Acquisition Entrepreneurship

Matt Perez (00:06):

Hi, my name is Matt Perez, and we are in rHatchery live with Blake Hutchinson. I think I'm pronouncing it right, right?

Blake Hutchinson (00:15):

Yes.

Matt Perez (00:16):

And Jose's not going to be here today because of, you know, with all the rain in California and everything else. He doesn't have internet and, but Adrian Perez may show up in the middle of this, so don't be surprised if it does, if he happens. Let me start by asking you I thought I understood what you did with Flippa and what's it called? Something Entrepreneurship.

Blake Hutchinson (00:50):

Entrepreneurship, yep.

Matt Perez (00:51):

Yeah, yeah. Oh, there, there's, there's Adrian. And then I tried to explain it to my wife, and I missed it completely up. So, what did you explain to us very slowly in big words? What is it that you do? What's your business model on stuff like that?

Blake Hutchinson (01:13):

Yeah, so what you are referring to is what we call acquisition entrepreneurship.

Matt Perez (01:20):

Acquisition

Blake Hutchinson (01:21):

In short, the ability to buy something that is currently operating and instead of having to start from scratch undertake zero to one, you are able to live and benefit from the cash flow of an existing business that somebody else has put their blood wet and tears into before you've come along. And as a result of that you have a greater chance of succeeding because you've got existing customers, you've got existing traction, you've got existing revenue. And so, the chances of failure are far lower, typically. And not only that, but it’s also actually an income source. So all of a sudden you buy a small business. It could be anything we specialize in digital and online businesses at flip up, but in theory, it could be anything, right? So, you could go and buy a laundromat that has been around for 10 years.

Blake Hutchinson (02:28):

That laundromat has a good income source. It's been operating for a long period of time. It's got a stable customer base. It's in a neighborhood where there's constant use. And you would buy that instead of starting from something from scratch. You don't need the same capital outlay. You don't need the trial and error. You don't need to run and think about the operations as you do tend to in a startup. You literally take it over from somebody who's already done a good job. And so that is acquisition, entrepreneurship, and what we tend to believe is a more tenable path to business ownership.

Matt Perez (03:03):

Yeah. I could see why it's more of a level of investments off the cashflow rather than get a capital. But how do you bite the business to begin with?

Matt Perez (03:17):

Let’s say a laundromat, which is, you know, maybe better understood the owner would want some money for it, right?

Blake Hutchinson (03:29):

Yeah, that's exactly right. So I mean, yes, it's to some extent, well, to a large extent it still is a financial instrument, right? So, it is an asset the asset needs to be paid for. But, you know, assets come in all shapes and sizes. So rather than thinking about it from the perspective of and mergers and acquisitions and big billion-dollar deals that we might sell on the front cover of Forbes or Tech Crunch, you think about it from the perspective of a multiple of cash flow or a multiple of profit. So they're not bought on the basis of skyrocketing valuations right, which rebalanced a little bit more recently, but still there, they're still outside the realm of the average person. So, let's take for instance our world here at Flippa. So you could buy a blog that is, for argument's sake earning $50,000 a year, you could probably buy that for two times earnings.

Matt Perez (04:36):

Okay?

Blake Hutchinson (04:36):

And yes, a hundred thousand dollars is still a substantial amount of money. I'm not suggesting it's not. And I'm not suggesting it's in within reach of absolutely everyone, but what that would mean is that I've got this asset that's been running for five years. It's consistently making $50,000 a year. I buy that asset for, call it two times profit. I've spent $100,000 on my asset the next year I continue to run that, I run it at the same levels as the prior owner. I'm now making $50,000 on that. That's a 50% return on my investment in year one. In year two, my asset is paid off. And in year three, I now have a stable income source that I can rely on. And that you know, has proven to be a safe bet for many people. It's not without risk, of course, very few things are, we're not suddenly suggesting that, you know, people who have never owned or even thought about a digital asset of any sort, we're not suddenly suggesting that they jump on our platform and start buying. Because that would be bad practice. But we are suggesting that they are undervalued, and underappreciated. We're suggesting that over the next 10 years, there will be this huge transition of businesses of all types, digital and brick and mortar and any other.

