Selling your SaaS startup: The VC view

Ladies and gentlemen now onwards with The show now our first session is going To be a panel about selling your SAS Startup from three fantastic Venture Partners Um what is the investor perspective we Are going to unpack that today and Ladies and Gentlemen please give you a Round of applause for my panel including Whit bout from Insight Partners Kathy Gal from Sapphire Adventures round Applause everyone And Megan Reynolds from vertex Ventures On yvcs are going to support your move To sell and how you're going to do it Thank you so much for joining us at TechCrunch disrupt Um let's get straight into it Um let me get my notes up here Um we are in a strange moments I guess Over the last few years we've had the Period of zurp which is now my new Favorite phrase zero interest rate Period Um which I just thought that was just my Life Um but um but obviously it was a very Very you know Big Bull Run and now we're Sort of supposedly in a bit of a bear Market which actually you know is when Startups often come back uh come back And uh and get going Um but you know the exit Market is a Little bit squeezed these days so let's

Just sort of go around uh and just ask The question about uh where you think we Are which where do you think we are Right now in in the sort of the exit Market yeah well it's certainly as you Said been an interesting period the last Couple of years Um I think we're in a bit of a Transition period we've we've obviously Seen a quieter Market the last couple Years in every respect really investing IPOs and acquisition but I think we're About to see a pretty significant uptick In the acquisition space primarily Because we saw so many companies Pre-market change take investment Dollars that only last so long you know Most people take a round of financing Thinking they're going to do another one In the next call it you know three years Ish give or take and so we're in about That period where people are going to Start running a little bit low on cash And that's going to create an Interesting decision point for people You know is there enough I don't know appetite to take on more Money with the current conditions and Kind of uh I don't know what the the Terms that are willing to be accepted or Not or is it time to maybe find a Partner and merge and or sell to kind of Find A New Path and and maybe get backed By somebody else Kathy so with thinks we

Are in a transition place place do you Think we're in sort of in an inflection Point or do you think that maybe we've Got a couple years more of this sort of You know will they won't they kind of a Market I think we'll have a more precise Answer to that exact question very very Soon because of course we have instacart And clavio IPO coming up which will be a At Bellwether for the IPO Market but I Think it's important to note that um There's different types of exits right For a venture-backed company wouldn't Mention this but there could be m a Strategic exit there could be a merger And there could be an IPO exit amongst Others um and with every cycle We see different volumes of each type of Exit for the past several years the IPO Markets were frozen for many macro Factors that I can happy to go into And the m a markets were also relatively Quiet which was surprising We have seen the m a markets come back Significantly I would say in the last Several quarters Particularly in my world in our world Startups who are acquiring other Startups so larger well-funded startups Have started to do tuck-in Acquisitions And I fully expect that to continue We've also seen large private Equity Firms take companies public who are Previously I mean private who are

Previously public so there's been Activities scattered but I think time Will tell the next week or so how we Should think about the future right so Honestly so you're you're setting it up As more of an m a market you know Consolidations correct right so Megan I Know that you were formerly an Entrepreneur first which is considered One of the the better company Builders Out of Europe but it's also gone Global In Asia and the US And now you're obviously with ventrix Um you're more playing more at the early Stage but it's much harder to do M A at That early stage though isn't it it's It's a good point I guess harder To make large strategic deals happen but I would say a majority of the m a that We're seeing right now you would call Maybe more of an aqua higher I'd say That's probably the balance to the IPOs The kind of strategic Acquisitions and So for in that market we've actually Seen a load of activity in the last Couple of years and I think that will Continue especially with the buzz around Ai and so for you know investing in the Precede if you're building uh if Founders of building infrastructure Software Um machine learning AI software for Those companies like often they'll have Maybe

