🏴‍☠️ ⚡️ 13x Conventional and Contrarian Views in Private Equity Buyout Investing (Musings)

We are Acquiring and Operating Micro SaaS firms in public. Join us every Saturday morning for acquisition deal case studies, operational tactics, growth frameworks, performance analysis, and more...

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🤔 MUSINGS

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Sir John Templeton famously said, "If you want to have better performance than the crowd, you must do things differently from the crowd.”

This sentiment is pretty straightforward, though the human condition is tricky. We tend to get caught up in hype, and we’re rarely conscious of it. We’re also cooperative animals, wired to fit in such that we have a greater chance of survival (the tallest nail gets hammered).

Choosing the Micro SaaS game immediately places us in the contrarian camp (based on deal size), though a contrarian point of view, for its own sake, can lead to awful outcomes. It’s a very bad thing when you’re the only one wrong as an investor…

The most important thing we can do is establish an independent point of view, think critically, discern unappreciated value, and act with conviction and insight.

That said, it’s always helpful to map the territory, so I wanted to explore the lay of the ‘conventional’ land such that we are clear (or intentional) about where our point of view diverges from history / the crowd.

Let’s dive in.

1. Deal Size

   1. Conventional: Target larger deals (>$3M ARR ) regardless of the competitive landscape (Valuation multiples, etc.)

   2. Contrarian: Seek smaller, overlooked deals (>$3M ARR), despite lower ‘return on effort’

2. Fund Size Dynamics

   1. Conventional: Scale up fund sizes over time for larger investments and management fees.

   2. Contrarian: Operate smaller, focused funds for nimble, specialized strategies.

3. Industry Selection

   1. Conventional: Invest in established industries with proven stability.

   2. Contrarian: Venture into emerging or disrupted sectors.

4. Profitability vs. Growth

   1. Conventional: Favor firms with solid profit margins.

   2. Contrarian: Target companies with significant growth potential despite current profitability.

5. Ownership and Influence

   1. Conventional: Prefer majority stakes for full control.

   2. Contrarian: Consider minority stakes to leverage strategic partnerships without direct control.

6. Value Creation Methodology

   1. Conventional: Apply a universal approach to value creation.

   2. Contrarian Approach: Customize value creation plans based on each company’s specific situation.

7. Customer Base Development

   1. Conventional: Broadly expand the customer base for market share.

   2. Contrarian: Deepen existing customer relationships for enhanced lifetime value.

8. Financial vs. Operational Focus

   1. Conventional: Rely on financial engineering for value creation.

   2. Contrarian: Prioritize operational improvements and organic growth as primary value drivers.

9. Operational Improvement

   1. Conventional: Implement broad operational changes post-acquisition.

   2. Contrarian: Make incremental, strategic improvements without core disruption.

10. Operational Complexity

    1. Conventional: Avoid companies with extensive operational issues.

    2. Contrarian: Pursue companies with solvable challenges for a significant value increase.

11. Technology Strategy

    1. Conventional: Utilize current technology to meet industry standards.

    2. Contrarian: Innovate with new or unconventional tech applications.

12. Strategic Acquisitions vs. Niche Markets

    1. Conventional: Aim for strategic acquisitions that fit within current models.

    2. Contrarian: Focus on niche markets or unique models that larger players overlook.

13. Geographical Strategy

    1. Conventional: Focus on familiar, stable geographic markets.

    2. Contrarian: Explore investments in unconventional regions with hidden potential.

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