Blake Hutchinson (05:55):

And that, you know, there is a viable pathway to business ownership that is in, within reach of many people. And so that's what acquisition entrepreneurship is all about. We think it's a viable, sustainable pathway to business ownership, and therefore what we say is owning your own future.

Adrian Perez (06:11):

So, then this is definitely differentiated from the startup world where everyone's trying to get a hundred x in order to make the portfolio successful. Yeah. And it's definitely more understandable in a weird way, you know, it is there's more legibility to that type of thing of like, well, it earns this much and I invest this much in the journey for making flip a Did you ever consider democratizing the, the purchasing part so that people could buy fractional portions? if I'm not, if I'm understanding or not understanding correctly?

Blake Hutchinson (06:46):

Yeah, no, you are understanding very correctly. And it's an interesting segue. In short, we will enable fractional ownership. There are obvious challenges with that, mostly legal compliance and governance related challenges. So at the moment, to answer the question, Adrian 99.9% of transactions are buying 100% of the assets. Okay? so there's no trading of shares, there's no entity sale. It's an asset exchange. But we've had a lot of requests for that. So, you can have, for instance let's say you could have a very small, you could have an e-commerce business, and that e-commerce business is maybe operating on Amazon. So it's a fulfilled by Amazon store. Okay? And, you know, this is widely recognized as a decent business model. You get the leverage of Amazon. So you take more of the risk out of the logistics and the marketing side, and you put more effort into the quality of the product side.

Blake Hutchinson (08:02):

Now, we've had requests for people who have said, well, I don't have half a million dollars at my disposal, but I do have $25,000. And so is there a way to buy into a syndicate, right? Where someone takes the reins that person takes a salary, but they're essentially taking a network invest of investors along for the right. And so at the moment, we are undertaking some prelim preliminary work with the securities council just to be able to set that up. And so the way that we'll end up working, Adrian, is you'll have a special-purpose vehicle. So that special purpose vehicle for the purpose of the conversation, let's call it Blake, so special purpose Blake is available, and we are raising $500,000 for the purposes of buying this particular asset. So the assets are there, the financials are there, and all the due diligence is accessible. And now we have basically all three of us acquiring that asset. Therefore, you're actually distributing business ownership among an even great, yeah.

Adrian Perez (09:11):

Yeah. Because I know the jobs act under Obama, I think it was Obama, which finally got done, made it so that, you know, it was no longer like, well, you must be an accredited investor with a bazillion dollars to invest in things. They were trying to make fractional ownership possible. So, gotcha. So, then this vehicle ends up being the legal fiction, the legal framework that you need for. Like you said, syndicating a purchase.

Blake Hutchinson (09:43):

Yeah, you're exactly right. That's the journey. That's very cool. That's very cool. That's the journey we're on. And so at the moment, you've got 6,000 assets for sale, but to be candid, unfortunately it is a one-to-one. So it's Adrian selling his blog, his SaaS asset, and his app. The good news is remember, digital assets, though they're no longer expensive to start. And so, we believe that there is this extraordinarily big, long tail of businesses that will be available for many people of great diversity from around the world of different sizes. And so it should be that you can buy into business ownership at a lower cost than ever before. The best example I have of that is a, there's a gentleman in New York his name's John Chen really interesting guy. And he bought his first asset on Flippa for seven and a half thousand dollars. Right? So that's accessible for many people. And he took, he worked hard on that asset. So I'm not suggesting you don't have to work. Of course, you do. He worked hard on that asset. Two and a half years later, he sold that for $550,000, right?

Adrian Perez (10:55):

Wow.

Blake Hutchinson (10:56):

Seven and a half thousand dollars, 24 months later, $550,000, he's now done that, he's now done that four times.

