No Exit Wounds – A Primer for SaaS M & A in 2023

While these immortal lines from Charles Dickens can apply to many things at any age, they seem particularly apt for India SaaS in 2023. We are now at a liminal moment in time – a period of transformative transition.

2021 and the first half of 2022 were the halcyon days for Indian SaaS startups – the “best of times” from every angle – availability of venture capital, high valuations, and pandemic-struck markets that opened up a plethora of new opportunities in a remote-first world.

It therefore came as no surprise that Indian SaaS startups raised record amounts of capital at unprecedented valuations to conquer this brave new world. By one estimate, as many as 1,350 SaaS startups have raised external capital hitherto, a number that was in the low hundreds just a couple of years ago.

However, the party ended far sooner than most people anticipated.

2023 is shaping up to be the “worst of times” – drying up of venture capital, sharply-lowered valuations, recessionary markets, and a post-pandemic world with a markedly lower appetite for trying new SaaS products. A PwC India report recently said the Indian startup ecosystem reported the lowest six-month funding in the last four years in the first half of calendar year 2023 at $3.8 billion.

Even companies that had raised funding in the last couple of years now have to face the daunting challenge of raising follow-on rounds at valuations at par or higher than what they had raised previously – most companies would need to grow their toplines by 3X to just merit their previous round valuation.

On top of that, markets no longer value unprofitable companies and mandate that SaaS startups grow meaningfully without sacrificing profitability. This sentiment is shared across the board from early-stage startups all the way to publicly listed companies. 

Against this backdrop, it becomes all the more important for companies to wake up to the world of M&A (mergers and acquisitions). While IPO dreams made sense in the previous world, it is increasingly clear that such ambitions might seem grandiose in the current age.

Equally, there is common consensus that follow-on funding beyond the Series A round is a brutal market right now with fewer than 1 in 3 companies likely to see success. Given the fact that traditional routes of exits and further funding are seemingly constricted for the foreseeable future, contemplating exiting through acquisition is a natural path to consider.

You’ve probably heard the phrase, “Most startups are bought, not sold.”

The dream is that you create a good enough product and the likes of Microsoft or Google will show up one day with a fat check for you.

The problem is, it’s just that – a dream. 

Most startups are sold…and only with diligent planning and great effort.

So how does a SaaS startup founder think about and plan towards an acquisition?

Every startup is different and every market is different, so it is over simplistic to attempt to come up with a definitive playbook that can be followed as a prescription to get your company acquired.

But while there is no playbook, there is definitely a primer for mergers and acquisitions that SaaS startups in India can learn from and apply to their own context. This primer is synthesized from hard-earned tribal knowledge and experiences from other founders who successfully got their startups acquired.

In this post, we will draw out the broad contours of this primer, and in future editions, we will dive deeper into specific aspects of M&A with founders who have played and won the game.

Speaking of games, one useful way to frame the M & A challenge is to view it as a contact sport

Come up with a process, commit to it, and adapt your play to anticipate your potential acquirer’s plays. Framed this way, getting acquired is simply a matter of closing the gap between your plans and the buyer’s expectations.

Let’s go through all the steps in this primer framework step by step.

Choose your game

Startup founders are typically driven by purpose and passion – they attempt to ding the universe by answering a clarion call that is not perceptible to others. But to have a realistic chance of a meaningful exit, this instinct has to be balanced by the cold rationale of market conditions. For your startup acquisition to be worth your time, you need to pick a game worth playing.

Here is a check-list to score your market:

  • Market Space / TAM – Do you play in a market that is large enough ($1B+)? 
  • Market Share / Color of Ocean – Is your space relatively unpopulated with competition? Even if there is competition, do you believe that you can carve out a significant market share for yourself?
  • Size of Potential Acquirers – Are there big companies in your market that you can identify as potential acquirers? 
  • Appetite for Acquisitions – Is there M&A activity in the space? Has it been there historically?

If the answer to all these questions is a resounding “yes”, only then do you have a starting point that could result in a significant exit.

