Search Funds Eyeing SaaS Startups

Lately, I’ve heard of new search funds eyeing Software-as-a-Service (SaaS) startups as their acquisition target. A search fund is typically an individual that’s raised a specific amount of capital with the sole purpose of acquiring and running a company. Think of it like a private equity firm with a solo partner that only buys one company and the partner becomes the CEO of the company. Search funds have been around for decades but ebb and flow in popularity.

From a search fund perspective, the target is usually a “good business” with the potential to grow into something significantly larger, often exiting in 7-10 years, just like a standard investment fund. In addition, they have a set of criteria of what they’re looking for in an acquisition:

  • Strong management team
  • Consistent growth and profitability
  • Recurring or re-occurring revenue
  • High gross margins or maintainable gross margins
  • Industry growth or opportunity to grow market share

Looking at this list of criteria, it becomes clear why search funds are eyeing SaaS startups. Save for the profitability component, many SaaS startups check all the boxes:

  • Consistent growth
  • Recurring revenue
  • High gross margins
  • Industry growth

While a strong management team is critical, it’s slightly less so in the search fund example where the search fund leader is going to be the CEO of the acquired company.

In addition, a huge number of SaaS startups have raised a large amount of money over the last few years, yet a meaningful percentage haven’t been able to grow into their valuations. The clock is ticking for these angel and VC-backed startups to find a home as ones that aren’t growing fast are having a harder time raising money. Search funds, much like private equity, are a perfect exit opportunity.

Look for search funds targeting SaaS startups as a growing trend.

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