Why Pure-Play Internet Businesses Make Excellent Acquisition Targets
In an earlier day, anything trailing with dotcom meant its worth was at least seven figures. Luckily things have reached a new, more reasonable equilibrium. Since then, many pure-play internet businesses have proven very attractive cash-cows investments. Easy scale, high mobility and less managerial requirements than their brick-and-mortar counterparts have made many internet businesses attractive for individual and institutional investors alike. Like their brick-and-mortar counterparts, Internet companies utilize a number of different and successful business models including:
- eCommerce product procurement and selling for both B2B and B2C customers
- Lead generation, online marketing, pay-per-click management and a slew of online services businesses
- News sites, forums and social networks
- Websites that run on affiliate programs for earning commissions from driving traffic
- General ad-based and ad-supported business models whose revenue stream is based on garnered web traffic
- Standard packaged software sales and downloads
- Recurring models in SaaS, PaaS, and IaaS for business and consumer customers
Each of these industries represents billions in its own right. Together, they make a complex, interconnected online ecosystem. But as a marketplace, the opportunities in internet M&A are rife with investment opportunities for institutions and individuals. Here are a few reasons why.
Mobility
Unlike brick-and-mortar operations, internet companies require less capital input for operating profitably. This often bodes well for maximizing ROI and mitigating some risk in tying up precious, limited capital. This type of business is especially attractive to individual investors hoping to maximize their time input while minimizing risk.
With a bit of know-how internet entrepreneurs can acquire online businesses and easily relocate them to any new location. That means even international internet M&A can be as easy as shifting to a different domain name server (DNS), especially if there is no inventory involved. Relocating a business is easy when the server and code can reside anywhere.
A previous client owned an pure-play affiliate site which garnered about 120K unique visitors every month. He and his wife both spoke fluent Chinese and decided to live in Hong Kong for a year, just because they could. They left their house and moved to China. Luckily their livelihood was one click of the laptop away and they fully enjoyed their time in the orient. They have since sold their business to a private equity fund for a very excellent pay-out. But their time in the orient would have been impossible without their pure-play web company.
Scale
Online businesses allow for much more rapid and easy scale-up. In a previous era, venture capital investors required much larger investments in infrastructure, manufacturing, labor and land in order to take a business to full scale. In short, it was more expensive to reach a large audience before one reached complete economies of scale. The internet is a game changer in the scale department. Less capital requirements makes it much easier to reach large groups of people at a much smaller cost. In short, pure-play internet businesses cause investors to salivate.
Minimal Management
Some of the most effective and profitable internet companies can be scaled and managed with minimal labor and overhead cost. This is a boon for investors who love to see maximized returns with minimal input. I have a great business friend who owns and operates his business in Downtown Bellevue, Washington. He runs a web-based lead generation company with between 10 and 12 employees. Average annual sales range between $8 and $12 million. Talk about scale with very little management. Granted, his team is very savvy and extremely bright, but because he leverages technology, he can produce about as much cash as a 50 or 60 person plant or facility on minimal managerial input. This is the type of stories investors are crazy about.
When it comes time to start a business, I feel internet companies are still a dime a dozen. Finding and dominating the right niche in the online world is becoming more difficult as time progresses, but Internet M&A will continue to be a hot-bed of activity for many of the reasons previously discussed.
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