Not every empire is built.
A brief look, if you will, at Uncle Sam's portfolio:
- 1803: Louisiana purchased from France for $15 million, or three cents per acre.
- 1848: California, Nevada, Utah purchased from Mexico for $18.25 million, or 21 cents per acre.
- 1867: Alaska purchased from Russia for $7.2 million, or two cents per acre.
Even by today's standards, these would represent extraordinary deals, with Louisiana costing roughly $345 million, the three western states totaling $600 million, and Alaska running a mere $126 million. For the price of one ZipRecruiter (last valued at $1 billion), the US government acquired more than 3 million square miles of territory and its associated natural resources.
This is to say that for all America's mythology around manifest destiny and self-reliance, our country's current borders and affluence relied on savvy investing as well as dogged determination.
Yes, empires can be built. But some are bought.
As technology lowers the barrier to product and company creation, a new type of empire-builder is emerging. While hedge funds, private equity groups, and venture firms battle for tech's fastest-growing companies, "micro private equity" searches for bargains amid a jumble of family businesses, software side projects, and profitable but unloved apps.
Their appearance is not only proving lucrative but fundamentally altering the landscape of small business.
Micro PE's rise
Where is money to go?
The current zero-interest environment has seen asset managers, and the wealthy clients they serve, increasingly shift allocation toward riskier investments. On the firm-level, that means greater allocation into traditional private equity or venture firms; individuals of relative means have fewer options.
Investing in a VC firm is out of reach for most, both because of the high minimum investments (often $1 million or more) and their inaccessibility to newcomers. Even if you have the seven-figures to deploy, good luck getting an allocation in a name brand fund’s next financing vehicle.
Angel investing has served as a reasonable alternative for those with fewer resources to allocate to the private markets and a desire to be closer to an investment. The high kill rate in early-stage investing necessitates a portfolio approach which, requires more capital than many realize at the outset and considerable patience with investments spread over several years. Even if executed with this kind of discipline, it's a hard way to make money. With a superabundance of early-stage financing options, only the highest-profile individual investors don't need to worry about adverse selection. For most, the truth is that if they see a deal, it is only because First Round, a16z, and many others, passed six months earlier. Though they help reduce the minimum ticket size, the same issue afflicts crowdfunding platforms like Republic or Crowdrize. Time to liquidity, if ever achieved, is predictably brutal.
All to say that accessing high-growth companies in the private markets is a tricky game, with billions of dollars and a horde of fleece vests running after the same names. Those factors have led enterprising investors to seek returns in pastures new.
Indeed, an entire territory of internet businesses is mostly untrammeled by investor footprints. As the barrier to building online has dropped — aided by on-demand cloud computing, infrastructural platforms, and low-code tools — a great range of products are being shipped by bootstrapped founders. Spiritually, these businesses are the successors to mom-and-pop shops and weekend side-hustles: usually, one-person operations grown organically. The critical difference is the cost-structure and market size for such products. In the past, the local, artisanal candlemaker would have borne the cost for raw materials and production, selling to neighborhood stores and expanding piecemeal. Today, a similar business might begin without the founder ever touching wick or wax. And, on the first day of business, serving the entire country would be relatively trivial.
The upshot is that seemingly small products can bring real money. Something devised over a developer's long weekend — a Shopify plug-in, a Chrome extension, or some other tiny internet fiefdom — may yield hundreds of thousands of dollars a year with a little sales and marketing effort.
The challenge for these bootstrapped companies has traditionally been liquidity. Venture-backed startups that achieve lift-off can tap the public markets or navigate a lucrative acquisition from another corporation. By dint of their size, smaller businesses don't have that luxury. While an e-commerce business pulling in $40K a month can be life-changing for an individual, it is too small to attract major corporations or traditional private equity buyers. The result is that business owners, many of whom have full-time jobs, are left with a set of undesirable choices:
- Devote full-time to a product that may have been created with relatively little thought and at the expense of a traditional job or other projects.
- Maintain the status quo and miss out on maximizing the revenue-generating potential of the new business.
- Allow the new business to dwindle in deference to traditional work and other projects.
In this respect, the triviality with which something valuable is made creates the problem.
Micro private equity offers a solution. Emphasizing their empathy for the bootstrapper, respect for legacy, and a streamlined M&A process, these investors typically purchase businesses outright, providing liquidity and peace of mind. Once completed, the firm looks to profit by clearing technical debt, and renovating design, operations, marketing, and sales functions. Often it is the last of these that is most neglected, with one-person side-hustles rarely having the time to run a professional sales funnel. Though not always the case, the micro firm may leverage existing properties to elevate its new portfolio company, bundling purchases or relying on shared infrastructure.
