Productizing MicroAngel Returns: Part One
Where do we go from here? Exploring how to elicit the maximum potential out of the MicroAngel model
For millions of entrepreneurs, first-timers, or otherwise, the biggest roadblock to playing the game is life, man.
For an eighteen-year-old with infinite energy and no commitments, building a startup and eating ramen is an entirely viable option.
An option that vanishes with time or repeated tries at success.
For some, the progress of life creates an inescapable need to put points on the board in the short term.
To prioritize survival over freedom.
This often leads to consulting and freelance as a way of making ends meet or, worse, a full-time job and a blood contract involving months, probably years, of nights and weekends to scrape forward toward salvation.
One segment beyond are the individuals choosing to pool whatever leftover resources they have as they endure the painful dread of their realities, to finance an eventual prison break out of the hamster wheel and towards the indie hacker dream of a bootstrapped company.
A fraction of the population jumps that ship every day, typically aiming to use whatever savings they’ve collected over the years to finance the runway needed to make it or die trying.
I could never overstate just how amazing that experience is, just as I can no longer sugarcoat the unfortunate failure rate of such a plan.
How I wish it would work for more people.
But starting something, anything, from zero is kicking off a new game hard-locked on Super Hard Mode.
You can win. And I hope you win.
But the numbers say you probably won’t.
Despite that, the bootstrapper journey continues to gain steam.
Of course, the reasons to choose to bootstrap over venture capital are varied:
your startup idea might not be venture compatible and/or you may not be seeking venture-compatible returns
you may not have the storytelling skills or the traction required for a pre-seed or seed investment
you may not have the ability to connect with angels or VCs who identify with your vision and plan
you may not be inclined to raise funds before reaching PMF but recognize the catch-22 that lacking resources could lengthen the path to PMF or completely jeopardize it
you may not want to sell any of your company at all!
you may not be willing to take shortcuts relative to your vision
and so on.
Until sometime last year, these two options — that of bootstrapping or raising angel or VC funds — were the only legitimate ways into the game.
You either do it yourself or raise money to build a team on day 1.
M&A has been around for centuries, but the work implied in buying or selling has made this option a non-starter for microSaaS startups and a large number of entrepreneurs trying to materialize their first big win.
The two-way liquidity provided by that marketplace and others made way for an experiment I started which proposed a third doorway into entrepreneurship via M&A.
There’s nothing new about M&A as much as there is something fundamentally disruptive in the ability to find, acquire and sell small software products without any middlemen.
If you keep your eyes open, you’ll notice that every new channel creates new startup opportunities. Because new platforms create a shift in the status quo, a gap emerges between the previous status quo and the new reality made possible by the platform.
In our case, my theory was that instead of investing some funds into runway designed to provide the time needed to build a product and reach market/product-fit, I could instead use a shortcut.
By buying products, I’d have revenue on day 1 and I could chart my returns right away. I wouldn’t need to raise funds because the types of products I’d acquire were not compatible with venture capital anyways. These were not moonshots. They were cash cows.
It became a much clearer path to creating value than by hoping.
Today, I know this model works. I know the theory proved true.
There is an incredible amount of value and clarity made possible by this approach because it removes the historical risks and pains implied by the other two entrepreneurship options.
And that is the basis upon which my exploration here begins:
And just about anyone can do this with a similar degree of success.
So what now?
What’s the best way to develop the potential of this model beyond selfish reasons (i.e. enriching myself)?
How can I make the result available without involving the operational requirement in the middle?
Fork in the road
After my first acquisition, I recognized that the model was working right away, but it was important to see it working for at least a year before I could truly plant my flag and support my claim.
As things moved forward, I didn’t pay much attention to the future, though I did what I could to position myself for it to be clearer.
I’ve learned how to make the most out of the advantage I have on hand, so I thought it silly to chart out a path beyond Fund I while I was working hard to try to figure out how to make the most out of that very fund.
I learned several valuable lessons, including the truth that running a microSaaS, regardless of size, is no simple task for ambitious individuals with passion and vision.
It can be a torturous experience to have the knowledge and skills required to increase the value of a given thing while having the wisdom to recognize the diminishing returns that would ensue from that activity.
Startups are a story of decision making and by and large, you can get away with making mistakes pretty much all the time save for a few critical decisions.
In my experience so far, the mistake gap is larger if you’ve managed to acquire at a reasonable multiple.
