In Stephen Schwarzman’s book, What It Takes, he remarks that “it takes the same amount of effort to do something big, as it does to do something small.” This was his impetus for starting Blackstone in 1985, now one of the world’s largest private equity funds.

While this may be true, I personally recommend first-time buying entrepreneurs start small. Yes, the effort to succeed may be the same, but the advantage to starting small is limiting your downside. This means you get to learn the skills you need with low risk, then can “promote” yourself to a larger venture.

I’ve been following that advice since 2016, but had I known even more, my success would have been even greater. Here are 8 things I wish I knew myself when I was starting out.

 

customer support

Support is 24/7

We’ve all been there. You’re analyzing a project, doing some pre-offer diligence, and in the sales materials the seller explains that there are “very little support requirements.” Perhaps they claim just a few tickets per week, or a few hours per month, is spent on customer service.

While this may be true tactically, the reality is you have to be available 24/7 to actually deliver the support. In today’s highly competitive landscape, you cannot “batch” support requests on a 1x or 2x /month schedule, simply because that’s more convenient for you.

Customers expect prompt replies, regardless of how big your company is, or how many resources (employees, debugging tools, error loggers) you have to service them.

The mental overhead of being “always-on,” even if just to receive 2 emails or phone calls per week, is a much greater cost than the moments you spend corresponding with customers.

 

Every product has bugs

Suppose you buy a product or website with “no updates in months.” This is a common selling proposition, to imply that the business is stable and will require little maintenance.

Even then, customers will still insist something isn’t working correctly. Thus you’ll  still spend a lot of time debugging user error, resetting customer expectations, and apologizing.

Sometimes, products with no updates in months can actually pose more of a liability, as we found out when purchasing Lobiloo.com. The previous developers hadn’t changed the code for 2 years, which did imply few bugs. But when we wanted to add a simple new feature, this took a couple weeks in “dependency upgrade hell,” wherein we had to change a lot of code just to deploy a simple update.

 

a b test

You cannot A/B test your way to success

The following advice applies to those of us buying small companies, which i consider anything under $1mm annual revenue.

Let’s do some math. For statistical significance, determining a ‘winner’ A/B test requires 100 – 1,000 conversions on each variant of your test. For small companies, this means you might spend 2-3 months running a single test. Yet, in the meantime you’ll be making dozens of other changes, which makes your test results useless.

What the selling founder often has, that you may not have, is unique market insights. Either from experiences leading up to their creation of this product, or simply the grunt work of building it over months and years. As a new owner, you will be working with less information than the seller, yet you will be expected to make better decisions.

Therefore, tactical knowledge of marketing tools isn’t enough to claim you will have a better shot at growth than the previous seller. Fundamentally you need to understand the intersection of human behavior and analytics. If the selling founder was already an expert in these areas, you may struggle to produce outsized returns.

At Fork Equity, our portfolio is a mix of products in which we already have special insights (B2B <> marketing tech <> eCommerce), as well as products with little up-front knowledge. To combat our ignorance, part of our post-acquisition checklist is to perform SWOT analysis on the market and create a 90 day marketing plan to prevent inertia and scale up quickly.

 

Talent doesn’t care how big your company is

As a founder with skin in the game, it’s easy to associate “less revenue” with “less compensation.” After all, you are likely working the most hours, for the least pay, in the early stages of your company. 

But talent doesn’t care how much money you make. A good marketer costs X. A good developer costs Y. You can try to mitigate this with significant equity stakes, but that often doesn’t work.

Why? Because the talent willing to be paid in equity is usually not the talent you want leading things after the company grows. Further, using lower quality talent in the beginning stages of your project means you’ll likely experience technical debt. Later, a more expensive developer will have to fix this, cancelling out your seemingly capital-efficient savings. A year later you now have less equity and less cash, in exchange for the illusion of progress on Day 1.

To be clear, this is not an argument for hiring expensive talent. Instead it is a recommendation to learn to do as much as you can yourself. Simply put, you need 1:1 time with the company to understand which skills even matter. What if you hire a great copywriter, but it turns out that advertising isn’t profitable? What if you hire a content writer, but your site has no chance of ranking in search? What if you hire a senior engineer, but all you need is a decent designer to improve the look and feel?

