MI284: Investing in (and Building) Online Businesses w/ Mike Vranjkovic

23:43I'll keep you the content because I think the FBA risks are significantly different, but definitely happy to expand on those as well. So one thing that we haven't talked about is competition. So let's say you have a lucrative niche. Let's say it's a larger niche that for some reason doesn't have a lot of competition. And then Red Ventures or one of Red Ventures' assets decides to enter the niche, you're probably not going to have a good day. Simply because they have, one, they have domains where if you add new content to those domains, it'll probably rank really quickly and I'll outrank you. So just like any business, its competition is a big thing.

24:19And then the other downside with, I guess, both content sites and any types of online businesses is these are not passive assets. They require a specialized skill set to run these assets, and they require quite a bit of time to run them. And oftentimes, if you're in lucrative niches or you have larger assets, you're competing with people that have been doing this for quite some time and that do this for a living. So we spent some time, five, 10 minutes now talking about some of the risks and the negative sides of this, but I know there's a lot of positives. I really like this business model. I've been involved with it.

24:56Like I said, I know you're really involved with it. So what are some of the intriguing sides of these businesses, this asset class, and what does this asset class do better than other, maybe more traditional asset classes? The most fascinating thing from an investing perspective is the multiples at which you can buy these businesses at. So especially if you focus on the relatively smaller transactions, let's say$200 ,000 to a million dollars, you could acquire one of these businesses for three to four X annual profits. And that's what makes it so attractive. If you buy something for 3X annual profits, and it just stays the same in three years, you're going to recover your initial investment.

25:43Now, the difficult part is that it just stays the same. But there's, of course, opportunity to grow these assets as well. People listening to the show, Mike, are mostly stock investors. Some are entrepreneurs, some are side hustlers, but most of them are stock investors. And so for the audience, what Mike is saying, we're always looking or often looking at multiples when we're making stock investments. We're looking at PE ratios, price to sales, et cetera. And what Mike's saying is you could buy these businesses at three times basically PE or less. You get two PE. So think about that from a public equities situation.

26:18Imagine if you could go out there and buy a great business that you're interested in that has cash flow and you could buy at a PE of two or three. That's a really intriguing opportunity. And like Mike said, there's some active piece to this, where there isn't necessarily in the stock market. You're not going to buy that stock and go out and run that business, but it's still the multiples that you can get as both a buyer and a seller are interesting because on the seller side, you're getting 36 times your monthly revenue and that you can upwards of that or more. And that can be really intriguing as a seller too.

26:47So there's this interesting dynamic between the multiples, both working for the sellers and the buyers. At least that's been my experience. Do you see that most sellers are pretty happy with the multiples, Mike? Of course, especially if you consider that a lot of the sellers are serial entrepreneurs and they take a business from where they build it from scratch or they buy it and grow it significantly. Then they take that cash and reinvest it into other businesses and do the process all over again. Are those the multiples that you're seeing, like 36 to 40 times monthly earnings? Is that roughly what you see in the marketplace?

27:18Yeah. I would say our average for the acquisitions we've done, we've bought 34 assets over the last couple of years. They've varied quite a bit, but I think our average has been in the mid-30s. And there's something to be said here. Sometimes you can pick up assets for 20X, so just under two years annual profits. And sometimes you need to pay up significantly for the assets for 5X. What you buy at it will, of course, determine your rate of investment. So if you buy something for 3X, that's 33 % rate of return annually. But that's not the only thing to look at. You also have to look at the risk, the likelihood of those earnings continuing, and oftentimes the lower priced assets are worse.

28:01And if you think about it from a seller's perspective, if you were really confident in the ability of this business to continue making money at this level or higher, would you sell it for a year and a half worth of earnings? Now, of course, there's always exceptions, but it's important to remember those are the exceptions. For somebody that's listening, think about this. If you have a site that makes$2 ,000 a month, it's doing well, it's a strong brand, et cetera, and you could sell it for 40 times your monthly the earnings, you have an asset that's only making$2 ,000 a month. I mean, that's good, but it's not crazy.