Adrian Perez (11:03):

Oh my. Wow.

Blake Hutchinson (11:05):

And so, the practice of acquisition entrepreneurship makes sense to a lot of people because they can actually assess something as viable from day one versus having to get to a point of viability over day zero to 100 or 1000.

Adrian Perez (11:22):

Which is sort of a different skillset at that point when you become the owner. I'm not sure how you guys do it, but, you know, if I suddenly became the owner of something and it was sort of this more straightforward non-startup type business, yeah. I have to manage everything, or does Flippa help me manage everything? I’m not where how that manifests for the person who just bought.

Blake Hutchinson (11:50):

Yeah, it's a great question. No, we don't manage it. So, we, you know, know our entire mission is to democratize the exit and enable business ownership. So what we do is provide a marketplace where buyers and sellers meet each other and negotiate and ultimately transact. We have all the tools you need to get the deal done. Once the deal is done, you are on your own, you are the business owner. Now, what a lot of people do is they will tap into the freelancer economy and they will leverage themselves where they have a skillset, but then they'll leverage others where they have a diverse skillset that they don't have themselves. Okay? So, for example, there was a gentleman in Canada, and he started buying small content websites. They're essentially blogs earning income through affiliate revenue. Okay? So, everything from garage gym pro.com, which was an affiliate website for in-home gym equipment. All the way through to Yorky's Passion, which was an affiliate website for Yorkshire Terriers, where they were essentially referring to Amazon to clip the ticket on dog-related accessories. Now, he knows nothing about content websites, but he's a relatively savvy person. And he said, okay, well I can buy these, each asset cost him between $15,000 and $25,000. So again, we're not talking sheep stations here.

Matt Perez (13:18):

So, he gets, let me clarify, he gets the main name, the brand if you will. That's really what he's buying because said he's got to generate new content himself.

Blake Hutchinson (13:28):

Well, he remembers that a lot of the time in the eyes of Google this business, these blogs have a position of authority. And so for many of the long tail keywords that are operating within the garage gym, pro ecosystem being home, gym equipment that particular asset was in the eyes of Google, very positive and powerful. And so, he is reliant on the history of.

Adrian Perez (13:59):

He can make money from old content.

Blake Hutchinson (14:02):

Yes. So he sits on the asset

Blake Hutchinson (14:07):

He then picks up the revenue from the links pointing out to various sources where he can attribute and he has relationships with. So now that's not to say though, that you don't have to continue to invest. But your investment is a function of what the business has previously done.

Matt Perez (14:32):

You start from a higher level.

Blake Hutchinson (14:34):

That's really important thing, right? And then you get economies of scale when you own multiple of them, because you can deploy the same staff base against

Matt Perez (14:42):

Multiple of them. So how do you make, how do you flip up makes money?

Blake Hutchinson (14:47):

We take a successful, so if someone sells, so we do small things, we do big things. So when someone sells a $20,000 blog we make 10% on that. So we take a contingency-based success fee. Okay. It's a lot smaller when someone sells a big thing because yes, there are still big trades that happen and certainly, you know we have a business model that is based on a full marketplace exchanging assets from as low as a couple of thousand dollars to as high as tens of millions of dollars.

Matt Perez (15:18):

Certainly, you take 10% or less of the transaction.

Blake Hutchinson (15:22):

Then it's variable. So, it declines as the asset size grows.

Blake Hutchinson (15:26):

But in short, you know , to operate the asset, what you do is you go and find someone who understands the content. So, you go and pay an assistant on Upwork or five or something, and so you're getting away with a low-cost investment and you are putting your own passions and knowledge base into the asset of course. But you're leveraging the cheap resources you can get elsewhere to continue to run the asset ex extremely successfully.

Adrian Perez (15:54):

How often do these businesses end up having a component where there are employees involved?

Blake Hutchinson (16:03):

Depends on the size. Typically sub $100,000, probably even sub $250,000. They're sole trader businesses.

