound gorilla, right? Pest control has, Terminix. It has Roland's 20 billion company, HVAC, you got carrier, what? 40 billion company. It's equipment, but also some service. Lawns got true green, right? Like house cleaning, you got Molly maids, you got Mary maids.

They all have scaled national brands, except for pools. And there's no law of nature that says there can't be. And so we're going to go build it right. Like it should exist in the market. When you think pool cleaning, you should think splash. You should think something like that. It should be, there should be like an obvious, market leader, either franchised or corporate, or, something in between that is like the known quantity in the category.

And. I think there's a window to go build that and that's what we're going to go do.

I think this is an interesting question. Paul Graham has talked a lot about how to find good startup ideas. And I tend to, find his advice extremely, resonant, but I sold Lawn Love, the firm that I just ran in the lawn care space. We grew that, started in 2014, took it through Y Combinator, raised about 6 million bucks in a large seed round from Joe Montana and Alexis Ohanian and all these folks.

And then spent eight years growing it to a national brand in lawns. We had about 120 cities, 40 States, about 200 full time corporate employees and thousands of independent contractors in the field mowing lawns every day and sold that in 2021 to a direct competitor to create what we believe is the largest marketplace in lawn and garden in the country.

And, I spent a year over there, I ran the integration and then, left a year and a day later in search of kind of new quests. And one of the things that I did is. Just ask these big existential questions, right? There's a bit of a like second or third time founder thing where, you know, how high the mountain is and you want to make sure the destination's worthy of the effort.

And so I looked at everything I, partnered with a friend and built a, LLM driven company that used generative AI to read, summarize and annotate the news. I built a marketplace for ADU building to help address some of the housing crisis issues in California.

I got married. I bought and renovated rental properties. I did a bunch of random things. And all of this was just a challenge I think that is inherent to founders once they've had a decent level of success is that you want your next chapter to be grander and more momentous than the last.

After a certain point that leaves a fairly small number of very overfished billion dollar ponds to go in search of. And there's a bit of a paradox in startup ideas, which is most of the important ones look like toys at first, the canonical case is Airbnb. Airbeds and breakfast is very far as an initial idea from what they are today, really, like the marketplace for physical space.

You got to be willing to do things that are a little goofy and that are not obvious ideas to start. And so I played around with a ton of different things. And ultimately, what I came back to is just this realization that. I'm a B grade AI founder, right? Like I'm not differentiated in the category.

Like I'm like thoroughly unremarkable in that space. But I've spent 15 years building a very specific set of skills and honing discreet muscles that are useful for running at home services, startups. And, to your question on like, how do you find the next idea? This is gonna seem trite, but it's true.

And it's like, doing things that are close to home. Doing things that you have familiarity with. Chasing shiny objects is a death trap for a reason. Because, A, you're trying to surf huge waves, which is great, you've got the tailwind. But you're alongside like a billion other competitors running after the same prizes.

And, it's hard to differentiate in that noise. But also, the odds that you have a genuinely novel insight into a space is low if you're approaching it as a total outsider and relative rube and just trying to like, me too your way into a hot category. I think that's the risk of, shiny object syndrome and chasing trends.

I ultimately just made my peace with home services. Like when I launched lawn love out of YC, I remember I think Dave McClure from 500 startups tweeted Lowell Y Combinator funded a lawn care company. And I wish I'd saved that tweet because I would have dumped on him unimaginably hard when three years later, they funded a lawn care company, but it was, it was comical.

At first, people always looked at me weird. When I said I was building a lawn care business, at least in Silicon Valley and kind of tech ecosystem, VCs often didn't get it because they lived in dense urban environments like SF in New York and lawns were a bit foreign to them. But it turns out 80 percent of American households have a lawn or like directly connected to a lawn.

And it is a massive hundred billion dollar a year industry in the US. And I know boring industries, quote, boring businesses have certainly become more in vogue of late now. It's like flip to the other side. When I tell people, I'm rolling up pool cleaning companies, they roll their eyes because every, reasonably intelligent Harvard grad has the, hopes and privilege of buying some gentlemen's 30 year old HVAC company today. And that's become like the trope. And I don't care I didn't care when it wasn't cool and it was odd for me to be doing it. I don't care when it's now blase.

