M&A, IPOs & Exits

Acquisitions — If You Do Sell, Try to Make Sure It’s At a Local Maximum


Jason Lemkin

Over the past 6 months or so, I’ve met with a series of entrepreneurs that turned down pretty attractive acquisition offers, relatively early in their lifecycle:

  • SaaS Co. #1 turned down an $85m offer on $50k in MRR.
  • SaaS Co. #2 turned down an $80m offer on $2.5m in ARR.
  • SaaS Co. #3 turned down a $40m offer on $2m in ARR.
  • SaaS Co. #4 turned down a $100m offer on $1.7m in ARR.

While the companies are different, in all 4 cases — the founders literally didn’t have a nickel to their names.  These aren’t second-timers, doubling down.  They didn’t put a few bucks away last time.  They have nothing to their names but their companies.  And still said NFW.

And man, I’m proud of all of them.  Because all four are great companies, growing rapidly, in great spaces, with great founders.

The thing is — I gave just one small bit of advice.  Understand that if you say No now, that’s OK — but in all 4 cases, you’re saying No at a Local Maximum.  It may take you a while to get to the next Local Maximum.

M&A (mergers & acquistions) can be very confusing in SaaS.   I mean, if you are growing say 10% a month, doesn’t your value also increase 10% a month from an acquirer’s perspective?

Sorta.  Kinda.  Vaguely.   But Not Really.

Screen Shot 2014-06-17 at 3.36.50 PM

Because the reality is, acquisition offers at a decent price — as measured against revenue, time, and effort — actually come at distinct phases of your company’s lifetime.  At other times, the price can be crappy.

Here’s what happens:

  • Pre-Revenue – You Aren’t Interesting.  Unless you have an amazing, proven team.  Anyone can build software these days.  No one is going to want to buy your pre-revenue SaaS start-up, unless you have a truly epic, proven team.  Anyhow can build an MVP.  What people care about is an MSP (Minimum Sellable Product) … which you don’t really prove until Initial Traction, or $1-$1.5m in ARR.  Which is the first Local Maximum …
  • When You’re Small, But Hot, At $1-$1.5m ARR, You Can Get Offers of $25-$100m.  Every Big Tech company has a budget for sub-$100m acquisitions.  Some are for “tuck-in” acquisition to fill feature gaps.  Others are to accelerate product rollouts they want to do, but are behind on or they want to get ahead on.  It’s hard to get much more than this for most SaaS products at this stage, but if you’re hot, you can get this.  See, e.g., Salesforce buying Assistly to jumpstart Desk.com for $80m, on ~$1m in ARR.  The key to this Local Maximum is you aren’t really valued on an ARR multiple.  You’re valued on a combination of (x) Initial Traction — having proven it works, with good customers and (y) an Absolute Price that is tolerable to buy (z) the #1 or #2 hottest in market.  Even if you don’t have nearly the revenue of the next guy.  It’s OK so long as you are hotter.
  • Then … You Enter the MRR Multiple Trap.  As you get bigger, you are going to be valued in an M&A opportunity somewhere between 5-10x ARR, maybe more if you are growing at a very high rate.   The problem is, using a 5x multiple at $2m ARR isn’t exciting at all.  $10m, after all that work?  Dude.   In fact, this phase, the MRR Multiple Trap, can yield the same or even a worse price than the prior stage — back when you were (x) Hot at (y) $1m in ARR.
  • It’s Probably Not Until $10m ARR or So You Hit Another Local Maximum.  Once you truly hit Initial Scale (say $10m- $15m ARR), then you’re no longer a proven product — you’re a real line of business.  Everyone can see 10x out into the future.  So acquirers can start to see you as a $100m-$200m product line for them, using the existing product, existing customer bases, existing go-to-market strategies.  Here’s where you finally can get into the nine-figure deals typically.  A nice example of a sale at this Local Maximum is Pardot selling for $100m to ExactTarget — on zero venture capital.  More on that here.
  • But then — The $30m Venture Round Sort of Ends That Local Maximum.  The good news of finally hitting $10m ARR, growing 100% YoY, is you can raise an epic venture round with trivial dilution.  But, it does sort of end Pardot-like acquisition opportunities.  If you raise $30m on a $200m post, you’re going to want to sell for $600m+.  Starts to get tough.  There aren’t that many acquirers here.  As the deal size approaches $300m-$400m … you end up in the …
  • Ain’t-No-Acquirers-Left Zone b/c It’s Too Expensive in Absolute Terms.  Yes, Yammer sold for $1.2 billion at a relatively low ARR rate.  But who else did?  The other billion+ SaaS acquisitions were all at $100m+ run-rates.   The problem is, apart from Google and Microsoft, it turns out anything much more than $300m-$400m is just too expensive in absolute terms for most public tech companies that buy SaaS companies.  Salesforce and Oracle have done billion+ SaaS acquisitions … but of companies that were already public.  These deals are tough, even if the multiple is fair.  Most acquirers just don’t have the cash or the market cap.  So you’re left waiting for the IPO, or a crummy or at least suboptimal acquisition.

