๐ฌ Dom Wells: Lessons on how to acquire a digital business
From lifestyle business to IPO: how to master the digital company acquisition dance
Hey everyone ๐๐ผ
Today I'm bringing you the first in my series of 1:1 interviews with some interesting and successful individuals who have all in some shape or form found wins with alternative investments.
And remember, when I say alternative, I just mean investment opportunities that exclude stocks, bonds and real estate.
I'll be talking to all sorts of folks, from those who've made successful investments in start-ups, art, franchises or even the diamond market, to those who've made staggering returns investing in collectibles.ย
The aim is simple - to share their experiences so that you can gain a first-hand insight into their world, the path they have taken and a deeper understanding of the alternative investment space in which they operate.
This week I am speaking to Dom Wells, CEO of Onfolio.
Dom started building online businesses in 2012, and started buying profitable ones in 2015.
In 2018, he founded Onfolio, helping others to buy and operate profitable online businesses too.
After pivoting to a holding company, Onfolio IPOโd on Nasdaq in August 2022, roughly 10 years after Dom started his journey.
๐ Can you tell us a little bit about yourself and your journey into the online business world?
Sure, absolutely.
In 2008 I moved to Taiwan to teach English. After a few years of teaching, I realized I wanted to stay in Taiwan but wanted to explore other career options beyond teaching. So, I delved into entrepreneurial starter books like "The 4-Hour Workweek" and decided to explore internet marketing because it offered the flexibility of working online without geographical constraints.
I started by creating a blog where I reviewed products and referred people to buy them on Amazon, earning a commission for each sale.
Then, in 2014, I founded Human Proof Designs, which focused on providing legitimate starter websites for aspiring entrepreneurs. I saw that there was a lot of demand, but there was also a significant problem with scams and fraud, so it seemed like a good opportunity. Over the years, the company expanded to include SEO services, content creation and all the other things that someone might need when buying a starter website.
In 2018, my audience started to express interest in learning how to buy established online businesses, such as those that were cash flow positive or $100,000 businesses, so I started Onfolio, initially as a separate company.
It gained traction and I eventually sold Human Proof Designs to focus entirely on Onfolio. We evolved into a holding company and went public in 2022 to accelerate our growth.
๐ An unlikely journey from teaching to online business! Were you always interested in the digital space or was it a gradual realisation?
Teaching English in Taiwan was more a way of living in Asia and earning an income than a calling. My university degree in media, with a focus on film, was much more in line with what I do now in terms of marketing, creativity and digital production.
But it's been a 10-year journey and I've evolved and learnt a lot on the job.
Maybe a lot of people in digital business acquisition start with an MBA and learn how to do 'spreadsheet acquisitions' whereas I started by learning how to operate an online business and really iterated from there.
๐ For those interested in buying digital businesses, what are the key considerations?
I think the most obvious one is there's a lot of scammers - some business sellers and brokers. Not all of course.
Basically people who don't present their business accurately, you know, so it's more akin negligence than fraud, I guess.
People might think, "yeah, this business is fine". You don't have to do anything. It's going to be great. And then, maybe you buy it and you get the keys and it turns out that it's a full time job and the business is in decline and the competitors are eating away at the market share.
So you really just have to assume that not everybody is being authentic about their business.
I think there's a difference between verifying everything in terms of getting access to somebody's QuickBooks and seeing that the revenues are actually coming in and the bank accounts are real. But then there's also the, okay, everything's authentic, but is this a good company to buy?
I don't know the easy way to teach somebody how to get better at it because it's, well, it's kind of an extreme hands-on thing.
You just have to learn by doing.
A lot of people approach this as a passive investment, but it's very much an active investment. And if people are comfortable with that e.g. buying themselves a side hustle or a full time job, I think that's fine.
The third thing I would say is that people have a natural instinct to approach it a little bit like flipping a house e.g. buying a fixer upper and thinking, okay, I'm going to buy this business and I'm going to 10 x its profits or double its profits.
And you can do that, especially if you're buying a smaller business.But I think more often than not when you do that, you just end up buying a bad business because you see all these broken things that you can improve and it turns out that half the time you can't actually improve them. Because if they were so easy to improve, the founder would have improved them.
