Last Updated on September 4, 2024 by
In the world of private markets investing, there are a handful of folks who I personally admire.
One of them is a guy named Andrew Wilkinson – the founder of Tiny Capital.
Tiny Capital’s story is absolutely bonkers.
At 19, Andrew Wilkinson was a college dropout working as a Barista making $6 an hour.
By 36, he was a baller with a net worth close to $500m.
His holdco, Tiny Capital, went on an absolute tear for 17 years, compounding the cash flows from his bootstrapped design agency Metalab into an empire of over 80 companies.
But as they say – what goes up must come down.
Tiny stock is down 48% since the entire business went public in 2023. Margin pressures have crippled earnings, and the durability of their business model is questionable.
I rarely buy individual stocks in the public market, but I’ve considered investing in Tiny many times over. In this financial teardown, I unpack the business to help me understand if I should continue to be a voyeur of Andrew’s journey or if this is a great buying opportunity.
About Tiny Capital
Tiny Capital currently has three core businesses:
- Beam – A holding company consisting of services lead businesses, including MetaLab
- WeCommerce – A holding company that owns Shopify tools, including reviews platform Stamped
- Dribbble – A social network for designers
They also have a PE fund which has done lots of their recent investing. The public business Tiny is an LP in the fund, having invested roughly ~20% of the $148m in capital.
In the PE fund, they also get a juicy 30% carry on the fund returns above an 8% hurdle.
Not bad at all.
Interestingly, a few of the fund’s portfolio companies are dope consumer-focused product businesses, including Aeropress (which makes aesthetic coffee machines) and Mateina (a collaboration with Andrew Huberman).
As a holding company, Tiny runs an extremely decentralised and tight ship.
All of the portfolio businesses are given only ~ one month of capital to stay afloat, and all of the profits are pushed back up to the holdco level to be reinvested.
I know exactly what you’re thinking.
How did Andrew make so much money? Can I build something like this?
Well, yes. The path is simple, but it’s certainly not easy.
Their first business was a home run that printed cash.
In 2006, Andrew realised that web design was incredibly valuable.
But only his geeky computer friends knew how to build websites.
He could charge businesses that needed a website thousands of dollars for the job and then outsource it for a fraction of the cost, pocketing the difference.
From that day onwards, Metalab was born.
He rode the internet boom, working with Stripe, Headspace, Uber, Upwork and other names you’ve heard of.
Whilst Metalab was (and still is) a great business, it’s fundamentally an agency – and agencies can be a headache to operate. Simply put, they are hard to scale. They generate good cash flow, but a lot of the work is project-based.
In addition, as they depend heavily on human capital, they need to hire a large number of people. As team sizes grow, layers of management become necessary – often consisting of personnel who are not directly generating revenue.
Andrew recognised this early and decided that the cash-flow generated from Metalab could be used to plough into better, more scalable businesses.
Tiny went after internet products that old school PE firms wouldn’t touch – internet tools that MBAs couldn’t get their heads around.
“(We were) buying Chrome Plug-ins and Shopify Apps … Are they even assets’ investors would ask”.
In the process, Tiny was able to operate in incredibly inefficient markets, striking deals at better valuations, and become an n of 1 firm.
For all you finance bros out there – Tiny didn’t even touch a DCF.
In the words of Tiny’s first employee and head of M&A, Jeremy Giffon, he could build a model—but at the end of the day, he was just making up the numbers.
All they focused on was buying great businesses at fair prices.
Simple as that.
Tiny’s Initial Investment Strategy
The first business they acquired was Dribbble – a social network for designers.
Interestingly, they had the Dribbble acquisition in mind from the start. Andrew was a passionate designer and user of the platform. He understood the product and its potential well.
At the time, Dribbble was only small, and Andrew invested in the business for ~$5-10m.
Today, Dribbble is the largest design social network in the world, with more than 16 million monthly visits and over 50% organic search traffic.
Financially, it’s a juggernaut and very defensible, with $61.5m in revenue for FY23 and 7.4m in EBITDA, at 12% EBITDA margins.
Goes to show the value of sticking to your circle of competence.
Tiny on Due Diligence
The one thing I love about Tiny is how quickly they can do a deal – because they don’t get caught up in the minutiae.
Instead of spending 6-9 months of pain dealing with investment bankers and lawyers, Tiny makes an offer within 7 days and can close a deal within a month.
Tiny’s DD process is pretty simple and comes back to first principles.
“Just make sure the seller is trustworthy.”
After all, Tiny isn’t going to deploy an army of consultants on you – so they just check all the simple stuff.
“We (would) look at Buffett, who could buy a $30 billion airplane parts manufacturer in an hour, and we were like, “Hold on, this company is a Stripe account and a website. It’s not complicated. Surely, someone out there can do it in less than six months.” – Jeremy Giffon, former Tiny GP
Delegation
Andrew always wanted ‘FU’ money so he could chill on the beach – and he ran his business accordingly.
Tiny implements Munger’s philosophy of ‘management by abdication’, leaving his CEOs to run Tiny’s portfolio companies with very little interference.
