EF Capital: Round 1 in Review
EF Capital Round 1 is off and running.
Funds for the program were raised from investors seeking passive income from online businesses. In Q2 and Q3, operators successfully deployed those funds across a variety of digital assets in the content and Amazon FBA spaces.
In reviewing Round 1, we feel it was a success and positions us well for Round 2.
The goal of EF Capital is to make online business investment accessible to an audience beyond traditional players such as entrepreneurs and well-funded private equity companies.
EF Capital aims to turn what has conventionally been an actively managed asset into a completely passive investment opportunity.
Have we succeeded? Let’s see.
Round 1 Overview
The first round of EF Capital was launched in Q1 2021.
Fundraising for Round 1 commenced in January and closed in April 2021. Operators completed acquisitions by July, within the 90-day acquisition period. The first quarterly report is due 30-45 days after the end of Q3 and is set to be released to investors in mid-November.
We had operators outline their investment strategies, including their target business models and acquisition criteria. With this detailed information in operator profiles, investors were able to go on our platform and select an operator in which to invest based on their experience and investment plan.
Here’s a summary of what happened:
- 160+ investors participated
- $7M raised
- Investors spent an average of $45K over multiple deals
- Largest total individual investment was over $500K
- 80% of the funds were invested within the first 90 days
To our surprise, 80% of investors had never bought or sold a business with Empire Flippers before. This indicates we are reaching a new audience, one of our major goals.
We strongly believed there is a large audience that loves what we do and wants to get involved but they simply do not have the time, skills or resources to acquire and actively manage an online business.
Still, this was more than expected. It validated our theory and filled us with optimism about the growth prospects for Empire Flippers Capital.
Another sign of our success was the deals that were made.
A Closer Look at the Deals Made in Round 1
Every business purchased through EF Capital was first vetted and then listed on our marketplace.
Once a business is acquired by an operator, the business goes through the standard Empire Flippers migration process. At the time of this writing, the majority of migrations for Round 1 have been completed.
Now that operators have their online businesses, the next few months will be focused on implementing growth strategies. Most of the growth occurs in the first 6 to 12 months, so operators are now establishing the foundation for the long-term success of these assets.
The first quarterly report is anticipated in Q4 2021; we will post redacted versions of the performance numbers.
By early 2022, after the operators have implemented the growth plans, Round 1 investors should have a clear idea of how their businesses are performing.
These investments were made possible through work done prior to Round 1 in 2020, when we built the foundation of EF Capital; in Q1 2021, we were able to put our plans into action. It was our first round with EF Capital and, in retrospect, we learned a lot along the way.
What Worked Effectively in Round 1?
The way the program is set up now, we raise money from investors and then operators choose businesses from our marketplace that match their experience and investment strategy. Since businesses are only acquired through our marketplace, we monitor the operators’ acquisitions to ensure that the businesses they acquire match their experience and strategy.
Each operator had full access to more than 300 businesses on our marketplace. To make an acquisition, the operators, on average:
- Evaluated 120 businesses
- Completed due diligence on 50 businesses
- Conducted buyer/seller calls with 7 businesses
- Made 3 offers
The operators had pre-defined criteria, including the number and size of businesses they can acquire. We monitored all activity to ensure that the operator made acquisitions in line with their predefined criteria.
Not all funds raised were spent on acquiring businesses, however, as some money was needed to execute growth strategies.
Overall, 78% of the capital raised was deployed across all of the acquisitions made.
We experienced overwhelming demand from investors to the point where some were refunded because their desired deal had the maximum capital allowed. As a result, we changed the fundraising parameters from a hard cap capital limit to a ranged limit for future rounds (currently implemented in Round 2).
Additionally, we built a custom technology platform and hired a dedicated team to scale EF Capital going forward. We have grown our team to 10 employees, including the managing director, a project manager, an investment analyst, two investment advisors, a customer service team lead and four customer service specialists to support our investors and operators.
Overall, we are very pleased with the high percentage of funds deployed and quality of businesses acquired in Round 1.
We expect these acquisitions to provide strong returns to investors. We look forward to building on this in Round 2 in September, but the first round was not without its challenges.
What Were the Challenges Faced in Round 1?
We learned numerous lessons on how to develop EF Capital.
Improving Investor Communications
Some early feedback we received from investors was that they wanted to hear about their investments more regularly.
