52-55% IRR business

A quick note before we jump in…

This week's newsletter has some philosophical parts.

Much more than usually.

It's because there was a deal and a term sheet that I was working on…and it didn't go through.

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Entrepreneurship can be hard…

Especially emotionally.

Been working on a few term-sheets for the past 2 months.

Lots of driving, lots of calls, lots of meetings…lots of time and effort.

Supposed to be a $1.5m acquisition; 3.5x EBITDA deal.

The main-owner keeps running the day-to-day.

• 2 owners,

• 5m+ in revenue

• 10-11% net profit

Biggest I’ve ever done.

Won’t happen tho (as of today).

Why?

The passive owner changed his mind and wants a lot more $$$

I haven't received the bill from the lawyers yet, but I guess it's somewhere between $5,000-$7,000

Second in the row.

Overall dead deal fees $10k+…

Let’s be honest, I felt a little down for a few hours, took a 45-minute walk, and then got back to reading two very important pieces of material from folks decades ahead of me.

Three lessons from a CEO of a PE fund which has $13bn AUM.

He shared on how he started out:

- Left investment banking in his early 30s and became an independent sponsor

- Simultaneously started consulting / advisor to support his family and pay dead deal fees

- Didn’t find his first deal for over 18 months.

His biggest takeaway was had he not had some money coming in for the dead deal fees and his overall expenses he’d have rushed to do a bad deal.

His first 3 deals averaged close to a 10x multiple on his capital.

Today he runs a massive organization and owns a pro sports team.

“Don’t put yourself in a position to be forced to do a bad deal – have reserves to support yourself and dead deal fees and do some advisory to help keep you in the game.”

The second piece comes from Xavier Helgesen of Enduring Ventures, a piece he wrote himself for the 25-year-old on his 45th birthday:

Biggest lessons:

1// Most “bad” things that happen to you are not as important as they feel at the time.

You can make more money, fall in love again, or start a new company.

You can’t recover time or health loss stressing about what went wrong.

2// “Don’t put yourself in a position to be forced to do a bad deal – have reserves to support yourself and dead deal fees and do some advisory to help keep you in the game.”

It happened on Monday, I had enough time to sleep on it. I got back to work and already on Wednesday I found two potential investors who were interested in our bonds (consumer loan business).

Lots of ups and downs, I must say.

- - - -

Don Valentine from Sequoia Capital was interviewing his new hires, people much younger than him.

Often 30 years younger than him.

If you don’t know, he was a "grandfather of Silicon Valley venture capital". As of 2022, the firm had approximately US$85 billion in assets under management.

What he said was very interesting:

“You’re going to struggle because you haven’t failed enough in your life.”

“Because if you’re an exceptional early stage investor, you’re not even right half of the time, and there are probably only one in 10, maybe one in five of your investments that are truly successful. Companies that have an ability to be acquired for attractive sum or to go public.”

- - - -

Putting too much pressure on every decision you make…

- - - -

There's a SaaS company I've been following for several years. It is accounting software for SMEs.

They were acquired 4-5 years ago and the growth in recent years has been amazing.

Just look at the post-acquisition numbers and margins.

- - - -

Something very interesting I read over the weekend came from the founder of Instagram.

Instagram founder Kevin Systrom: “most successful things are pivots”

In the clip with Tim Ferriss, Tim asks Kevin Systrom—who famously pivoted a failed check-in app into Instagram—how do you know when it’s the right time to stop?

“In some aspects, there’s a fetishizing of perseverance… And yet, if you look at a lot of the largest public successes, many of them had some type of pivot or shutting down of something that wasn’t working.”

Kevin posits that most successful companies are pivots. He points out that YouTube started out as a dating site. And there are plenty of other examples:

•  Slack started out as a gaming company called Tiny Speck

•  Twitter started out as a podcasting app called Odeo

•  Twitch started out as JustinTV, oblivious to gaming streamers

• The Discord founding team's first product was Fates Forever, a MOBA game on mobile platforms that failed.

Kevin suggests that most first products fail because it's really hard to tell what's going to work before you put it in people's hands.

"The key to entrepreneurship is failing REALLY quickly: putting it out there, seeing if it works. If it doesn't, diagnosing why. And then focusing on how to improve it from there... Most of the time you get it wrong. So the question is: knowing you're going to get it wrong, how equipped are you to deal with that failure really quickly before you run out of money?"

He continues:

"The entrepreneurs that I've seen do really well are the ones that are equipped and engaged in the change from something that's not working to something that is. Far too many people--because of ego or whatever--stick with ideas for far too long, and it ends up going really poorly."

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How has been the week in the small holdco world?

Traditional business

Am I taking the failed deal too serious?

As Don Valentine from Sequoia Capital said:

“You’re going to struggle because you haven’t failed enough in your life.”

I think it's because I haven't worked at a PE firm or an investment bank before, so I haven't seen it happen in real time.

I mean working for 2 months on a deal only to find out it probably won't happen. (I will not overpay!!)

You put in effort, time, money, and a lot of hope and emotion (even though you know you shouldn't, but I guess that's the nature of life).

Many of our current problems are being solved by BEING intense — lost a deal? Let's go find another one.

Which means I've spent the last few days making calls to potential target companies.

Having a meeting with one of them tomorrow, on Monday. (I'll keep you posted.)

Consumer loan business

Here's how it goes:

Slow and steady growth

Raised additional $50k in bonds from a local investor (2 year period, interest rate of 13%) —> this came through a warm lead (a friend of a current investor).

Which got me to state the very obvious:

Warm leads are 100x easier to deal with than cold leads.

A week ago I received an intro to a potential investor.

He's interested in our bonds (consumer loans business).

Called him, introduced myself and our company. Explained exactly what we were building and how things would go.

Then sent him a more detailed email about the terms.

Made a follow up call on Wednesday, he is interested and will invest $50k over 2 years.

I am a big fan and believer in cold calling and emailing.

But warm leads and intros are just SO much better.

The question I keep asking myself is how do I get more of these warm leads and leads?!

Take care,

Mikk Markus aka PrivatEquityGuy

Here is this week’s podcast episode with Ben Wolff – a co-founder of Onera & Stay Oasi.

Fascinating story of how he built a 50% IRR business.

(Links to Spotify, Apple Podcasts, and YT can be found in the comment section below.)

Thanks a lot for following the journey.