In some instances, he will only hear from the CEO by way of an annual report he receives every year.
Provided that the business is continuing to perform well, there will be no need to intervene.
He literally just ghosts them 🤣
Andrew after he buys your company
Even when hiring CEOs, Tiny loves hiring master delegators.
“A good CEO should be able to get run over by an ice cream truck and have the company continue to operate for months or years without a problem.” – Andrew Wilkinson.
Margins
I didn’t want to bring this up – because I love Andrew’s story.
But WTF has happened to the share price recently????
Tiny’s stock is down 50% since the merger with WeCommerce last year.
Ouch.
Source – Capital-IQ, as at 12 August 2024
Looking at Tiny’s audited financial statements, the margin compression appears to be related to general increases in costs across a range of line items.
Source – Tiny 2023 Audited Financial Statements
Compensation expenses increased dramatically from 2021 to 2023, up 33% from 2022 to 2023 and 47% from 2022 to 2023.
It’s not clear what change in headcount Tiny has experienced over this time, with a large jump likely associated with the WeCommerce merger, but Tiny doesn’t appear to be benefiting from economies of scale.
When I look at Tiny’s business, it’s not exactly clear:
- Where the moat is
- How they will have pricing power over time.
Except for Dribbble (benefits from network effects), almost all of Tiny’s portfolio companies are either services-based, ‘digital widget’ businesses that aren’t technically difficult to replicate or direct-to-consumer companies.
Only 19% of their revenue comes from recurring sources.
Source – Tiny Management Accounts
Tiny still generates most of its revenue from its digital services segment (most of which is Metalab). But services businesses aren’t great businesses. In 2023, this segment had only ~6.7% EBIT margins and was unprofitable on an NPAT basis.
Inflation in Canada definitely wouldn’t have helped, hitting 40-year inflation highs of 6.8% in 2022 (Source), but obviously, Tiny struggled to pass these costs on in the form of higher prices.
Across other key expense accounts, there doesn’t appear to be very much room for improvement. Hosting fees are likely relatively fixed for the business, and professional fees aren’t going to go down very much after Tiny went public, up 29% in 2023 (more lawyers, accountants, IR people etc).
If I was investing in Tiny, I would be super worried about two key ‘macro’ trends:
- AI / Automation
- Offshoring
Is Chat-GPT going to kill Metalab? Maybe not.
But give it 10 years + a remote workforce, and these ‘thin’ services companies might be dead meat.
Looking forwards, Tiny’s margins were slightly better in Q1 of 2024, but only marginally, with EBITDA margins at 7%, slightly above (3%) in Q1 2023.
On a free-cash flow basis, Tiny recorded $2.8m in cashflow from operating activities in Q1 2024, up from a ($1m) outflow in Q1 2023, so the business might be moving in the right direction?
But who knows. Only time will tell.
Leverage Concerns
Tiny is also levered up to the eyeballs in debt.
As a Warren Buffett fanboy himself, I’m surprised Andrew let Tiny have this much debt on their balance sheet.
On an EBITDA basis, the numbers don’t look too bad (2.0x net debt to EBITDA).
But on a cashflow basis, their debt load was over 27x cashflow from operations – which feels really high.
To pay it off, they are going to need to:
- Get profitable
- Sell some businesses
- Raise capital
Realistically, Both 2 & 3 wouldn’t be great outcomes for Tiny.
There could be some more pain coming if margins don’t lift.
Changes in Leadership
Let’s get to the interesting bit.
What’s Andrew doing now?
Andrew recently stepped down as CEO in mid-2024.
Simultaneously, he announced plans to sell 3,100,000 shares in Tiny, or about 1.7% of the company, but will still remain the majority shareholder (~66% ownership after the sale).
Tiny shares plunged 16% on the Monday following the announcements, after an already difficult year.
My take?
Andrew’s sell-down feels immaterial—he probably just wanted some liquidity for personal endeavours (he plans to use the funds for philanthropy).
Andrew stepping down as CEO feels like a big loss for Tiny, but his Twitter told a different story.
He seems to be stepping aside to let a more competent leader run the business in Jordan Taub.
Jordan is a corporate weapon, previously working at Constellation Software and as the CEO of WeCommerce, so he is better equipped than anyone for the role.
Andrew is still going to be actively involved in the business, continuing to source deals, make investment decisions and contribute to the businesses’ long-term strategy.
At heart, Andrew is not a CEO, but a founder.
I think this shift will enable him to do what he does best – invest in great companies without the headache of managing a team.
Wrapping Up
All in all, Tiny’s journey has been pretty incredible.
From serving iced lattes in Victoria to riding his private jet around the world, initially struggling with financial hardship in his youth and dealing with the downsides that come with lots of money, Andrew has really done it all.
He is no doubt a force of nature and is someone who I will continue to admire from afar.
Andrew recently released a memoir outlining the journey of his life, building Tiny from the early days into an investing conglomerate. You can find his book on Amazon here.
