Software as a Service or SaaS, is a wildly popular business model that has seen impressive growth over the last decade. Hell, probably many of your stock investments include: Zoom, PayPal, Etsy, and big tech stocks, a.k.a. FAANG.
While, overall the SaaS market growth rate has slowed down, SaaS companies, are continuing to shape our economy and technology landscape.
So, what are Micro SaaS Companies?
A Micro-SaaS company represents a small-scale play within a broader market, a lifestyle SaaS or side-project, or a very niche SaaS that solves a specific problem, think car dealership vehicle add-on forms. One of my companies in the past. Within a niche of "Services" for car dealerships, and further within a niche of a specific form required.
While many traditional SaaS businesses rely on investors or funding to get their feet firmly on the ground, Micro-SaaS businesses are nearly almost always bootstrapped or self-funded. They have an important role to play in the "Software is eating the word" environment we live in.
Another example, is Storemapper, a store locator app for E-Commerce companies. The founder, Tyler Tringas, is the person who coined the term “Micro SaaS”, and he describes it as:
“A SaaS business targeting a niche market, run by one person or a small team, with small costs, a narrow focus, a small but dedicated user base and NO outside funding”
The small amount of funding needed to build and scale a Micro SaaS business is one of the reasons why people choose to either fund or acquire one (In our case, as XOXO Capital we always acquire Micro SaaS's). However, you might be wondering why you’d choose to acquire a business with a revenue stream that’s limited by a specific niche or purpose. Let me explain...
The Benefits of Micro Private Equity
Many startups and particularly those in the SaaS sphere, especially the ones you hear on the glamorized online news outlets, will inevitably go down the angel or venture capital "VC" route of funding. While it’s a "traditional" or stereotypical track to take and can have significant negative effects for the owners of that business, external funding isn’t always the best route to take for companies.
That’s why we believe in the fruits of Micro Private Equity, or Micro-PE, both for founders looking for ethical and fair exits and firms, like XOXO.
In VC, companies have to deal with what’s known as power laws. That means that, if an investor buys 10 companies, they’ll expect one or two to cover the rest that either break even, run at a loss, or fold. So, investors will push the companies with the most revenue potential, often past their limits, and more frequent than not, at the demise of the founders and company.
However, with Micro-PE, you acquire businesses that are already generating revenue and put operators in place to manage them. You don’t typically push one business to cover the losses of many, but rather, nurture each one to grow independently of the others in their portfolio, or better yet, pair businesses that compliment each-other to cross-sell.
This makes Micro PE a fantastic outcome for Micro SaaS businesses, particularly as these businesses are serving a smaller niche market that may limit their revenue potential and also their opportunities to sell.
Again, you’re probably wondering why you should acquire businesses that have a potentially limited audience or scope. Here’s the important thing you need to remember - the goal isn’t to purchase only one business, but a portfolio of cash flowing SaaS's. Think "Modern Mailbox Money" (A term coined by one of our GP's Henry) you sit at home and collect your payments or "checks".
Sure, your first acquisition may be a Micro-SaaS company that helps freelance artists connect with Twitch streamers for commissions. However, your next might be a company that builds software that allows a customer to customize phone case designs for e-commerce businesses. Over time, your revenue stream is diversified between each of these niche businesses.
So, while it’s perfectly understandable to be concerned about a business’s scope and potential for growth, you should also be aware that micro-PE is a much more attainable path for a non-institutional investor to create wealth, where otherwise, they would not have opportunities to invest in VC not in angel.
Use a Micro Acquisition Platform
If you want to get straight to the point and find micro SaaS businesses that are already looking for buyers, then using a platform or directory can save you hundreds of hours of research.
MicroAcquire is a free platform that helps verified buyers connect with sellers, and they claim that they can help you make a purchase within 30 days. While seller listings are anonymous, you’ll get all the financial and core information you need to evaluate whether that business is right for your portfolio, and it’s easy to contact sellers through the platform. At XOXO, we actually bought one of our properties, Toybox Systems from MicroAcquire, big thanks to Andrew Gazdecki for creating it.
