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Micro Private Equity 101

Private equity, with its promises of sky-high returns from investing in exclusive private companies, has traditionally been accessible only to large institutional investors like pension funds and university endowments.

But like the public markets that have been cracked open to individual investors through brokerage apps, zero-fee trading and meme stocks, private equity is going populist. For the first time, we’re seeing the rise of "micro PE" - a new class of private equity firms targeting individual accredited investors rather than institutions and writing smaller investment/acquisition checks, typically between $50,000 to $250,000.

This new flavor of PE offers qualified individuals access to fast-growing startups and private companies that previously were out of reach. Micro PE comes with major (and frankly, terrifying) risks and challenges, but it also provides opportunities for portfolio diversification and outsized returns for investors who understand the landscape and startups willing to take an alt-path. Which should be welcome news to the crypto crowd.

How Micro PE Differs from Traditional Private Equity

To understand micro PE, understand how traditional private equity firms like KKR and Blackstone operate. PE firms raise billions of dollars from limited partners like pensions, sovereign wealth, and endowments. This pooled capital is then used to control ownership stakes in established private companies, with PE firms actively restructuring these businesses to boost growth and margins.

PE firms make money by eventually selling these companies or taking them public, generating huge returns for their limited partner investors - typically 20-30% annualized over the life of a fund. But this enormous upside comes with substantial risk, as many private companies fail. PE investments are highly illiquid, with capital locked up for 5-10 years in a fund.

Micro PE takes the same model but shrinks it down. Micro PE allows for smaller exits for fast-scaling companies seeking a not-insignificant payday at a lower valuation. Fund sizes range from $10 million to $100 million versus the multi-billion funds of major PE firms. The limited partners are high-net-worth individuals and family offices rather than institutional investors. Check sizes run from $50,000 to $250,000, allowing micro PE firms to fund earlier-stage companies. Micro PE partners often advise and assist their portfolio companies, while traditional PE does more financial engineering and governance.

Micro PE spans trad healthcare sectors, enterprise software, and consumer products. But much activity is focused on emerging technologies like fintech, artificial intelligence, and blockchain, where individual investor expertise can provide an edge. Geographic hotspots mirror the innovation economy - Silicon Valley, NYC, Boston, and Austin.

Some examples of successful micro PE-backed ventures include:

SaaS.Group - Founded in 2017, this firm acquires profitable, bootstrapped SaaS companies with $2M-$10M in ARR. They aim to smooth the acquisition process for founders by providing post-acquisition resources while letting the companies operate independently. Their 15+ company portfolio includes companies like Juicer, Sniply, and Prerender.

Thrasio - One of the fastest US companies to reach unicorn status, Thrasio acquires successful Amazon FBA brands and uses economies of scale to accelerate growth. With over 200 brands spanning household products, Thrasio estimates that 1 in 6 US households own them. Acquired brands have often doubled revenue since being acquired.

Tiny Capital - This micro PE firm holds minority stakes in 90+ companies and majority ownership in 35, aspiring to be the "Berkshire Hathaway of the internet." Tiny is led and staffed by founders, so they understand founder needs during acquisitions. Deals close in under 30 days, with founders often staying on post-acquisition.

These examples demonstrate the range of strategies within micro PE. Some focus on specific niches like SaaS, while others take a holding company approach backing a diverse portfolio. Commonalities cover founder-friendly terms, accelerated growth post-acquisition, and portfolio diversification strategies. When executed effectively, micro PE can provide attractive exits to founders while generating strong returns.

These wins demonstrate micro PE's potential for funding high-growth startups and generating outsized returns. Investors get in early with favorable valuations and can ride the wave as startups scale. At the risk of being Captain Obvious - the challenge is identifying the winners ahead of the curve.

Buyers like Thrasio and Tiny Capital are significantly impactful in terms of both the number of acquisitions and valuation.

FE International stands out among brokers, with many vetted buyers and a high sales rate.

Venture-backed buyers like Thrasio have shown rapid valuation growth, indicating a potentially lucrative avenue for investment.

The upside of MPE comes with a heavy and risk-laden downside.

  • High failure rate - The majority of venture-backed startups flop. Micro PE portfolios likely see 50%+ of investments written down to zero. Diversification across multiple bets is key.

  • Long lock-up periods - Like traditional PE, expect 5-7+ years before seeing liquidity events from micro PE portfolios. Your capital will be tied up for extended periods.

  • Low liquidity - Micro PE investments can't be sold like public stocks. Plan to hold through to a startup's exit. Secondary markets provide some liquidity over time.

  • Due diligence requirements - can't cut corners here.

  • Lack of cash flow - Micro PE stakes don't pay dividends like bonds or yield like income stocks. Upside comes from exits down the road.

Micro PE isn't suited to every investor. It requires individuals that meet SEC accredited investor criteria - $1 million+ net worth or $200k+ annual income. Expect a long investing time horizon of 5+ years.

Tips for exploring micro PE:

  • Seek founder-friendly firms that allow you to stay involved post-acquisition and keep company culture intact. This includes resources to support growth versus drastic overhaul.

  • Consider both full and partial acquisitions based on your goals. Selling a minority stake can provide growth capital while retaining control.

  • Evaluate portfolio breadth when assessing micro PE firms. Those with experience across multiple sectors can be better advisors.

  • Prioritize understandable terms and accelerated timelines. The best micro PE firms streamline the process for founders.

  • Leverage micro PE’s flexibility on metrics like revenue multiples. Their models may accommodate startups not yet fitting VC or M&A criteria.

  • Weigh opportunities to diversify and grow the business under micro PE versus going alone. The expanded resources can aid scaling.

  • Assess the level of support each firm provides in areas like operations, marketing, technology, and global expansion after acquisition.

With the right match, micro PE can give founders an ideal mix of capital, expertise, and freedom to continue building their vision. The options are expanding. Stay connected to the data points if you can, and follow the folks at Alts. They’re all over it.

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