Part of the edge a small investor innately possesses is the ability to go where others cannot. As assets under management (AUM) increase this becomes increasingly difficult to sustain. Most professional investors day dream about doing big, heavy deals with large enterprise values. They say that, in order to profit more from their time they must increase the deal size and do fewer transactions. We believe there is another way to slice the market:
If we can close a lot of transactions we gain efficiencies that allow us to stay small. I wrote about low transaction costs in another post HERE. I am not going to claim that we have this figured out. We are not passing over like-minded sellers that happen to be larger. However, I do believe we can differentiate ourselves in the smallest market that is nearly impossible for others to replicate. They simply will not give up the things we are willing to trade.
Here are a list of things we are willing to give up:
Auctions – We don’t compete in auctions.
Brokers – We have never purchased a listed business. (We have been left at the alter after seller gave us their word.)
Complicated earn outs – We don’t put our reputation at risk.
Too much debt – We don’t like >50% debt to assets to meet our equity hurdles.
Third Party Due Diligence – If we don’t trust the seller, or cannot figure it out ourselves, we walk.
Audited Financials – We don’t require audited financials from sellers (we do that later.)
Industry Experience – Since we don’t borrow heavily, we may buy a business type that we have never owned.
The reason this creates edge is because we can differentiate ourselves as an owner. Our transactions are super simple. We are not stretching to barely get a deal done. We follow through. And, as a result our costs are exceptionally low, and we get preferential deal flow. This ultimately provides more value to the seller. They get a smooth transition to the next phase of their lives. This is an experience they cannot get elsewhere and is worth consideration. Plus, it provides us the ability to go small… like really small, like <$1M revenue small.
The leadership here at Little Engine Ventures is a group of scrappy farm-town entrepreneurs. We like to keep things simple and go fast. As a result, we are tuning our little engine to close 26 companies per year. That’s one every other week. Can we do it?
I think we can if we attract great leaders, keep things simple, and provide a lot of autonomy.
We are okay owning concentrated investments. This occurs when a small business becomes a big business. We don’t have to force it, but we are prepared to go the distance, applying common sense, technology and straight forward innovation that matters to the customer.
We think big. I want this portfolio to grow substantially. But, I don’t want to force something that is not destined to occur as a result of it’s effectiveness.