Several startups are about to be bought by Private Equity

The parties made an offer for over half an hour at an airport bar. Four weeks later, they hit a sale price of about $3 billion, more than 20 times AuditBoard’s valuation when it last raised seed funding from VCs.

The speed of the deal and the shiny multiple illustrate how private equity funds are able to gobble up startups more often lately. Although many founders still yearn for an IPO, a period of high interest rates is causing late-stage startups to stay private longer. Meanwhile, an antitrust crackdown, particularly in Big Tech, has starved some venture capital-backed companies of another way out.

The exit freeze is causing some founders to take a second look at private equity, said Michael Brown, general partner at Battery Ventures, a firm that supports companies at all stages, from seed to growth and buyout. Battery was also AuditBoard’s largest institutional shareholder.

“It moves very quickly. They’re actually paying really good prices for things — as attractive as they are strategic,” Brown said, adding, “and you get immediate liquidity, whereas if you go public, management can’t just sell on the first day. .”

PitchBook data shows that software acquisitions are on the rebound, with about 59 deals in the first quarter. That might not sound like much, but it’s significant as a growing share of all results, said Derek Hernandez, a senior emerging technology analyst at PitchBook.

The number of corporate mergers and acquisitions of software companies has fallen about 20 percent below pre-pandemic levels, while software acquisitions are trending toward a five-year high, according to PitchBook.

The software-as-a-service category is particularly poised for consolidation, said Aaron Fleishman, a software investor at Tola Capital. The software market has exploded during the pandemic, with people working from home and businesses spending more on all things cloud. But in the face of rising inflation and interest rates, software customers, from tech startups to mom-and-pop shops, have slashed their budgets.

Fleishman noted that when software spending fell significantly, many companies with subscription-based revenue in the $20 million to $50 million range found themselves at a standstill. Their sluggish growth has made it difficult for these companies to attract new venture investors. They are not large enough to be published and are not likely to be picked up by a holder.

“There aren’t a lot of buyers for these assets because it feels like last generation right now,” Fleishman said.

Their sticking point is private capital gain. Firms like Thoma Bravo or Vista Equity Partners—top tech private equity providers—can buy a company, break it up, build it to a few hundred million in annual recurring revenue, and turn it around or take it public. It might also turn to other businesses to create a new Frankenstein software giant.

“You’re going to see a lot of that consolidation over the next year, two years,” Fleishman said.

The purchased becomes the buyer

In this market, some software companies are looking to sell more to private equity. Others do the shopping.

This spring, Metropolis, a startup building a better parking app, followed the private equity playbook by taking private SP+, one of the largest parking networks in North America.

Yoni Rechtman, an investor at Slow Ventures, which first backed Metropolis in its early stage, said the growth buyout helped Metropolis not only expand its market presence but also capture more value. “To own assets is to own all the advantages,” Rechtman said.

The deal follows news in October that Metropolis had raised $1.8 billion in financing led by Eldridge Industries, a provider of equity and debt financing. Flush with cash, Metropolis is “effectively using our capital to acquire companies rather than to acquire customers,” Rechtman said.

But it’s not just startups imitating private equity. Sequoia changed its model so it could keep companies public longer. General Catalyst bought a healthcare system. Andreessen Horowitz plans to invest in the private equity asset class through its family office division.

These trends show that the worlds of private equity and venture capital are colliding in new ways. Startups are caught in the middle, weighing the lure of faster liquidity against the traditional dream of going public.

With interest rates high and a liquidity crunch reshaping the landscape, private equity is seizing the moment.