My real only point here is if you say No to a Good Deal at a Local Maximum — understand it may be another 12-24-36-48 months until you get back, structurally, to a time where there is Another Good Deal.  If there ever is another, at all.

I’d Go Big, if you have something.  I’d Say No.  Now I would, at least.  But that’s just me.

Whatever you do, don’t say No at a Local Maximum — and Yes later at a Local Minimum.


Published on June 20, 2014


  1. Great post.

    The other point that we see a lot (as sell-side advisers) is that when you’re in the MRR trap and the $30mm venture round example, you’re in a weird spot with what’s going to happen post-acquisition. The team may not be big enough to really exist alone internally and the product may require a new or altered sales cycle/strategy that existing sales reps aren’t going to be natural at doing. This is almost the riskiest point from an acquisition standpoint, because if you leave the team alone then you’re likely not realizing some of the natural cross-sell opportunities to your existing base. If you integrate it, you may break it in doing so. Obviously some other reasons that these deals didn’t work out for the acquirers, but Buddy Media and Vitrue are examples of this.

    When you get passed this and to that next level you can really buy the team as well as the product and help build around that (at least for the near-term).

    1. So true. It’s really hard in a big company for a business to survive if it’s less than $30-$40m ARR or so. If you get acquired at $1m or less ARR, integration is easy. If you get acquired at $40m+ ARR, integration is less important, you build on the engine (like it or not), you do it strategically. The classic “tuck-in” acquisitions are often the hardest to integrate successfully.

      My answer to this in our acquisition was to ensure the sales team couldn’t really be touched for 2 years. This let us at least get past the hump.

  2. Jason, your blog has literally changed my life (if you can define change as sleeping better). I’ve founded a company that eventually went public http://johnsungkim.com/2013/05/five9/ and bootstrapped my current company to operational breakeven; approaching profitability. We’ve turned down 2 offers in the last 12 months – one from a PE firm (cheap) and one from a “hot” pre-IPO company (too risky after all this work). I second guess myself all the time but your content helps me ‘track back’ to my core beliefs and trust in my team. Thanks!

  3. Here’s the other point: Expected Value (EV) = Exit Price (EP) x % likelihood of exit. These companies have EVs of $40-$100M x 100% = $40-$100M. Let’s say half of them fail to scale due to competition, failure to execute, failure to get financing, whatever, so the next milestone is $100-200M EP x 50% = same EV as first milestone but 2-3 years later and half will get close to zero. In a great year, 100 venture funded companies go public – and only a few in your sector and it’s 7 years later… Let’s say $1B EP x 3% = $30M EV. Eugene Kleiner got it right: “when they’re passing out the hors d’oeuvres, eat the hors d’oevres.” Tim Dick, GP Startup Capital Ventures.

    1. Yeah that why outsiders I think always advise a sale unless it’s clearly a rocketship to IPO. And founders who are very bullish don’t worry about % likelihood of exit. If founders were 100% rational they wouldn’t be founders, they be I-bankers or better yet at hedge funds. Or VPs at Google or Facebook flying private.

  4. Thanks Jason – another incredibly valuable post.

    Care to share some thoughts about how you think about the risk associated with rejecting an acquisition offer at the “Hot” stage? It must be very hard to turn down these very full valuations without a strong belief that you will be able to keep sprinting fast enough to stay ahead of the now willing competitor.


    Dave P.

    1. Yeah I think the comment above from Startupcv nails the math. You are probably an “idiot” to pass up most great offers that substantially overvalue the company, from a purely rational perspective. Even if you get a much better offer later, the risk you won’t is just way so high. But, as founders we overweight our probability of success. Sometimes, you just have to go for it if it feels right.

      My only real point here is if nothing else, if the sale is at a Local Maximum … think harder before saying No. Because even if you get more offers (and you may not), they may be worst, adjusted for stress, risk, time, and drama, than one at a Local Maximum.

      See, e.g., RelateIQ selling to Salesforce at $400m on single-digit ARR at a true, best-est, Local Maximum. Rationally, Saying No would be stupid. Box saying no to Citrix at $600m on $30m ARR? Very aggressive. But rational, b/c there was a clear path to IPO and a higher valuation (at a cost of years of time, lots of stress, and tons of hard work to come).

      1. RelateIQ to Salesforce is a perfect example. If they turned it down now, it would be a long long road to an IPO or acquisition by someone else. I wished they had gone for it, but really hard to tell a founder to say no to that.

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