So public Cloud and SaaS stocks continue to be under a lot of pressure, with many Cloud leaders trading for half of what they were trading at just a few months ago.

But there’s one pocket of excitement: Private Equity deals.  Some of the latest examples:

What’s going on here?  Well a lot of things.  In some cases, a PE firm can upgrade portions of management and grow faster.  In other cases, getting to invest more heavily for a few years as private company can fuel faster growth, and a later IPO at a much higher price.

And there’s a third case, of 1+1=3.  Of combining two slower-growing SaaS / Cloud companies into one that is growing at an OK rate.  That’s likely what’s happening with Datto, in part, as it will be combined with Kaseya.

Here’s a really simple example of that math.  Take one SaaS company at $60m ARR, growing 40%.  Not that great — not enough to IPO.  Now combine it with a second SaaS company at $40m ARR, growing 50%.  Again, not enough to IPO.  But what happens when you combine them?  Now you have $100m ARR, at 45% growth.  Enough probably to IPO the next year.

By combining 2 slower-growing SaaS companies into 1 with good enough growth to IPO or a strong exit, you create financial arbitrage and magic.

Or even look at Datto, acquired for $6.6B.  Its growth is really … low.  Especially when you consider it has 116% NRR, then 19% growth is so slow.  It’s barely adding anything beyond growth from existing accounts:

But combine it with another B2B company, and together, they may well be worth more than alone.

There’s obviously a lot of operational complexity here, combining 2 companies.  A lot.  But the PE firms are pretty good at this.  It’s what they do.

And if you hang in there in SaaS, and do this long enough, you’ll may well get an offer like this.   I’ve literally talked to 2 founders doing tens of millions in ARR in the past 3 weeks that got similar offers.  Not as big as the deals above ;).  But substantial.  It just takes time to get that big.

1 + 1 = 3.

And a related post here:

Why I’d Rather Be Acquired by Vista Than a Big Tech Company



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