One question I’ve kept coming back to recently is whether we’ve sometimes approached strategy in the wrong order.
Not because we’ve suffered from a shortage of strategies. If anything, we’ve probably had too many.
Grow this business. Maintain that one. Roll these companies together. Hire a better operator. Improve the margins. Add a new channel. Hold indefinitely.
The problem is that we’ve sometimes started with the playbook we wanted to run, then asked whether a business could fit inside it.
We wanted long-term cash flow, so we treated acquisitions as long-term holds. When we wanted growth, we looked for ways to make businesses grow. We built structures and then judged opportunities by whether they fitted those structures.
The more experience I’ve had buying and operating online businesses, the more I think that approach is backwards.
Some businesses are worth holding for the cash they can generate over many years. Others are attractive because there’s an obvious inefficiency to fix. Some make more sense as part of a larger group. Some depend on finding an exceptional operator. And some should probably be improved and sold once the work we set out to do is finished.
Sometimes the right answer is to hold.
Sometimes it’s to sell.
The goal is to make a good investment, not to make every investment fit the same model.
That means understanding where the return is supposed to come from, then matching the strategy, people and incentives to that opportunity.
In other words: fit the strategy to the asset, rather than forcing the asset into your preferred strategy.
One of the original ideas behind Onfolio was fairly simple: if you can buy a profitable online business at an attractive price, you shouldn’t need heroic growth to generate a good return.
When I started buying online businesses in 2016, I could often buy them for around 2.5 times annual earnings. Even if you pay roughly four times earnings and those earnings hold up, that represents an earnings yield of around 25% before taxes, financing and parent-company costs.
Those economics are already compelling.
I still think that basic idea is right.
Where my thinking has evolved is in treating it less like one useful strategy and more like the strategy.
One playbook, not the playbook
Because Onfolio was built around long-term compounding cash flow, we tended to judge opportunities by whether they fitted that model.
A business we could improve and sell six or twelve months later might be dismissed because “that’s not what we do.”
A durable business at five times earnings might be dismissed because it sat outside our preferred multiple, even if maintaining it could still produce an attractive return.
And once we acquired something, the natural assumption was generally that we would hold it indefinitely, rather than asking whether the best outcome might eventually be to sell it.
In each case, the playbook came first and the asset came second.
That doesn’t mean the original playbook was wrong. Buying a good business at an attractive multiple, maintaining or growing its earnings, and using the cash flow to acquire more businesses can still be an excellent strategy.
It just isn’t the only strategy.
A business can be a good asset under one approach and a poor fit under another. The more useful question is not simply whether we like the business. It’s what we are actually trying to do with it, where the return is supposed to come from, and whether we have the right structure and people to make that happen.
Sometimes the opportunity is just mispricing
Some of the best investments I’ve made in online businesses weren’t really operational transformations.
They were situations where something simply looked mispriced.
Years ago, I bought an Amazon affiliate site with a lot of traffic but relatively little revenue.
Normally, you look at the earnings, apply a multiple and arrive at a valuation. But this site also had roughly 300,000 monthly page views.
The problem wasn’t traffic.
It was monetisation.
We added display advertising and tripled the income.
I’ve done variations of this several times. The businesses and circumstances were different, but the basic opportunity was the same: the asset was earning less than it should have been because of an obvious monetisation or operational inefficiency.
There wasn’t always some elaborate three-year turnaround plan. We hadn’t necessarily invented a new product or hired an amazing executive.
The same asset was simply worth more once an obvious inefficiency was corrected.
I used to do the same thing playing World of Warcraft.
Sometimes I’d go to the auction house and see an item I knew normally sold for, say, 50 gold listed for 20.
The obvious move might be to list mine for 19 and undercut the market.
But if I knew 50 was the normal price, the better move was to buy the two listed for 20 and relist all three closer to 50.
It’s basic arbitrage.
Yet with businesses, it’s easy to convince ourselves that every return has to come from years of operational excellence.
Sometimes the edge is simply noticing that price and value have diverged.
What if decline is the base case?
Mispricing doesn’t always mean there’s an obvious improvement to make.
Sometimes the opportunity may simply be that an asset can produce an attractive return even if its earnings gradually decline.
There’s an assumption buried inside a lot of acquisition models that I’ve become interested in questioning.
Usually, we model a business as maintaining, growing or, in the downside case, suddenly falling off a cliff.
But what if gradual decline is simply the natural state of certain acquired businesses?
You buy a founder-led business.
The founder leaves. Some relationships go with them. Little bits of institutional knowledge disappear. Marketing becomes slightly less effective. A competitor catches up.
Nothing dramatic happens.
The business just gets a little worse every year.
What if, instead of pretending that won’t happen, you actually underwrite it?
You could think about some businesses almost like depreciating assets. Maybe the business makes $1 million today, then progressively less over time until eventually it isn’t particularly meaningful anymore.
