SaaS is Back!! pic.twitter.com/jFqQ6zRz6A
— Jason ✨BeKind✨ Lemkin #ДобісаПутіна (@jasonlk) March 21, 2022
Recently a number of founders have reached out to me about offers to acquire their company from Private Equity firms like Thoma Bravo, Vista, etc. Some offers are more real than others, but there’s an army of associates, principals and vice presidents at top PE firms looking for SaaS companies at $10m-$1000m ARR to acquire. Once you cross $10m-$20m ARR in SaaS, you’ll likely start getting these calls and emails.
M&A isn’t all fun. Yes, you get liquidity. But once you sell it, it’s not yours anymore. You’re not the sole boss, you don’t get to make the decisions. “Bean counters” tell you what to do. And your upside is capped. You can even … lose your sense of purpose and self sometimes.
It turns out though, sometimes, there’s a third path. PE firms in SaaS basically do three types of acquisitions:
- Mash you into a larger portfolio company. Usually, they ask you to stay as a VP or GM, but you’re combined with a larger portfolio company so you can IPO together. Can be intellectually interesting, but again, it’s no longer yours. You can often roll over some of your equity into the combined company, but otherwise, it’s a lot like a Big Tech Co acquisition, really.
- Bring in outside management and CEO, let founders move on and rest. The big PE shops have a bench of CEOs and execs they can bring in to run any SaaS company. They know some founders get tired and want a true exit, so they can make this very easy on you. For some, this is a great option. It’s less work than being acquired by a Big Tech Co, where they often want or force you to stay for 2-3 more years. You literally can leave the day the deal closes, with cash in hand, and not have to do one more thing.
- Partially cash you out, let you still mostly run the place. Mostly. This is an interesting option and more and more common for SaaS companies at $50m+ ARR. The Big PE firms do have some oversight, and some back-office consolidation. They often streamline or eliminate your marketing and ops teams — which is painful. But they let the founders keep running it, and often, sell about half their stock. So you get a “partial exit”. You get to sell say half now, but roll over the rest and try to IPO or go even bigger. It’s not the same as keeping it all, and having 100% control. But it’s still … muchly yours. At least, it’s more yours than most M&A options.
Now that I’ve seen enough of these deals go down, they certainly aren’t perfect. The PE firms are machines and there to make money. Teams churn, and it’s not the same after. It’s not the same.
And it’s important in these deals to truly understand how the rest of the team will be treated. In some cases, Big Tech Companies take across-the-board retention more seriously, especially the first year after an acquisition And some of your team might much prefer the perks of Big Co life. My CTO from Adobe Sign / EchoSign is now one of the most senior scientists at Adobe, even a decade after our acquisition. It’s worked out incredibly for him.
But the top PE firms in SaaS and Cloud know what they are doing. If you really want to walk away when you sell your company, a PE firm is better than a Tech Co, all other things being equal. PE firms know how to replace you, and won’t make you “rest and vest” or stay any longer than you want. And they often don’t mess around with large escrows, massive indemnities, clawbacks, and other provisions traditional Big Tech Cos. put in place. The deals are so, so much simpler and faster. So much simpler and faster.
And if you want to both go long and sell … PE firms sometimes can deliver some of both. At least, if you’re at scale. Let you still go for that IPO, but have the safety of selling half your stock. Two bites at the apple, sometimes, done right — can be a gift,
Really both those options, in practice, are often more appealing than being acquired by a Big Tech Co.
option image from here