Earlier this week I was talking to a SaaS entrepreneur and he brought up how much better his financials were now. Curious, I asked what made the difference.
This is a business that was growing modestly while burning cash. With the onset of the pandemic a few months ago, they made the difficult decision to let go of staff, cut all travel expenses, and change the overall focus to profitable growth. Instead of trying to squeeze out a slightly higher growth rate, they’d focus on gross margin and grow at the rate of the market.
The business has grown through the pandemic, albeit more slowly, but the swing from losing money to making decent money has been dramatic.
This is not an isolated case. Hundreds, if not thousands, of SaaS startups that were losing money at the start of the year are cashflow breakeven, if not nicely profitable.
Private equity, as a potential exit route for SaaS startups, has been growing rapidly over the years. Whenever I talk to a private equity investor, they lament that too many SaaS startups are losing money, making them undesirable as acquisition targets. PE is happy to fund growth, but has almost no appetite to fund losses.
Now, a tremendous number of SaaS startups have made hard changes, and those hard changes have made them much more attractive to PE acquirers.
Look for a large percentage of SaaS startups to stay the new profitable course and next year to be a banner year for private equity SaaS acquisitions.