To make good on their investment, firms first look to increase profits. After this point, some seek to sell properties on, receiving their own liquidity, while others are content to run them as cash-generating properties.
In its variety and idiosyncrasies, the landscape of micro private equity is unlike any other corner of tech, featuring trendy upstarts, ersatz family offices, traditional financial institutions, and venture-backed goliaths.
Some define micro PE as "organized pools of capital used in the acquisition of businesses under $5 million in enterprise value." In researching the space, I found that cardinal line to be a hazy one. Some purchase companies considerably above that point, while smaller investors use online marketplaces to buy "businesses" worth just a few hundred dollars.
This is to say nothing of the different titles buyers choose from "holding company" to "partnership" to "portfolio company."
Given the nascency of the space, I have purposefully cast a wide net in my analysis below. I have made one distinction: between micro PE and "search firms," which are created to purchase and operate a single business. The latter have not been included below.
Those in tech have likely interacted with this space through Tiny Capital, the investment vehicle of Andrew Wilkinson. Billed as "The Berkshire Hathaway of the Internet" (a comparison favored by Tera Holdings, too), Tiny purchases "wonderful internet businesses" profiting between $500K and $30 million a year.
Thus far, that's resulted in 30 majority purchases, including internet favorites such as Dribbble, Creative Market, and Designer News. Though Tiny's portfolio is relatively diverse (there's a modern furniture brand next to a government software business), most fall into one of a few categories: creator software, podcast software, digital agencies, niche media, and job boards. Wilkinson values current holdings between $472 million and $790 million.
Before being rolled into Joe Liemandt's ESW Capital, Think3 showed similar variety, purchasing DevOps company Engine Yard, helpdesk software Kayako, e-commerce search business SLI Systems, and remote work platform Sococo. The LinkedIn profile of former Think3 founder Andy Tryba notes the company grew Sococo's sales 600% in 11 months as part of its restructuring.
Others take a more concentrated approach. SureSwift Capital, Ramp Ventures, and Horizen Capital exclusively invest in SaaS businesses. Meanwhile, Goja only buys e-commerce brands, and Maple Media specializes in mobile apps and games.
Permanent Equity, run by Brent Beshore, expresses its focus differently. Investing under the banner that "boring is beautiful," Permanent Equity partners with businesses earning profits of between $2.5 million and $15 million a year.
This is a trade made by many micro PE firms: the boringness arbitrage. While venture investors struggle to get excited by anything with less than a $5 billion TAM and 70% margins, micro firms are delighted to find a dusty, untrendy profit-generating business. Little Engine Ventures (LEV) seemingly shares this approach, investing in Circle City Dumpsters, Autoglass Express, and Brickyard Logistics.
Even within the world of software, there exist unloved corners and properties waiting to be maximized. Dura Software invests in "hyper-niche software products," including a maritime email client and a healthcare messaging service.
A new class of buyers has arrived in recent years, backed by venture-dollars. Rolling into town like Daddy Warbucks, Thrasio and its competitors have commenced a version of micro private equity inspired by Nathan's hotdog eating contest. In pursuit of their own growth — Thrasio reached a billion-dollar valuation faster than any US company — these holding companies are devouring promising Amazon businesses, then supercharging them by optimizing listing placement, marketing tactics, and supply chain management.
The scope of opportunity and absence of public data makes finding an acquisition target particularly hard. If you had $500K to buy a business, where would you begin? For many, the curation managed by a reputable broker pays for itself.
FE International is the gold-standard in the space, with a 94.1% sales rate and over 53K vetted buyers. The firm managed the sale of Drip, HitTail, ScraperAPI, Payfunnels, and LeadOwl, among others. Current listings include the "World's Largest Business Name Generator," a hair care Amazon company, a "VPN Authority" affiliate business, and a "B2B Git Client Version Control Software."
QuietLight provides a similar proposition, though with an intermittently more politically divisive bent. Current listings include a "4.5-Year-Old Humorous Pro-Second Amendment & Patriotic Blue-Collar Workwear Brand" and a "Weapons, Ammo, and Accessories Content Site."
Though personally unpalatable, this represents another potential arbitrage opportunity for small business buyers. With the overwhelming majority of venture capital firms explicitly liberal-leaning, there may be an opportunity in creating a portfolio united by political affiliations, either expressed through the product (gun-toting tee-shirts) or management team. Perhaps a second act for John Matze, Jr.
While brokers handle higher-end sales, marketplaces have emerged to serve the rest of the space. Interestingly, in recognition that stores change hands, Shopify offers Exchange, a marketplace to buy and sell shops. As ecosystems grow, it will be interesting to see if other platforms follow suit.
