Private Equity’s Growing Importance in Startup Exits

Last week I talked to two different SaaS entrepreneurs that were considering acquisition offers from private equity firms to buy their startups. Historically, it was more desirable to be acquired by a “strategic” (a company that would pay a big premium because the startup fit in so well with their current business) and less so to be acquired by a private equity firm because they were often a “financial” buyer that didn’t pay a premium. Now, there’s often no difference as private equity firms are paying “strategic” valuations for SaaS companies.

Almost a year ago, I highlighted that 2021 will be a banner year for private equity SaaS acquisitions and the prediction proved correct. While I was right, my assessment wasn’t nearly the whole picture. In 2020, many SaaS companies cut staff and burn in response to the pandemic lockdown thereby making them more desirable to private equity firms (cutting costs made many of these SaaS startups profitable, a common requirement). What I didn’t expect was the pandemic to accelerate digital transformation and growth for many SaaS startups, making them more valuable (growth is one of the biggest drivers of valuation multiples). In addition, interest rates dropped dramatically making the value of a future dollar of cashflow more valuable. Finally, for these reasons and others, publicly traded SaaS company valuations skyrocketed (see the BVP Cloud Index).

Before, these SaaS exits to private equity firms were often small to medium-sized (tens of millions to hundreds of millions of enterprise value), (Read more...)