08 Aug 2023

Venture-backed startups are better known than their bootstrapped peers for achieving wildly high growth rates and amazing M&A valuations. But those same companies are right now finding themselves strategically out of place.

When markets turn sideways, VC-backed ‘growth at all costs’ strategies do indeed have an opportunity cost, as a growing pool of financial acquirers are hunting instead for lower growth but more steady and sustainable SaaS businesses.

We’ve discussed before about M&A transaction trends and how they roll through emerging technologies and economic cycles. Today is the heyday of all things AI, and it’s likely to stay that way for a while. But the overlooked opportunity for most SaaS companies is actually more financial than technological.

We do believe AI is the next wave of computing. Many venture-backed startups are quickly pivoting to fit into this trend, which will prove successful for some but may cause others to go belly up; tangibly integrating GPT4 and other emerging AI technologies is extremely expensive (as demonstrated by some one- and two-year-old AI startups raising hundreds of millions of dollars recently).

Instead of chasing AI, we are recommending venture-backed companies to instead follow the bootstrapped playbook. Especially if they’re considering an exit or recapitalization anytime soon.

While there is very real strategic interest in AI, only a handful of acquirers will pay strategic valuations for just a handful of the most innovative companies. However, the buyer pool for steady and sustainably growing SaaS business is tremendously larger. A recent Pitchbook article covering the Association for Corporate Growth conference discussed how growth equity funds are starving for deal flow. The article even quoted one investor as saying, "There is a real sort of fire to get something done and to find something to do."

Supply is currently outpacing demand and demand itself has turned toward those stable and profitably growing SaaS businesses.

As an aside, for those who want to discuss Silicon Valley VC, growth equity, and M&A opportunities with me, I will be in London the week of Monday September 18 for meetings and to attend the Big Data LDN conference. Feel free to shoot me an email and we’ll find a time for a tea or coffee: ben@iconcorpfin.com