does traditional search work for online businesses?

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October 16, 2023

by a searcher from Georgetown University - The McDonough School of Business in Washington, DC, USA

does traditional search work for online businesses? for example e-commerce, SaaS, digital courses etc? would investors be okay with this?

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Reply by a searcher
from Harvard University in Boston, MA, USA
I'm almost 100% focused on digital since my geography is so limited - my two cents:
1. Digital assets are often overvalued - some of that is justified (below 5% customer churn, heavily automated ops) but often times I feel like people just assume they can get a 4-6x valuation for just about anything.

2. I think ecomm in particular has significant risk unless it's a consumable product with recurring rev - imo too many ways to get outcompeted unless you have significant branding experience. Or you can buy it for 2.5x earnings and milk it for cashflow (I say this as someone who works at an amazon aggregator). I would never bet on growth. Also a lot more capital intensive than people realize

3. for ecomm in particular, you should discount 2021 and 2022 revenues, really hard to comp w/ covid.

4. I rely on first principles - what's the moat / what's durable about the business? Does it have recurring revenue characteristics? What makes the business easy or hard to compete against?

I'm working on a deal where I'm putting in roughly 5% of the 10% capital injection for an SBA loan, but the business is incredibly niche and has really good characteristics relating to point 4. Financing is doable though.
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Reply by an investor
from University of Delaware in Boca Raton, FL, USA
Totally agree with the prevailing sentiment here. We are very open to software/SaaS based businesses as long as they generally meet the metrics of traditional search. There still has to be EBITDA but often the higher growth rates of these types of companies is such that, the absolute level of EBITDA can be initially slightly lower than would be needed for slower growth acquisitions. The downside is, as also mentioned in the comments above, the valuations tend to be higher multiples. Those multiples have begun to come down a bit but still often remain high.
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