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), but now with the private equity firms getting larger, they are regularly buying unicorns as well (see Pipedrive and Gainsight Exiting to Private Equity). Now, look for private equity firms to do more large and mega deals, along with the typical deals because there’s so much money on the sidelines that has to be put to work.

Finally, this all plays well into the startup community as it solves a long-standing issue of liquidity for entrepreneurs and investors. No longer is the there the concern that it’ll take 10+ years to make money off a quality seed investment. Previously, the it took both building a successful business and finding a great exit via going public, strategic acquisition, or dividends — a tall order. Now, it’s still incredibly hard to build a successful business, but the options for liquidity have grown dramatically, and private equity plus later stage investors are the main reason.

Private equity’s importance is growing dramatically in the startup community, and it bodes well for increased investment in innovation.