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We just added a startup to our deal flow… 

That brings a really unique opportunity to investors.

One I can truly say I haven’t seen before.

You see, when you invest in most startups, you’re hoping for that ONE big payday… 

Either the company IPOs (goes public) or they get acquired by some other company.

But this startup is aiming to bring its investors multiple exits along the way – each of which creates a mini-exit…and triggers a payout to investors. 

How are they doing this?

They’re buying small home service businesses (think plumbing companies) where the owner is ready to retire.

And with a little TLC, updating, and systemization…they’re able to grow these companies significantly.

As their portfolio grows, and they put more business through their system, they plan to sell off businesses along the way and bring returns to those who’ve invested.

I sat down with the founder last week for an exclusive interview inside our Angel Investing Insider community.

This isn’t his first time building a startup with this kind of model either.

And the plans he has for this company are pretty impressive.

See for yourself…

 

Growing A Portfolio of Businesses

 

We have a new startup on our Angel Investing Insider Deal Flow.

What they’re doing is so unique — the founder buys small businesses, optimizes them, grows them, and sells them for a profit. This startup is really like a fund, where investors buy into the companies, fund the growth, and hope for big returns on them. 

I got a chance to sit down with the founder of this startup to get all the details. We spoke about his background in finance, his history of buying and growing businesses, and the future of his company. 

Let’s dive in.

 

Founder Backstory

 

The founder of this startup grew up in Chicago, Illinois. When he was 12, his parents moved to California’s Central Valley, smack dab between Los Angeles and San Francisco.

Raised in a household where both parents were small business owners, he grew up with a keen sense of hard work. His parents wanted something different for him, not the 24/7 working schedule of a small business owner.

So he went to Berkely to study finance. He was passionate about investing — geeking out over Warren Buffet and the big plays in the investing world.

He carried his interests into an investment banking career after college. There he helped companies like Google, Amazon, and Microsoft do M&As.

He enjoyed this but wanted to get closer to the action — closer to the business owners. So he packed up and went into venture capital. 

He joined Goldman Sachs in their venture capital unit. Here he made investments directly off of their balance sheet into tech companies and other strategic ventures.

He enjoyed the technology and innovation he saw, but he had a bit of trouble reconciling some of the evaluations in Silicon Valley at the time. Betting $20-30 million into a company that started six weeks ago just wasn’t for him.

He decided to branch out on his own and start his own investment fund. He saw a need and opportunity in the market. There were many small, unloved software and media companies that could benefit from acquisition but didn’t have the means to get there. 

 

New Business Buying and Optimizing Small Businesses

 

So, he started a special fund to capitalize on this. 

His new company would acquire small, $1-2 million software companies. It was inexpensive at the time. They would pay 2-3x the earnings, a great deal for those unloved companies. 

So a startup with $1 million in revenue would be acquired for around $3 million. The same companies if they went public or went the VC route would go for $20 million

From 2013 to 2018 the founder and his partners acquired around eighteen businesses and provided around 30% profit to investors. He says it was a satisfying process — buying, fixing, systematizing these small businesses.

But around 2017 the rest of the world started waking up to the asset class he was working in. There was a lot more competition. The deals he was landing for 2-3x earnings would go for 5-6x earnings. It just became more difficult to find deals.

At the same time, he really loved what he was doing. He had created sophisticated systems for acquiring and enhancing small businesses, invested hundreds of thousands in software to find the businesses, and built training systems to train the CEOs.

So he asked himself, “Can we take this to another market? One that is as unloved as online businesses were in 2013?”

 

Changing Industries and Building the Startup

 

He did a deep dive into nearly every business category in America searching for a viable market. 

He landed on home services — very different from software companies. These are services like plumbing, roofing, and HVAC. He found that there are hundreds of thousands of these companies in America. They are often very profitable, making millions of dollars a year. 

But here’s the kicker — most of these companies are run by people who are 60+ years old. Many of them want to retire but have no one to pass their business on to. Their kids went into other fields, just like our founder did. Their kids are engineers, doctors, lawyers, and don’t want to run a plumbing company. 

So he found a major transition point in this market. The owners needed a way to move on in life without compromising everything they worked for. 

This was his new unloved industry, ready for systemization. He bought his first HVAC company in 2019. He said it was like, “Going from the Major League to AAA Minors.” Before with the software companies, he was competing with VC-backed startups with $100 million in funding. Now he was bringing the same mindset into a field where most owners were long settled into their ways and weren’t hungry for growth. 

With minor optimizations, the HVAC company grew 80% in a few months. 

It’s no wonder our member got so excited about this startup…

 

Business Model

 

At first, the HVAC company was making about $800,000 a year in profits. The founder bought it for $2 million. He didn’t need to pay cash, financing these businesses is easy, the bank understands home services and the companies were profitable. There was little risk involved. 

Then, he would put down around $300,000 in funding over ten years. That $300,000, after debt payments, grew to about $600,000 per year. And this was all from simple changes.

For example, these home services companies would be charging 15% less for services than the competition without knowing it. Through market analysis, the founder could tweak the prices and boost profits. 

Another thing, these companies were doing very well on Yelp, with hundreds of 5-star reviews. But, with revenues of $5 million per year, companies would still only spend around $3,000 per month on advertising. Companies that size usually spend $20,000-$30,000 per month on advertising. Just by bumping that number up a bit, he could achieve another 20% of growth. 

Next, he would add technology systems. Instead of the owner waking up at 5:00 AM and drawing the routes for each driver on a map, the founder brought in software to handle that. 

Little by little, minor changes compounded into big returns. This is the business model. Searching for, buying, optimizing, and eventually selling unloved companies with loads of potential.

The cash-on-cash return here is even better than in his venture deals.

 

Q&A with the Founder

 

Q – Of the 18 businesses that you bought, how many do you still have? And how are they performing?

A – So we’ve sold nine of them at this point, so they’re exited. Three of them were very successful, with returns for our investors of above 100%. Of the remainder, I’d say that six would be a good return for investors — and as I said, for us, 20% to 30% is a good return. Two are still a challenge. 

You can’t bat a thousand. On two of them, we got smacked and we learned from it. Even then we got the capital back to our investors.

Q – Are you planning to enter other essential services other than HVAC and plumbing?

A – We are. We are open. There are a lot of niches that look appealing to us, water restoration, tree trimming, landscaping, flooring, are all interesting to us. But we also know the power of focus. 

We want to start and have success, validate it out, and really build a strong team. If we had a choice right now of buying a great plumbing business or a great flooring business, we would add the second plumbing business because the expansion is going to be more profitable for us. 

But, if in 5 years we’re like, oh man, we bought all of the plumbing businesses in the area and there’s nothing left, I think that’s when we will certainly have to expand.

Q – How many businesses do you have in your portfolio right now? And what is the plan for the remainder of 2020?

A – With this new entity in the startup we made, we have three companies right within that cusp of closing, which is why we are doing this round. And those are all in the plumbing space. Then we have two other businesses that are a little further out. 

Our goal for 2020 is to buy five businesses. We have been working on some of these for a long time and COVID slowed things down. But basically our goal is four to five businesses a year, one great business a quarter.

We’re constantly sharing our favorite startups with members and this company is just one of the startups on the deal flow for members of Angel Investing Insider.

Author: Chris Graebe

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