10 or so acquisition offers before they Hit the series B and so for that market It's very very high octane I see so um So this is It's almost like a talent Marketplace to some extent in it in a Way as you mentioned so for those scale Of Acquisitions call it maybe a 10 Million acquisition up to I mean we're Seeing larger ones around 100 million But I'd say more typically like 10 to 50 Million dollar Acquisitions for those For those Acquisitions it's usually Talent it's technology and so they're Not buying a company per se but they're Buying the technology that you've built And maybe the phds that you brought into Your team and that's basically consuming That into the organization so yeah it's Not a traditional acquisition I suppose Also there's there's because there's so Much activity around generative AI right Now people are going like wait a minute You're working on the same thing let's Get together kind of thing maybe that Sort of thing's happening Um let's let's a little let's kind of Slow down a bit and and what I'd like to Do is draw on your respective Experiences Um we I know that you you have Um a fantastic uh resume and experience In this space Um Dropbox acquired hello sign which you Were part of

Um and you've been part of I think 17 Acquisitions yeah Um right Um and so you were Chief Operating Office of hello sign Um and you've done so many other things I've been it's interesting like sort of You know looking looking back you know What sort of experiences what some of The interesting things that happened When you were selling the companies that You're part of Oh boy and it I'll give you one really Interesting story on the buy side and Then I'll give you one really good one On the sell side so I remember we were In the midst of acquiring a small Company it was not quite an aqua higher Tuck-in type of acquisition but close Like 30 employees kind of thing and uh We were let's call it nine steps down a 10-step path with them right at the end And we got the two executive teams Together to kind of start planning and Networking and you know getting to know Each other and it was like a junior high School dance movies were over there They're like we know we're supposed to Talk to each other but we can't figure Out what to say we could not for the Life of us like figure out any way to Connect with one another and we walked From the deal we bought the second tier Player because we're like this isn't

Gonna work and I think it was a really Really smart move Um it was not because there wasn't a Cultural fits or exactly yeah and I Think if you I think culture fit is Really underestimated actually as to how Successful an acquisition will be Because if people aren't happy and There's no culture fit they'll feel kind Of you know disenfranchised they'll Leave and then you lose the very thing Or at least a big part of the very thing You acquired so culture if it was that Was a very interesting lesson for me and Thankfully happened early so I got to Leverage that later and then on the Selling the company side Um it's it's kind of the flip of the Coin really of like what's it going to Be like to be part of this other company And is it going to be good for that when We were selling hello sign our big kind Of criteria we had a great path forward Staying on our own but I was like is This going to be better are we going to Get better support more investment reach To new customers faster than we could on Our own Global expansion faster than we Could on our own and will it be a good Home for our team and the answer to Every one of those was yes yes yes yes Yes yes yes yes so that was kind of the How we made the call and if if one of Those tick boxes doesn't work is there a

Way of making it work in some way pre or Post acquisition posts yeah yeah I I guess it depends on how big the Delta is Um we actually had a hard time due to Some system challenges that I don't need To go in to post acquisition in starting To do bundling and Joint selling and Things like that so we kind of had to Re-architect some of the backend systems To do that and that was one example Where I think we all thought we were Just going to hit the ground running on Joint selling and we're like oh small Hiccup we can work around it Band-Aids But like so yeah I think you can fix a Lot of things post probably not Everything but I suppose culture is Still definitely quite a big one yeah Um uh Kathy um I think was it was it Thought spot or no what was the company That's why I did um yeah acquire uh Company recently do you want to can you Tell us anything about what happened There Um you know in terms of the story yeah I Mean I would say um I'll zoom out a Little and share some common kind of Learnings about startup tuck-ins during This period of time I think a really Really interesting Dynamic that we've Seen over the past couple years is that Cash went from becoming from all being Almost free it was so easy for Founders

To raise money to all of a sudden now We're in this environment where it's Really hard to raise Venture funding Right it's really hard to get other Types of funding as well so cash has Become king again right that's certainly What it feels like out there And so you have an interesting Dynamic Where there's many startups that raise Significant amounts of capital in 2021 They have that cash sitting on their Balance sheet hopefully they've reduced Burn but growth has slowed down because It's a tougher macro environment to sell And they may no longer be worth Evaluation their last post money Valuation at whatever round they raised In 2021 but they have this cash on their Balance sheet right and that's worth Something that's worth something to a Lot of people so I'm seeing this Interesting Dynamic now where Other the other VC back startups will Say Just as Whit was saying there's a Checklist you're kind of going through On deciding whether or not an Acquisition makes sense and at the Highest level and I used to be a m a Baker so I used to think about this all The time it's like is this transaction Going to be a creative for both sides And what a creative really just means is Hey does one plus one equal two or

