Kingmakers Ops (August 2020)

Deal Abstract

https://wefunder.com/kingmakersops/about

Private equity for small businesses. Very solid investment thesis, but uncertain whether it’s venture backable. What technology are they building that lets them scale to buying and operationalizing dozens of businesses in the next 3-5 years? In addition, with a downpayment of $200k per business (leveraged,) how much capital will they need to get to $20MM in EBITDA per year?

Shoutout to Moe H. for the tip!

Decision

Pass

Why Investing/Passing

  1. Not a startup or tech company.
  2. That said, I really like this business and think anyone whose investing in this would be making a solid, stable investment.

The 6 Calacanis Characteristics (91 161 18)

CheckPass/Fail
1. A startup that is based in SVFail: Seattle, WA (based on contact page.)
2. Has at least 2 founders Pass (2)
3. Has product in the market Fail: (investment fund)
4. 6 months of continuous user growth or 6 months of revenue.Fail: no revenue.
5. Notable investors?Fail: CEO comes from Highland Capital and Goldman. No other high profile investors.
6. Post-funding, will have 18 months of runway Pass: Raising $1MM at $463k yearly burn means ~26 months, though obviously burn increases once the money comes in.

The 7 Thiel Questions (ETMPDDS)

  1. The Engineering question:
    • N/A: No technology.
  2. The Timing question
    • Good: Can see COVID being a great time to acquire boring businesses on the cheap.
  3. The monopoly question
    • Bad: though not necessary for this to be a good business.
  4. The people question: 
    • Good: this team definitely seems well-positioned to execute on this hypothesis.
  5. The distribution question
    • Fine: nothing bad but nothing remarkable.
  6. The durability question
    • Sure: The upside to boring businesses is you know HVAC and plumbing will in demand for a long time.
  7. *What is the hopeful secret?: 
    • They can build a good business by using timing to buy businesses cheap, offer retirement plans to operators, and make superior market returns in an investment that is more venture.

What has to go right for the startup to return money on investment:

  1. **Where will your company be in 5 years? 1) Have a portfolio of recession-resistant small businesses that generate $20mm+ per year in EBITDA 2) Have each portfolio company to be systematized, focused on growth, with a strong leadership team and unified brand in place 3) Have each of our portfolio companies make measurable improvements to the lives of their employees and community members 4) Be in the process of filing for an IPO or other arranging another liquidity event for shareholders
  2. Deploy a playbook for ‘automating’ the business: scale trainings for multiple CEO’s, train executive management, fire and replace leaders where necessary, understand cost centers, develop economies of scale, etc.
  3. Economies of scale: I don’t personally have the vision, but I’d need to see how the company scales its domain expertise in HVAC growth. I suppose helping a Chicago HVAC company scale is the same playbook as a Bakersfield HVAC company. In this case, it may more of a franchise model than a winner-take-all model.

What the Risks Are

  1. Financing is not fast enough: To get to $20MM in EBITDA would mean the company can acquire 100 companies a year. To go from 0 companies to acquiring 100 companies a year in 3-5 years would require a great deal of capital.
  2. Operationalizing is not fast enough: Especially in boring businesses, there are a legitimately large number of hard, human problems to solve. Bad leadership, demotivated workers, marketing funnel problems.
  3. There really are not that many risks to this business, since all the businesses have product market fit. Reciprocally, I struggle to see how this is a venture backable business.

Muhan’s Bonus Notes

Compare to https://www.rotorooter.com/

Financials (References)

  • Total Amount Raised: US $8,500
  • Total Round Size: US $1,000,000
  • Raise Description:  Seed
  • Minimum Investment:  US $1,000 per investor
  • Security Type:  Crowd Note
  • Valuation Cap:  US $7,750,000
  • Offering Type:   Side by Side Offering

Updates

This is where I’ll post updates about the company. This way all my notes from offering to post-offering updates will be on one page.

Review these deal memos every time the startup raises a new round

Test if original thesis still applies

Notice trends in how you think

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