28:32You can sell it for$80 ,000 and that's the power of it as the seller. And the most exciting thing is like, let's say that this was one of your first assets that you've built or you've built a number of these assets before. Oftentimes they'll take that 80 ,000 and they'll go out and build five new assets with that. And maybe three or four, they'll be able to sell again. What do you see for characteristics that increase the value in the multiple? that you could sell a business for? And what do you see that actually reduce the valuation and reduce the multiple you could sell it for? Yeah. So the really interesting thing with these online businesses, especially the ones in the range that I talked about, is if you look at a publicly traded company, if you look at a stock, the multiple that they're valued at, the multiple that they're trading at is usually based on how fast the business is growing, Where is it expected to be a few years from now?

29:25Some of that plays into play. Some of that is part of the way you value online businesses. But even more so than that is how likely are these earnings going to continue? Our fund would be happy to pay a 5x annual, 60x multiple for something where we have a very high confidence that there is a high floor on those earnings. We have very high confidence the earnings won't go anywhere no matter what happens with ChatGPT or any of the other risks that we talked about, especially if we see opportunity to grow the business. So as you'd imagine, the longer of a track record you have, the easier it becomes to project out what's going to happen in the future.

30:05And going back to the content sites, you can see what's happened in the past, the site, when there have been changes, how it's been impacted by competition. So generally, older businesses are worth more, all else being equal. Larger businesses tend to be worth more because you get more of a professional buyer pool that's willing to pay more. The exception is on the very low end. If you look at businesses probably under 100 grand, oftentimes those go for ridiculous multiples because people are really excited to get into the space and they're willing to overpay. I would say anything that makes them less risky.

30:39Earlier, we talked about traffic. Let's say you have a website that doesn't receive 100 % of its traffic from Google. Let's say it has an email list where it sends a newsletter and that's how it gets a lot of the traffic. Let's say that it has some social media traffic. Let's say it has an Instagram account or Facebook account or whatever, and that's where it gets some traffic. Now, and let's say Google traffic is only a third of it. Now, if something happens to Google, let's say something that none of us were projecting, let's say AI just absolutely crushes Google in the next week and we never hear of Google again, I think that's probably unlikely, but that business wouldn't go from 100 to zero.

31:14It'd probably go from 100 to 70 because it just lost one third of its traffic. And also, you could say the same about revenue as well. So if you don't make 100 % of your revenue from display ads, say maybe you make some from display ads, you make some from affiliates, you make some maybe from your own products, maybe you sell ads in your own newsletter, maybe you have a YouTube channel and you make some from AdSense. So you can also increase the multiple of your business and the value of your business of these online businesses by diversifying your revenue streams as well. What drove you to start a fund investing in these types of businesses and what you guys are doing at WebStreet?

31:49Was there a legislative change that made it possible when it previously hadn't been? What got you there? A little bit, but that wasn't the main thing. So prior to founding WebStreet with my business partners, Justin Cook and Joe McNati, I worked at Empire Flippers. So that's an online business broker that was founded by Justin and Joe. And what they do is they sell online businesses, websites, Amazon FBA businesses, SaaS businesses, anything that makes money online. And one question that we kept getting over and over again over the years was, hey, I think a 2, 3, 4x annual multiple and profit is really, really attractive.

32:29I want to buy these businesses. I have capital to deploy. I want to invest in them passively. how about I buy one of these businesses and you guys run it for me? And the answer was like, no, get out of here. We don't do that. Or can you match me up with somebody who's like, well, not really. I can't really vouch for them because I don't know how they would be as an operator. So we heard this question over and over again for many, many years. So we had all this unmet demand of people that wanted to passively participate in these online businesses without having the skillset or without having the time to actively manage them.

