MicroAngel State of the Fund: October 2022
Reached 70% cash-on-cash, passed $30k MRR, adjusted selling multiples, new outreach campaign. 30-day Revenue: $31.45k
Hey microangels! Hope you’ve had an excellent month.
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Some of the months with the best performance end up being months where I barely get to make any new moves.
Yet the seeds we’ve planted continue to bear fruit every month, further improving the performance of the portfolio.
The two primary flywheels contributing to Fund 1’s returns are cash-on-cash returns from monthly free cashflows and valuation gains enabled by MRR growth.
As of today, Fund 1 performance breakdown goes as follows:
capital invested 21 months ago: $573.5k
cash returns collected: $416.8k
current cash-on-cash rate: 5.5% monthly, 66% annually
portfolio valuation: $1.71m
total value against invested capital: $2.13m
total multiple on invested capital: 3.71x
Something I had always planned around is the implication of buying at an attractive multiple on my returns.
Since the start, I’ve modelled after a minimum acquisition multiple of 4x, but have consistently received offers and observed the market operate far above that.
I often receive emails from MicroAcquire detailing new listings.
In the rare instances where Shopify apps in the >$100k ARR range are newly listed, they often come attached with an asking ARR multiplier in the 6x-10x ARR range, which makes most of us — but not all of us — balk at the price.
Despite this, this inventory quickly sells, and demand continues to outstrip it. Bidding wars are commonplace now that microacquisitions have gained popularity amongst micro PE funds and microangels alike.
Despite the market remaining red hot, I always planned to sell both apps together so they could benefit from the same multiple.
I would justify my asking multiple on the basis of the apps’ individual merits but recently, my perspective has been changing.
With Reconcilely starting to really separate from the pack, it begged the need to revisit valuation across the portfolio.
That is, considering an asset can, in fact, breakout and begin rapidly growing which would be conducive to greater asking multiples above what I’ve planned so far.
Somewhat separately, I had a few check-ins this month with different interested parties for both apps. It seems like a deal for Postcode Shipping might start to materialize soon.
With Reconcilely rapidly catching up to our minimum monthly burn, it might become possible to offload Postcode Shipping so we can focus fully on Reconcilely, without suffering a context in which we burn funds.
As that, of course, would be a non-starter.
I did some work on our app store listings considering the deadline for the new designs/requirements is December 1st.
I’ll have to complete this work going into November to ensure we’re satisfying all requirements to stay competitive on the app store (or better).
It’s mostly collateral to make. New screenshot sizes have inspired me to create new screenshots altogether. Same thing with app videos. Hopefully I can put a 60-90 second spot together for each app using Canva or something. Nothing crazy, promotional only.
Kicked off some new outbound resources to give things another go, and we’ll see soon enough if those bear fruit.
This new sales channel could have a dramatic impact on both ARR growth and monthly free cashflows implied by selling annual pricing plans.
Lastly, have been making some decisions regarding the DAO and laying the groundwork for what’s next considering our pivot away from the DAO context.
It seems our family can’t catch a break with kids constantly needing doctor visits, as well. I feel like I’ve spent half my month tending to my children’s health and it’s not even winter yet.
Just two short months left to the growing stage — in which we specifically try to commercialize the product work that has been done during the fixing and improving stages — before we start thinking about the next chapter for the fund.
I’m thankful for the progress so far and I feel vindicated by some of the performance gains that were enabled by the decisions I make every day.
It means things are going well, and it means I’m in a zone of comfort I’m looking forward to expanding next fund.
I’m still spending time building the Triwizzy Tournament for the Doodles community as part of a 60 ETH proposal to build the platform and execute the first tournament for the community.
Having loads of fun with it, though it can be a time sink. Honestly not too worried about it, as it does help keep sane in the midst of all the craziness of life.
If things are moving up and to the right in this playbook, you’re doing it well, and you can afford to play in between.
