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The framework I'm using to turn $500k in micro-acquisitions into $1.4m over the next 2 years
The MicroAngel Investment Thesis
One of the most powerful things you can do as the ambitious individual that you are is to invest in yourself, far more than you invest in anything or anyone else in your life.
To invest in yourself sounds like a pretty opaque idea, until you take the time to really decide what is putting a hamper on your velocity and progress as a person.
Once you know what's in the way of what you want, it becomes like a cleaning obsession.
You'll scrub off whatever is holding you back by finding a way to deal with the financial wall preventing you from getting the chance you deserve.
Over the past several years bootstrapping and growing SaaS businesses, I’ve noticed the movement grow and accelerate. The world counts over 50 million indie hackers already.
If you ask a friend what they would do with half a million dollars in cash, you’d get a bunch of different answers.
Some would tell you they’d buy a dream car or a big house.
Others might choose to satisfy more… basic instincts :)
The goal is to make the money you invest have money babies. A three way isn’t going to work out the way you think it is 😂
Ideally, you can grow your wealth by investing in stuff you know and/or are really good at:
Long-term thinkers might say they’d buy real estate…
…After all, how hard can that be?
You’re just trying to find undervalued properties, secure them at attractive terms, rent the vacant space, and successfully earn strong returns on your invested cash.
I’ve always had an interest in real estate, but I have come to realize that it’s a great way to keep wealth rather than build it.
Last year, I sat down and created a plan to buy my first properties. Time in the market always beats timing the market, so I figured I should get some skin in the game as soon as I could.
When I started browsing through the available properties in my general area, it became clear we were still in a seller’s market. I had sold my house a year prior with some pretty good gains and yet prices were even higher.
If I bought some residential stuff today, I’d basically get crappier properties for every invested dollar then I would have a year ago. I had just sold some real estate at an all-time high.
This would be buying high to inevitably sell low.
Individuals have made literal fortunes investing in real-estate. But it’s a game that is hyper-dependent on location. As a micro-angel, your propensity might only be to invest locally.
Investing locally makes total sense: you want to be close to your investment so you can personally intervene should the need arise.
The thing is, Montreal is not an amazing place for real estate investing. Your dollar doesn’t go far. Rents are super low compared to neighbouring metropolises like Toronto, New York or Boston.
I remember seeing multifamily properties listed for as much as $1.2m with only two units and producing as little as $40k per year in gross rent income. After costs, most of those aren’t even profitable on a cash-on-cash basis!
The opportunities are varied across the world, but the point is that the real estate option doesn’t work out for everyone, depending on their starting location.
I have no appetite to invest in Las Vegas without being close to my properties. That might be different if I had a pedigree in real estate development, but I don’t.
Commercial real estate is much more straightforward, but COVID decimated that market. You’d think it’s the best time to buy commercial real estate, and technically, it is.
But I think that’s only true to a much larger investor whose portfolio can withstand the current commercial lease climate.
A cashflow investor wouldn’t touch most of the deals out there with a ten-foot pole.
They are not great investments and they’d come with a whole lot of painful baggage. Because you still need to fill your vacancy. And be available to your tenants if shit hits the fan.
So I decided, you know what, no thanks.
I don’t know enough about real estate to build value out of the properties I acquire. I don’t have many contractor contacts. I’m going to make mistakes.
I will likely learn real estate, but at what cost?
Is that really what I want to be doing with half a million dollars?
The other option of course, was investing in the open markets. My TFSAs and RRSPs are maxed, and I don’t love the idea of trading as a career. I’m a decent trader, but I wouldn’t say it’s my calling.
I’ve also been a cryptocurrency holder for a very long time, so I already am pretty well diversified in terms of investing in low, medium and high risk financial assets.
The question was actually, were I to move $500k out of those assets, could I make a decent return while also buying back my time?
As I ruminated over all the different possibilities, I considered learning new skills, investing in existing products I worked on and everything else in between.
For the past year and more, I’d been moonlighting Batch, a radically new way to sell out of Shopify inventory with just a few clicks.
I wanted to invest into the existing business really badly, but my cofounder had recently welcomed a new child into his family.
