Have a strong M&A offer? Not sure what to do?
Look at this pic or a similar one
Do you want it? If so, say No
If not? Probably just say Yes pic.twitter.com/K483lKnyzd
— Jason ✨Be Kind✨ Lemkin (@jasonlk) April 21, 2021
So I wrote a version of this post years ago, about when to think about selling your startup, if you do get an attractive offer. But then the advice seemed to get stale in the age of the unicorn, when everyone seemingly could be worth $1 Billion. Well, that age does seem to be over ;). Venture rounds post Series A are tough again, IPOs have been on hold for quite a while, and most importantly, multiples are down. SaaS companies are just valued at far less than they have been in many years:
It’s just all … harder. And it reminded me of a stretch when over 6 months or so, I 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 had no savings. These weren’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 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 to an acquisition offer, 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.
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 $25m or if you are in a hot space (maybe generative AI today), sometimes even $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.
It used to be you really couldn't raise a ton of VC money in SaaS until you hit $10m ARR
That had one side benefit: it meant almost any good M&A offer at that stage would make the founders big $$$
Today, way too many SaaS founders raised too much pre $10m ARR
— Jason ✨Be Kind✨ Lemkin (@jasonlk) May 2, 2023