Current fund lifecycle stage
✅ Buying (02/2021 - 05/2021)
✅ Fixing (06/2021 - 08/2021)
✅ Improving (09/2021 - 12/2021)
→ Growing (01/2022 - 12/2022)
Roll up (1/2023)
Exit (2/2023 - 4/2023)
Funds Deployed: $573.5k
Closing MRR: $30.97k
30-day Revenue: $31.45k
Rolling cash-on-cash return: $416.8k (+72% / 0.72x)
30-day ARR growth: $22.8k (+6.5%)
Current Total ARR: $371,652
Cumulative valuation increase: $1,139,728
Portfolio Valuation1: $1,713,228 (+198.73% / 2.98x)
21-Month Total Return (MOIC): 271.42% / 3.71x
When I pair the run rate acceleration with the addressable market opportunities implied by the work we’ve done (releasing QBO, increasing ARPU and LTV dramatically 40%+ and opening up new lines of revenues at the mid-market, etc), it’s clear the value of the app is rapidly shooting up, and thus I’ve adjusted the minimum asking multiple for Reconcilely up to 5.5x.
Considering most of the portfolio’s growth comes from Reconcilely, the implied multiple added to the MRR growth have produced a large increase in the paper gains of the product.
To stay true to the monthly state of the product on a rolling basis, I now think of my asking multiple as a living thing that can change on a month to month basis predicated on reaching new product, revenue, retention and/or expansion milestones.
In other words, you can elicit a greater valuation out of an acquired product by improving its product. But you can also do so by unlocking new run rate improvements by commercializing the things you’ve built or improved during that time.
Provided we continue to grow the product, continue to unlock improvements in ARPU/LTV, and increase run rate by serving the upcoming QBO market, which dwarfs Xero demand by 10x on the App Store, we are poised to continue increasing the asking multiple.
This is a new dimension I hadn’t necessarily considered in the planning stages of the fund.
Yes, the Growing stage would aim to drive MRR so valuation would go up.
But I hadn’t fully considered how growth and product engineering might directly lead to new commercialization opportunities, which, if unlocked at least a little bit, radically increase the buyer’s likelihood to drive more value post-acquisition, and thus positively influences buying multiple.
This is one of the main reasons why I had chosen to focus on Reconcilely to begin with.
Its ceiling is many times higher than Postcode’s because the potential markets for the product can expand without the product itself changing all that much.
Now that the run rate is improving, I can chart an estimated timeline to burn zero were we to operate only Reconcilely, which would allow us to exit our Postcode Shipping position, realize our gains with that product and maintain our velocity on the Reconcilely side without having to burn through funds (as Reconcilely would be able to support both myself and my partner).
Further to that, the general profitability of the fund would improve because the large bulk of our costs are on the Postcode Shipping side, and Reconcilely can be run on a very lean and inexpensive stack.
It’s good timing, as many of the funds and individuals who had expressed interest in both apps have recently been checking in for updates and to re-express their interest to acquire our products.
In particular, we have been in touch with a good partner to hand-off Postcode Shipping.
It’s somewhat of a lukewarm relationship, but objectively the best one considering the strategic value the app would represent for the buyer.
I’m comfortable with the idea of exiting Postcode Shipping because I don’t necessarily intend to work on it over the next two months.
However, I’m not willing to forfeit the cash-on-cash returns I stand to collect provided I simply continue holding the app, with its incredible stability driving those returns.
When I started the fund, the CAD:USD exchange rate offered $1.25 CAD per USD, which was useful because I was holding the portfolio on a personal basis and declaring all of its revenues as personal income and benefiting for the exchange proceeds to basically pay for taxes.
This logic mostly stays true on the business side (~22% tax), so I hadn’t really thought about it too much until recently.
Specifically, last month I converted our payouts at a rate of $1.38 CAD per USD, increasing our net proceeds for that month by quite a margin.
We ended up closing the month over $41k CAD, and though the majority of my costs are in USD, the leftover profit from converting most of our USD balance to CAD provided a nice little boost to CAD balance.
As of writing, the USD is hovering around 1.31 CAD.