I don't care when it's now blase. I'm just going to go build an in an industry where I have a durable competitive advantage. And I think what matters to me are, do the economics work and are they compelling? And do I think I can apply particular specialized leverage in the space that gives me a kind of advantage operationally?

And so long as those answers are yes, I should go do that all day long. And that's how I think about it.

[00:15:10] Kevin: Hear from Jeremy on the shift in venture capital strategies and why profitability matters now more than ever.

[00:15:16] Jeremy: One of the enduring truths, I think most people will agree with about the venture capital industry is that it is highly cyclical and what is in vogue changes with the macro environment pretty quickly. And I've seen this now through many cycles over, a couple decades of entrepreneurship.

It's funny, you can tell the tenor of the economic environment by what, Y combinator companies are saying on demo day and like some years, every company is talking about how they're profitable. Granted they're profitable with 5, 000 in revenue. So not paying themselves salaries apparently, but profitable nonetheless.

That becomes the thing that obviously suddenly people flip to caring about. And it's a calling card. It's we're profitable. This means I'm successful. And then. You get hit into the heady days of 2021 and, low interest rate environments and largely free capital and no one cares about profitability is arguably like a adverse signal, because if you're profitable, you probably don't have good things to deploy dollars into to grow faster and, profitability is almost a bit of a dirty word. Also, in those moments, these VCs have huge balloon funds that they've raised and need to go deploy those dollars and guess who doesn't need venture capital is profitable companies.

Being profitable makes you a bit of a, certainly disqualified from a lot of funds, even being interested because you simply don't need them. And so this does vacillate, right? Depending on the economic climate of the moment my DNA is in bootstrapping.

I bootstrapped the first companies I ever founded. When we did raise outside cash for long love, we raised a grand total of six, six, six and a half million bucks. Yeah. And, we'll break even when we exited. And at all points, we're pretty capital efficient in how we built the business.

And, that, that is a by product of, I think the, just the default DNA that, and the bias toward operating efficiently. But when you think about what businesses are going to thrive today and how should you capitalize a company in this era? If you look over the last 10 years, the average venture backed company raised 400 million to get to 1.

6 billion of enterprise value. Those days are over, right? One capital ain't free. And that's not a very efficient conversion of equity dollars to kind of enterprise value, but you still got to build billion dollar companies, right? Cause the ambition of founders demands it. And certainly the venture math demands it, but you have to do it on relatively few primary bucks.

And the way to do that is a MNA driven model where, in which you're acquiring cash flows and you can recycle those cash flows to acquire other similar businesses, and then use the companies you built, you buy as a bootloader to build real vertical software. That is a Extraordinarily capital efficient model.

It allows you to build a significant company that is certainly venture scale on the upside, but also is meaningfully downside protected because unlike many venture vets where you're eating your dollars into a cash incinerator and hoping it gets to escape velocity before going to zero and, hopefully it doesn't dilute you too much in the process.

Here you're buying cash flowing assets and you're recycling those cash flows and these assets trade at pretty consistent multiples in the private markets, right? It's a bit of a downside hedged bet with venture style upside is how I would characterize it. And I think it's perfectly suited for this moment in, in terms of our interest rate environment.

And part of what's so exciting about doing it this way today.

[00:18:27] Kevin: To wrap up, the next chapter for Jeremy is all about partnering with leading pool companies and leveraging his experience to help them grow.

[00:18:34] Jeremy: Step one is let's go partner with a bunch of amazing pool companies, right? Let's meet the right folks who are building impressive businesses in their own right. But also where we can jump in and get our hands dirty and help leverage them further to scale beyond that and reach like 10 X higher heights that, that is definitely mission number one and.

I'm going to be doing this for a long time. Like I've been in home services for 15 years. You don't do anything for 15 years unless you have learned to love it. So I'm going to be doing it for another, call it 15 years at least. And, hopefully just have a long, a longer time horizon and more patience than the average bear and just compound indefinitely.

[00:19:13] Kevin: If you liked this Spotlight episode, please leave us a review. Every review really helps. Follow us on Twitter at zypsycom if you don't want to miss an episode. That way, you'll be able to see every time a new show goes live. That's all from us today. Thank you for listening to this episode of Zypsy Spotlight.