You can afford to make more mistakes — and collect more optionality as a consequence — if your success isn’t critically dependent on every subsequent decision you have to make.
I discovered how much more weight each of my punches would carry if I could focus on a single product.
But I also made several good calls.
Segmenting the journey, from buying to learning to fixing to growing, was crucial in maintaining my ability to see the forest for the trees while maintaining focus on the things I was trying to accomplish in any given month.
It would be incredibly easy to get overwhelmed otherwise considering the sheer number of activities that one could do.
I discovered these nuances as Fund I matured, and today I wonder if they’d scare me as an investor had I known about them on day one.
There was certainly some consideration about these likely challenges, but as an operator, these felt like obvious obstacles.
I had to reconcile these risks together.
I wonder if a more purist microangel (standing away from ops as much as possible) would be turned off by the operational requirements I’ve learned exist as it relates to microSaaS microacquisitions.
The reason I ruminate over these thoughts is that I’m faced with the choice of what to do for the second fund.
Realistically, this fork in the road has a few possible destinations:
Reinvest proceeds from Fund 1 into Fund 2, stay independent, and aim to double-up again.
Maintain this pace for the foreseeable future and grow the team responsibly over time. Potentially use some debt.
The point of this is to grow our operating capital and cash flow over time by compounding our proceeds.
Pocket the proceeds from Fund 1 while investing a percentage of them into Fund 2, which would be a primarily LP fund.
Raise $5M to fun the first LP fund over the next two years, to repeat the same model at a slightly larger scale. Potentially bring on a third operating partner.
This is interesting considering the amount of LP interest I’ve had + VC funds waking up to the advantage of having 3-4 investments per fund return 3x+ pretty quickly and with a way higher success rate and a shorter return horizon.
These are the two main directions I’ve been thinking about for the past year. But as I start thinking about the future and our Fund 1 roll-up for an exit, I recognize an important truth:
As an investor, I want to maintain the same rate of return without necessarily having to operate products.
Similarly, as an operator, I’m limited by the number of products I can operate and can realistically only scale through more people. It’s rare to find a product that runs itself post-acquisition because most people acquire products with a clear idea of what to do with the product after it is purchased.
So in reality, I’d like to find a way to maintain the same returns and the resulting quality of life that these returns enable while reducing the need (or requirement) for me to operate anything.
That’d be pretty great of course, and a big improvement on the model. Who wouldn’t want to produce 2x+ in 12 months without having to do much?
That’s certainly straying from the beaten path.
But I’m getting a similar feeling as I did when I started the experiment. This is the way towards true freedom.
What I’ve discovered is fundamentally a huge leap forward for other entrepreneurs like myself.
But I think there’s a version of this that represents the full potential of this new asset class we are giving birth to.
Productizing MicroAngel Returns
If I could wave a magic wand, here’s how I envision MicroAngel evolving:
First, the buying phase would evolve.
I don’t want to spend 6 months to find products to buy. I want to buy into products I use every day, but that’s not possible unless the folks building those products let me buy equity.
So the first problem is to help evolve the buying part.
While I recognize the many advantages made possible by acquiring a product outright, the end goal I’m running after (the returns without the work) doesn’t necessarily require acquiring products outright.
What we’re acquiring is MRR, first and foremost.
And that’s the buying journey that’s missing. I want to buy MRR and call it a day. But that’s only going to be possible if folks who work hard to build that MRR have an interest to sell the right to that MRR to me (instead of pocketing it).
The people who are willing to sell that MRR might be inclined to do so on the basis that I might be willing to pay a 4x return on their annualized MRR.
If folks are willing to sell 100% of their products for a 4x multiple on their annual recurring revenue, does it start to reason that they would also accept a 4x multiple for, say, 5% of their MRR?
If you make $20K MRR and I want to buy $1,000 MRR from you, would you be willing to give up that revenue for the foreseeable future for, say, $50k?
I’m not talking about selling equity. I’m effectively talking about selling the rights to revenue. Buying into a revenue share with a few differences:
The ownership of the MRR you buy is represented by an asset that can be transferred back to the original seller or some other investor (at presumably higher valuations)
The original seller of the MRR benefits from any secondary sales if it gets sold to someone other than them
The original seller has a means of clawing back MRR at a set valuation that both the seller and buyer agree to at the beginning
The value of the MRR grows over time as the product grows in maturity
So imagine I bought $1k MRR for $50k. So a 4.17x annualized multiple. Four beautiful years later, you’ve collected $48k in MRR as a result of holding on to the asset.
