Micro Website Investing Roll Up Files IPO – Onfolio IPO Thoughts

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The business model of buying cash flow producing websites at lower multiples 2x-4x, rolling them together and then taking the larger combined entity public at a much higher multiple is a VERY appealing business model. 

A few have pulled it off VerticalScope while many more of these roll-up plays have failed (some spectacularly – IncomeStore). I started to attempt this in 2017 before the founding team got sucked into the crypto rabbit hole. The Amazon FBA world has seen a surge of this type of roll up activity over the last couple of years. 

So… it has been with great interest that I have followed Dom Wells and OnFolio with interest as they work to take their portfolio public. I have known Dom since 2014 and it has been fun to follow along with his various online projects including this incredibly ambitious one. 

Recently OnFolio has filed with the SEC to have an IPO and has therefore revealed a lot of information related to its operations for us to dig into and learn about website investing. 

This post looks at the performance of OnFolio to date and what we can take away from it as we build our own strategies in this space. 

TLDR:

• Running a portfolio of sites can be VERY financially rewarding! The estimated performance for OnFolio website investing is…
  • ROCE = 72%
  • ROI = 116% over ~2 years
• Doing it at scale and turning it into an investable vehicle is REALLY HARD!
  • Net Loss of $1.9M on revenue of $1.8M due to very high SG&A expenses.
• Roll-Up Financial Alchemy Could be a Massive Wealth Generating Event
  • Total funding estimated at ~$3.1M (shown as accumulated deficit) spent over 2 years results in an implied pre-money valuation of $59M for the IPO (20x return if they pull it off… likely even better since a lot of that $3.1M was debt)

Source of Information:

• SEC Website – https://www.sec.gov/edgar/browse/?CIK=0001825452
• Specifically the S1 – https://www.sec.gov/Archives/edgar/data/0001825452/000165495422005381/onfolio_s1.htm

This article will look at…

• What is OnFolio
• The Simple Math of a Roll-Up Business Model 
• OnFolio Performance
• Implied Valuation of OnFolio
• Conclusion

What is OnFolio:

OnFolio buys and/or manages online businesses (content websites, ecommerce businesses and productized services). 

From their filing “We acquire controlling interests in and actively manage websites that we believe (i) operate in sectors with long-term growth opportunities, (ii) have positive and stable cash flows, (iii) face minimal threats of technological or competitive obsolescence and (iv) can be managed by our existing team or have strong management teams largely in place. Through the acquisition and growth of a diversified group of websites with these characteristics, we believe we offer investors in our shares an opportunity to diversify their own portfolio risk.”

The Simple Math of a Roll-Up Business Model

The math is incredibly compelling…

Buy online businesses, using debt ideally to not get diluted, at 2x-4x the earnings and then go public and get a 20x+ valuation on the “rolled up” assets. 

Simple enough in theory but does it work in the real world? 

OnFolio Performance:

This is the new information that was fun to dig into. 

Overall Numbers:

2021

• Revenue = $1,808,543
• Cost of Revenue = $1,073,509
• Gross Profit = $735,034
• Expenses = $2,687,345
• Income (Loss) from Operations = ($1,952,311)

So on $1.8M in revenue, $0.7M in gross profit was generated but expenses crushed that resulting in a $1.9M loss. 

I believe these massive expenses are a reflection of the effort needed to go public… look at the length of the filings! Those would be some scary legal/accounting bills!

The Seller and General Administration expenses are huge and potentially a large portion of this are one-off costs associated with going public. In the filing, it shows $553,651 in costs estimated in the efforts to go public representing a significant chunk of the expenses. 

A more interesting and potentially fair way of looking at OnFolio is how has it done with the sites it has.

Portfolio:

• 5 – wholly-owned content/ecom sites
• 1 – wholly-owned productized service
• 10 – websites with a management agreement (OnFolio gets paid to manage the site)
• 2 – productized services being managed (OnFolio gets paid to manage the business)

Looking at the 100% owned websites and the provided purchase agreements we can then estimate their performance based on the organic traffic from ahrefs…

NOTE – The MASSIVE drop of 90% for PrettyNeatCreative occurred in the first month and has climbed back so although it looks terrible this drop may have been calculated into the purchase price based on the APA and relatively low purchase price?

So traffic across the 100% owned portfolio is up 9.06% for the sites we have all the required information for.

This shows the strength of the portfolio model where several sites can drop but the overall portfolio performs better. 

Return on Capital Employed

One of the best measures for a roll-up is how profitably can it deploy capital in acquisitions. 

Basically has Onfolio created value through its acquisitions and website operations? 

Looking at the revenue breakdown… 

• Website Management $940,779
• Advertising and Content Revenue = $204,910
• Product Sales = $661,154
• Other = $1,700
• Total Revenue = $1,808,543
• Gross Profit = $735,034

Then considering the net cash used in investing activities in 2020 and 2021 of $1,020,496 we have a ROCE = 735,034 / 1,020,496 = 72% which is huge!

Or another way is the ROI if the assets purchased were liquidated at a 3x multiple

• Portfolio value with a 3x multiple = $735,034 x 3 = $2,205,102
• Investment = $1,020,496
• ROI = 116% over ~2 years

So the portfolio performance despite some sites dropping appears to be very positive. A couple of things to note would be how much of the cost of revenue is not fully captured in the cost of revenue declared such as…

• Management time building/running productized services from scratch (not a repeatable activity at scale)
• Strategy/sales for the website management agreements potentially not being fully baked into the cost of revenue.

Implied Valuation of OnFolio:

I am no financial advisor/investment expert etc so I hope I am calculating this correctly. 

Amount of Cash Being Raised:

“We estimate that the net proceeds from this offering will be approximately $13,246,349 , or approximately  $15,316,849 if the underwriters exercise their over-allotment option in full, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.”

Cost Per Share:“14,127,125 shares (or 14,564,018 shares if the underwriters exercise their over-allotment option in full), at an assumed price of $5.14 per share.” So the final value of OnFolio would be 14,564,018 x $5.14 = $74,859,052 which would include the assets of ~$15M cash raised plus the existing portfolio of assets.

This is the financial alchemy that makes rollup business models incredibly attractive…

• Deploy ~$1M in capital
• Buy assets for 2-3x
• Have those assets perform reasonably well
• Go public at an 84x multiple on Gross Profit? (74M – 15M cash = 59M non cash value of the business / 0.7M Gross Profit = 84 X)
  • Even though the overall business is losing money and will continue to lose money. 

Overall this seems like a shocking valuation to command especially given some of the very scary wording in the filing… “Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern;” I don’t read enough of these filings to know if this is boilerplate risk communication or a red flag… certainly sounds like a red flag! 

Summary:

• Running a portfolio of sites can be VERY financially rewarding! The estimated performance for OnFolio is…
  • ROCE = 72%
  • ROI = 116% over ~2 years
• Doing it at scale and turning it into an investable vehicle is REALLY HARD!
  • Net Loss of $1.9M on revenue of $1.8M due to very high SG&A expenses needed to go public. 
• Roll-Up Financial Alchemy Could be a Massive Wealth Generating Event
  • Total funding estimated at ~$3.1M (shown as accumulated deficit) spent over 2 years results in an implied pre-money valuation of $59M for the IPO 
  • Dom with 5,550,000 shares at $5.14 would have a very good day!

I am impressed with the ambition of this strategy and wish Dom and all involved the best!