There are lots of questions on this forum about starting a small business or investing in them in general. I’ve now been doing it for a while, and have learned a few good things I think would be helpful for all.
Context:
Started, scaled and sold a few small companies.
Joined this forum and a few others to start learning about how to invest in the same space I started my companies in.
Compounding money from those exits at a pretty good rate. Should have $50m+ in liquid NW within 4 to 7 years depending on if I want to sell some of the portfolio. Have allocated 8 figures of my own $. Net multiple 7 figures per year
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1. Need a big edge.
I have a little bit of capital, so I focus on opportunities that aren’t structurally viable for LMM/MM funds. For example, carve out right now where we don’t need to deploy much cash but have crazy upside. A fund can’t do that deal since they need to deploy capital. I do not want to get into a bidding war because I will lose lol
I have a background in running companies, so I focus on small distressed deals where revenue is under $100m. We can move faster on the diligence side because of our background, which means we can bid in a better way or get deal flow nobody else does. Entrepreneurs do not want to report to some associate at a PE fund that has no operating reps.
We also do a lot of other weird things that are not viable for people with a committed fund because of mandates, hold periods etc.
2. Need to understand the business.
If you’re buying a business with under $100m in revenue, you need to really, really understand how it works down to the nuts and bolts. This lets you underwrite it from the ground up instead of top down, which IMO, is the only way to invest in small businesses.
3. Never overpay.
It’s so hard to make money when you overpay. I’m a deep value guy at heart, but have done some growth deals where I felt valuations were good. I get that great companies are usually not cheap, but by underwriting from the bottom up, we have a good idea of how much we can juice DISTRIBUTABLE cash. Not just ebitda margin. This is a moat for us combined with never paying at the top end of the range. Theres simply too much volatility and “luck” in our industry. For example, COVID was either amazing or the worst thing to happen to you. I don’t want to be the guy that overpaid for something that got Pwnd by COVID. :-)
4. Don’t get lazy and keep learning.
Many of our competitors don’t reply to people on weekends, attend events, or put in the hours they should. We are extremely grindy and have no problem living in horrible places for extended periods of time to drive returns. Honestly I think a lot of our returns are driven by simply being stupid, sweaty and high energy. Our competitors make a bit of money, then get lazy. I think we do a good job of continuously learning too. I’m in a few text chats with people that are 10 years younger than me and do 2% - 5% of our revenue. But they are running the latest tactics/incredibly grindy, so I learn a lot from them and stay up to date.
5. You can never be too tactical.
We have no problem jumping in and doing things. ERP swaps, marketing, cost optimization, etc. I have a ton of reps with it all and have no issue working with a team on the weekend to help out and move faster. This helps with some of the above points.
Sorry if formatting is messsed up, wrote this on my phone while in a car.
Based on the most helpful WSO content, here are the key lessons from investing 8 figures of personal capital:
1. Find Your Edge
2. Deeply Understand the Business
3. Avoid Overpaying
4. Stay Hungry and Keep Learning
5. Be Tactical and Hands-On
These lessons emphasize the importance of discipline, operational expertise, and a relentless work ethic in achieving success in small business investments.
Sources: My Key Takeaways From the Introduction of the Intelligent Investor. Part 1/16. To Be Continued., 6 Lessons Learned After Leaving Finance For Entrepreneurship, Days of the development tycoon over?, Starting your own Fund/Firm
I have been following your posts/comments for a while and I appreciate you sharing your knowledge here. I am curious - you seem more of an entrepreneur than an investor who constantly evaluates risk/reward ratio (or is it just the same?). From entrepreneur's perspective - how do you view potential investment opportunities through the lens of financial analysis (I realize this is rather an abstract question but I imagine this view differs from people who dont have deep operational expertise)? Also, given your background, it seems you have quite high risk tolerance - was it something you were born with or you have put an intentional effort to cultivate it?
Thanks!
I think we look at things from the bottom up, as in...
What does this look like if we were running it? Where & how can we improve the business? What are the individual parts worth?
If we can't really improve the business I am not comfortable owning it because that is effectively our moat.
I don't think our strategy is overly risky, as we've never lost money on a transaction. I guess entrepreneurially I have more risk appetite, but I'd say it was mostly because I was too dumb to be reasonably employable lol
Nothing to add here but I have been following you for a while and love your updates/responses - keep em coming!
Thank you!
How many companies do you typically own at once?
We have 2 or 3 positions we are super active in. Probably ~8 - 10 at a time total. But some are very passive.
How did you even start? Like what was the first thing you did to get to where you are?
Bootstrapped & sold 2x brands before ~24.
As WSO has grown considerably (especially of late), we have thought about potential tuck-in acquisitions at times but have never really come close to pulling the trigger... it seems a lot of people mention ~3-5x multiple for smaller businesses but in my experience, most of the businesses I see on most marketplaces that would be relevant for us (ie some synergies) are asking for 5-10x... even one that had declining revenue (I also think I'm very risk-averse by nature).
So I guess my question is on sourcing. Are you finding better deals because you are agnostic and have a wider universe like ecom in general or do you think there is some secret sauce to finding distressed deals. what % of your time is spent sourcing / evaluating deals vs fixing/improving Ops?
Thank you! (also for the fashion tips - you may know the blazers I wear in all my videos are thanks to you ;-)...
Patrick
I guess being in an adjacent space, anything search-heavy is terrifying right now, especially content. This makes sense due to the user-generated content, but I imagine others are relying more on TOF coming from things like articles/blogs? If they are, then I'd be way lower on multiples.
For finding deals, I think at this point we are well known enough that if you're distressed in consumer and have something with $100m or less in revenue, then you are coming to us. Now, it feels like we have been doing this for so long that we know who the usual bankers are, and we're tightly integrated into the community bc of how many conferences we attend or run.
RE: time allocations, it's all very seasonal but ~40% of my time is usually spent on sourcing/looking at deals VS "operating".
But yeah for something like WSO, I guess trying to find other niche forums with a very valuable audience makes a ton of sense.
How much did you start with? What resources do you recommend to read up on?
never got into finance because of early career choices but am a big hobby investor and have done well picking stocks. Read this forum to learn about investing. Have 20m I can deploy from family / work.
Where would you start from square one.
I wouldn't say I can give you good investment advice when it comes to stocks. All of our alpha is driven by operational changes to a business, and structurally "cheap" buys. I do not believe this is doable in public markets without 9 figures.
'preciate you posting. Always follow your posts. Keep on keeping on brother.
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