Unexpectedly, last week, i bought a new business.
On Monday evening I received a text from my biz partner telling me to check out this site that was just listed on EF.
It was a crypto publishing business and it looked like it had potential..
On Wednesday I had a call with the seller.
It still looked good and more and more a fit for my investment criteria.
We knew there were other buyers interested so if we wanted it we had to move fast..
So we did.
We wired the money on Wednesday and BOOM.
It was ours ????
This business is my second significant private biz investment. And I am very, very excited about it!
Why did I decide to pull the trigger on the purchase of the new biz?
Here are 5 investment keys that the new business fits which made it a ‘hell yeah’.
1. Great multiple/valuation/ROI
‘You make your money when you BUY. Not when you sell’
Cardinal investment principle.
And this site was great value.
A website like this commonly sells for a multiple of 3x its yearly profit.
However, since the site was young and was only monetized for 7 months, it was listed at just a 23x last 6 months average monthly profit.
That’s less than a 2x yearly profit multiple!!
So, if we hold things steady for a few more months we should easily be able to flip it for at least a 3x multiple vs the 2x we bought it at.
Which would mean a solid return on our investment in a just a half year.
Which is amazing return!!!
But, it wasn’t only selling at a good multiple.
As sometimes ‘profit’ can be misleading if the biz has big capital expenditures like physical product businesses.
Which leads us to the next point..
2. Great Free Cash Flow
Now only was the site selling at a great multiple, it generates the #1 thing I look for currently when evaluating an investment –
Free cash flow.
Free cash flow is the money left over every month after all the expenses are paid.
This is different than ‘profit’. Because, for ex, in an physical product business (which I have a lot of experience with) ‘profit’ is calculated as revenue – COGS – expenses.
This can be misleading though, as with physical product businesses you often have to spend more money to purchase more and new inventory.
So while the ‘profit’ is calculated as explained above, that can be quite different than the actual cash that is going into the bank each month.
I’m primarily interested at this point in generating cash flow from my investments.
Since this is a publishing business and has very low overhead, fixed costs and capital expenditures. It generates fantastic free cash flow.
That means that the business is set up to pay solid returns to its shareholders.
3. Domain expertise
Another criteria that is important for me when I make an investment is domain expertise.
I want to invest in businesses that I understand the space and industry so i can make informed decisions and lesson my learning curve.
Well, last year I dove deep into crypto.
I attended conferences all over the world, and interviewed industry leaders on a podcast.
So I have a very strong understanding of the space and industry as well as a ton of connects.
These contacts I believe will be incredibly valuable as we look to expand the site and for potential partnership or collaboration opportunities.
4. Huge upside potential
VC extrordinaire Chris Sacca stated in his Tim Ferris interview that one of the criteria he looks at for his investments is ‘give yourself a chance to get rich’.
This is important to keep in mind because all investments take time and effort and energy.
So you have limited bandwidth (as well as most likely capital) to deploy on your investments.
When making an investment then, you want to ‘give yourself a chance to get rich’ meaning that the business has a BIG upside and has the potential to generate a huge return.
This business I certainly believe fits that!
While the business has been generating good revenue the last few months, I see a ton of opportunity to increase revenue in both the short and long-term.
The previous owner is a crypto enthusiast and not a seasoned entrepreneur.
So during our call i identified a handful of ways that I believe we can significantly increase revenue from its current monetization options as well as add in new monetization strategies.
5. Leverage my team
‘If i have seen further, it is from standing on the shoulders of giants’
We bought this business outright. Not investing in the business and owner/operator.
That means that we would need to take over the operations of the business.
While I was very excited about the business potential, I did not want to buy myself a job.
And I’ve come to understand my ideal role is that of a Visionary vs integrator/operator.
Fortunately, i have on my team an AMAZING operator who I think is a perfect fit to run this business.
She is extremely well organized and a great communicator. And we’ve worked together on a ton of different projects (including crypto related) so i know, love and trust her.
Being able to plug in and leverage my team to run the business was an important X factor in the decision to purchase it.
Not only being able to plug in an operator, I’ve got the rest of my team available and able to contribute to the growth of the business.
So I can focus on identifying more investment opportunities…
Now, every investment comes with a host of risks….
But when a business checks my 5 keys, I feel confident and excited about the opportunity.
Curious to hear from other investors what kind of criteria they look for in an investment.