What is Micro Private Equity? What are Micro Acquisitions?

Andrew Pierno -

Micro private equity is the buying, operating and selling of companies on a smaller scale than traditional private equity. Generally the purchase prices are sub $10M and are not high growth venture companies. The focus is instead on cash flow and stable growth. Micro acquisitions are a synonym. Colloquially, people use the terms interchangeably.

There are a lot of ways to execute on the micro private equity model. You could buy a carwash, you could buy a storage unit, but I will be focusing on buying SaaS companies.

The short version is this:

  1. Buy a company
  2. Use cashflow to grow / maintain the product
  3. Pocket the excess cash.
  4. Maybe sell it, but that's not the goal

If you're coming from the startup world, a few things should strike you as odd:

  • What?! You're not maniacally focused on 20% MOM growth?!
  • What about exiting isn't that the whole point of starting a company?

There are a bunch of reasons you might want to buy a company with existing cashflow instead of starting one from scratch. A few of them are:

  • No need to guess if people will want the product. They're already paying for it!
  • You have an adjacent business that could also sell this product (i.e. let's say you have a service business but no SaaS offering).
  • You can skip years of guesswork (what should we build, how should we build it, will people want it)
  • You want an extra revenue stream
  • Your skillset is in growth (going from 1 to 10), but not necessarily in going from 0 to 1.

Overall though, I've found it useful to think of micro PE as taking the real estate model and applying it to SaaS. Buy, improve, and collect "rent" with the option to sell whenever you want to.

A brief history of micro private equity

IDK. I didn't spend more than an hour looking but I couldn't figure out when this first started. Whatever. Tiny capital has been doing this (with more modern internet businesses) for 15 years.  I'm sure they weren't the first. If you find something, ping me!

The Playbook

Buy - Obviously step one is to acquire something. I don't think it needs to be (and perhaps shouldn't be) something large. My first one was screenshotapi.net for $23,000 at $550 MRR. Split between 4 partners, this wasn't very much money.

Grow Profitably - Some buyers prefer all cash, some prefer to use debt. Either way, generally there is a more conservative approach to growth. Growth can be expensive, and time consuming, but if it's neither, then by all means, go to the moon!

Hold/Flip - Some people in this space are more comfortable flipping sites, holding them for a short period of time with the goal of reselling them quickly. Otherwise, you can hold and pay yourself dividends along the way. Eventually, you'll have paid back the principal and have a revenue generating asset you can reap the benefits of forever.

Getting Started

It doesn't take a ton of cash to get started. See if you can get a small group together to buy your first one to lower the potential downside.

Marketplaces - There are tons of marketplaces to find businesses to buy. Many of the listings are absolute garbage, while others are like those retail stores where you walk in and there are only 5 t-shirts in the whole store... all of which are very expensive. There's also a lot in between. Check out:

Indie Hackers - Some startups post their revenue metrics. They're not necessarily looking to sell but reaching out won't hurt.

Twitter - I reach out to people on twitter all the time who share their metrics openly. If done tastefully, it won't be considered spam.

Valuation

Generally, you can expect to pay between 2-5x EBITDA. Some people use another term SDE (seller discretionary earnings). At the end of the day, I've found most sellers haven't sold a business before, and have no idea what a market rate or a fair offer for their business is. Tech companies are some of the worst. They want 10x gross revenue, like they read about in Tech Crunch.

Diligence

Real Revenue - Make sure the reported revenue on the site matches what you see in Stripe or their payment processor. Often times the discrepancies are due to a lack of accounting rather than malice. But still, you need to know exactly how much the thing makes to provide an accurate valuation.

Customer Support - Make sure to get a sense of how much work customer support will take on a weekly basis. You may unexpectedly find yourself drowning in customer support due to a buggy or unstable product.

Tech - I've been bit here before. It's so hard to really know what you're buying. What does the system look like under load? Does the server crash frequently? What's the code quality like? Where are the bodies? I still haven't figured out the best way to evaluate code before you get your hands on it. Sellers are often loathe to give you full access before you buy it. So fare we've had to do significant (i.e. heart surgery) engineering on 2/3 companies we bought.

Culture

This part is somewhat normative (i.e. this is my opinion). The VC backed startup game is a way of life. Once you take the money there's really no going back. Having done it and seen the downsides, I'm now more focused on bootstrapping profitably. There is a subset of people in this space who are not anti-vc, but realize, as I do, that most businesses are not VC scale. The VC model itself operates on power laws. If 1 in 20 portfolio companies ends up being a unicorn, the other 19 just straight up don't matter (financially). Also, VC backed companies have a few different ways to exit (even if it's a bad exit) including traditional private equity. These micro SaaS opportunities are small enough that they don't make sense for a larger private equity company, and unless they're an acquihire, they're generally not good for strategic acquisitions either.

 So where does that leave the bootstrapped founder(s) after they've built a great small business but want to move on? Before micro acquisitions became a thing, the answer wasn't very clear. My position is that there is a giant hole in the market for profitable small SaaS businesses to have a great exit, and for the buyers to take the company onto the next stage, whatever that may be.

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