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HYPE #1 - Micro Private Equity Cartel
3 RULES First : Profit, Second : Profit, Third : Profit
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This week, in less than 5 minutes, we'll cover these topics :
What is the Micro Private Equity ? 👉 The Profit First …
Micro PE fund vs Traditional Private Equity Fund 👉 Disruption….
Market game analysis 👉 Who are the Players ? And what do the Haters say …
Let’s get started !
I. What is the Micro Private Equity ?
Micro private equity refers to organized pools of capital used in the acquisition of businesses under $5 million in enterprise value. Traditional private equity will usually not acquire businesses below this valuation level due to the lack of systems and sophisticated management generally associated with businesses of this size.
Micro private equity are typically not structured as a formalized fund, but, rather, a group of high net worth individuals, executives and/or entrepreneurs that will invest on a deal-by-deal basis.
There is a significant opportunity for micro private equity in the coming years where an increasing number of business owners are looking for exit alternatives. Micro private equity will play an important role partnering with entrepreneurs to buy businesses from retiring owners that are seeking an immediate exit.
Micro private equity can also generate higher returns than typical private equity due to a few factors including:
Ability to acquire businesses at lower valuation multiples due to lack of competitive sale processes with limited number of buyers fighting for deals in this space;
Injection of young motivated management teams that will replace the exiting owners who may have been content with the business size and process. This new management will often implement more effective business processes that were not used by the previous ownership to aggressively grow the business; and
Attractive deal structures that include vendor financing, resulting in higher returns on the buyers' equity.
The higher potential returns are commensurate with the high risk associated in smaller businesses due to lack of scale, business systems and barriers to entry.
II. Micro PE fund vs Traditional Private Equity Fund
Money at your fingertips
Buying businesses in the Micro Private Equity segment often means partnering with operators who know their business intimately but lack operational sophistication. This gives the Micro PE manager the opportunity to quickly realize significant gains through the implementation of processes and systems to increase efficiency (Marketplace all in one).
Arbitrage by rollups
Fund managers seek complementary acquisitions within highly fragmented industries to take advantage of natural arbitrage opportunities. The vast universe of Amazon FBA or Shopify owners, for example, allows you to select the most interesting opportunities.
Because of these unique tailwinds – a significantly larger and untapped pool of candidate companies, multiple entry stability, and ample opportunities for organic growth through operational improvements – private micro-investment funds still typically target IRRs. by 25%, while many larger VCs lowered TRI goals in mid-teens.
Barriers to Entry: Isolating the Private Micro-Investment Market from the Bulge Bracket
The evolution of the buyout market over the past few years suggests that the stability of multiples in the Micro Private Equity segment simply positions it as the next buyout by bulge tranche firms, bringing multiples in line with the rest of the market. Marlet. A closer look reveals significant barriers to entry that will continue to isolate Micro Private Equity.
Inconvenient deal size
Large private equity funds tasked with deploying billions of dollars will not achieve the scale needed in the micro-investment space. Filling a portfolio with acquisitions of this size and then managing this number of companies is unfeasible. The structure of the fund does not allow it to be profitable.
Strong operational involvement
Acquiring businesses in the micro-investment space requires working in organizations that often lack the necessary infrastructure and processes. Sophisticated improvements are needed. This is the strong point of Micro PE it is at this level that it manages to be very profitable. A classic fund generally has a vintner of companies in its portfolio, but only two or three ensure the profitability of the fund. Here we change culture. Every business is 100% profitable.
Tapping into a larger, “undercovered” playing field
Although there is an oversupply of attractive target companies, finding these opportunities requires rigorous monitoring of target industries through non-traditional channels, as opposed to collecting CIM from investment banks – the typical process for sourcing private equity.
Complementary to existing private equity allocations
Private equity funds originally offered access to transactions too large for the typical investor to participate in individually. Private Micro Investment investing turns this value proposition on its head by giving investors access to a collection of deals too small for the typical investor to research and manage. For this reason, cumulative Micro Private Equity investments fit well into existing private equity allocations due to their differentiation and lack of cyclicality in entry multiples. As a result, returns are more consistent and tend to outperform the broader private equity market in hot cycle or peak investment vintages.
Invest directly against funds
Attempting to gain exposure to the Micro Private Equity space through direct investments was a difficult task. Developing a proprietary pipeline to find deals is a long process and operational expertise is needed as the post-closing involvement comes in handy. All these points have been simplified by marketplaces and brokers online which simplify access and allow deals to be finalized in 30 days on average. The new platforms allow diversification and a very rational approach to costs. By investing through a fund, the investor can leverage the fund's network for deal sourcing, outsource the operational headaches of redesigning a small business, and access diversification across various verticals. . But this approach is less and less efficient.
III. Market game analysis
Starting a business is risky. And takes time.
You may spend years seeking product-market fit, building systems and still fail.
Buying businesses helps you save you time, skip years of costly mistakes, fast-forward to product-market fit and focus on scaling.
Micro Private Equity Funds
Third-party tools like Stripe, Google Analytics, Square and Shopify will make it easier to verify metrics. Buyers will trust by proxy. This makes cursory due diligence easier.
Finding and buying alternative assets, like Spotify playlists and social media accounts, will become easier. Sites like Swapd make this possible.
Know your unique advantage. How will you add value? Build a playbook:
Raise revenue by raising prices
Raise revenue with conversion rate optimization
Raise revenue by negotiating better affiliate commissions
Raise revenue with profitable paid acquisition
Raise revenue by going from free to paid
Lower customer acquisition costs by improving SEO
Lower costs with tax-efficient business structures
Lower costs with tax credits
Lower costs with a remote team
Lower costs by automating workflows
Buy businesses with similar customers and cross-sell to boost LTV and lower customer acquisition costs. See Awesome Motive in the WordPress space.
Build a personal brand for proprietary deal flow. A few names consistently came up in this thread.
Find deals using tools like Traffic Opportunities and Product Explorer.
Help others find deal flow. Here are a few ideas:
Micro-SaaS: Source and standardize deals from several marketplaces.
Digital Product: Sell a live Airtable database of deals. See Product Explorer.
Paid Newsletter: See Traffic Opportunities and Website Flipping Newsletter.
XaaS: Become a scout or bounty hunter. Offer deal-flow-as-a-service.
🔑 Key Lessons
Start small and move up in deal size over time.
Forget 0 to 1. Go from 1 to N. Save time, reduce risk and “buy” product-market fit.
Build an “audience-first fund” for proprietary deal flow.
Assume every business has a price and do cold outreach.
“What is micro?”
It’s relative. Let’s say businesses valued under $5 million.
“This assumes that I have money.”
Or that you can raise money or get seller-financing. You can reduce some market risk by copying successful businesses. Assuming that there are no strong moats. But execution risk remains.
“Small deals have high transaction costs relative to the deal size.”
Prioritize learning over earning at this stage.
“It’s against terms of service to sell social media accounts.”
Wrap them in an entity and sell the business. Not the account.
“Data provided by sellers can be faked.”
This is a cat-and-mouse game. And may never be solved. Live dashboards from third-parties like Stripe and tools like Phlanx make this easier to spot. Talk to customers and trust your gut.
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