The prospect of giving up a great role at his day job to take on intense risk (while still at $0 MRR) for less income was not justifiable.
After many nights thinking through the decision, I made the call not to invest in my existing startup.
It was clear that doing that would create an intense level of pressure neither of us felt we wanted to operate with. We would bootstrap.
I wanted to invest in us more than anything, but not if it meant feeling the same way we would had we raised money without a working engine.
There was a reason we didn’t raise any pre-seed money for Batch at the beginning. So it made zero sense to invest on the same basis up until the point we felt confident the business was taking off.
At the end of the day, I realized that my interest to invest was driven almost purely as a means of taking my cofounders and myself full-time for some determined period of time so we could figure things out.
So I started to devise a different plan to achieve the same result without creating pressure on either my team or myself.
I explored different scenarios from a first principles approach.
What do I know?
I want to invest in myself and my team
I don’t want to waste $500,000, in fact I want to grow it
Eventually, I came up with two main goals I wanted to accomplish with the cash I would ultimately invest:
I’d buy back my time, effectively investing all the cashflow created by whatever I’d invest in to pay for my own living expenses, thereby enabling me to play the game full-time without pressure, and without burning money or the idea of runway.
I’d be able to exit my investment for a 2x return within 2 years, which would be enough to justify using this money in the MicroAngel fund vs. leaving it in passive, safer investments.
Basically, I want us to eat the cake and have it too.
Ready your forks. Here’s the plan.
Fund I: $500,000
Goal: 2.7x total return between cash-on-cash and IRR
$360k in personal income over 2 years from portfolio's cash-on-cash returns (0.7x) as a means of buying back my time as a full-time maker ($15k MRR USD → $19k MRR CAD)
$1m return on liquidation event as a secondary goal (2x+). If I'm gonna sell the portfolio, might as well pick investments that can earn a positive return in the future when I exit
0.7x → ~$360,000 in cashflows
Accomplishing Goal 1 is a question of selecting good deals for strong cash-on-cash returns that yield about $15k in cumulative MRR from the portfolio.
If I then hold the portfolio and pessimistically assume zero revenue growth — which isn’t the case — then I'd secure my ~$360k revenue over the 24 month timeline.
Of course, the caveat is I need to deploy my funds by the end of month 1 to start perceiving my cashflows ASAP.
Otherwise, I run the risk of not returning 0.7x by fund maturity despite hitting $15k MRR at some point. The pressure would then be to increase MRR over time to catch up and product 0.7x by the exit.
One of the big advantages of Canadian indie hackers is that we basically collect a 25% bonus on our income thanks to the CAD:USD exchange rate.
What you see as $15,000, I see as $19,500 — and the difference in quality of life is major at this level of income. We both pay $1.50 for a jug of milk, in our respective currencies — Canadian milk wouldn’t cost me $1.95. There’s true arbitrage.
$20,000 in gross income is about what I’ve become used to as a marketing freelancer with a defensible reputation.
I only worked with referrals, and my ask is far lower than the amount of value I create, despite usually only sticking to growth advisory roles.
One advantage as a Canadian self-employed individual reaping USD income is that the exchange rate effectively pays for my income tax, after deductions.
I tend to save about 25% of what I make for taxes, and in this case, the exchange rate pays for it, and I can claim $15k in net income for myself (CAD).
If the portfolio can deliver $15k (USD), I can reliably stop doing whatever I’m doing if I so ever choose. It’s a big reduction in stress and opens the right doors.
If I don’t sunset existing engagements, I have enough budget to operate a small, nimble team. I don’t have to actively participate.
Importantly, this defines a requirement for the type of products the fund would seek to acquire, which is that they need to effectively run themselves, with an extremely low support burden.
Having the optionality to hold or grow at a whim provides the power to turn on the gas whenever you want, and potentially only temporarily.
That’s really useful in case you need a few uninterrupted months to just really focus on one thing.
I could realistically hire a freelancer or two, give up a bit of that MRR, and check out completely out of the business. But that’s not my style — I’m a tinkerer.
In return for this $15k MRR, I’d be investing about 1-2 days per week into the portfolio.
