As Marc Andreesen once said, "The only thing that matters is getting to product-market fit." Builders-as-buyers are able to skip this challenge by purchasing companies that have already achieved product-market fit; instead of spending millions just to find it, builders-as-buyers can solely focus on accelerating a repeatable, scalable and profitable growth model. As technology lowers the barrier to product and company creation, a new type of empire-builder is merging. While hedge funds, private equity groups, and venture firms continue to battle for tech's fastest-growing, disruptive startups, "micro private equity" searches for sustainable innovations at deep discounts amid a growing ecosystem of bootstrapped businesses that are cashflow positive with stable growth but are "diamonds in the rough." The emergence of this asset class is not only proving lucrative but fundamentally altering the landscape for bootstrapped businesses and low-growth VC backed founders in the Chasm stage of their growth cycle.
How did we get here?
The maturation of this new $49 billion outlier market is the direct result of:
The 99.4% failure rate of VC capital pursuits that have propelled a new wave of founders that prioritize bootstrapping cashflow positive businesses to $500K - $3M+ in ARR;
And over the course of 3, 5, 7 and 10 years these businesses mature their core product offerings and customer base, however, are unable to scale beyond the Chasm due to inadequate access to capital, inability to afford growth resources and lack of commercial skills and operating expertise.
The result is that founders become trapped in their own business and are left with a set of undesirable choices - all of which lead to burn out, attrition and eventual closure:
Maintain the status quo with limited resources and miss out on maximizing the revenue-generating potential of the business.
Allow ongoing operations to dwindle in result of dedicating 6+ months to capital raising which pulls founders (the heartbeat of the biz) away from daily customer and product needs.
Double-down on an unrealistic vision of scaling the business beyond the Chasm stage using operating profits and at the expense of reducing founder, take-home earnings which is the primary income source for founders at this stage.
In this respect, the triviality in which something valuable is made creates the problem. Micro private equity (or holding companies like Cloud X) offers a solution. Empathizing for bootstrappers, respect for legacy and a streamlined M&A process, these firms provide liquidity, peace of mind and a permanent home for the future of this emerging asset class. Post acquisition, these firms look to accelerate growth and profitability by layering in their own version of growth engines, clearing technical debt and renovating UI/UX design, onboarding, marketing and sales functions. Often it's the onboarding, marketing and sales functions that are most neglected or nearly non-existent, prior to acquisition. Having only small product / engineering teams in place, with little resource capacity and time to run a commercial strategy and sales funnel.
As Yotam Ottolenghi once said, "Another man's trash is another man's treasure." The natural rate of growth, better stated as, "The organic, self-service growth engine" of micro-SaaS is the most attractive feature of this asset class. These companies achieve profit-generating, six and seven figure annual recurring revenue numbers without professional marketing and sales functions; often without any focused marketing spend. Hence, the notion of diamond in the rough!
The landscape of micro private equity is unlike any other corner of tech, featuring trends upstarts, artificial family offices, traditional financial institutions and venture-backed goliaths. The future of this space is rapidly mainstreaming: identifying cloud markets with room to grow, bulking up through programmatic acquisitions of relevant assets, with options to hold the growing cash flows over the long-term or spin-out for liquidity is a sure-fire strategy that will increasingly see more capital in-flows.
In closing, micro buyouts change the calculus. With a relatively small outlay, in 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. More importantly, this 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... motivated by life-changing opportunities rather than astronomical valuations and planet-colonizing levels of wealth.
The evolution of micro PE will become a natural conduit to more widespread wealth creation and GDP expansion; enabling more to build their online empire in the digital age. Watch this space!
Brandon B.
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