The IPO Alternative No One is Talking About : PE Exits

In a world where IPOs are an unlikely outcome and traditional M&A exits are difficult to manufacture, there is a new alternative for liquidity starved founders and investors — The PE exit. It’s an invisible ecosystem to most, but when you see a headline about a PE firm making an “investment” in a mature SaaS startup, and there is no mention of valuation, or even what series it represents, you’re most likely witnessing an acquisition, of sorts. The original investors are bought out, the cap table is cleaned up, and the founders are provided some liquidity, usually around half their holdings.

In the last eighteen months I’ve been involved with at least 10 startups that have sold, or seriously entertained, acquisition offers from PE firms. Acquisitions like these have primarily been B2B affairs, but earlier this month Hellman & Friedman acquired a controlling interest in IoT home security startup SimpliSafe, for a reported billion dollars so there’s no reason to believe it couldn’t expand to consumer startups as well.

Much in the way First Round Capital and Y Combinator kicked off the founder-friendly micro-seed fund, the likes of Vista Equity Partners, and their peers have created a genuinely new category of capital. What follows is a quick guide for anyone who wants to understand this mysterious new exit opportunity.

How the process works

These firms focus on promising, but sub-optimized businesses in a specific vertical, usually SalesTech or MarTech. They look for teams with:

• Demonstrated product/market fit
• Established sales processes
• $20M+ of annual recurring revenue
• category with significant TAM

Typically, a firm will buy these companies at >5X multiples, sometimes roll up multiple acquisitions, scale them up, and look to put them back on the market for a 2X gain in about three years time. It’s a surprisingly straightforward approach to tech investing.

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