Greater like hopefully more than that Right And so we're seeing this idea now where Companies are acquiring other Venture-backed companies typically for All stock transactions there's no actual Change in cash no cash paid out to the Party being acquired And then the combined entity now has More cash on their balance a bigger War Chest so it's kind of an interesting Dynamic and not every m a transaction That has happened over the last couple Quarters fall into that category but It's an interesting Dynamic I'm seeing Happen more and more at least that Because Um a wider exit for both companies when They do that M A but it's all you know They're basically doing it for stock Kind of thing is that because eggs you Know Big Air exit markets and IPOs Etc Further away at this point yeah that's a Great question Megan I have a couple of Ideas around why this is happening right Um number one there has been a what I Call incrementalism in SAS over the past Couple years which means there's been Many SAS application companies that have Been very very narrowly focused right Not just a product maybe a specific Feature and in this tougher Market Environment there's a lot of pressure on Companies to consolidate their vendors

To save money and just work with fewer Vendors and companies are all Struggling right now to figure out how Do we become the platform play how do we Become the one vendor that's not Consolidated but it's a Consolidated Tour right and so one way to go about That is all right you're building a Product and there are several other Features and products that are Immediately adjacent you can either Build those yourself that's going to Take some time right depending on the Complexity or you could require a Company so it becomes a big roll-up Market in a way doesn't it yeah yeah Right Um and speaking of Roll-Ups and um I Know Megan you were part of eight early Stage exits when an entrepreneur first Yeah yeah or so so Um what are some of the learnings you Had during that period um and obviously That was more at the early stage and did And what kinds of motivations did the Entrepreneurs have with it to join a Bigger company was it to was it burn out What was it yeah I think motivation is Always very different and very founder Dependent but actually uh the story that You shared with the first story around Uh stepping away from an early stage Acquisition because of the culture fit Um hearing you tell that story actually

I think there's some really cool founder Advice in that and I've seen it time and Time again when an early stage company Maybe one to three years in gets Approached by a much larger company or Gets into a conversation with a large Company And if you're a technologist or you're Building your company for the first time It's really hard to know how to approach Those conversations you you're really Swimming swimming in deep water And so for a lot of Founders their Reaction to that their immediate Reaction to that is like oh I can't Share too much I don't you know I don't want to in case This doesn't work or in case something Goes wrong I wanna the immediate Reaction is I want to hold my cards Close to my chest and I think the impact Of that often is as an acquirer you're Like who are these people I haven't had A chance to get to know them and so I Think I've seen lots of successful Acquisitions fortunately but I've also Seen where they go really wrong and Often it's just just found us thinking That they they need to keep things quiet Do you think um we're in a market where Early stage Founders probably maybe feel More Under Pressure perhaps they can't Raise another round there's a lot of That going on right now

Categorically yes there's a lot of Pressure Um and I also think for a lot of Founders another another mistake or Another thing that they in shooting for You know I want this massive exit and I I want to IPO there is a um a trend of Not starting those conversations early Enough and so I think it's changing a Little bit now in terms of the market Turning but you never want to be having Those conversations in a position where Uh your your company is in difficulty Exactly as Kathy was saying earlier You're buying a business how early Should we uh should have found us a Startup start those conversations and What sort of relationships what sort of You know blunt conversations should they Have with their board and their Investors on the board what do you think Well I think there's a leaving the board Out of it for a moment and investors one Of the things I loved and I think was a Big learning for me at hello sign was The founders were very open to whatever The right exit was and not predetermined On oh my God it has to be an IPO or it Has to be a strategic acquisition it was Much more let's build a great business That delivers a lot of good value that Customers love and if we do it right We'll have every option on the table and I just thought that was such a

