M&A in SaaS: Deal Volumes Drop to Pre-COVID Levels in 2023

The second largest category in deal flows after bootstrapped SaaS companies, consisted of businesses with total funding ranging from $1 million to $5 million. Usually, companies in this segment already have an established product with a well-defined target market and a proven customer base. Given the relatively modest total funding, companies in this category are generally smaller. This can present buyers with more appealing valuations, and also, there will likely be fewer external capital providers of the target company that the acquiree will have to negotiate with.

Deal Volumes by Last Funding Round

Out of the 3,030 SaaS deals recorded in Crunchbase from 2013 to 1H 2023, we can exclude the bootstrapped SaaS companies and companies where the venture series is unknown. This leaves us with 1,629 acquired targets for which the “last funding type” information is available.

As we said before, a similar trend appears here. Most SaaS companies that engaged in fundraising were acquired relative earlier in their development journey. Several reasons underpin this pattern, including:

1. Synergy opportunities: strategic investors recognize a target’s value early and can benefit from cross-selling or up-selling to existing customers.
2. Founders opting for early exit: in some instances, founders chose to exit early rather than continue the running the company.
3. Avoid ownership dilution: buyers often prefer acquiring SaaS businesses before additional funding rounds dilute ownership. This results in fewer stakeholders to negotiate with during a deal.  
4. Scaling and customer acquisition challenges: scaling operations and acquiring a substantial customer base can create formidable hurdles for certain SaaS firms. As a result, they may look towards acquisition as a more complete solution instead of trying to grow using only their own resources.
5. Intensifying competition with growth: the landscape can become increasingly competitive for a SaaS company as it grows, necessitating more significant capital injections to remain attractive.

While not constituting a significant percentage of the industry, the SaaS sector exhibits a noticeable level of private equity engagement. Financial investors are particularly drawn to SaaS business models, attracted by their considerable growth potential and the asset-light operational framework. Notable participants among private equity buyers encompass firms such as Vista Equity Partners and Thoma Bravo.

Deal Volumes by Company Headcount

The analysis of deal counts by headcount shows a prevailing trend: most acquisitions occurred when companies were still relatively modest in their workforce. Small-to-mid size firms (not too small, as many financial investors have a minimum ticket size) tend to attract a broader spectrum of potential buyers, fostering increased competition in the acquisition arena.

However, as we progress along the company size spectrum, there is a noticeable decline in the frequency of acquisitions. Between 2013 to the first half of 2023, a mere 76 SaaS businesses with a headcount exceeding 1,000 employees were acquired, signaling a shift in the dynamics of the acquisition landscape as the size of the targets grows.

Out of the 300 SaaS deals, 60% of the companies had less than 50 employees. This can be for multiple reasons including, but not limited to;

• Companies with smaller headcounts have smaller valuations.
• Strategic buyers prey on smaller companies with innovative SaaS solutions and buy them out to unlock synergies, and gain a team with a strong know-how.

From Founded to Acquired

We analyzed the time between a company’s founding and acquisition date. The results aligned with our previous findings that most SaaS deals involve smaller, younger companies, with over 50% occurring at Series A or before.

Looking closer, about 1/3 of acquired companies were 5-10 years old when purchased. Such a SaaS company usually has an established team, product, and growth strategy by this stage.

On the other end of the spectrum, only a few companies were acquired within two years of being founded. Such a new company often needs more proven products and go-to-market strategies. Also, instead of an acquisition, buyers may conclude that it’s easier/less risky be to build the product internally.

Median Valuation Multiple

We used Mergermarket to get data on valuation multiples. Looking at over 1,000 software company deals since 2015, we identified 354 SaaS transactions with published financials.

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SaaS valuation multiples: 2015-2023

From 2015 to 1H 2023, the median SaaS valuation was 5.1x revenue, but a quarter of the deals closed above 9.7x. Despite the 2020-2021 public market boom, median M&A multiples only grew slightly from 5.8x to 6.4x before falling back to 4.7x in 1H 2023, in line with pre-COVID figures.

How Likely Is It for a SaaS Startup to Exit?

Despite the hype around SaaS exits valued in the billions with blockbuster IPOs and strategic sales, the reality is that lucrative liquidity events are rare. Most startups will not go public or sell for huge sums.

In our segment of 31,000+ companies marked as SaaS in Crunchbase, only 12% were acquired. Most of the companies continue to operate as a private entity waiting for the moment. The routes to exit are also non-obvious; while IPOs are getting the most attention, they only represent 7% of the exits.

Prominent SaaS Deals

Analysis of some of the most prominent SaaS acquisitions shows a mix of strategic players and financial buyers, though the USA entities lead. On the strategic side, Salesforce is very active, with over 50 deals (not all SaaS), including several in the billions. Its M&A strategy targets companies that complement or enhance Salesforce’s products and services.

Among financial buyers, Thoma Bravo follows a “buy-and-build” investment strategy, acquiring and aggregating software companies into larger entities. They have closed numerous deals above $10B. Fellow private equity firm Vista Equity Partners, known for aggregating vertical software firms, is also active in large acquisitions.

Conclusion

We expect acquisitions to remain the dominant exit strategy as demand grows among buyers looking to acquire SaaS solutions and integrate them into their stacks. Some other trends that we see in the near future and expect to impact the M&A landscape of SaaS businesses:

• Ongoing trend of companies staying private longer, delaying or avoiding public listing.
• With lower public market valuations, we expect fewer stock deals. Pre-IPO companies closely track public markets, so their valuations and acquisition appeal may decrease, too.
• Venture-backed firms focusing on growth over profits face lower valuations as markets increasingly favor profitability. Such profitable SaaS companies often do not have external investors, so dealmaking activity among bootstrapped firms is expected to remain hot.
• In emerging markets, tech-savvy companies can grab market share from public rivals through superior technology. So rather than push for IPOs, private equity firms that own such companies may retain their investments longer, possibly even inject more capital in it.
• Large-cap deal volume has decreased as debt costs have surged. Investors now find investing in these large scenarios, often laden with debt, more challenging. Consequently, they diversify their investments across multiple smaller deals, intensifying the focus on deal volume in the middle market. 
• PE funds are downsizing as raising mega-funds becomes more challenging. Mega funds still pursue significant take-private deals, but they are also establishing smaller funds to invest in the middle market due to the high demand for deployment. Smaller deals usually involve less financial engineering, which is beneficial amid the high-interest rate environment.

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M&A in the Software Industry: Over 39k deals between 2013 to 1H 2023

2024 SaaS M&A Outlook

• As we step into 2024, we believe SaaS deals will again return to the market, but with a relatively muted excitement compared to the 2020-21 boom period. The focus will remain on a clear path to profitability for SaaS companies, and valuation multiples will continue reverting to their long-term averages.
• Artificial Intelligence is expected to remain in focus.
• Contrary to concerns that emerging themes like Generative AI might overshadow traditional SaaS, we think that both will coexist and complement each other in 2024 to drive synergy potential. Put simply, SaaS will ‘not’ take a backseat or be forgotten by VCs and strategic investors as AI becomes all the rage.
• Vertical SaaS solutions will likely generate more M&A interest than their horizontal peers. This trend aligns with the growing demand for tailored SaaS solutions that address industry-specific challenges and requirements.

About Aventis Advisors

Aventis Advisors is an M&A advisor focusing on technology and growth companies. The world would be better off with fewer (but better quality) M&A deals done at the right moment for the company and its owners. Our goal is to provide honest, insight-driven advice, clearly laying out all the options for our clients – including the one to keep the status quo.

Feel free to contact us to learn more about M&A opportunities in the technology sector.