You turn around and sell the $1k MRR for 3x-4x annualized revenue to some other investor for a sum ranging from $35k to $50k, bringing your total return range to $83k - $98k, a 1.6x - 2x return over your initial $50k investment.
Now, is 2x in 4 years good? Yeah, not bad actually.
Sure, 2x in 2 years is better.
But if you can get 2x in 4 years without having to do anything, you may be inclined to choose that option instead.
The question then becomes what do you buy?
And my answer to that question is your friends’ stuff.
Following the logic that you want to invest in your smart friends and whatever it is they are doing, be it as an angel or otherwise, I would certainly see myself buying MRR of products I use and/or of products that friends have built.
And the reason I’d do that is because they’ve been building in public for years already. This has exposed me to what amazing businesses they are building and has fed my interest to participate in whatever capacity I can.
Rather than being relegated to a position of indirect (cheerleading) support, both my friends and I could benefit from me buying into their MRR:
They’d get a solid chunk of change they could use to make a meaningful investment without having to pay back a loan and/or sell any equity
They’d effectively earn a teammate/supporter/customer in me as we’d have a vested interest to see continued growth
investors want more growth to attract new buyers, who will purchase MRR at higher multiples than previous investors, providing liquidity in the right ranges
operators want more growth for obvious reasons, but this model also enables several windfalls per year without ever giving control beyond revenue sharing.
I’d get access to MRR without having to operate the products, while actually being a customer of the products and thus understanding their potential for future growth and stability
Both of us would benefit from me eventually exiting my position, either in the form of my friend being able to buy back the MRR at an advantaged valuation or in the form of me selling my position to a third party and my friend benefiting from that secondary sale.
Indeed, with something like this, someone could exit over time by selling off chunks of MRR either until none is available to sell. But there’s a lot of baking to do in the game theory implied by such a marketplace.
The way we acquire needs to be rethought, but not by reinventing the wheel.
Folks already openly share their metrics and revenue, but the information is often shared as a token of vanity more so than as a means of quantifying progress or valuing the sale of MRR chunks.
You probably have an idea of where I’m headed with this.
I’ve been a blockchain enthusiast for several years, both as an investor and as a builder, but I continue to resist implicating that technology unless it can be core to the experience.
So far, I haven’t found anything that cannot be done unless it is powered by blockchain. Sure, asset classes like the one I’m describing would benefit hugely from the same societal-economical playground that currently powers the NFT world.
But it would be an inevitable alienation of the type of person whom I think would benefit the most from this. Tech bros would certainly be able to adopt a web3 version of this marketplace, but I’m not convinced it is a requirement more than a nice-to-have.
In this scope, I’m seeing something that makes better use of the ‘build in public’ concept by empowering builders to efficiently quantify the value of their product, and their progress, and to expose tools to acquire portions of MRR in exchange for a healthy upfront multiple.
An NFT is interesting as a mechanism because it would allow the seller to package up MRR within a single NFT, and to limit the total number of NFTs in such a way that their value will continually rise as a consequence of being a limited resource representing a larger and large total amount, very similar to a non-inflationary currency which would see its value grow as money supply grows.
It sure feels like an appropriate use case for web3, especially within the context of a decentralized asset class that can be used to power independent fundraising for bootstrappers at a rhythm that is more compatible with the present and future plans.
I’m interested to hear from you what your thoughts are, both from the perspective of someone building and selling MRR, to the investment opportunity of microangel returns without having to operate any products thru to web3 as the potential delivery channel.
There’s still a lot of baking to do, but I feel I’m onto something special considering the research has been done over the past year and more, as the world continues to shift towards bootstrapping, building in public, web3 and community.
Until next time!
Interesting concept. As a builder I like the idea of selling free cashflow for upfront capital, but only if I need that upfront capital. As an investor - I love the idea since Im buying into reliable cash generating businesses but would question web3 as the delivery channel.
Came here from an Indie hacker comment. Very interesting read!
What are your thoughts on a micro-PE type lending solution? So offering a loan for a leveraged buyout of a micro SaaS collateralised by the assets (or MRR) of the biz being acquired itself?
e.g I want to acquire a 250K SaaS generating 10K MRR , so i put (say) 30% down and fund the rest of the loan from the SaaS' (being sold) MRR itself.