The question becomes:
At the price we’re paying, and given the cash we expect to receive over the life of the asset, is it still a good investment?
That changes the way you look at deals.
A declining business isn’t necessarily a bad investment.
A declining business bought at a price that assumes perpetual stability probably is.
Likewise, a business doesn’t have to exist forever for an acquisition to produce a very good return.
Years ago, when small content sites could sometimes be bought for 1.5 times earnings, people would effectively buy them knowing that some would eventually disappear. If they got their money back plus a decent return before that happened, the investment still worked.
That’s very different from assuming every acquisition needs to become a permanent compounder.
Let the playbook come second
This is where fitting the strategy to the asset becomes useful.
There are businesses where the right answer may genuinely be:
Buy it. Maintain it. Collect the cash flow.
There are others where we might see a handful of obvious improvements, make them, and decide six or twelve months later that the best thing to do is sell.
Sometimes the opportunity is aggregation.
A single company may not be especially interesting on its own, but several similar businesses together may support better management, shared infrastructure and a higher valuation.
Sometimes the opportunity is really about the operator.
Someone may already have a team, a proven playbook and an acquisition pipeline. In that situation, perhaps our job isn’t to pretend we know better. Perhaps it’s to provide capital and infrastructure, align the incentives, and let them run the strategy they understand.
And occasionally, something we thought we might sell turns out to be something we’d be crazy to sell.
The mistake is deciding in advance that all of those situations need the same answer.
The operator is part of the strategy
Choosing the right playbook is only part of the answer.
The person running the business also has to fit the strategy.
Someone who is very good at maintaining a stable cash-flow business may not be the right person to execute a six-month improvement-and-sale plan. The person capable of leading a roll-up may need a different skill set again.
And if the investment thesis depends on an entrepreneurial operator creating significant value, a conventional salary may not be enough to attract the right person.
If someone is capable of taking a $150,000 business and turning it into a $300,000 business, they can probably go and work on something of their own.
But the equation changes if they participate meaningfully in the value they create.
Imagine we provide the acquisition capital and infrastructure. They provide the operating playbook.
They receive enough compensation to focus on the business, but their real upside comes from making the investment work.
We acquire something for $150,000. They improve it. We eventually sell it for $300,000.
Instead of obsessing over whether their salary should be $80,000 or $110,000, perhaps the more useful question is how much of that additional $150,000 they should participate in.
That starts to look more like private equity or independent-sponsor economics on a smaller scale.
The capital provider gets rewarded for supplying the capital and taking the financial risk.
The operator gets rewarded for creating value.
Everyone does well when the investment works.
The common denominator
None of this feels like a different mission for Onfolio.
If anything, it feels closer to the original one.
The objective was never really to become a content-site company.
Or an agency company.
Or an ecommerce company.
Or a SaaS company.
Those are asset classes.
The broader objective is to use our experience in online business to deploy capital intelligently and generate attractive returns.
Sometimes the return comes from holding.
Sometimes it comes from growth.
Sometimes it comes from aggregation.
Sometimes it comes from an exceptional operator.
And sometimes it simply comes from noticing that something is worth more than the price someone is asking.
The mistake is forcing all of those opportunities into the same playbook.
Fit the strategy to the asset.
Because ultimately, the common denominator isn’t the playbook.
It’s the return on the capital.
What this means for Onfolio
None of this is abstract. In practice, it changes what we’re willing to look at and what we’re willing to do with it.
It means being open to shorter holds: buying a business with a clear set of improvements in mind, making them, and selling if that’s where the best return is, rather than assuming every acquisition is a permanent one.
It means being more open to aggregation, where several similar businesses are worth more together than apart.
It means structuring operator deals around the value created, not just salary, when the thesis depends on the operator.
And it means being more nimble about the strategy itself: deciding what the play is for each asset before we buy it, and being willing to change the answer when the facts change.
The businesses we buy will still be profitable online businesses bought at sensible prices. What changes is that we stop assuming there’s only one thing to do with them.
If this was useful to you, it would probably be useful to someone you know. Feel free to share it or forward it to a friend. One of the hardest things about being a small public company is simply being discovered, and word of mouth goes further than anything else.
If you want more of this, I write a weekly email about buying and operating online businesses, and what it’s like doing that as a public company. You can subscribe at onfolio.com/newsletter.
Disclaimer: This post reflects general thinking about acquisition strategy and contains forward-looking statements about how Onfolio Holdings Inc. (Nasdaq: ONFO) may approach future opportunities. It does not describe any specific planned transaction or disposition, and actual decisions may differ. The examples are drawn from Dom’s personal experience buying and operating online businesses and are not representative of any current portfolio company. Nothing here is investment advice or an offer or solicitation to buy or sell any securities. For complete and authoritative information about the company, refer to our filings with the SEC at sec.gov.