Side Hustle Research, Part 2

I almost considered editing my last post on Side Hustle Research because these thoughts came so quickly after I published. The Side Hustle Podcast led me to a very exciting topic that is bringing together a lot of goals and seemingly fitting a lot of pieces of this journey. I found the Empire Flippers Podcast, Her.ceo, and finally Web Equity Show which was the most exciting to me.

There are a group of entrepreneurs and investors who are looking at small online businesses as an asset class. The idea is that why start an FBA business (for example) from scratch when you can buy one that already has cash flows. Many start-ups fail, so buy one that didn’t. This also aligns with the article Debt is Coming by Alex Danco. When annual reoccurring revenue (ARR, the key measure for online businesses) is predictable, it becomes like an fixed income asset and is more amenable to traditional financing like debt. What we are talking about with this model is not just one web business, but many, making up a portfolio, delivering predictable monthly cash flows.

There are two additional aspects here that are exciting to me. First is that you can buy these businesses for relatively cheap and have full operational control over them. Second, they are currently selling at 2x multiples. This means potentially big returns on no growth, with direct control over making growth happen. These are generally businesses that sell products on amazon, or generate ad revenue through publishing content and range in size from profits of hundreds of dollars a month to hundreds of thousands of dollars a month.

I will be taking a course at school next term called Launch Your Startup and these are the concepts I will be bringing to that class. It could end up being a holding company or an accelerator or an escrow company for purchases, not sure yet. But this idea connects for me strongly with Entrepreneurship Through Acquisition / Search Fund and with my Ten Year Goal of making my friends rich. This idea will require investors small investors and the management and operation of small businesses. It is seeming like a very good fit.

Search Fund Accelerator

I have not spent enough words writing about the impact of Search Funds has had on my thinking. I first wrote about Entrepreneurship Through Acquisition six months ago, but my research in the meantime has continued.

The Columbia Entrepreneurship Through Acquisition Club Resource Page has many great articles and my research spread from there. The basic concept is to raise two funds. First is a small fund to support you for one to three years while you search for a small business to buy. Once you have found the business, you finance the purchase through raising equity, and a combination of bank and seller debt. You then run the business as CEO until exit, usually within five to seven year to Private Equity.

This concept was so exciting to learn about I became obsessed, consuming all information I could find and talking to everyone who would listen. To me, it seems like such a wonderful opportunity to experience many exciting aspects of business in a short period of time: company research, due diligence, acquisition, management, growth, exit. At at the end is the opportunity to make life changing money. Your investors have real opportunity to make money as well, since it requires smaller sums than traditional Private Equity and companies are usually bought at 4-6x multiples. This to me seemed like the way to exit the corporate world, and get real business experience.

This model also brings with it a small community of investors, operators, alumni, and funds. It seems like a passionate group of people. Through the club at school, I got to meet fund and accelerator operators who had been through this process and in the community for years. I felt like I had discovered something special that fit with so many of my goals and skills.

The approach that I found the most interesting was the Search Fund Accelerator of which there are less than a handful. In that model you join a cohort of searchers and have the backing of the accelerator during your search. The accelerator also manages the fund for the purchase and has actual mentors for you while you manage the business.

My only concerns have been around how to actually pull it off. Could I live on a much smaller salary for the years it took to purchase the business? Could I move out of New York City if I found the right business elsewhere in the country? Would the numbers work out to make it worth the effort at the end rather than getting a higher paying job for seven to ten years?

Side Hustle Research

I have done some preliminary broad research on potential side hustles and have a couple options that I will research in more depth.

My research followed a particular path but led to interesting results. I found the Mad Fientist blog through a reread of Simple Path to Wealth. From there I found the Side Hustle Show podcast, which led me to two potential business ideas:

First, is options trading which I am researching through Option Alpha and through my Capital Markets course at school. I like this as a side hustle because I am already very interested in investing and naturally motivated to spend time researching, building models and strategizing. Since I am in an MBA program currently, I have more resources and support to learn than I would otherwise. I am also interested in treating this like an income generating business rather than speculation or long term savings. There is the potential here to generate consistent and somewhat predictable income. The downsides are there are some inherent risks in trading, there is a steep learning curve, and it requires significant capital to generate income. I can easily start with a model that will generate $100/mo but scaling that to $1000/mo requires 10x more capital. There is no multiple or exponential growth potential in this business.