With the roll-up month approaching (January), I’ll need to do a little bit of bookkeeping and house keeping to cut out all non-standard spend so we can provide a clean profit margin on an SDE basis.
When the buyer acquires either product, what they’ll need to know is the margin moving forward — meaning what I spent up to now, including discretionary earnings is irrelevant — so they can understand their free cashflows and the fixed costs implied in operating the product.
As an example, all current payroll, mine included, is purely optional.
The support team we pay for is optional — though a resource for processing and resolving support inquiries will be required.
The trickle we spend on Shopify ads is optional.
The analytics stack we have implemented is optional.
Very few things really need to be in place for things to run properly.
It’s important to distinguish those from non-essentials so the latter can be discounted out of the costs for a more accurate profit margin the buyer would have moving forward.
I’m a little late on some R&D tax credit work so this admin stuff needs to get done, which means my upcoming month is 3 main things:
Reconcilely product engineering
Reconcilely accounting & bookkeeping
Reconcilely tax credit application for last quarter
Not amazing considering not many of these help increase our run rate.
Frankly, my one goal over the next 60 days within the Growth phase is to get QBO out of stealth so we can launch in the QBO App Store and hopefully double our run rate in time for the roll-up (and a potential increase to 6x+ ARR).
Outreach Try 2
In the past two months, I hired two separate resources to conduct some outreach but neither panned out.
This time, I decided to work with a small offshore agency out of Dublin with a different playbook.
Rather than playing on quantity, we’ll attempt a quality game.
Their mission is to take over my LinkedIn account and do high-touch research and outreach to a specific list of accounts.
This means taking the time to build a profile and case for specific accounts we want to work with and reaching out with a high degree of success.
The individuals doing the outreach will be product-educated while will enable them to serve a customized pitch to each lead relative to the solution those leads are likely looking for.
Reconcilely’s secret sauce is that it has an intelligent payout consolidation technology that allows it to send a single invoice to account for all of the activity that has taken place within a given Shopify Payout - regardless of the amount of orders.
This dramatically decreases the number of invoices created in the accounting system, which in turn reduces the amount of time it takes to reconcile bank account deposits against matching invoices.
Instead of matching thousands of invoices to a given payout deposit, a single invoice is created that exactly matches the payout and allows the merchant to reconcile payout transactions with a single click.
Merchants on the Pro plan save an average of 70 hours per month thanks to this feature.
That figure exceeds an average of 150 hours per month saved for Shopify Plus merchants.
That’s an entire full-time resource that merchants don’t have to spend on. It’s thousands a year they don’t have to spend and hours per month they can instead invest into growing their business.
All for $990 per year.
It’s a no brainer.
Using tools like Storeleads, we can easily identify merchants in specific geographies who use Shopify Pay as a payment gateway, which means our value proposition above is likely to be a strong fit with those segments.
Similarly, we aim to release the same consolidated invoice tech for all payment gateways, which would enable us to do outreach on a per gateway basis.
Tired of reconciling hundreds/thousands of PayPal orders in Xero?
We’ll send a single invoice to account for all of your Shopify orders paid with PayPal so you can reconcile your entire PayPal account with a single click.
This is a prime example of how improving what our product can do at a high level tangibly opens the doors to a greater addressable market.
Since we already have a means of reaching that market, it’s the market/fit that matters — and that fit is strong with the consolidation value propositions because they have a direct and real benefit (automation leads to time saved with zero effort).
Like last time, the success metrics for this new channel is to drive new revenue by signing merchants in the midmarket.
Specifically, we’ll aim to score points with Shopify + Xero customers in the APAC & UK regions who use Shopify Pay as a payment gateway.
It’s a nice, defined segment for which we have a very strong offer.
There are at least 100,000 stores which fit this criteria as of today.
Provided we can reach 500 decision makers per month, the goals I’ve outlined for the outreach campaign are to:
Fill 2+ hours (4 demos) per day
Maintain a demo closing rate of 50%+
Produce 2 new customers per day or ~10 per week
Focus only on the $490/yr and $990/yr plans
That defines a top line potential of $5k-$10k per week in additional cashflow based on the pricing plan mix.