Learning to code, learning how to write, and learning how to manage developers are all high ROI skills that you can begin developing today, before you even purchase your first company. Then when the time comes, you’ll maintain higher margins and more freedom.

 

Competition doesn’t care about your lifestyle business

Many of us get into micro PE because we believe in the power of niche

This is a real phenomenon: small businesses that solve hard problems for a group of people enthusiastic enough to pay for it. But even in the bleeding edge niche markets there are competitors. And some of them have a lot more resources than you do.

So, in case you’re tempted to buy a nice little business, “sit on it” until you hit the payback period, then make it a “cash cow” after hitting breakeven… from my experience buying ~10 companies, it never works exactly like that.

The truth is, a competitor is always trying to eat your lunch. They will ship superior features, find and email your customers an enticing incentive to switch over, and throw in better pricing to boot.

Buying a small company —  even in a “boring” niche — means entering an arena. You better be ready to fight.

 

All marketing channels have scale limitations

I’m personally attracted to companies that grow via inbound search. But even if a project we acquire ranks #1, #2, and #3 in search, there are only so many queries per month for our ideal terms.

If the selling founder already “maxed out” a couple marketing channels, you need to find new channels quickly in order to hit your payback period and enjoy ROI.

To do this, learn as much as you can from the seller about “what they tried” in terms of customer acquisition. Also acknowledge that you’ll need to budget additional capital to find new growth channels. In other words, the previous seller’s margins may be a lot higher than yours, because they settled into a status quo.

In our experience, we increase costs after acquisitions, not decrease them. At least for a few months. We anticipate this “pain in the butt” expense as our entry ticket to the market. To go 2 steps forward, we often must take 1 step backward.

 

tow truck

Smaller companies don’t have smaller fires

You may think nothing could go horribly wrong with “just” a small content site or SaaS application. False.

Server crashes, major dips in search rank, and even security breaches can happen at any stage. And customers, whether you have 1 or 1,000 of them, will be just as upset if they are paying $5 per month or $500.

Buying a small company that provides a simple or inexpensive service does not give you lenience to provide lower quality service or support.

 

No real business can be fully automated

Two of our portfolio companies, Fomo.com and Cross Sell, each receive 100’s of support tickets per month. Despite 300+ wiki and knowledge base articles, video guides, highly iterated UI/UX improvements, and a robust admin panel for our support team, we still observe edge cases.

A few examples:

  • One customer needs an invoice from 7 months ago to have a new VAT number on it, for their European tax filing amendment. 
  • Large company wants to try your service but needs you to complete a 140 question “security assessment” and provide documentation about your infrastructure
  • A customer who signed up 3 years ago was promised their account would remain “on hold” by the previous seller, and now you need to recover it from your backup database.
  • A customer sells their company to someone else, and the new owner files 15 chargebacks against you because they weren’t told about your product subscription.

These are just a couple things we experienced in the last 30 days at our portfolio. You will have to decide on a per-project basis, which incidents are worth systematizing and which ones will require you to simply stay nimble, and stay available.

 

Summary

Companies are run by people. They always have been, and they always will be.

Web applications break. Niche content sites lose PageRank. Mobile apps get kicked off app stores. Hot eCommerce products become fads and demand dries up. And on and on.

Building a sustainable business requires vision, judgement, and perseverance. But these skills cannot be taught, they must be learned. Specifically, learned on the job.

If you haven’t bought your first business yet, I suggest finding something small. Calculate this dollar amount by determining what you could lend to, say, your mother, and still be OK if it wasn’t paid back in full.

The good news is, it’s unlikely you’d actually lose 100% of your investment. Why? Because acquisitions are inherently de-risked: you’ve bought something that works. Nevertheless, this investment sizing exercise is just one of many decisions you’ll need to make to be a good portfolio manager, so it makes sense to think critically on Day 1.

Through acquiring your first deal you’ll learn invaluable skills in operations, marketing, sales, support, and product development. These are the “things that don’t change.” Then you can apply those to larger and larger ventures, increasing your bottom line and your probability of success at the same rate.

Scale yourself, and your company will follow.

 


Author: Ryan Kulp is the founder of Fork Equity, a micro private equity shop that acquires and operates SaaS web applications. He is also the lead instructor at Micro Acquisitions, a leading online course that teaches entrepreneurs how to source, acquire, and manage their own portfolio.