Traditional tech investments have generally fallen into one of two categories: venture capital deals for unprofitable but rapidly growing startups or institutional investments in large, profitable mature tech companies. However, as this sector evolves, there’s a new category emerging that has caught private equity’s attention.
In recent years a new crop of acquisition targets has emerged: small, profitable tech businesses. These companies are too small and growing too slowly for traditional VC or investment banking.
However, businesses in this category often have attractive margins and recurring revenues. That makes them attractive to buyers focused on cash flow.
A new crop of micro-PE firms has emerged to exclusively focus on these opportunities such as Permanent Equity of Columbia, Mo., and British Columbia-based Tiny Capital.
Permanent, led by CEO and Founder Brent Beshore, targets businesses making $2.5 million and $15 million a year. In a recent update on its website, the firm said the market had become more favorable.
“We started experiencing a change about six months ago. Our offers, which didn’t go up with everyone else’s and won’t go down if others’ do, have gotten more competitive. Bankers seem more concerned with [the] quality of capital and are far more flexible on process. And, some of the new-to-the-game competition is finding operating businesses harder than they expected.”
Tiny, co-founded by Andrew Wilkinson and Chris Sparling, has closed over 30 deals for Internet businesses with annual profit ranging from $500K and $30 million. Tiny started as a traditional VC helping start-up companies, but pivoted in 2014 to a more traditional PE model by buying existing, profitable companies as the tech sector matured and there were more opportunities to buy than build.
Not surprisingly, new platforms are emerging to serve up deal flow opportunities as well, such as MicroAcquire of San Mateo, Calif.
MicroAcquire is a marketplace for purchasing niche web-based businesses. These include private messaging tools for healthcare service providers, data tracking tools for freight services, or podcast software.
“We’ve been seeing record numbers in terms of private equity firms registering on our marketplace,” says Andrew Gazdecki, founder of MicroAcquire.
MicroAcquire is two years old and has processed over $500 million in acquisition deals. While the platform is open for anyone, including individual buyers, Gazdecki has seen an uptick in professional investors and private equity firms recently. He believes competition and valuations are attracting these acquirers.
“Competition amongst private equity firms is at an all-time high and any edge these firms can gain for new deal flow sources, they’re taking full advantage of, which includes platforms like MicroAcquire,” says Gazdecki. “Acquisition activity has been increasing as valuations have become more realistic compared to 2020-2021 which is a huge net positive for startups.”
“Profitable SaaS and profitable e-commerce businesses are of the highest interest to private equity investors,” Gazdecki adds. “To be more specific, B2B SaaS that is mission-critical even during a market downturn or a recession.”
This downturn is far from over, according to Brent Beshore. “If you look at 2008, the low point for PE wasn’t really until 2010/2011, so if we are entering a downturn (which is seems like we are), then it will be a while before things turn fully down and head back up.”
Permanent Equity: [email protected]
Tiny Capital: [email protected]