It's like how Warren Buffet started out thinking that you should buy cigar butts and, and try to get one last puff and then Charlie Munger basically said to him, no, you should just buy good businesses and just cash flow them. And so I think people would be better off just looking for good businesses to buy rather than easy flips.
And what about the types of digital businesses that can be acquired?
I think the best type of business to buy is probably not an ecommerce business because with ecommerce you typically have to keep throwing cash into the business.
So that leaves high margin things. There's software such as SaaS and that can be hard because you have to pay a premium and usually you're buying it from a technical founder. So you basically either have to hire a developer, which kills your profit or you have to do all the development work yourself.
So if someone was a coder or a developer, I would say buy an indie project and just expand it yourself.
I like service based companies e.g. a marketing agency.
The business model of an agency can usually scale up and down with revenue, depending on how you configure your employment structures, and agencies and service businesses don't usually need you to put a lot more money into them so they can just cash flow nicely.
Of course they'll have good months and bad months, but typically they can run quite well, especially if you have a good operator running the business and a good business developer. I think if they have recurring revenue also, that's even better. Some kind of retainer.
It's really hard because for some people ecommerce is probably the best acquisition for them, but it really depends on their skill set. But for me I like agencies because I just have a good track record with them.
It's hard to really give a one size fits all answer. But hopefully there's some insights in there.
๐ง What kind of due diligence should people think about doing prior to acquiring a digital business?
I mean, it usually comes down to finances - what are the trends over time, costs, margins, revenue streams etc.
And then, do you feel like you know how to run the business?
Is it something where the founders basically do everything and they take that knowledge with them when they leave? Or is it the team that stays, where the knowledge is?
Maybe the founder is doing a not-so-good job and you know you can come in and do a better job.
Then you look at the competitive landscape, is it something where the founder sees more and more competition coming in, so they're getting out while they can?
If we (Onfolio) were buying a content creation company now, weโd be thinking is AI eating that founder's lunch, because everybody's just using ChatGPT for content instead of paying them, and they're basically trying to get out while they can.
How easy is it for someone else to just come in and copy the business?
Are there opportunities for growth?
And then there's the financials. There's two or three sides to this. One is, are the numbers right? And then if a subscription business for example, what's the churn rate and doing cohort insight and other research that might be pertinent to that type of business.
And finally, thinking does this business need you to throw $500,000 a year at it just to keep it afloat, or does it cash flow quite well?
๐ For people who are thinking about getting started, can you give us the best and worst case scenarios for investing in digital businesses?
The best case scenario is to find a digital business with steady revenues that can be sustained over time. In this case, you can expect a consistent return on investment, typically around 20-25% or more.
On the other hand, the worst case scenario is to invest in a business with declining revenues that may require constant capital injections just to stay afloat.
This can lead to financial losses and a significant reduction in returns.
๐ What qualities do you think a person needs to be successful in the digital business acquisition space?
I think perseverance, curiosity and an ability to distill a lot of different information.
You have to almost self-direct your own education and also test things.
You can read tons of different case studies but until you actually jump in and try it, you don't know if those case studies are actually true or applicable.
And the ability to delegate and be willing to pivot and evolve your thinking as things change. Because there's not really one way to be successful - just staying in the game long enough to succeed.
๐ If someone wanted to acquire a digital business as a passive investment, what would you recommend?
It depends on the amount of money you've got to invest.
So I think the best thing to do, and obviously this is not an easy task, but would be to either partner with an operator or hire an operator to basically run the business for you.
So for example, there's people out there who might want to use, like in the US, an SBA loan to buy a business and they need ~10% deposit. You could put up the capital or some of the capital and become a partner in the business. Or you could buy the business 100 per cent yourself and then go out and hire somebody to run it.
Another method - there are funds out there that you can invest in, which is not quite the same as ownership, but you get exposure to the upside.
Book, Courses and Podcast Recs?
๐ง Quietlight brokerage and Empire Flippers - both are good podcasts
๐ป Jaryd Krause and Matt Raab - solid courses on buying online businesses
๐ โBuy then buildโ - Walker Deibel
Links for Dom and Onfolio:
Twitter - highly recommend and hereโs a snapshotโฆ
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Thank you!
Jason
DISCLAIMER:ย None of this is financial advice. Concepts of Finance newsletter is strictly for educational purposes.