Mostly maintaining and marketing to grow MRR, but also potentially working on the product itself if the situation ever calls for it.
The goal of the cashflow component is to buy back my time so I can reinvest it deliberately, rather than having to sell half my week to be able to work on whatever I want during the other half.
The ability to do that without burning through the $500k is, on its own, a strong enough return to warrant the fund.
That said, Goal 2 exists as a means of positioning myself for some compounding returns.
If I’m going to spend $500k today on something it ought to be worth more a couple of years later. The cashflow on its own makes it all worth it, but an ambitious individual will still aim to optimize wherever else possible.
In this case, returning 2x in 2 years would be pretty awesome. And if I’m right, I won’t even need to do anything extra to ring in those additional tendies.
2.0x → $1,000,000 at exit
If I spend $500,000 today and want to return 1.7x two years later, that's easy. We’ve already accounted for the 0.7x return, so returning 1x just means getting my money back.
I'm building a portfolio of products that are growing at a stable clip, which I won't hold for so long that they would become stale or needy. So the odds of at least returning my capital are high.
If I want to return a more ambitious $1,000,000, then I'd need to increase the valuation of the portfolio so it'd be worth that much.
Generally, at that price range, I wouldn't accept any offer under 3.5x, especially if it's a portfolio of high-affinity (they cross-sell well) products that throw off extra-stable, low-churn ARR in a high-growth segment.
I could likely earn 4x or more through a PE firm.
So the goal is to secure good deals at reasonably low multiples too. The great news here is that the nature of the products I choose don't command super high returns to begin with:
They're really small products usually under the $100k selling price. You don't typically even approach 3x at that level unless it's a high growth product
there is a large inventory of deals by jaded developers looking to divest from their projects and willing to accept a lower multiple for a quick, all-cash transfusion
the nature of the product is so simple that the owner does not see any future potential in holding it, and thus seeks to exit
the seller might be selling due to limitations in marketing abilities that prevent them from taking the product to the next level, which is a statement that sacrifices a lot of leverage on the seller side
Of course, I've got to hustle too.
MicroAcquire and other marketplaces expose me to so many deals.
It's a question of patience and determination. Patience to find the right deal and the determination to make a strong, decisive offer quickly when the right product comes along.
In many ways, it feels a lot like setting up a reconnaissance position, keeping constant eyes for movement, and having the radio at the ready to call in an airstrike at the opportune moment.
Most importantly, I made the decision to start the fund because I've been exposed to amazing deals for the past 3 years, with varying levels of success wiggling my way into transactions.
I've lost so many deals because I wasn't actively working on building a portfolio. It was just perusing and absorbing. It made me consider what or how I’d need to orchestrate to take action.
MicroAngel is a deliberate attempt to do that using a model that has simmered in my head for the last few years.
Having decided to focus my energy on things that I know, I immediately turned to Shopify applications as the profitable Micro-SaaS category I’d build my mini fund upon.
Investment focus: Shopify Apps
Shopify is eating ecommerce and arming the rebels vs. Amazon
The Shopify app store used to be full of app clones, but now more and more brands launch on Shopify + raise capital to grow
There’s a massive and growing long tail of incredible opportunities
Net negative churn is the ultimate goal and requires expansion, which Shopify merchants are already used to
I want to cross-sell Batch to my portfolio’s customers
I’m looking for apps that are:
Default alive, especially organic-based
Possible to acquire under $200k with plenty of upside to either buy+hold or buy+grow
Operating at 90%+ margins for high free cashflows to either be banked or invested into growth
Extremely low support burden creating second-order benefits like being able to buy-and-hold or reinvest more cash into the company for growth
First, if I could, I’d only buy 2x products at $250k. That’s nearly impossible to pull off in my time frame.
Realistically, I'd select 3x $150k investments and 1x at 50k.
I wouldn't attempt to hold 10 products at $50k each all on my own. That would be too much diversification and it would needlessly divide my attention.
I could aim to buy equity in 10 different startups at $50k, but that would be a very illiquid investment that wouldn't throw out any cashflows, which is the primary reason I'm parking this money where I am and how I am.
