Executive Summary
- Our overall strategy is to continue leveraging non-dilutive financing for further acquisitions. We believe that we can get sub 15% cost of capital and expect greater than 25% ROI from the acquisitions. At scale, this should generate millions of dollars in free cash flow.
- The types and size of business we are buying tend to be $500k-$2mm EBITDA internet-based businesses which is a soft spot in the market that tends to be too large for individual investors but too small for many institutions.
- Our team has over 70 years of experience managing these types of businesses making us uniquely qualified to operate in this segment of the market.
- Currently the fixed costs associated with operating our business have reduced profitability but we believe these will be overcome with 1-2 more acquisitions at which point the fundamental model will kick in and growth will happen.
As many of you know, at a high level, Onfolio actively buys and holds profitable online businesses, integrating them into our portfolio and reinvesting the cash flows into organic growth and additional acquisitions.
We want to delve a little deeper into the operating blueprint of Onfolio to show investors the heart of our strategy, the mechanisms of value creation we are employing, and how we plan to maintain our growth trajectory. We believe the value we are creating will sustainably grow as our strategy plays out into the foreseeable future.
Onfolio is focused on buying high quality businesses that provide online services, digital products, online education, and software to hold long term.
Where possible, we look for businesses that have recurring revenues, are asset-light, have digital marketing and operations as key differentiators, and are in sectors with future growth prospects. We don’t look for unprofitable enterprises or businesses with lumpy revenues or unproven business models.
There are numerous businesses available for acquisition at any given time that would interest us that are collectively worth many multiples of our market cap.
We typically pay no more than 3-4x EBITDA to acquire these businesses — if we can buy them and operate them successfully, this typically means we can compound capital at around 25%.
We’ve acquired 10 businesses so far, four since our IPO in August 2022, and we’re very excited about the opportunity to make additional acquisitions.
Our management team has a combined 70 years of experience, spanning everything from operating online businesses to marketing, business development, capital raising, and acquisitions.
We believe our core competency is finding profitable businesses where the sellers have been unable to maximize their business, efficiently integrating these businesses into our portfolio, and operating them well post-acquisition. Since our IPO, we have been doing exactly that.
We’re now working on telling our story more to help everyone outside of Onfolio who aren’t immersed in the day-to-day process like we are, understand the potential.
We may be small now, but we’re in a space with hundreds of potential acquisitions and limited competition. We buy businesses that are too large for individual investors and too small for private equity. They are large enough to be profitable without requiring risky cash infusions but small enough that they still have some unrealized growth.
We’ve recently laid out our AI investment strategy, which you can read here, which adds a layer of opportunity on top of our existing thesis.
We’re also excited to access more non-dilutive financing so that we can continue to make profitable acquisitions, accelerate our path to profitability, demonstrate our operating leverage, and generate shareholder value.
What do we mean by non-dilutive financing? It could be debt, it could be our Series A preferred shares, or it could be some joint ventures. The main point is that we aren’t currently considering an equity offering at today’s market cap.
Building Our Flywheel
Not every business we acquire will have synergies with the rest of the portfolio, but they can still benefit from our processes and operational knowledge.
Buying multiple businesses allows us to create a couple of flywheels within a broader flywheel.
- The ability to compound cash flows.
- Individual businesses can perform better as a result of being part of the wider portfolio.
For us, the flywheel is as follows:
We buy a profitable business, double down on what is working, fix what isn’t, and either grow it successfully or, at the very least, maintain its revenues and profit levels. We then take that subsequent and inherent 25% return, and reinvest it into another acquisition.
With each acquisition, we have potential synergies and cross-promotion opportunities with the rest of the portfolio. We also acquire more trade secrets, playbooks, and marketing knowledge.
We then do the same as before, optimize the cash flows, and make another acquisition. Wash, rinse, repeat.
Right now, we’ve built the wheel and the foundations that allow us to turn the flywheel on, and we’re excited about accelerating value creation from here.
This potential to compound capital at a 25% rate at scale provides for great long-term economics but requires discipline and strong foundations.
We believe that if we just continue to make strong capital allocation decisions and execute on the right acquisitions, then we will be very successful in building a much larger, stable, and very profitable business.
Onfolio Roadmap:
Pre-IPO
Going public was a crucial step towards giving us more available access to funding to be able to fund additional acquisitions at our desired scale. In effect, it was our launch pad. The goal before the IPO was to build the necessary foundation for the holding company, along with the public company infrastructure.
This step, while crucial, brought with it increased costs for items like SEC filings, audits, Director & Officer insurance, and some key hires.
Post-IPO
We raised $12.7M net of fees in our IPO, with the primary goal of using this capital to acquire profitable companies to help us reach breakeven and, ultimately, profitability ourselves.
In October 2022, we completed three key acquisitions:
- SEOButler – Acquired for $950k and had trailing twelve-month free cash flow (TTM FCF) of $260k
- BCP Media/Proofreadanywhere – Acquired for $4.5M and had TTM FCF of $1.2M
- BWPS – Acquired for $1.2M and had TTM FCF of $330k
These three acquisitions added around $1.8M in free cash flow to our bottom line at a collective acquisition multiple of 3.7x FCF.
In January 2023, we closed on one more acquisition:
- Contentellect – Acquired for $850k with TTM FCF of $300k
As of our first quarter 2023 10-Q filing, we still have $4M+ cash reserves, which we could use for additional acquisitions or working capital.
The Outcomes
An investor looking at our first quarter 2023 earnings report might think that the acquisition strategy is going slower than planned, given that we still reported a net loss despite the four acquisitions since our IPO.
However, the quarterly report was a bit “noisy”. There were a lot of residual one-time expenses in 1Q23 that aren’t recurring, as well as some additional cost-cutting earlier this year that has not been reflected yet in the earnings report. Thus, given these two factors, we don’t believe extrapolating 1Q23 results is a good proxy for determining where we are on the path to profitability.
To determine whether our corporate strategy is working, we analyze the acquired businesses to see if they’re performing as expected. If we can acquire businesses profitably, then the whole thesis remains intact.
So far, three of the four businesses acquired since IPO are “on schedule”, meaning they have earned what we expected in terms of free cash flow so far. The remaining business has had great months and frustrating months, as can happen in the initial post-acquisition period when integration is still taking place.
Given these collective results, we are confident that our business model is working.
The only thing we feel might not be “on schedule” is how quickly we’ve shed our IPO-related expenses and one-time fees and been able to generally reduce our burn.
The projections we’ve made internally tell us we are on the right path to profitability, even without further acquisitions.
What’s Next?
With one or two more acquisitions, we expect to be on the cusp of outpacing our largely fixed organizational structure and associated expenses, and professional fees related to being a public company, as each subsequent additional acquisition is purely accretive and helps fuel the Onfolio flywheel.
Although there are, of course, variables to consider – for example, size and terms of potential financings we may pursue, capacity for organic revenue growth of our subsidiaries, etc. — we are targeting profitability as we exit 2023.
Our next steps are to continue cutting costs where we can, exercising discipline with one-time expenses, and seeking non-dilutive funding for additional acquisitions. We currently don’t have any plans for an additional equity offering, as we don’t feel it will be necessary to issue more shares to reach profitability.
Our overall strategy is to continue leveraging non-dilutive financing for further acquisitions, taking advantage of the difference between the expected cost of capital and the expected 25% ROI from the acquisitions which, at scale, should generate millions of dollars in free cash flow. As we continue to execute our strategic plan and share our results, we expect our story to attract more investor interest.