Refreshing point of view and so smart Because that's exactly how it worked out Like I said we had a great path to keep Going on our own but we also had this You know great offer from a really Really good partner that checked all the Boxes and we felt we'd be better off Doing that so it I I really think that's A very healthy approach I can't wait to Hear what you guys have to say about This but the idea of let's build a great Company that delivers a lot of value and Makes customers happy and if we do it Right we'll have all the options on the Table I think is exactly the kind of Early alignment conversation that you Want to have you know they're they're Absolutely Founders who are dead set on An IPO do you think that's a very Different conversation the full run that We that Founders lost sight of that A little bit or at least it got maybe a Little blurry you know it was very easy As you said you know money was so cheap It was easy to raise and you know Founders look every founder has to have This crazy dream and a lot of faith and Obviously the big dream is ideally an IPO so yeah I think it probably got a Little fuzzy there yeah a while Kathy What sort of metrics do you think um Startups should should Gather in their Wart in their sort of strategy Um in this time to to head towards the

Right path to an exit So is it all the kind of standard ones Like customer lifetime value and things Like that are there anything that that People forget that's quite important So first of all I want to just plus one On what just said I think What I advise my companies that I work With is to keep an open mind but always Go back to First principles you want to Build the best company that delivers the Most value to your portfolio to your Customers that's number one Um But for later stage companies that are Aiming for IPO right there are certainly Metrics that they should keep in mind Right you should also say like I want to Shoot for IPO in 2026 you should have a General sense of what metrics you need To hit to make that a reasonable and Practical outcome and from an IPO or Public markets perspective there's all The typical things right like there's The scale and growth rate but there's Also an you know instacart has been a Really really interesting case study to Watch over the past day or so A real turn towards profitability And metrics like the rule of 40 and Other efficiency ratios taking a much More important weighting than Historically when Companies were smaller growing faster

But they were still able to IPO at nice Valuations I see so yeah you've got to Hit those those Basics haven't you what About at the early stage Megan Um you know should um companies um you Know obviously they want to build good Businesses That's fairly obvious but um what other Kinds of metrics should they look for That's a great question for the earlier Stages I mean if we're broadly Separating the acquisition Market maybe Into three parts there's the aqua hires There's the kind of maybe product line Acquisitions Um and then on the higher scale it's Like the the company acquisition so in The scale of like a sales force buying a Slack so like taking those three I'd say For the aqua hires it's really just best Building the best possible product so Unique technology a unique platform Um that will provide additional value to A large company and the second and the Second acquiring a product line really There it's efficiency yeah I think Revenue scale matters less But can you show that getting that Revenue is efficient to the business Burn is low and on the third side it's It's again it's that what you mentioned Earlier about is this business Commercial Business that you've built Accretive to the larger business it

Needs to be self-sustaining and so Across all of these things I'd say the Thread is Cash is King cash flow you Need to really understand the efficiency Of your sales and perhaps go yeah I was Just going to make an additional point One of the things I love about Insight Partners is that we actually have a team Of people focused on helping our Companies and Founders think through Should they go through M A and how to Evaluate all the things we're talking About that matter because I don't think That especially a first-time founder or Somebody who hasn't gone through an Acquisition before in any way it's hard It's complicated there's a lot of Questions to answer and so I love the Fact that we've got this set of people Who are experts at this to kind of help Our Founders think it through like what Should I be thinking about what should I Ask what should I be looking for what's What's a red flag you know and Um that's something that we are just Really proud to be able to do and kind Of lend an extra hand in the process Mike can I add something um this is an Advice to all the founders who are out There one thing I always counsel my Portfolio companies to think about no Matter how early in my earliest Portfolio company is a series a company So fairly early I always ask them to