33:03And we already had an audience of people that know how to manage these businesses because we had a marketplace where these businesses are being bought and sold. And like I mentioned earlier, a lot of the sellers are repeat sellers. So they'll go out, build one of these businesses, sell it. They might buy one, grow it and sell it. Oftentimes, we saw the same assets being bought and sold multiple times and we could see exactly how it was doing. So we had this built-in market demand of people that wanted to invest passively. we had this large audience of people that knew how to run these businesses.

33:35And then we had this light bulb moment. I don't think you can even call it a light bulb moment. It was kind of like, all right, we finally decided to do what people were asking us for years to do. And then we launched WebStreet or formerly Empire Flippers Capital. Standalone company initially shared a lot of the resources with Empire Flippers, but now completely standalone, no shared resources and buys businesses from anywhere, including other brokers. Robert Leonard So explain exactly how it works from the investor side, maybe as the portfolio manager or basically the property manager, if you will, of the asset that you guys buy.

34:06Break down that process for us. Robert Leonard Yeah. So it's fairly simple. When we designed this, we rolled it out in phases and we tested through it. And one thing that we wanted to do from the beginning was try to line up everyone's interest. We had two goals. We go out and find the best portfolio managers that we can find and then line up the investor's interest, the portfolio manager's interest, and our interest. What we do is we go out and raise money from investors, mostly accredited investors. We recently opened up a crowdfunding test that we might continue, mostly accredited investors, so high-network individuals looking to deploy capital.

34:44Our average investment is probably 50 to 100 grand from the accredited investors. So first, we go out and we find portfolio managers. We look at a track record of building these businesses, buying them, growing them, running them, and selling them. and we look at a lot of portfolio managers and we admit a very small percentage. Once we have our portfolio managers, we'll go to our investors and say, these are the four funds that we have open right now. We have these four experienced portfolio managers. You can invest in these four different funds for, let's say, 50 grand. I'll get you a stake in each fund and each fund is going to buy multiple assets and the funds are different.

35:20So one might be a content fund, one might be an FBA fund, one might be a Kindle fund, one might be a software fund, and then the investors give us the money. Then the operators or the portfolio managers go out and buy these businesses. We of course have oversight. We make sure that whatever investment criteria they laid out to investors, that they will buy those businesses. So if there's a guy that has a deep experience in content businesses, and he comes across an e-commerce FBA business and he wants to try it out, we would veto something like that. And we have a whole investments team that helps with the due diligence process and so on.

35:54And then once these businesses are bought on a regular quarterly basis, the profits are split with the investors. So the investors keep two-thirds of the profits and one-third goes to the operator and ourselves. So the attractive thing here is if you buy a business at 3x annual, if you get to keep 100 % of the profits, you would be making, what is that, 33 % a year. If you give up one third of the profits, you're making about a little bit over 20 % a year, which are still really, really attractive returns for a passive investment. Let's take a quick break and hear from today's sponsors. Hey, it's Sean O'Malley, just popping in with a quick message.

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39:44That's theinvestorspodcast.com slash tip-finance. All right, back to the show. What are you seeing as the best opportunities today? Both maybe what you think personally, do you think content sites, affiliate sites, maybe SaaS tools, Kindle, D2C, e-commerce, FP &A? Like FP &A, do you like those personally? And also what are you seeing for investor appetite? What are investors coming to you saying they want? Which type of these assets do they want most? Good question. I get this question all the time, or I used to get it all the time when I would talk to investors more. And the answer is always, don't try to pick a winner.

40:22So if you're a passive investor looking to spend a certain percentage of your net worth in online businesses, I definitely would not try to pick a winner like Content or FBA or SaaS or whatever the case is, because they all have different risk factors. And we've covered a lot of these risk factors already. So I think the key here would be diversification. I'm very bullish on FBA. That's actually my background. I went and started multiple Amazon FBA businesses, and I have some good experience with that. And I'm very bullish on that business model as well. SaaS, of course, with the reoccurring revenue stream.