Blake Hutchinson (16:15):

This is a great thing, right? Because we're in the world of side hustles.

Adrian Perez (16:20):

Yeah, yeah. There's like a whole market for it.

Blake Hutchinson (16:23):

And so, you know, any one of us talking today on the side, we might own a blog, we could have an e-commerce business, maybe we've got a small SaaS app, maybe we've got an iOS or Android application. Maybe, maybe we don't, but lots of people do

Adrian Perez (16:38):

Small 3D printing business, that's a 3D printer behind me. So yeah, I totally understand that.

Blake Hutchinson (16:47):

So, the world of digital assets is very well, it's a long tail, right? There are hundreds of millions of these things, and obviously some are worth more than others. So what we believe is that the digital economy and the world of entrepreneurship should not be the realm of an exclusive few that can tap into capital, right? That tap into the smarts of Ivy League graduated engineers. We believe that it should be democratized as it essentially has been in many respects. But then better than that, we believe that spawns the next generation of business owners, because most businesses have a three-to-six-year life cycle. And you know, Intuit will tell you that out to their cloud accounting software, they can tell you that the average life cycle is X. And as a function of that, we believe that instead of these digital assets just sitting on the shelves, every one of them should be given the opportunity to change hands multiple times.

Matt Perez (17:57):

No, it's a really interesting approach. I couldn't explain it the way that you have made it now, but so I'm sitting here thinking, so what we're into the whole thing about re you know, rHatchery live and the radical model is co-owned companies. So instead of getting your power from capital, you get your power, power from contributions. So, he contributes more, get more, and he contributes less gets lost. And that contribution is not determined by the top guy or anybody, you know, a judge or anything like that, but rather by each other. So imagine that if we were to form a company, we would decide what you are doing, Adrian, and I would say is your contribution, and you and Adrian will decide what my contributions are and whatever is left.

Matt Perez (18:59):

And so, it's a dynamic thing is it's got many sized looking and stuff like that. But I would imagine that we'll end up with companies that are like this, you know, assets that are making a hundred K a year. Yeah. And not growing particularly, because that's not the point of it. The point of it is to live in a co environment. And so, in that case, let's say, I would say no, but you guys stay, want to stay in the business, so you want to sell it and make some money, but you want to stay in the business. So how would that, how would that work?

Blake Hutchinson (19:45):

Yeah, I mean, let me put it in a couple of ways. One of the ring things that I personally had to realize coming into my role as the CEO was how global digital business ownership is and how variable the needs of our collective global citizens are. And so I had a discussion with a person in Croatia, and he had said to me welcome to the new role Blake. And all I was doing was I was speaking to a bunch of our community members to try to understand our platform and what they wanted us to do and work on, and what they wanted us to improve. And he had said, do not get away with the lower value portion of your marketplace because he had assumed that we would go up the value chain and continue to sell more and more expensive or higher value assets.

Blake Hutchinson (20:47):

And so the point he was making is if he buys a $5,000 asset for his son, that $5,000 asset might actually be making two and a half thousand dollars per annum.

Blake Hutchinson (21:06):

The two and a half-thousand dollars per annum enables him to democratize business ownership within his own family. And give his son a livelihood from which to grow from.

Blake Hutchinson (21:20):

And so, part of it is, yes, shared ownership and distribution of responsibilities. Part of it is given the accessibility of digital assets, you actually democratize business ownership amongst so many more people.

Blake Hutchinson (21:43):

Then you have the question that you've posed, which is, okay, well, how do you get distributed ownership distributed responsibility and shared benefit? We have absolutely seen examples of an individual who buys one of these assets on floor, but then ultimately distributes ownership among many. So for example, there's been assets that have been a particular themes or niches, for example, crochet as an example, right. Where a crochet community was running a crochet blog. And so they're all contributors to that, right? Right. It's about crochet. It's essentially the same as Yelp. It's user-generated content. But the difference it's about a particular topic where people have a shared passion and they each share in the revenue that that blog produces.