We considered this when expanding our team and set up a system that allows us to communicate important information to investors between quarterly reports, including updates on acquisitions made and percentage of funds deployed.
Overseeing Acquisitions & Negotiations
We learned that many operators have strong experience operating businesses, but they need help acquiring businesses—this is true even for operators who previously sold businesses or made past acquisitions.
The EF Capital team works closely with operators to help them acquire businesses that are optimal for their investment strategy. Operators submit their expectations and proposals and review them with the EF Capital team. Our team then creates a variety of revenue forecasting models to accurately project earnings and dividends.
Additionally, EF Capital helps operators define a bidding and negotiation strategy with sellers. By doing this preparation prior to negotiations, the operator is able to make a better deal and achieve higher returns for investors over the life of the investment.
Note: EF Capital operates completely separate from the brokerage side of Empire Flippers, with its own dedicated team. It is imperative for us to avoid any conflict of interest with the EF Capital program and Empire Flippers marketplace. When reviewing any potential deals for EF Capital, we refer only to information that is available to all buyers on the marketplace.
Bringing in External Advisors
EF Capital is bringing in third-party advisors to assist operators with acquisitions, including due diligence and negotiations. This support will make it easier for operators to deploy a larger sum of funds faster and acquire better businesses based on their strategy.
We will also have operations advisors that will vary from deal to deal, for example, a fractional CFA for a complex e-commerce business.
Leveraging Collective Operator Knowledge via Masterminds
Another form of support we implement for operators is regular “mastermind” calls. On these calls, operators share their experiences and provide advice and resources to help each other succeed as they manage and grow the assets.
Building a Custom Platform for EF Capital
To manage fundraising in Round 1, we hired a third-party fund administrator to raise money from investors via their proprietary technology platform. The main purpose was to handle investor communication and document signing while providing tax, legal and accounting services.
While outsourcing this operation worked, we thought it could have been more efficient. We decided to use our engineering team at Empire Flippers to bring these functions in-house and create our own custom platform, which has streamlined the capital-raising process.
Our new “EF Wallet” feature allows investors to keep money with EF Capital so they can deploy funds and receive investment returns more quickly and without having to send and receive multiple wires.
As part of the onboarding process, investors verify their identity as per Know Your Customer regulations. They must also confirm their status as an accredited investor. Before entering into a deal, the investor completes associated documentation, which includes a subscription agreement, operating agreement and private placement memorandum. The investor formerly completed these tasks via the third-party fund administrator, but now they can go through these processes in just minutes on our platform.
We also plan to create a more sophisticated investor dashboard that allows investors to monitor allocation of their funds and risk factors associated with their investments, such as the monetization of the business and its traffic sources, along with performance of their aggregated and individual deals.
Revamping Investor Marketing Material
When we launched EF Capital, we expected the majority of investors to be previous customers of Empire Flippers. We created all of our marketing materials under the assumption that the audience would understand online businesses as digital assets so we could expand to a broader audience later.
However, that broader audience came to us sooner than expected.
We had to adjust our marketing materials to accommodate this new audience that was unfamiliar with online business investing or with online businesses generally.
Some of the materials we created include:
- Short-form investor information page
- Detailed FAQ
- One-page Investor Summary
- Comprehensive operator interview on each deal page
As you can see, we learned plenty in Round 1 and will continue to improve EF Capital in Round 2.
Round 2 is Now Live!
Taking everything we’ve learned and built to improve EF Capital, we have now launched Round 2.
As an incentive, early investors in Round 1 were given early access in Round 2, having one week to invest in deals before they were opened to the public. We will continue this early incentive plan for future rounds so that those who invest before September 30 in Round 2 are rewarded with early access to deals in Round 3.
In Round 2, we have seven operators; two are repeat operators from Round 1 and five are new.
With these new operators coming in, and based on their experience and expertise, we have opened up to new monetization types such as Amazon KDP and e-commerce.
In the future, we plan to open up to additional business models including SaaS.
Once Round 2 is successfully completed, we expect to launch a third round shortly thereafter.
We will continue to assess and improve how EF Capital works as we develop our operations, team and platform.
Due diligence on operators for Round 3 will begin in October. We are looking for experienced operators with a proven track record in running online businesses. We will publish a blog post in the near future explaining what we look for in an operator and describing our due diligence process.
If you are interested in being considered as an operator for Round 3, please complete this form and we will get back to you.