Planning Your SaaS Exit

^{The highway to an IPO might be long, but it has multiple exits along the route.}

^{As a SaaS founder, you're most likely working towards a plan to hit a $100M ARR, since this was the unsaid benchmark for going public in the US market. However, in recent times, the bar to go public has significantly risen, with recent examples like Klaviyo and Rubrik surpassing $500M! Now, what does this mean for everyone building or investing in SaaS? This got us thinking, so we dug a little deeper.
Traditionally, going public or listing on a public exchange (typically in the US) has been the primary exit route for many SaaS companies. Freshworks' successful listing in 2021 paved the way for other Indian SaaS startups to take the same route.}

^{On the other hand, M&As and PE buyouts have also created disproportionate value for founders and investors but often get overlooked when planning for your exit strategy.}

^{Today, as the bar for IPOs continues to rise, we believe that these alternate opportunities will present themselves a lot more, and it is critical for founders to understand how they can navigate this evolving SaaS exit landscape.}

^{A quick summary of what that looks like for a SaaS company based on revenues.}

^{Using ARR as our guiding metric, we will take you through the decision-making process and considerations involved in each possibility.} 

^{1. Corporate M&As} 

^{‍Chances of M&As reduce significantly post the $150M valuation mark. Think before you raise your next round and invest in partnerships with potential acquirers to keep those doors open.}

^{Mergers and acquisitions happen for a variety of reasons, but there are broadly three different kinds that matter to SaaS founders:} 
_{Acqui-hire: Early-stage companies with solid engineering and development teams often find themselves on the radar of more established players in the space.
These players are primarily looking to onboard the team’s talent, creating a safety net for founders and investors, especially those building in competitive markets. With valuations ranging from $500,000 to $1 million per engineer depending on location and skill set.}  

<sub>Product acquisition: Companies with an ARR of $5 million to $20 million, and valuations of $150 million to $200 million can become a potential target for product acquisitions. Larger companies (acquirers) go this route because they often focus on plugging feature gaps in their tech or products. 
What makes you a lucrative target? Focus on building strong IP and be among the top two or three products in your category. It's important to understand the decision-makers in these acquisitions. A business unit or product head typically leads these with budgets of $150 million to $200 million. If valuations are higher, the process would need board or finance controller approval.

It is, therefore, important to factor this in while raising your follow-on rounds. Since banker-led M&As are limited at this stage, it helps to build partners̱hips with your potential acquirers early on. In the best-case scenario, early partnerships can lead to joint GTM strategies. In the alternative scenario, it leaves the door open for M&As. While valuations are complex, strong technology can command a significant premium, with some infrastructure and cybersecurity companies fetching over 50x earnings.</sub>
‍
_{Game changers: If you have scaled beyond the $20 million ARR mark, it is most likely that you’re valued upwards of $200 million. Acquisitions in this segment are the blockbuster kinds that make headlines. 
What makes your company attractive to acquirers in this segment? Larger companies see you as a springboard for expansion into a new business line or geography. Strong cross-selling and upselling opportunities between your business and the acquirer’s can make you a desirable target. Capital efficiency is key, so make sure you’re on the path to meet the rule of 40. Nobody wants to buy a cost centre.} 

_{It is important to remember that mega acquisitions such as these are an opportunistic outcome, not planned ones. While these deals involve extensive negotiation, an offer of 1.5X on your last valuation is considered a good outcome.} 

_{2. PE Buyouts}

_{‍Capital efficiency and Rule of 50 are critical metrics. Engage a banker early to help you get fit}

<sub>‍Companies exceeding $20 million ARR, with slowing core business growth but potential for profitability, may find private equity (PE) acquisitions more attractive than traditional M&A deals. PE firms typically target mid-sized companies to create a “platform play” within their portfolios, combining them with similar businesses for accelerated growth. For larger companies exceeding a $1 billion valuation, they favour buyouts as pure financial investments.

Finding the right PE buyers, however, is hard, as these are typically banker-driven relationships. Engaging a reputed investment banking partner 12-24 months in advance is crucial. They can help you get fit for a PE acquisition by meeting key financial metrics and identifying the most suitable buyer.</sub> 

_{5 Things to Consider as Benchmarks for PE Buyers:} 

• _{Rule of 50: A variation of Rule of 40, this metric measures the sum of growth rate (ideally 20%), and profit margin (ideally 30% free cashflow margin)} 
• _{Net Retention Rate (NRR): Demonstrates customer retention strength. Target thresholds are 110-120% NRR for enterprise customers and 100% for SMB.}
• _{Gross Margin (GM): Shows profitability on product sales. Aim for a GM of 80-90%.}
• _{Lifetime Value/Customer Acquisition Cost (LTV/CAC): Indicates customer lifetime value compared to customer acquisition costs. A ratio of 3-4x or higher is desirable.}
• _{Sales Efficiency: Measures sales effectiveness. A ratio greater than 0.5x is considered good.}

Valuation expectations:

• _{Mid-Sized Deals ($50M-$100M ARR): For companies experiencing slowing growth but early profitability, average acquisition multiples range from 5-6x ARR.}
• _{Larger Deals (>$100M ARR): For companies with slowing growth but strong unit economics and strategic synergies with the PE firm, acquisition multiples can reach 8x ARR or even higher.}

_{‍3. IPO: US & India Scenarios}

_{‍ US SaaS IPOs are hard and while Indian markets may be untested, it could offer a premium in the near future. ‍}

^{The most coveted exit of them all. There are two scenarios we see as opportunities for founders:} 

_{US IPO: While it is the most aspirational outcome for Indian founders, it is a rare occurrence. Until 2021, the minimum threshold for going public was $100M ARR, and the median was around $180M ARR. Today, this bar is significantly higher:}

• _{Strong Financials: At least $200 million to $250 million in LTM ARR with a line of sight to $1B in the future.}
• _{Sustainable Growth: Demonstrate at least 40% year-on-year growth while maintaining capital efficiency (cash burn below 5%) and meeting the "Rule of 40".}

_{India IPO: While the US IPOs were once the holy grail of exits, listing on Indian stock exchanges offers a great option, even though this is as yet an untested market for SaaS businesses. Especially considering the shortage of domestic software companies, this "scarcity premium" could further enhance returns.}

_{Creating an Indian IPO winner however requires a strong focus on profitability (at least $12 million or ₹100 crore in EBITDA). Consider onboarding an experienced CFO well in advance (2-3 years) to navigate the Indian IPO process.}

<sub>With Indian SaaS founders on the growth path, the three options above are a ready reckoner for potential exits available to them. These can act as a framework to guide you towards strategic decisions throughout your company's lifecycle. The idea is always to maximise returns and achieve your long-term vision. Whether it's an acqui-hire for a young, talent-rich startup, a strategic acquisition for a product leader, or a well-timed PE buyout for a company seeking financial stability, there's a strategic exit waiting at every stage of growth.

If you're a founder reading this, we hope this exit map helps you plan the right path to maximise value creation for your company! And if you'd like to chat further about this, reach out to Ashwin, Madhav, Pranay, or Vikram.
Thanks to everyone who shared their insights & experiences for this analysis. Shout out to: Simuel Howell, Karl Anderson, Nishant J, Michael Shea, Nishant Doshi, Alok Mundra, Gaurav Mangla, Ravi Shankar, Mahesh Yellai, Pavan Sondur, Gagan Josan, Yash Kotak, Rahul Bhattacharya, Bipul Vaibhav.</sub>