So the other day a CEO reached out to me about advice on an acquisition. They wanted to do three things:
- Enter a space they had no product or customers in today; and
- Add on at least $10m of extra revenue for the year; and
- Not add too much to their burn rate.
So this CEO really wanted to buy a startup at around $10m ARR, that actually wasn’t remotely close to #1 in the space, and wasn’t growing anymore. I’d actually invested in the #1 in the space, which today is at $200m+ ARR. So I knew the space fairly well. But the CEO really wanted to enter this adjacent space to their existing product line.
So in the end, they bought this smaller competitor that was at $10m ARR … but growing basically 0%, albeit cash-flow neutral. But barely growing at all. And they paid effectively about $80m for it.
Is a SaaS startup at $10m ARR growing basically 0% objectively worth $80m today? No. It might be worth close to nothing based on a DCD analysis. No VC would touch this startup for a Series B round. No VCs at all. Even a PE firm wouldn’t buy it with no growth at all, I don’t think.
But sometimes. a bigger player really wants to enter a space for strategic reasons. And the #1 and even #2 players are just too expensive, and/or too complicated, to buy.
In that case, sometimes, if a startup is at least at scale, say $10m+ ARR, and knows the market and customers, a BigCo will still buy them at a multiple more appropriate for a startup growing far faster. They’ll make the bet they can build on this core, and in effect, by doing so both re-accelerate growth and save several years of product development and early sales.
You can’t bet on this. If growth has stalled below 30% once you’re at $10m-$20m ARR, you’re in a tough space. 10%, 20% growth just doesn’t compound fast enough at that stage.
But even if you’re out of ideas for now, don’t give up all hope of a potentially decent M&A offer, especially if you are cash-flow neutral and haven’t raised too much (that’s important). If you’re in an important space, someone may still want you. Just keep doing what matters, and what keeps your customers happy.