41:00So I would say if you're looking to do this as a passive investment, try to get exposure to multiple different business models. If you're looking to get into this and buy these businesses or build these businesses from scratch yourself, my advice would be the opposite because somebody that's good at running an e-commerce FBA business, it's a completely different skill set than running a content business. So I would say if you're looking to build them, run them yourself, see what skill set you have compared to what's required to run these businesses effectively. If you're looking to passively invest, you should be monetization agnostic.

41:36You should be just spreading out your investments over multiple different managers, multiple different monetizations and risk factors and so on. I personally think content sites and affiliate sites are a good place to start. I'm not saying you have to do that as an investor, but I'm saying if you're interested in starting one of these businesses, I think that's a good place to start because then you can, for me at least, it opened the world of all of these opportunities. I had no idea of what was possible, the monetization strategies, how you can get traffic, so much stuff that I learned from doing those two things that are...

42:08You can scale them to be massive. I have a friend of mine who sold a content site for a million dollars. So it can get big. But if even it's just a stepping stone, you can learn so much there. Maybe you go do e-com and DTC stuff and you can take some of your SEO knowledge and traffic acquisition and drive that to an e-com product and do a DTC model. So I think you can learn a lot from content and affiliate sites that you can use in these other models. I completely agree. I think the skill set that you learn in running content businesses, and exactly like you said, you might continue running content businesses.

42:42And there are some very large content businesses like we talked about with Red Ventures earlier. But even if you decide to pivot in a different direction, that'll be a useful skill set. I know a lot of people personally that run service agencies and that get a lot of their clients through content marketing from their past experience running content sites. Absolutely. I've seen that as well. I'm curious, tell me a bit about your FBA experience. What have you done personally? What were the products? What'd you sell? How did that go? Just tell me a bunch more about that. I'm interested. Joined Empire Flippers.

43:14My plan was always to go out and start my own business. Really enjoyed what I was doing with Empire Flippers. I ended up staying there for much longer than expected. Eventually left, started my own Amazon FBA business. This was in 2016, I think, launched the product. It just did really, really well out of the gate. I was like, this is amazing. This is so easy. And then the product got absolutely crushed a few months later. And then it went from doing really well to losing money consistently. And then it launched many, many more different products after that, probably making every mistake in the book that you can think of.

43:51And then after a few iterations, after a few tries, we finally managed to figure it out. So leftover today, I have two Amazon FBA businesses, one in the kitchen supply niche, so boring products that restaurants buy, and then one in the fitness niche, like the medical device fitness niche. That's the bigger one of the businesses. I'm not actively involved in either one anymore. I have a business partner that runs all the day-to-day operations, and we have a team in place. So for me at this point, I'm more of a advisor or strategic investor. I still own half of the businesses, but now I'm passively involved in it.

44:29It's also a good way for me to get an inside look at latest Amazon FBA trends and that knowledge is helpful for the fund. But I would say when we launched these businesses, we launched them quite a few years ago, the market has definitely changed a lot. It has become more competitive. Specifically, it has become more difficult to launch new products without an existing audience. So more difficult in terms of, let's say you have whatever product on Amazon and you're trying to get it to rank, just like you're trying to get your website to rank in Google. Of course, Amazon's algorithm is differently.

45:00It works differently. You're trying to get the reviews, you're trying to get traffic to your Amazon page, and so on. That part has become more difficult than it was five or six years ago. It's become more difficult to pick up reviews. So as it's gotten more difficult to launch new products, less competition has been entering the space. And as less competition enters the space, owning one of these Amazon FBA businesses is actually more valuable. One last thing I want to touch on that listeners might have picked up on is that Mike didn't necessarily mention the exact product for either of the businesses.

45:35And one of the things that really surprised me when I got into this business was that people are very secretive. And this is nothing against you, Mike. This is just how the industry is. Is that when you talk to other people, they'll tell you they own a content site or an affiliate site. And they'll say, okay, maybe it's in the automotive niche or it's in the home niche or the fitness niche or whatever. But they very, very, very rarely disclose what the actual website is. And it sounds like it's the same for FBA businesses and things like that. And for listeners, it's because there's so much competition.