Other platforms like Transferslot, Indiemaker, Sideprojectors, AcquireBase, Flippa, and FE International are also useful platforms for finding Micro SaaS, side projects or online businesses to buy. While these platforms aren’t always Micro-SaaS focused, they can be a good way to find online businesses that are trying to get off the ground.
The major benefit of using a platform like this is that you’re able to find business owners who are already hunting for buyers, so it’s significantly easier to start a conversation with them about the process. Not only that, but most of these platforms allow you to apply filters, so it’s easier to find what you’re looking for without countless hours of searching. For example, you may only want to buy a PHP e-commerce app, that is a lot easier if you can filter out those results from the get-go.
The drawback with marketplaces, is you will be competing with many other buyers and often, listings will be demanding higher multiples.
Monitor SaaS News and Forums
While these platforms are designed to help Micro SaaS business owners connect and find community, they’re also a valuable source of information on what companies are on the rise and what their tech-stacks may be. Even if you’ve got your eyes on a bigger company for your first acquisition, researching these platforms can also help you to understand what the Micro-SaaS sphere currently looks like, and potentially evaluate how the industry will change over time.
Product Hunt is a particularly useful platform because you get to browse an overview of the company’s product, see the latest updates, and quickly find related products. Plus, you can click on any business owner or developer’s profile to contact them or see what other projects they’re working on.
If there’s a specific micro SaaS product you’re looking to acquire, then Product Hunt can save you hours in research by recommending other related products you may like. For example, if you are looking for a Notion add-on tool to acquire.
The challenge of this method is many of these companies or products are not yet profitable, or are being run by founders that may be less likely to let their "baby" go.
Despite what you might have heard, cold emailing is still a viable option if you come across a Micro-SaaS company that you’re interested in. While it might not have the same success rate when compared to methods like using an acquisition platform, that’s not to say that it’s a waste of time. I even sourced one of our deals from using their website chat tool and hitting them up. In fact, one of our GP's own's a cold emailing company, Cold Email Studio.
For every Micro-SaaS business owner who is actively looking for a buyer, there will undoubtedly be another who hasn’t considered the benefits of selling or is still on the fence about whether it’s a good decision. These, can be some of the best deals you get.
So, cold emailing them can be a way to encourage them to consider the possibility of selling, and by being the first person to open that discussion, you’re first in the queue when it comes to the sale.
Reaching Out on Twitter
Twitter is a surprisingly good place to research and source Micro-SaaS acquisitions, and particularly, to open conversations with business owners about the potential of selling their company. In fact, Andrew, one of the partners here at XO, used Twitter to chat with the founder for one of the properties we now own.
Many business owners use Twitter to network with each other, keep up with the latest industry news, and share their thoughts on new developments. It’s a great platform for advertising your business, which is why investors like you should use it to network with prospects.
However, like LinkedIn, you can also use Twitter to showcase your expertise and knowledge in the SaaS industry, and sharing information and your insights can be a valuable way to prove your value as a potential buyer and build a good brand for your firm.
That way, you can begin to nurture potential acquisitions before you even send the first message. And, when you do begin reaching out to Micro-SaaS companies, having a presence on Twitter can strengthen your offer because it can demonstrate your values, knowledge, and approach to investment.
Top Methods to Source a Micro SaaS Company: In Summary
As a buyer, there are four main routes you can take when you’re looking to acquire a Micro-SaaS company. Either you can use a platform that connects you with sellers, nurture your leads with cold email, use internet forums, or social media connections. Each method has its own benefits and drawbacks, but all are effective in helping you to find a Micro-SaaS to acquire.
Whichever course you choose to pursue, acquiring your first Micro-SaaS company puts you well on the way to building a diversified Micro Private Equity portfolio.