Microacquire appears the most professionally-minded marketplace, monetizing through subscriptions on the buyer side. Current listings range from $1K to $14 million and include a CRM for raising capital, a portfolio tool for photographers, and an ed-tech SaaS platform reporting $2.4 million in ARR. Empire Flippers, another marketplace, also focuses on premium listings.
The rest of this segment is varied. Flippa and Fliptopia feature a wide range of businesses, while platforms like Fameswap allow users to purchase social handles and YouTube channels. While holding companies certainly exist for domain names, interestingly, I did not come across a firm focused on aggregating social handles as part of a micro private equity strategy.
By and large, there are few tools made explicitly for this new class of investor. Dealflow is an exception. The sourcing tool helps micro PE firms identify potential acquisitions from multiple sources and run an automated pipeline. Product Byte looks to offer an edge by surfacing promising businesses in data-driven reports. Latka aggregates data on SaaS firms, though many are far beyond microscale.
The most useful tools may be those built for general usage. Ahrefs offers SEO analytics, App Annie and SensorTower offer mobile data, and tools like Jungle Scout give insight into the Amazon seller ecosystem. Platforms like Panjiva, a division of SAP, shed light on import and export routes and stakeholders. All may be invaluable to a micro PE fund on the hunt.
It's hard to know just how lucrative this world can be. Acquisitions are not splashy affairs celebrated in trade magazines but rather muted, with codebases and domain names quietly transferred.
Tiny certainly seems to be working. WeCommerce, a Shopify-focused acquirer within Wilkinson's holding company, listed on the Toronto Stock Exchange in December and currently boasts an $868 million market cap. That represents a significant windfall for the firm and may represent the start of a pattern. In that respect, Tiny's playbook is not dissimilar to IAC's: identify a market with room to grow, bulk up by acquiring relevant assets, and spin-out for liquidity. With SPACs making public listing increasingly accessible, we may see more firms follow suit.
A few other stories worth noting.
- Rob Walling, a pioneer in this field, reported growing HitTail's revenue 10x in 15 months. He subsequently sold HitTail and bought Drip, which he sold for a reported 8-figures.
- Fork Equity purchased Shopify plug-in, Notify. The team rebranded the product as FOMO, boosting revenue by 50% in three months. The product has continued its impressive growth.
- Nathan Latka purchased Chrome Extension Sndlater for $1K. He rebranded the service as Top Inbox, grossing $153K over the following two years.
In its enthrallment with magnetic founders, the tech sector has forgotten that many of its greatest businesses relied on inspiration from elsewhere. Facebook notoriously arose from the visions of the Winklevii, Tesla’s roots rest with Martin Eberhard and Marc Tarpenning, and Uber was first Garrett Camp's brainchild.
The lesson here is that the best person to grow a business is often not the source of insight. Micro buyouts formalize this wisdom, opening the market so that good products may be matched with willing, well-suited stewards.
In doing so, the movement brings a different type of entrepreneur to the fold: one focused on execution above imagination, motivated by the act of building rather than an overarching mission, and content with a life-changing rather than planet-colonizing level of wealth.
For these individuals, traditional startups may have looked almost like a lark, a capital-fuelled boondoggle that offers an infinitesimal chance of absurd riches and a high likelihood of an extended sub-market rate salary. Those with a family and significant financial commitments, in particular, may have found such a career path overly risky. Furthermore, many may come from non-target geographies or non-tech backgrounds, making venture funding less accessible.
Micro buyouts change the calculus. With a relatively small outlay, an investor can buy into the world of entrepreneurship. In doing so, not only do they acquire a tangible asset, they purchase time and pay for defrayed risk.
As Marc Andreessen once said, "The only thing that matters is getting to product-market fit." Builders-as-buyers are often able to skip this challenge by purchasing companies that already have happy customers. Rob Walling estimates that purchasing HitTail saved him 18 months of work, precisely for this reason.
On balance, we should expect the growth of the micro PE movement to provide a pathway to tech company ownership for more professionals outside of San Francisco and New York. In another era, these individuals might have put their money to work in local real estate — today, they will look for returns among websites and widgets.
Though significant wins have been logged, we are just at the start of this movement. Indeed, there appear to be substantial opportunities that have yet to be touched.
A few I intend to keep an eye on.
- Riding new platforms. Just as WooCommerce has profited from Shopify's rise, I expect new hold cos to emerge that focus on other fast-growing ecosystems. Figma, with its extensive range of community plug-ins, represents a strong bet.
- Thrasio for X. The success of Thrasio (and its cohort) illustrates the value that can be created by bundling similar assets and aggressively implementing operational best practices. Builders could apply this playbook to different spaces. A few examples: a conglomerate of Substack publications (perhaps kept on-platform, perhaps not), a collection of Teachable courses, or a roll-up of community forums.