Second, is selling products through Amazon FBA and potentially sourcing those products from foreign manufacturers. This space seems interesting but potentially crowded. Good news with that is there are many tools and guides to get started and be successful. I have mentioned in previous points that I like the idea of reselling or retail in niche. FBA and eBay seem to be good options if you can find consistent inventory. The most consistent and predictable way to source inventory seems to be by working with manufacturers to establish product lines, rather than retail arbitrage or online arbitrage. There are also interesting opportunities for consulting and wholesale since this has attracted many small businesses.

I am starting a new job so progress might be slow but the new job does present more compensation and potentially lucrative stock options. I will be able to increase my savings rate and investment rate of return.

Separate the Long Term and the Short Term

In an earlier post, I was thinking about a side gig to make a little extra money and get experience running my own very small business. After initial online research was discouraging, I decided to put this off and focus on school. Now I am more comfortable with school and am revisiting this idea. The numbers I laid out are still a motivator and potentially good goals. Being able to pull a profit, then 1000/mo, then 4500/mo out of a side hustle business would be great.

In Infinite and Elusive, I was struggling with picking a business to pursue. For the long term big picture I solved this with ETA. What this solved for me was that I could be an entrepreneur who is primarily interested in running and growing a business without caring what that business actually does (usually what people think is most important to an entrepreneur).

For the short term side hustle, I decided to speak with all my friends and acquaintances who I know have side hustles to get ideas and to hear how they got started and what their first steps were. This has been informative, motivating and has helped strengthen those relationships. The research I did on franchises I was able to share with a friend who is interested.

I started focusing on reselling type businesses. I think they appeal to me because they represent an opportunity to capture value that other people overlook. They also usually have a time and patience component which appeals to my personality.

The IT Conference

I went to an IT conference last week that was attended by mostly small business who provide IT services to other small businesses. Because of that, over half of the attendees were CEO’s or owners of their companies. In general, I found it really exciting to be among these business people and to be a part of their conversations. Specifically, I observed that most of their backgrounds were technical, people who quit their IT jobs to do it themselves. There was a lack of skills and experience with value selling, finance, operations, and marketing. Some had an interest to develop these more but most knew they had to but prefer to ignore it. This gave me encouragement that small business is an area of interest and an area that I can bring value to.

A general topic was that “money” has started to flow into this industry, which I think means Private Equity and some Venture Capital.

Another general topic of interest was these service companies becoming more formal in their finance and accounting. One concept that they are adopting is the role of the Service Manager. This is a P&L manager for a line of business for the company, generally defined as responsible for great customer experience, employee experience and gross profit for the line of business. It seems to be a more technical person in the role and more hands on.

There is also a constant reminder to show business value to customers rather than just being a technology provider. These are not business people and it is helpful to see that and see what kind of value I could bring to a small business in this space but also to small business in general.

Franchises

I attended a webinar on franchising put on by school and delivered by John Armstrong from FranNet. I think there are some really interesting industries and businesses represented in franchising that opened my mind to more potential small business possibilities. There are two reasons I feel that this option is not as strong as searching. First, funding seems more difficult to obtain. There does not seem to be the benefit from having investors and advisors with you during the process and because this is a new business you are responsible for funding the net working capital and cash flows until you find customers. Second, franchises are fully focused on operations with limited potential for additional growth and development. I would like more creative control of the business strategy and marketing for my company than is possible with a franchise. The idea of turning my own small business into a franchise itself is appealing however.

Entrepreneurship Through Acquisition

I considered shutting down this blog but have more updates after a period of discouragement. After investigating many side hustle as business ideas, I felt discouraged. Instead I worked on implementing a couple of insights from Leadership and Organizational Change class from school. First has to do with expanding and strengthening my personal network and second is in strengthening a promotional mindset in myself.