Adrian Perez (22:43):

And that was done basically the user who bought this company, or in this case, the blog that is this resource, then reached out to his community to connect them with that ownership as well.

Blake Hutchinson (22:59):

Correct.

Adrian Perez (23:00):

Okay. Yes. See, that's fascinating because what we've been about is very much the democratization of ownership. It's like the ownership's fine. It's just we want people to be able, like, as you're speaking about this, I imagine a future world where you run into anyone and they say that they're an owner of some company.

Blake Hutchinson (23:23):

And they may have had companies bought from them and vice versa and started, you know, it would be, right now you talk to someone at a party and you're like, do you own a company? And it's like, well, if you're in the Bay Area, then maybe. Because everyone's trying to do their startup, but anywhere else, the answer is no. I work for this other person. Yeah. They gave me a few shares of stock, but their answer is not, yes, I own a company. Yeah. Even if they do have stock that technically is some fractional thing of ownership. Yep. And that would be, that would be really good. And it's kind of funny you talked about that blog, and one of the things we've talked about is we have these platforms like Facebook or other things where people glomerate knowledge, they glomerate their resources and work together for free usually, and they usually get no reward other than the connection they have with other people.

Adrian Perez (24:26):

Yep. And so like I'll elaborate more on what my dad was talking about, this sort of non-self-assignment of assets. So, when we were working on this book, you can see the book behind him in the middle of the screen, radical companies. Yep. He and I are co-authors of the book along with Jose who couldn't be here. And that at one point we come up with this idea for rats, and the idea there is that everyone gets a single rad, and that rad is a fraction of the profits of the company, but it's not like a co-op where everyone has a specific fraction of the pie or an equal fraction of the pie. You have to give your RA to other people or cut it in half and give it to other people.

Adrian Perez (25:16):

So at one point my dad and I, we've been, it's just the two of us trying this, right? So, it's kind of a silly academic experiment at this point where every day we're working on the thing, and I give him a red that week, he gives me a red that week, and it's just, it's going, it’s total equity until one day I propose some idea and he steamrolls me and doesn't let me get the idea out. And, he is like talking about it and not listening to me. And that day I don't give him a rad. And so, it's not like you could give negative rads, but in this case, I gave nothing, you know, that sort thing. And it immediately started a conversation because the next day he's like, why didn't you gimme a rad? Or I don't know if it was an email or something, but then we're talking about it, and I explained instead of the typical business problem where it festers, right?

Adrian Perez (26:14):

You're like, you feel hurt. You might not have any way to give feedback that really has teeth that in the, in how these rats do. Yeah. And especially if your is, you know, he's the person in charge, and so what are you going to do? You know, that, that sort of thing. And then, you know, months later you bring it up and then the guy's like, oh, I didn't even know I steamrolled you, you know, that, that, that sort of thing. And the idea then is that let's say there is that blog, some of those people are going to contribute more than others.

Blake Hutchinson (26:49):

Yes.

Adrian Perez (26:50):

And in our case, what we're trying to do is adapt the system where yeah, there's equal power. But there's an unequal assignment of a contribution. So, if I recognize that you, Blake, have done an amazing job, this week, I may give you all my rads, but then next week I didn't hear from you, or next week I didn't hear from Matt. So, you know, I don't give anyone rats. Yeah. And so, rats are just the name for this, it could be units or kudos or whatever it is. But we're, we're super fascinated by the idea of democratizing this stuff in a way that you know, here we're in your company, we're talking about the hard asset itself. Yeah. It's not the management, it's not, you know, things like that. The other thing too is so like you have Sequoia Capital and they're a VC fund. Yep. And so there the buyer is an institutional investor and the person selling is someone who wants to sell a fraction of their startup.

Adrian Perez (28:04):

And Sequoia acts as the mediator, the platform in between, in a very boutique way. Obviously, Flippa is attempting more of a true platform.