If we focus on 500 decision makers per month, or 125 per week, and we want to close 10 customers per week, our success rate per lead needs to average 12.5%.
Which is pretty aggressive, all things considered.
To further reverse engineer the KPIs:
10 closes per week at a 50% demo conversion rate; coming from
20 demos per week at a 25% (?) demo signup rate; coming from
80 messages opened per week at a 25% open rate; coming from
320 messages per week (avg. ~2 messages/lead/week)
If we expect 1 out 4 users who open the message to book a demo, and we know we should be booking 20 demos weekly, then we need to get at least 80 message opens to book those demos.
If we we need 80 opens per week, and we estimate an open rate of 25%, then we need to be sending 320 messages per week across those 150 leads, or approximately 2+ messages per lead per week.
From there, we can try a 1-2-3 combination:
Outreach on day 0
Followup with a testimonial on day 3
Followup with loom video of product on day 5
The goal of each email is to earn a booked demo on my calendar.
Assuming we can book 4 demos a day or more, it is likely we’ll be able to drive 40+ new customers per month from this segment alone, which would represent a revenue acceleration between $20k and $40k ARR per month.
That’s not including the fact we would book those $20k-$40k immediately as we will be selling yearly pricing plans. The recurring nature of this sales channel could have a dramatic impact on monthly cashflows.
Provided this works, I’ll hire a closer to take over demos and remove myself from the process of this campaign.
I’d then build the next campaign, and hire another closer once that works, and so on.
Goodbye for DAO?
It’s been several months of researching, preparing, and building the initial community for the DAO.
Every few days, interested new members pop up in the Discord to ask where things are and how they can contribute to will this thing into existence with us.
But we’ve had to make a tough call over the past few weeks to completely shelf the DAO concept due to two things:
the financial requirements implied by our legal framework; and
the uncertain liability protection offered by that framework
In short, it would cost quite a bit of funds to get the thing off the ground in a kosher way.
It doesn’t align with what I’m willing to personally forfeit to get it going.
But worse, the framework itself isn’t even guaranteed to work.
Uncle Sam could wake up any time and decide we’re in the wrong bucket, despite the way the companies are structured.
In short, the big issue is that if there’s a payment to token holders, it is automatically considered a yield.
Arguing our payments are compensation can only hold so far and represents a fickle defence in the event it is challenged.
This sucks hugely.
We want to build the DAO. And hopefully one day we will.
So we’re putting it down for now, and refocusing on what we’re trying to accomplish, and draw any possible precursor milestones we could accomplish in the meantime that better DAO legislation could come into play.
The goal is still to build a tokenized community of microangels — so we are likely to continue regrouping individuals building, buying, investing and financing microacquisitions into a single destination — and our NFT project can stand on its own within that context.
No promise of a yield.
From there, things can begin to take shape bit by bit.
We’ve had conversations internally around building DeFi products that this microangel community could consume as legitimate alternatives to other products and services.
One such idea is to build a decentralized protocol for non-dilutive acquisition financing:
A smart contract enabled by a liquidity pool driving a merchant cash advance offer that anyone could use, provided their business fits contract criteria.
In the meantime, the DAO founders (myself included) have been laying the foundations for Microangel Fund II (LP), which likely will launch as a separate brand, but which will effectively aim to offer the microangel playbook as an investment opportunity to any accredited investor.
More on that soon. Feel free to get in touch if you’re interested in LP participation.
Before I let you go, I’d love to get your opinion on what you would like to see out of this newsletter once the Fund I experiment is over.
I’ve a half-mind to start a microangel podcast and to really start driving community. Let me know if that sounds interesting, and of course as usual, I’m open to any and all ideas/feedback to help create more value for you.
That’s it for this month!
Be well :)
Postcode Shipping @ 4x
Reconcilely @ 5.5x