Think have a point of view on what makes Your business strategic to others right And strategic is a term that can mean a Lot of different things but really Sharpen your pencil on hey like do you Have a customer set that could be really Really interesting to someone else do You have a product that fits really Nicely with another company do you have A unique distribute distribution channel That other people would be really Excited to get their hands on right so You don't have to think about exactly Who your specific potential buyers might Be but just think about what makes your Company unique and special right here I Wanted to ask all of you about Obviously the trend that's on everyone's Lips these days about generative AI Because what's going on obviously is you Have the kind of The Wider economy you Have the technology industry and then Along Comes This sort of magic fairy Dust called generative AI which Um I think three years ago they used to Call blockchain whatever that was And it was sprinkled Along on Pitch Decks and now they've spring they've Taken out the generative AI Fairy dust and sprinkled it all over Um but more seriously Um there are obviously now startups out There who might have been trundling Along in the SAS space for instance

Um you know perhaps they you know the Big Data plays machine learning whatever And now they've gone wait a second let's Like plug in this kind of Rocket Fuel Called generative Ai and bang you know It's actually like in fact actually I Was actually talking to a company last Night at dinner uh at the speaker dinner Saying that they'd they'd tried for ages To make this thing work and then they Just applied these gen AI algorithms and It just had just taken off and and I was Like okay I'm sure well you are talking To a TechCrunch journalist but so Obviously it is taken off but um that's Probably fairly true to some extent Isn't it there are companies that have Done that so so that we've got the wider Economy and now this this transformative New technology that's there's a actually Going to sort of throw some petroleum Onto the fire of some of these companies So are we going to see there for some Companies go Um oh by the way now Microsoft have Bought us hello you know kind of thing Do you think Megan I mean I absolutely uh you know I think I think Microsoft specifically if to Some extent made their bet in the AI Space Um but for sure I think well uh it's Hard to say at this point but it seems Pretty certain that the other Cloud

Players will will also be making strong Bets here Um and so it's kind of it's kind of a Strange place for the acquisition Markets like the thing I mentioned Earlier around the kind of three Different buckets of companies I think It'll be really hard for a lot of these Early stage AI platforms AI Infrastructure research driven companies To show any kind of sales efficiency It's not really what they're built for And so my prediction is that we're going To see uh this kind of blurring between Aqua hires and like you know buying a Product buying a company and so it'll be Aqua higher in terms of bringing in PhD Talent and bringing in this research Talent which is very scarce with the Valuations that you'd be seeing for Buying a product business upwards of Kind of 100 200 million 300 million Maybe even to a billion yes especially Because because those see some of those Seed rounds are being blown up because Of the Jedi AI aspect Kathy what's your View on this subject um I think we're Already seeing it happen right we're Seeing specific companies already Adopting gen AI features in their tool And seeing significant Revenue right the Category that jumps top of Mind Initially are companies focus on Creators and and it makes sense right

It's natural Affinity what gen AI does For what creators need to do in terms of Creating a complete new modality that's Easier to allow them to create faster Ideally better more iteration But I'm seeing it with other companies As well in particular around vertical SAS which has been super interesting Right so you've imagined any sort of Company that has unique data set and by Adding gen AI you're creating a new user Interface that makes it easier to access The data easier to get value out of that Data Theoretically like your company will be Worth more because your users are Getting more value out of it so I do Think it's still early days but it's Something that I'm eagerly tracking Wait yeah definitely early days agree uh You know it's only been what not even a Year yet since the chat GPT phenomenon Sort of woke everybody up to the Possibilities of gen AI Um but I mean we've invested already More than 4 billion in AIML companies With across 70 or so deals which it says A lot I mean there's just a lot out There and I'm really excited that we're Living in the midst of seeing this Change and seeing all the possibilities That you're talking about Kathy have Kind of you know you get better data you Get to better data faster you get to

