Micro Private Equity

Post by
Andrew Pierno
Micro Private Equity

What is micro private equity?

It's the private equity playbook applied to a (much) smaller scale.

This is directionally correct, but there's something else going on here. Why is this an opportunity? If there was money to be made here, wouldn't it have already been consumed by the existing private equity companies?

Over the past 20 years, the startup scene went from garages to WeWork's with on tap kombucha. These companies are often measured not by how much money they make, or how sound their business model is, but by how much money they raise. If you raise $10M in a seed round, the company is currently "successful". But what about all the other fundamentals of business, like revenue and profitability.

Don't misunderstand what we're saying. There's nothing inherently wrong here. There is a time and a place for venture, but we believe that not ALL companies should pursue the venture trajectory, and in our case, we're keenly interested in those that have fallen off the wagon. If you're on the VC track, keep running, we'll cheer you on, but we'd like to show you another path to a healthy, meaningful exit.

We believe there is a new, emerging asset class. This class consists of small, profitable SaaS companies. When we buy a company, we aim for a two year payback period, and we take dividends along the way. Ideally, growth is a healthy 5% a month and in 3 years, we either make a call to hold it forever or sell it.

VC is subject to power laws. In a portfolio of 20 companies, generally one or two make all the profit for the fund, while the other 18 either die or have insignificant outcomes. This causes some mis-aligned incentives between the entrepreneur and their investors. Investors are consistently pushing each company to try to be that one or two that pays back the fund. I.e. they ask each company to shoot for the moon. Most won't make it.

All we're saying is that instead of shooting for the moon, try to create a meaningful, profitable business that might not be a $1B business. It's okay to make $1M a year! It's okay to make $100k a year! For a bootstrapped team, the numbers don't have to be very large for your company to provide you with life changing money in an exit.

In short, micro private equity is different than vc in that:

  1. We're not subject to power laws. Each company in our portfolio has it' own natural growth rate, and that's okay.
  2. We don't try to force each company to be a unicorn. We think regular horses are great too.
  3. We take dividends along the way (i.e. excess cash from each month that's not re-invested goes back to the partners).
  4. We buy revenue generating assets (as opposed to a right to a potential future stream of cashflow).

A useful metaphor might be to think of what we do as buying and selling houses or commercial real estate, but we do it with software companies.

Again, we're not anti-venture, but we do believe 95% of businesses are not venture scale companies, and could have much better outcomes for their founders if they focused on being profitable and growing at whatever growth rate is comfortable and healthy.