I also took the opportunity to join a club called Entrepreneurship Through Acquisition. It’s goal is to promote this as a career path for MBA graduates. The idea is to run distressed or bankrupt companies that you either buy or are purchased by a small group of investors. This is appealing to me because it has some of the positive aspects of a franchise but with more freedom and variety of choices.

With the MBA degree and my network in place, taking control and turning around a business is an appealing idea post-graduation. It also gives me focus in my studies and networking.

Infinite and Elusive

The biggest excuse I hide behind is that I would start a business but I don’t have an idea for one. This seems like a good place to start. There seems to be infinite possibilities for businesses when you look, or pay attention to creative people with side-hustles. However, the idea seems elusive. There are parameters for a good idea, but I also need to be on guard for talking myself out of every idea.

There are many types of businesses to choose from and they don’t have to be an invention or backed by a new idea. There are franchises, services businesses and even taking an existing product or service and offering it in a new way or to a different customer. I understand deep down one is probably never “selling a product” and is probably selling change, or an experience, or education, or community, or customer service. These values should drive the business decisions and I want to discuss them later. Here I want to think about what it is that will be transacted.

One type of side hustle involves involves doing more of what you do. If you are an IT specialist at a company, maybe you take on some of your own IT clients outside of work. This has the benefit of multiple income streams and gives you leverage to negotiate with your employer for more flexible time. However, there is no large net positive in dollars you make for your time. You earn more money, because you are working more hours. Even if you can make better dollars per hour in your side gig, it won’t scale unless you start hiring to fulfill your service contracts. This is possible but also low margin.

The other type of side hustle involves upfront work and on going maintenance work, but can scale without employees. A way to think about it is, if you go on vacation, will your business still be making money while you are gone. This could be YouTube videos or selling products, versus coaching or tutoring or gig economy jobs (Dog/Baby Sitting, Task Rabbit, Driving, Delivery, etc).

Because of my current limitations on time being in school and working full time, the business approach makes the most sense for my situation. It will allow me to create in bursts and continue to grown in the meantime.

The Immediate Needs

Business school tuition is a strong practical motivator to make first steps to starting a business. My program is extremely expensive and has caused concern for the amount of debt I would need to finance it. A better option would be to supplement the payment with additional income from a side business.

One way this could work is to earn and save the cost of tuition before payments are due on the loans. The total cost of the program is $200,000 and the first payment is due in 30 months. This would be closer to about $7,000 per month. Regular monthly payments on this loan would be approximately $2,500 per month which is what I can estimate to save from my primary income. This leaves average $4,500 per month. This seems like a lot but any portion of it would beneficial and acknowledging that the hardest part is going from zero to $10 rather than $10 to $1,000.

The values are less important than having numbers that provide short term useful purpose. It is a motivation that is more tangible and available than a ten year goal, but a mindset that will serve well after these immediate needs are met.

The Ten Year Goal

In my very first class session of business school, the very first activity the professor asked us to do was to write on an index card our one, five and ten year goals. The perspective he wanted us to take was of looking back from this time in the future and seeing all the steps we needed to take to get to that point. I am shocked that so far, this very first, seemingly obvious and predictable activity has had the most impact on me of anything else I have done recently.

What I was confronted with when filling out my card was that ten years from now I don’t want to be working for someone else’s company, far from it. I wanted to have made my friends rich.

This is an idea I ran across when talking with a colleague about the company Connectwise that, from my understanding, was founded, built and taken public in a thoughtful way that benefited customers, employees, and shareholders. The founder, Arnie Bellini, built a high quality business that is a net positive in the world and made his friends and early investors rich.

This struck me as the only point; why do anything else.

Starting and running my own business has been on my mind, but the activity in class put me in a perspective that to be there in ten years, it isn’t going to happen on its own. If I am serious about this I need to start taking steps or facing my life towards that goal.

This has caused me a great deal of cognitive dissonance. My excuse thus far has been that while I know a lot about how my company will run (what kind of culture we will have, some people who will work there), I don’t have an idea for what we will be doing or selling.

It seems that most people start with an idea, and I am starting with an index card of pretty general goals. The leap is that with these directions, the rest will follow.