46:04And a lot of people have seen, it's not that hard to just literally copy and paste somebody's blog post onto their own website and essentially steal everything that somebody else done. And I like to think people wouldn't do that, but people do do that. And a lot of people have had that experience. So that's why it's very, very surprising to me when I came into this world and this industry to see how kind of closed knit it is in terms of what people are actually working on. Well, in fairness, some of the FBA guys are a little nuts. So they won't even share what industry it's in. It's like, all right, there's millions of products in the kitchen that she won't even tell me what industry it's in.

46:37So some guys definitely take it too far, but we even do the same precautions in our funds. So as an investor, all the assets being bought, you have the website URLs, you have the link to the Amazon storefront. So you can see the products, you can see everything that's going on. But with new prospective investors, we have all of our previous investor reports and we'll draw up redacted versions. So we'll have all the financial statements. And we'll just say content asset one, content asset two, FBA asset one. It'll have all the relevant financial data, but it won't have the information that identifies it.

47:10That was really, really interesting to me when I came into this industry. So I wanted to make sure we mentioned that to people that are listening, that are maybe just hearing about some of these ideas for the first time. Mike, I really enjoyed our conversation. Like I said, this has been a topic of mine that I've been researching for the last year pretty heavily, and I've been really passionate about it. So I really enjoyed chatting about it and I hope the audience enjoyed it as well. For anybody that's interested in learning a little bit more about your fund, what you guys got going on, more about these types of businesses, where can people go to find you and follow along?

47:41Yeah. Go to our website, webstreet.co. So webstreet.co. If you're interested in being an investor, if you're an accredited investor, high net worth individual, like I mentioned earlier, we're testing through a crowdfunding option, depending on when this gets published, that may be open by them or not. And then of course, we have a two-sided marketplace. So we're always looking for very experienced portfolio managers that are running their own portfolio of online businesses and that are looking to run a investment fund through WebStreet. Or if you just want to generally learn about the industry, we've been publishing more and more content on how it works.

48:17I'd say check out our blog. Yeah, definitely. I recommend people listening, go check out WebStreet. Even if you're not an accredited investor, you're not going to be a portfolio manager, you're not going to make any investments, but you're interested in learning more, go check out their website. They have some cool info there. Go check out Empire Flippers as well. A lot of cool... Just see what the opportunities are. One thing that I recommend to people that are looking... So oftentimes I talk to people that are looking to build their own online businesses or that are just starting out or that are somewhere along in the process and they have no interest in investing simply because they get a much better ROI on putting it into their own business.

48:50And if you have the opportunity to do that, you should definitely do that. The only time you should think about investing is if you want to diversify or you can get a better ROI or you want to be passive. Exactly. Or you want to be passive or you got to the point where you can't deploy any more capital into your business. Even those people, what I would recommend for those, go to our past investment deals. Those are obviously no longer open for investment because they're closed. And then go to each investment deal page and you can see a interview with the operator, with the professional portfolio manager, and we'll ask them a number of questions.

49:22What type of assets are you looking to buy? Once you buy these assets, what strategy are you going to use to grow them? What strategy will you implement early on? What strategy will you implement later? What type of risks do you look out for? So depending on whatever you're interested in, whatever flavor or monetization of online businesses, you might be able to find some interesting info in there. I like to do the same thing. I'll go to Empire Flippers or I'll go to other brokerages or marketplaces that sell these businesses and I'll go on there and I'll see what businesses are selling, how much they're selling for, what they're doing right, how they're making their money, and just do an autopsy, if you will.

49:56But even though they're still alive, it's still a business. It's still working. But I try to dissect it as much as I can to learn from a business that's being sold. I can see how much it's selling for and just learn from it. So yeah, go to your website, check all that out. And yeah, Mike, thanks so much for joining me. I appreciate it. My pleasure. Great talking today. Bye-bye. All right, guys. That's all I had for this week's episode of Millennial Investing. I'll see you again next week.

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