Companies always show their best side.
Your investors ask, "How is everything going?"
"GREAT", you say.
Not good, but GREAT. Good isn't good enough. You're one of 25 other companies in their fund and if you don't post big numbers, suddenly emails take 2 days for them to get back to you, then 3, and pretty soon they forget what your company even does while they (understandably) devote all their attention to the winners.
We're having a tough moment with our 3 portfolio companies.
To be fair, it's not going badly at all. We're struggling in some areas, namely engineering, but overall everything is fine. Screenshot is doing great. Sheet.best just got a strip integration, and Toybox... well that one is still in need of some help.
I think we all vastly underestimated the amount of our personal engineering hours would have to go to building, rebuilding, and maintaining each of the companies. It shouldn't surprise me, but it did. Each codebase is also in a different language, which doesn't help. We have one in node, one in python, and one in rails.
One issue with micro acquisitions sub $100k ARR is that there just isn't enough cashflow to hire great people, let alone local devs. It makes staying in the green difficult on any particular month with heavy engineering effort.
And we're also trying to raise a fund. And most of us are not full time on this. It's a lot.
- If your servers have had any crashes in the past month or cpu spikes that aren't easily explainable... that's a new dealbreaker. It's probably a clusterf*$# we don't want to deal with.
- If your code doesn't scale and will require a significant re-architecture... that's a new dealbreaker.
- We may also start imposing strict requirements around programming languages. It's just too difficult to wrangle so many different projects in so many different languages.
- Moving up stack helps mitigate all of this. If you can acquire the team that wrote the stuff, then it's not such a big problem, but for smaller deals, where we have to execute big engineering efforts, it's just too tough to do.
- Nearly all micro acquisitions are distressed assets. Even if they don't market themselves as such (who would!), they are often actually alpha versions of what you'd build if you could start from scratch. And so far, for 1/3 companies we started over from scratch.
- Don't buy a bunch of these at the same time. We did 3 with 4 partners (3/4 write code) and it was still too much. Do one, get it on a path, then consider doing another.
It's an interesting moment for micro acquisitions. We have some big tax changes coming down the pipeline, we have a new demon to contend with (inflation) and all of this will impact equity markets and private investments. Will the current activity in micro acquisition-land stay this hot? Probably not. Multiples should come down a bit and when they do, we'll be ready to pounce on some good deals.
Options for our current portfolio:
- Sell them all - start fresh. Take the lessons learned and move on. We'll post a profit (nothing amazing. Maybe 2x) in a relatively short period of time, and I know I can weave a narrative around it.
- Keep going - We're sitting in the fire. We're feeling the pressure. Perhaps this is just a low point. We could push through and post better numbers early next year.
- Sell the problem child (children) - Sell one or two of them, and just focus on the remaining companies. At this point, all the companies are the devils we know. I'm sure all acquisitions start out with some kind of "What the hell did we just buy?!" feeling, but every once in a while you have to accept defeat and move on.
We'll see what the future holds. The good news is that our first company has nearly tripled in MRR since we bought it. This business model may be subject to power laws after all.