I’d also then have to manage ten products, with ten stacks and tool kits. That’d be a shitload of work that I don’t want to take on.
Finding 4-5 products that fit my criteria is not necessarily going to be easy either. And I need to field my funds quickly, because the goal of Fund 1 is to secure at least $360K in cash flow.
The longer it takes to secure $15K worth of MRR for the portfolio, the more I'll have to make up the growth from the portfolio or IRR during my exit in two years.
What is likely going to happen is there will be:
must-take deals (90%+)
great deals (80%+
good deals (70%)
bad deals (<60%)
Must-take deals tick all the boxes and can be scored at a low multiple. They're no-brainers. Just write the check and run.
Great deals are fundamentally sound with a strong gut feeling that the asset will overdeliver on its targets
Good deals may not hit all investment criteria but are good enough not to pass on, especially because I don't know when the next great or must-take deal will appear
Bad deals fit my investment focus but do not pass my investment criteria. I do not invest in bad deals, obviously.
Disqualified deals are outside of my investment focus. Stick to what you know.
I use a simple 24-point yes/no grading system to score deals.
How I score deals
✅ Interest/expertise in the nature of the product
✅ Is the app history strong
✅ Is the tech stack manageable
✅ Is the support burden low
✅ Does the app have many (good) reviews
✅ Can this be a buy-and-hold
✅ Can this be a buy-and-grow
✅ Can I close a deal under a 3x multiple
✅ Is the potential cash on cash return 30% or greater
✅ Is it default alive
✅ Is it meaningful revenue
✅ Is churn under control (20% is just too much)
✅ Is the ARPU fairly strong (>$15) for Shopify
✅ Is technical debt under control
✅ Any feature/integration that could make MRR pop
✅ Is net negative churn possible
✅ Is app ranking stable
✅ Is the churn rate acceptable
✅ Is the expansion rate acceptable
✅ Does the expected MRR growth align with fund goals
✅ Is the visit to install conversion rate healthy
✅ Is the the install to trial conversion rate healthy
✅ Is the trial to paid conversion rate healthy
✅ Does it have an expansion path
OK, so now I have an idea of when I'll pull the trigger.
The next question is, what will my distribution look like? Not 80/20, since I'm choosing the deals...
After spending a few years browsing SaaS listings, I've noticed there pretty much are mosquito deals, small deals and medium deals.
Because I'm unlikely to find only growth deals, I need to prepare for the possibility of having to field my funds for higher-than-expected multiples.
That’s likely going to have an impact on my available funds and, eventually, whether I can reach my MRR goal and/or safeguard my IRR come time to exit the products.
That said, I’ve got an announcement to make…
I’ve closed a transaction to acquire the first product in the fund!
Expect the full write-up this weekend (EDIT: here it is). It’s going to be fun digging into how I found the deal, how it came together, my due diligence going through the above items, going through negotiation and eventually sealing and closing the deal.
It’ll be my first subscriber-only post, since I’ll be sharing some intimate details. I’ll follow the same format as the Deal Reviews I’ve started to write.
If this was a valuable read and you’re looking forward to Deal Reviews, consider supporting the newsletter so I can spend even more time sharing these insights and the journey with you.
PS. I’m just a guy trying his best out there. If I made any mistakes or incorrect statements, please let me know!
The big internal push-and-pull is that I kept calling bullshit on my own statements. I kept justifying investing $100k-$500k as a funding round to effectively go and do the thing full-time & keep it simple.
I was happy to invest in my startup, give it an honest go at it, and fail. That’s life. You have to take risks.
What I couldn’t bear was the thought of writing off the investment because I had invested too early or into no particular engine.
If I made a bad investment, that would be a really expensive mistake.
It wouldn’t feel like a write-off if the path to MRR was clear. As long as as we didn’t have market/product fit and net positive MRR growth every month, we had no idea of how far from default alive we were.
I just don’t think you should ever raise money to find market/product-fit. Do whatever it takes with whatever you have to get to it, then pour some gasoline over it. Even pre-seeds can only go so far. $500k is a tiny sum of money in the grand scheme of things.