The Rise of Micro Private Equity

January 8, 2022

What is Micro PE?


Micro Private Equity, also referred to as “Micro PE” or “Micro Cap Private Equity”, describes an investor fund which acquires or buys into small (or better “micro”) businesses. It is part of the overall mergers and acquisitions industry. 

Micro PEs commonly target companies with valuations below US$ 5 million, but acquisition prices can fluctuate above this line. 

The ultimate goal of these Micro PE funds is to buy and sell their target firms, in many cases internet businesses such as SaaS companies. Alternatively, some investment firms focus on permanent equity, meaning they acquire firms and hold them for the long term without any intention of selling them.

This style of investing has experienced a tremendous rise in recent years. This is because many founders of successful small businesses cash out and start reinvesting their earnings into buying more small businesses by creating their own Micro PE fund.

Micro PE investors are riding the wave of more and more bootstrapped internet businesses becoming profitable leaders in their respective niches. These ventures produce stellar cash flows without the need to raise Venture Capital funding to grow into larger market segments. 

These businesses make for great acquisition targets, as they lend themselves much better to the “Private Equity playbook” as opposed to traditional VC-funded startups.

Micro Private Equity firms, tiny capital, Calm Capital
Prominent Micro Private Equity funds


Differentiating Micro PEs from other investors


Micro Private Equity funds distinguish themselves from other investors primarily by the profile of their target companies. They prefer to invest in profitable small businesses which have cornered a small niche and generate a lot of excess cash. Many of the prominent players in the ecosystem focus on technology-based or internet businesses.

The space Micro PEs inhabit becomes even more clear when comparing them to their investing peers. Rather than compete with traditional Private Equity investing, they exhibit synergies with them. Conventional funds will not consider acquiring small businesses valued at below US$5 million. This affords Micro PEs the opportunity to scoop up these small companies with little competition, grow them to the point they have reached a size interesting to traditional PE firms and then sell them on.

Micro Private Equity funds furthermore do not compete with Venture Capitalists. While Micro PEs look for small cash cows that dominate a small niche, VCs seek startups with immense growth potential and appetite to capture an enormous total addressable market while running unprofitably. Hence, these two investors would very likely never negotiate with the same founder.

Moreover, Angel Investors target startups in the very early days, for often even before any revenue has been generated. This type of investing tends to be very risky with high potential upside (similar to VCs) and takes place in the earliest stages of a business’ existence. Micro Cap Private Equity firms only start looking into businesses years down the line, once product market fit has been found and proven and profits have been generated.

million dollar payout

The ecosystem


The Micro PE ecosystem is made up of many firms, as well as brokers and marketplaces that serve them. Firms tend to have a specific focus, many funds concentrate on internet businesses such as SaaS or eCommerce.

These firms get their deal flow mostly via three channels: inbound, brokers and marketplaces. Brokers tend to offer quality businesses to invest in with fewer other Micro PEs competing for bids, however, fees can be considerably higher than offers coming in through other channels. 

Marketplaces help Micro PEs scout for investment targets through a wide range of listings. Here, founders tend to get more competing offers which can increase the price of their business.


Selected Micro Private Equity firms



Selected Micro Private Equity marketplaces



Selected Micro Private Equity brokers




Micro PE’s impact on founders

 

The recent rise of Micro Private Equity investing has been incredibly helpful to the founder ecosystem. Especially bootstrapped owners of internet businesses with valuations below US$ 5 million now have an opportunity to (partially) exit. With more and more players coming to market, these business owners can increasingly receive competing offers to ensure they get a fair price for their equity.

 

Trends

 

A big trend amongst Micro PEs is their increasing interest in partial buyouts. Most are led by former founders of small businesses and startups with the intention of buying up a few companies to then take over operations and grow the businesses. Here, the issue is that this model only scales to the capacity constraints of the Micro PE’s operations team. Moreover, hiring additional rockstar CEOs and engineers to run more companies is a difficult feat and in turn requires even more management time.

 

The solution several Micro PEs have turned to is partial buyouts. Only buying minority stakes in cash flow generating businesses allows the acquirers to participate in the profits of small ventures they understand without having to spend more of their precious time managing the day-to-day operations of these companies.



Further resources: The Generalist, Trends, Primary vs Secondary offerings, Secondaries via Venture Capital

About the author
Jan-Philipp Peters

Jan-Philipp is the co-founder of BitsForDigits. He has extensive experience in the world of startups, tech and finance. Before building a Micro Private Equity marketplace, he worked for Google and Facebook.


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