Blake Hutchinson (28:14):

Yeah.

Adrian Perez (28:14):

But one of the things Sequoia talks about is serendipities between companies and they want to purchase companies that can be integrated parts of an ecosystem for what they've already bought. Yeah. And I'm wondering, do, when you're looking at companies, and obviously digital is one specialization Yeah. But how much more do you think about how do we add this company to the platform? Like what motivates that? Right.

Blake Hutchinson (28:42):

Yeah, really good question. So we, you know, we're very democratic in that approach. So long as the asset can be validated, and verified for quality and quality is a function of data we don't want someone to buy something that isn't, as it seems.

Adrian Perez (29:03):

Yeah.

Blake Hutchinson (29:03):

Then, you know, clearly we're, we're a democratic and open marketplace that gives people access. We have some certain policies around what you can and can't lose. But the question you've posed and the approach that say Sequoia, the Sequoia analogy you have used is actually quite similar to the way individuals consider opportunities. So, for example, and again, it's not necessarily, in this particular case, it's not necessarily about democratizing business ownership, but we had a tattooist, right? So he owned a tattoo parlor. As we know, people walk in, they sit down on the bed there and he starts doing his art. Now he went and bought a blog about tattooing on Flippa. So he buys his first ever digital asset for not very much money because it offers him synergy and better ability to own his own audience and drive obviously foot traffic into his physical parlor. Now, the concept of buying synergistic assets is very common in that regard. They don't have to be the same business model, but you want, you know, shared category or shared topic base.

Matt Perez (30:24):

The, but the difference is that Flippa is allowing individuals or supporting individuals to do this. And the thing about Sequoia is there's a lot of secrecy I know about this company. I don't know about this company. And yes, they can play together and maybe, maybe I'll tell the owners of the company. The operators of the company, and you're saying, no, it is individuals. They're doing tattoos, they want to get a tattoo plug or whatever it is. And they may get another company that does tattoo equipment. I don't know what that, I don't know anything about tattoos, but that is selling something about tattoos and stuff like that, that is based on Amazon kind of thing. So, there's a similarity, but it's usually different because the last, it brings it down.

Adrian Perez (31:23):

Yes. The expertise is devolved to the most important person, which in this case is the purchaser. The purchaser themselves.

Matt Perez (31:31):

Yes.

Adrian Perez (31:32):

If a middleman's deciding what's good for you, they may guess wrong or right. And you know, may guess wrong or right as well, but usually the person with the most expertise is the one you actually want to listen to.

Blake Hutchinson (31:46):

Yeah. And you know, the other thing about this is you can pick and choose whether the existing, the old existing business owner retains some equity, right? So, you actually when you buy an asset on Flippa, there's a discussion that plays out and you often see someone say, look, I just want to invest it in the digital asset, but I'm, I'd like you to stay on and, and share in the upside, right? So it's genuinely democratic in that way because it's a two-way exchange of information. But yes, I mean, people are obviously doing it because they believe in the assets, capability, and potential. But yeah, there's no secrecy. It's completely democratized.

Adrian Perez (32:28):

So I like that. I like that transparency. I think we have to wrap up.

Matt Perez (32:32):

I'm going to jump in because he's got to leave, and we got to wrap up. Next week's guest is Bindu Kalesan, founder of Tury Health. And she's going to tell us all about a transparent, safe data exchange platform for people to share their health data which people are very paranoid about it. So anyways this was really, this was really good. Really? Yeah. This was really, I really liked it. I didn't know what to expect because, you know, and that's half the fun, and but I'm glad we did, I'm glad we got together and let us know how we can help you promote and stuff like that. And we'll be happy to. Okay. And I know you gotta run, so yeah, thank you so much.

Blake Hutchinson (33:25):

Yeah, I'm just for everyone's context, 6:30 AM here in Australia, so I got to run to get on an airplane. But thank you so much for the time to chat. It's a great topic.

Matt Perez (33:34):

All right. Bye.