Michael Bereslavsky August 8, 2020
We are excited to share the results from our first small fund!
We’ve been buying, growing and selling online businesses for over 15 years now and this was the first time we set up a fund with several investors. Previously we used our own capital for all the deals, and occasionally allowed some investors or partners to join.
We acquired the first deal through that fund in January 2019 and some others from February to July 2019. More recently, we’ve also acquired several sites in January to July 2020. This fund was generally targeted higher risk, lower multiple deals, that had higher growth potential and a short term flipping strategy.
In the first 1.5 years of the fund, we’ve acquired 9 businesses with a Total Acquisition Cost of $457K, with the capital invested throughout this period.
For the past 18 months, we have generated $346K in revenue from affiliate sales, digital product sales, and advertising and had $65K in operating expenses.
We’ve sold 4 of the businesses for a combined amount of $494K (after all transaction fees, deal fees, and commissions), and we still have 5 remaining sites with a combined estimated fair market value of $275K.
If the fund were to be liquidated now at a fair market value, the Total Value would be $1,050,604, with a Total Return of 130%.
The fund has been operating for 1.5 years, but on average most assets were held and the capital was invested close to 1 year. Most capital calls happened between June to July 2019, and since then we’ve distributed proceeds from sales immediately.
To most industry outsiders, these returns may look incredible or unrealistic. But for anyone who has bought or managed a website, it is not unusual to get a 100%+ return on a deal. The challenge lies in doing it consistently and repeatedly and that has been our main objective for the past 15+ years in this space.
This fund was also hit substantially by COVID-19 and by the recent drop on Amazon Commissions. Otherwise, the return would have probably been close to double.
But since our SEO efforts were continuously successful overall, it didn’t look as bad as it could’ve been:
We’ve had many of the sites relying on Amazon Associates for revenue. However, in some cases, we were able to substitute it with other affiliate programs and even come out of on top:
Some of the sites didn’t perform very well
One site was sold at break-even: it was acquired for $45.2k and sold at $27.5K. The site has also generated $18K in total monthly profit.
Our lowest deals were two of our smallest acquisitions for $10.1K and for $6.3K. The first one is only generating about $150 in monthly profit now due to some drops in rankings. We are still working on growing it, but at this point we’ve accepted that this is likely to be a loss. For the second one, we’ve combined with another much bigger site we had in the same niche and were able to achieve some benefits. However, on its own, the site was barely breaking even due to high management costs.
A site in the education niche suffered a lot from COVID-19 (as most universities are closed). The site is now recovering and should turn a profit soon:
Most Acquisitions were very profitable
Our most profitable deal was a site we acquired for $51.3K. It has generated $24K in profit and was sold for $142.5K in 9 months — a close to 200% annual return.
Several other deals had similar returns of 100%-200% (if the sites are sold now at fair market price) and others had more modest returns of under 100%.
Our most complex site is a SaaS business. It required us to work with 3 different programmers to maintain, improve, fix issues. However, it is also one of our most profitable businesses as we are able to grow it steadily.
Our biggest deal for the fund was the sale of two sites for $340K:
Our average deal size in this fund is $50.7K. We found this to be a good range to target initially, however, we are now focusing on bigger deals as they tend to be much more profitable.
We’ve learned some valuable lessons
- We’ve only used the proceeds from revenue to reinvest in growing all the businesses in the fund. This was how we planned it originally, but in retrospect we would’ve been able to grow some sites a lot more and generate higher revenue and returns had we invested more in aggressive growth where possible.
- Buying bigger sites is more profitable (duh!), while buying small sites is not worth the effort and time and it’s not practical to manage effectively. A business generating $20K per month doesn’t require 10x the expenses, team and effort to manage a $2K per month business. In reality it’s more like 2-3x.
- Our deal focused approach is working well. We’re continuing to improve our private deal flow and review hundreds of deals so we can pick the best ones.
- Quick access to capital and an efficient buying process are essential! We’ve missed some good opportunities because it took time to execute a capital call or get approvals for some deals.
- We need to diversify more (duh!) across revenue sources, traffic sources and types of businesses. While still staying within our areas of expertise.
- We have some of the smartest people on our team and that makes all the difference and helps us generate the highest returns in the industry! So we’ll continue investing in growing our team.
- We need more capital and more investors, as our deal flow exceeds our current available funds, and since we focus on having a fast acquisition process, we need to be ready up front, in order to efficiently do great quick deals.
Update – Nov 1, 2020
We’ve tallied up the recent data to provide this intermediate update, and the overall return increased to 134.77%. We’ve acquired 3 more websites for this fund since, and it now has 8 properties (or 9, as some are combined), and we were able to grow most of the websites revenue, except two, which had some drops in rankings. However, the overall profit and portfolio growth increased. The investors also decided to reinvest a lot of profits back for future acquisitions and we are now looking several more bigger deals for this fund.
A a small family fund, this is closed to new participants, however, we are establishing more funds and opportunities for new investors currently as well.
As our team has grown quite a bit in these past 1.5 years from less than 10 to over 20 people, we are now able to manage a lot more businesses and acquisitions efficiently without having to rely on agencies. Our main focus continues to be developing our internal capabilities in SEO, marketing and other areas.
We are currently setting up a bigger fund in Q1 of 2021 to allow in more investors and do bigger deals. We’ll continue with acquiring businesses in $100K to $1M with focus on finding great deals, growing and reselling them and doing our best to continue producing 100%+ annual returns.
We are also continuing with our buy manage service for investors willing to own businesses directly. We’ll continue applying our strict buying criteria to deals as our experience proves again and again that it is worth the effort to build out a private dealflow to find the best deals, rather than applying the “index fund” approach to website investing.
As the industry develops I’m excited to see how it grows and becomes more structured. I expect we’re going to see more funds, more deals and capital in this space. As investors become more educated and informed, their returns will grow as well. From our side we aim to make our small contribution by sharing more resources and results, and preferring to work only with investors who understand the online business space and its risks, as well as rewards!