- Tiny for X. Wilkinson's shop succeeds partially because of its demonstrable tech-savvy. While other buyers look like venture firms or other financial institutions, Tiny looks like a product company. It possesses a cachet more or less equivalent to brand name VCs. Others should follow this approach. While Tiny has carved off several niches, so much space remains. What would Tiny look like if devoted to APIs? What about remote work tools? Or logistics?
- Community and education. No matter one's experience, buying a first business is a daunting task. And operating it, once the papers have been signed, represents a lonely one. While a few classes and communities exist, there is relatively little competition. Creating an exceptionally detailed, serious course could help more entrepreneurs find a suitable target. A community would ensure operators were supported as they grew.
Roman historian Tacitus once noted, "Great empires are not maintained by timidity."
The expansion of micro PE is allowing many more to eschew timidity and build their online empires. As tech continues its infiltration of industry, we should expect the proliferation of digital products to accelerate, providing ever more opportunities for the savvy investor and spirited builder.
Welcome to the age of the micro mogul. In a sector that has been defined by grand ambitions and big thinking, fortune may soon favor those that think small.
*Thanks to Justin M for his many good thoughts on this space.
The Generalist’s work is provided for informational purposes only and should not be construed as legal, business, investment, or tax advice. You should always do your own research and consult advisors on these subjects. Our work may feature entities in which Generalist Capital, LLC or the author has invested.
Micro Private Equity, also referred to as “Micro PE” or “Micro Cap Private Equity”, describes an investor fund which acquires or buys into small (or better “micro”) businesses. It is part of the overall mergers and acquisitions industry.
The median net IRR is between 20% and 25%. Consistent with the PE investors' gross IRR targets, this would correspond to a gross IRR of between 25% and 30%.
Calculating the MOIC on an investment is generally straightforward, as the formula is simply the net cash return (“cash inflows”) divided by the initial cash contribution (“cash outflows”). MOIC is interchangeable with several other terms, such as the multiple on money (MoM) and the cash-on-cash return.
The three measures of private equity performance you need to know are internal rate of return (IRR), multiple of invested capital (MOIC), and public market equivalent (PME). It's important to learn and use all three metrics in tandem because they account for the others' blind spots.
IRR is an annualized rate (e.g. 30%) that would have discounted all payouts throughout the life of an investment (e.g. 16 months and 21 days) to a value that equals the initial investment amount.
As with any other financial metric, what's good for one investor may be bad for another. An investor who is risk-averse may be satisfied with an IRR of 10% or less, while an investor seeking a balanced blend of risk and potential reward may only consider properties with a projected IRR of 20% or more.
For levered deals, commercial real estate investors today are generally targeting IRR values somewhere between about 7% and 20% for those same five to ten year hold periods, with lower risk-deals with a longer projected hold period also on the lower end of the spectrum, and higher-risk deals with a shorter projected ...
In short, MOIC is a useful metric for analysts when they want to evaluate how attractive an investment is. However, using MOIC in a standalone way may lead to misleading results. MOIC should be used to measure across different investments in a portfolio.
Multiple on Invested Capital (or “MOIC”) allows investors to measure how much value an investment has generated.
MOIC is calculated by dividing cash inflows by outflows (i.e. $500/$100). While this example above does not consider the impact of the credit facilities' interest expense on the MOIC, there will generally be a small negative impact on the MOIC of the Fund.
The common rule of thumb is that of 10 start-ups, only three or four fail completely. Another three or four return the original investment, and one or two produce substantial returns. The National Venture Capital Association estimates that 25% to 30% of venture-backed businesses fail.
IRR reflects the performance of a private equity fund by taking into account the size and timing of its cash flows (capital calls and distributions) and its net asset value at the time of the calculation.
- The International Private Equity and Venture Capital Valuation.
- Market Business New.
- The Strategic CFO.
- Grant Thornton.
- The Journal of Alternative Investments.
Sophisticated buyers look for a minimum IRR of 25% for their investment in mid-market companies due to the risk and more limited liquidity options available. Using a simple calculation, investors would need to triple the value of their investment over 5 years in order to earn at 25% IRR.
First, it provides severely distorted incentives for the timing of cash flows and grouping of funds. Second, it biases upward volatility estimates. Third, at least for venture capital and buyout investments, simple average performance measures are significantly upward biased.
IRR assumes that dividends and cash flows are reinvested at the discount rate, which is not always the case. If the reinvestment rate is not as robust, IRR will make a project look more attractive than it actually is. That is why there may be an advantage in using the modified internal rate of return (MIRR) instead.
Money multiples are another metric that measure returns from an investment, providing a cash-on-cash measure of how much investors are receiving. They are calculated by dividing the value of the returns by the amount of money invested.