250 or 60 to 4: OffDeal

Happy Wednesday. I’m heading down to Charleston tonight for the weekend to go to two concerts and to actually have some good seafood which Charlotte grossly fails to provide. 

In other news, I had a friend ask me what stocks to invest in. I told them you either have unique information (not insider), or you buy great companies you use everyday. Unless you are doing it full time, investing should be incredibly simple. Only took me over a decade and thousands of dollars in losses to understand that (hey nice tax write offs though!). Onto today’s issue. 

If you missed what the 250/60/4 segment is, check out the original issue here.

Company: OffDeal

Description (from Perplexity): OffDeal.io is an AI-driven M&A advisory platform focused on streamlining the acquisition and sale of small to mid-sized businesses (SMBs), particularly those with annual revenues between $5 million and $100 million. Founded in 2023 in New York by Ori Eldarov and Alston Lin, OffDeal leverages advanced AI and big data analytics to automate and optimize the M&A process, positioning itself as a modern alternative to traditional business brokers and investment banks.

Background: I saw a theme a few years ago. There are some companies that build software purpose-built to get their customers out of excel (I work for one). This makes the experience of moving from excel to software feel truly magical. Similarly, nowadays people are using ChatGPT daily. It’s awesome, but it’s a broad product. It’s good at a lot of things, but not great at any one thing. So, if you notice a daily workflow that AI is simplifying for people, there's a chance you can build a company that goes deep on perfecting that single use-case.

Take an investment banker for example. Their daily workflows have been completely revolutionized by AI. Pulling comps, running models, and building pitch books are now tasks where AI is a co-pilot that helps handle a lot of the grunt work.

In a firm like Goldman Sachs, this is incredible when doing a $1b+ deal. Your team of analysts associates become incredibly efficient. When you’re collecting fees for these gigantic deals, it makes sense to have these large teams do this work even when they are becoming increasingly efficient.  

Investment Thesis

This is where I start to love Offdeal and the market they serve. As I was saying before, when you have large teams covering large deals, you’re collecting millions in fees. As the deals get smaller, the unit economics start to make less sense. You simply wouldn’t use a 20 person team to run a $100m deal. 

Let’s make a really intense chart to illustrate this. This chart is laying out multiple different deal sizes and what the costs would look like using a typical 20 person investment banking team as well as the typical fees collected on these deal sizes.  

So at the low end of deal sizes, it makes no sense to use a 20% team. The cost of that team is going to significantly outweigh the fees you collect. This is an exaggerated example of course, but it drives home the point that these large and medium size investment banks won’t focus on the smaller end of the market when it comes to deal size.

This tail end of the market though represents about 50% of the deal volume in the market. While the $ percentage is significantly lower, if you have a smaller team, that doesn’t really matter. This is where OffDeal is betting and why I love the company.

Smaller Deal Team = Ability to do Smaller Deals

To an extent it starts to become simple math. What if you can have a 1-2 person team execute a $10m transaction? At OffDeal’s roughly 5% fee, you can generate $500k in fees. By using proprietary AI systems and hiring experienced investment bankers, OffDeal is going after the tail end of this market that has traditionally been ignored by larger firms. To give a quick idea about this side of the market, in 2023 roughly 9,000 SMBs traded hands for a value of around $6.5b. I’ve said about 23,000 times in the past year that AI is going to increase efficiency and open opportunity, this is a prime example. One to two person deal teams with an AI co-pilot doing a heavy amount of the operations work allows for an opportunity in this market. 

Technology Stack

The way Offdeal has built their AI stack is top of the top. They purpose built multiple AI tools for the hardest parts of the job. They have a dataset of 2m potential SMBs that they are able to work through when sourcing a deal rather than spending weeks searching. They built collateral and outreach tools that are prepared by an AI then reviewed by a human before being sent out. They are building AI-first and getting it right.

Two Viable “Exit” Paths 

I put exit in quotations because one of these isn’t really an exit. The first path is that they continue to dominate doing deals in the SMB market and start to drift upmarket into larger deals. If they can execute a $250m deal at half the fees of a regular firm, they become a serious competitor. This isn’t really an exit, but more a path to become a $1b+ firm. The second is that a PE firm or bank starts to see how much potential this tool has and tries to buy the company for itself. 

Other Notes

This isn’t even mentioning the fact that their founding team seems incredibly fit to build this, they are hiring like crazy, and they have good early traction. 

Investment Note

The biggest risk for a company like OffDeal is banks and other firms realizing they can build out the same system and build it themselves. There is a cost-benefit analysis that needs to be done for these firms, but it’s always an option. Nonetheless, I like this company and believe they have a lot of opportunity in front of them. They raised a Seed round in Sept 2024 at around a $17m valuation. Since that was almost a year ago, I am going to market up their valuation around 75%. 

So, I am going to mark my hypothetical $4m investment at roughly a $30m valuation. 

In order to see how bad (or great) I do at these investments, we are going to track them on the 250or60to4.com website. 

Song of the Week

Going to see Dave Matthews Band this weekend, so have to share this one.