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3 Reasons for the Increase in SaaS Equity Investment

April 30, 2018

In just the last few weeks, we have seen Marketing Evolution raise $20.6 million in Series B funding, Uberflip raise $32 million in Series A funding, and Pusher raise $8 million in Series A funding.

These deals are just part of a larger trend of SaaS Capital portfolio companies either raising equity or being acquired.

In fact, the current environment is by far the most active equity investment period we have seen since launching SaaS Capital in 2007. Why? Here are a few of our observations:

  1. The emergence of private equity in SaaS. Five years ago there were only a handful of PE firms willing to invest in an unprofitable SaaS company. Now, PE firms are investing in, recapitalizing, and outright buying all the SaaS companies they can find. In addition, strategic buyers, buoyed by their own stock price, are bidding aggressively to keep pace.
  2. The track-record of the space. Not only has the public SaaS stock index crushed the overall market over the last 5 years, there have been no real “blow-ups” either. The business model is not conducive to blow-ups, and so the perceived risk/reward remains attractive.
  3. Leverage. Institutionally backed SaaS companies can borrow 1x ARR, sometimes more. With debt still relatively cheap, this further enhances the attractiveness of the space to the PE community.

We have noticed, however, the new-found PE interest is not equitable across all SaaS companies. Most PE firms don’t invest in companies below $10 million in ARR, and most are looking for substantial organic growth. Sub $10 million ARR SaaS businesses with modest growth rates are benefitting least from the current environment, while investor interest and valuations grow exponentially with growth+scale. Keep an eye out for our upcoming research on the $10 million breakpoint and more announcements like the ones above.

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