Higher quality you get inspiration you Get all these amazing things from this Technology so I I really think it's it's Very early days I think we are going to See Aqua hires in the near term and Probably more strategic consolidation Downstream but what I'm excited to see Is I don't I don't think we're seeing Even just the tip of the iceberg yet I Think we're there's so much more Possibility that is we're going to see Every kind of technology company Leveraging AI in some capacity to create Better experience is to deliver more Quality all the things that we're Talking about that can be done but I Also think we're going to see emergence And consolidation of things on the Infrastructure side and the peer play AI offerings so that's going to be fun To watch too and I think somehow these Things are all just going to sort of Play together until we start to see some Patterns emerge and just too early yet Very interesting it is very interesting Isn't it a lot of we are living through A kind of quite a transformative period I think we in the closing moments of of This I'm going to set you all a task I'm Going to turn you all into journalists And what I'd like to do is to ask you All to think of yourselves as reporters And Reporting back From the VC lands and the VC networks

And the circles that you move in so what Is the chatter amongst your colleagues Uh give us some insight about because Obviously VCS they have LPs they need to Return the fund Um and what is the chatter amongst your Colleagues that we don't necessarily Have to reveal too much about your own Firms but you know over the cocktails That you might go to Um what what can you report back to us Breaking news with Um amongst uh your your colleagues in The VC world yeah I mean we really have A an AI specific chat room with I don't Even know how many people are in it I Don't know 60 80 people across the firm And so we are having this dialogue Literally around a virtual water cooler Kind of every day Um and I think there's any is there is a Chatter about exits and selling it I Think it's a really across three key Themes one is we're helping to educate Each other because there's so much Happening across this space that no one Person can track everything going on so Sharing headlines sharing interesting Stories sharing learnings and sharing Funny things that you come across that Are entertaining in the AI space so that There's education I think is one big Thing and of course there's lots of fun Critical chatter that goes along with

That like well that sounds really stupid Actually those kinds of things I think The second theme is how should we think About investing in the space and you Know how conservative versus aggressive Do we want to be and and so I think We're we're sort of I would put us sort Of in the Middle Ground if like Obviously if we've already done 70 plus Deals in the AIML space I mean that's Pretty widely scattered but most of it Has been sort of in the business Oriented platforms infrastructure tools That help companies do better work but But uh let me help you along the journey Are you positive or negative about the Next year or a couple of years oh very Positive right very Kathy I've never Felt more excitement and optimism from The VC Community Um people what way people are excited About the companies that are being Founded right now right the growth Trajectories that we've seen for some of Them and not all of them are AI Companies let's just be clear a lot of Them are but not all of them There's good quality businesses now and Unlike what we saw in 2021 Founders are Now realizing hey like investors care About efficiency right Um cash is King I should make sure that I'm growing my company smartly but we're Seeing companies grow and it's because

They have great Technologies and Products right and they're being smart In terms of their go to market strategy And that's very exciting the other big Topics amongst my group is you know for For current portfolio companies right That are facing headwinds how can we be There for them how can we do more to Help them through this tough time so so We're back to a startup Market is what You're saying we're back to the early Stage again reset Kind of feels like that some days I feel like you're digging for gossip of Course I don't know and I'm not and I'm Not gonna add I'm not gonna ever gossip Was it that raisin just Outsourcing your Job uh but I uh maybe as a as a relative Outsider to Silicon Valley as you can Probably hear it's not a native Californian accent Um the I think something I've been Surprised by here versus investing in Europe where I've been for the last Investing for the last six years Um The amount that the investment markets Seemed to be influenced by what specific Investors are excited about From the outside you know that the Larger firms like the insights The Sapphires the Sequoias who are driving These markets and investing in specific Spaces

Um you kind of see that from the outside In London but you're a little sheltered From it whereas here it's just such a Driving force in what everyone tends to Look at and it's it's work in separating Yourself from thinking about from Getting too brought in and hype and I Think that's also important for Founders Uh just one Insight so I guess to Summarize keep your eyes on the prize as It were to some extent yeah it's easy to Get distracted here yeah I felt that Um well I mean I've really enjoyed our Conversation thank you so much for Coming to TechCrunch disrupt thank you For turning into my reporters on the Ground I'll be tapping you for for Stories in the future of course but Ladies and Gentlemen please give a warm Round of Applause to a whip about some Inside Adventure Partners inside Partners Kathy girl Sapphire adventures And Megan Reynolds from vertex Ventures Thank you so much


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