Familiarity with web-based business deals?

February 05, 2021

by an investor from Carnegie Mellon University - Tepper School of Business in Philadelphia, PA, USA

For most of the past year, I have been looking at pretty traditional search-fund type businesses: HVAC, plumbing, professional services, etc.

However, I have recently been looking at and running across more web-based businesses. You know the type: a few years old, 50%+ margins, SaaS-type analytics businesses or e-commerce, owner only spends 4hrs a week running it, 0-5 employees, <$1M revenue, etc.

Do people have experience with vetting these types of businesses? It would be great to hear how you approach the limited history, rapid growth, and figuring out whether it's real or some sort of hoax. I'd also be interested to hear your approach to speaking with SBA lenders about these businesses: limited historical revenue but opportunity in rapidly expanding niches.

Thanks!

Reply by a searcher
from Harvard University in Milwaukee, WI, USA

I have seen those as well and suggest you look at them carefully from a sustainability lens and how they fit with your objectives. While the business has been doing great for the last 2-3 years, what is really their competitive advantage? Better marketing, SEO, Amazon rankings? Will it still be relevant in 5-10 years? Put them through Porter's five forces and see what shakes out versus other opportunities (e.g. bricks and mortar). SBA lending only happens on a small portion of these because they don't meet their lending standards. Most deals are looking for cash offers but there are some specialty lenders that will help fund these. I would contact the brokers listing these and ask questions not only on specific deals but the sector in general (if you haven't already). There is definitely opportunity here but you need to do your homework.

Reply by a searcher
from Temple University in Philadelphia, PA, USA

In my experience, you'd likely want at least 3 years of operation, but like all deals, you want to put together a framework about what makes these deals good. Are they relying on any platform like Facebook/Amazon, how big is the email list, what is the customer churn and LTV, where they hosted, what does the codebase look like (do you need a developer), etc. Happy to talk in greater detail or meet (I believe you're in Philly too).

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