How to Leverage the Opportunity in Micro SaaS Investments

On this episode of the Private Equity Value Creation Podcast, Shiv sits down with Andrew P., Co-Founder of XO Capital . They discuss XO Capital’s highly-targeted investments into small, PLG, single-purpose SaaS companies, and how their thesis contrasts with typical VC attitudes.

Learn about why micro-investing presents a blue ocean opportunity, how Andrew’s technical capabilities inform the ways XO Capital creates value, and how XO is able to scale companies profitably with limited resources.

Falling Off The Venture Track = Opportunity

Back then, there wasn't a strong market for acquiring these sub-million dollar revenue companies. Large corporations often lacked the appetite or infrastructure to deal with such small deals.

This experience sparked an idea: what if there was a better way to acquire these "fallen angels" of the venture world?

There are many companies boasting a great product, and experiencing early growth, but simply not scaling fast enough for the next VC round. These companies often fall by the wayside, despite having significant underlying value.

By acquiring these companies, XO can provide them with the resources and expertise needed to reach their full potential. This approach caters to a niche market, offering a valuable lifeline to promising businesses while delivering strong returns for investors.

Building a Portfolio by Stacking Smaller Assets

Don't underestimate the power of small, recurring revenue. XO Capital's first acquisition was a single-purpose developer tool that took screenshots of other websites, generating a mere $500 in recurring revenue per month.

Today that same business is on track to do $7,000 in recurring revenue this month alone. That's a 14x growth in just three years!

How PE Firms Don't Have Competition For Smaller Companies

Many investors don't focus on smaller assets. Besides the occasional individual investor and strategic acquirers looking for bolt-on additions, there's a void of dedicated capital targeting these smaller companies.

The lack of competition creates a golden opportunity. These sub-$20,000 MRR businesses, while seemingly small, can be diamonds in the rough. They often have a proven customer base and a solid foundation for growth.

Balancing Growth and Churn

When it comes to acquisitions, XO looks at companies with a healthy growth trajectory. They focus heavily on:

• Lifetime Value (LTV): This metric tells the total revenue a customer is expected to generate over their relationship with the company. Lifetime Value (LTV) can be misleading for businesses under two years old, especially if they haven't experimented with pricing. In such cases, LTV might not accurately reflect future performance.
• Retention: Strong customer retention is crucial. Building it is hard work—it requires a solid product and ongoing effort. Businesses with churn exceeding growth become a turnaround project. In Andrew's experience these situations are notoriously difficult to salvage.

Here's the catch – churn is often a product of time and experience. This creates a "Goldilocks zone" for acquisitions.

Finding these acquisitions requires patience and a keen eye, but the rewards – sustainable, scalable businesses – make it all worthwhile.

Interested in more? Watch the full episode with Andrew ??

Private Equity Value Creation is a podcast about the innovative approaches leading investors, operators, advisors and bankers employ to?drive sustainable growth?and create enterprise value. Hosted by Shiv Narayanan.

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