Pick your (T)eam

Once you have identified the game, the next step is to pick your “T” – basically, identify the lead case for acquisition. Why would anyone acquire you? The answer to this needs to tick at least one of the main “T”s – Team, Traction, or Technology.

Experienced hands at M&A will tell you that it is better to pick just one of these three options and lend all your strength to that individual ingredient and be the best at that rather than spread yourself thin by trying to be all things to all people. 

While it is likely that you need to be good at all three of these key elements to win in the market, excelling in one of them will make you a more palatable target for acquisition.

Understand the rules of the game 

Once you have picked your game and identified your team, you need to apprise yourself of the rules of play. 

There are three foundational elements to this.

Firstly, make sure that you have all the basic hygiene factors right when it comes to corporate governance and structuring. From choosing the right geography to domicile your entity to optimize for taxation to ensure that you document everything – your cap table, investor agreements, employee contracts, agreements, customer lists, patent filings, bank statements – so that you don’t need to scramble for anything in the due diligence phase.

Keep in mind the fact that ensuring good governance and professional structuring is key to many desirable business outcomes even beyond the prism of acquisitions.

Second, understand buyer motivations. Like you, buyers are people with goals they want to meet, and you’ll attract more offers when you know what motivates them. Every year, a new generation of entrepreneurs enters the acquisition market and you’re competing against them on product and attitude. Be open, honest, and collaborative if you want to stand out from the crowd.

Finally, be prepared. All else being equal, your preparedness going into an acquisition could decide whether you get an offer. Buyers shouldn’t have to educate you on the acquisition process – it slows everything down and adds extra work to an already exhaustive itinerary.

Instead, understand all facets of the acquisition process, including business development basics, due diligence, deal structures, asset transfer paths, tax implications etc. Even better, prepare an acquisition plan in advance. This might include a breakdown of assets, who owns what, social and email accounts, team directory, and so on – essentially a manual for running your business once it changes hands.

Try to maintain a trailing P&L statement for at least 24 months so that it is ready to share at the first sign of buyer interest. Bring in professionals as soon as you can afford to in your startup evolution – ensure that you have a great CFO, auditor and legal counsel.

It is tempting to think of these functions as unproductive overheads but the cost you pay for ticking the checklist on these aspects will easily be recouped and then some. 

Play a smart game

The key to getting a good acquisition is to build a company that has a high “saleability” quotient. Saleability simply refers to an asset that is easy to sell, in our case the acquisition of a startup by a bigger company. Targeting saleability doesn’t imply that you compromise on other aspects of your business. You need to continue to focus on your customers, their needs, and the market. But it is still possible to align these broader imperatives with the one of building a “saleable” business.

How does one do that?

While there is a broad spectrum of playbooks to get acquired, they broadly converge on their specific plays:

“Become relevant”

Look at and examine your company from the perspective of the potential buyer. 

Figure out if you are relevant from the prism of “timing” – is this something that the buyer is interested in at this point in time, does it see this as a top priority? If not, read the “tea leaves” – understand what the acquirer’s top three priorities are for the next three years and explore the possibility of aligning yourself to one of these in a focused manner. Building your business with an end game in mind can help make it easy for bigger companies to identify and acquire you.

It’s also important to make sure that you can articulate and communicate your value proposition well. In all your marketing messages, use the same terms and terminology that your potential buyer does in its own positioning and PR. Speaking in the same language as your potential acquirer not only establishes top-of-mind recall, it also helps them understand and slot you better within their own broader portfolio of solutions.

Use this opportunity to also establish a clear value proposition to set yourself apart from the competition and constantly reiterate on how you are superior, different or unique – make it easier for your potential buyer to rationalize and justify the acquisition.

“Familiarity breeds acquisition”

The chances of a big company cold-calling you out of the blue and making an acquisition offer is only slightly better than an ice-cube’s chance in hell. To improve your odds, you need to put yourself squarely and strategically in the cross-hairs of your buyer. The key to doing this is to build relationships with your acquirer at multiple points.

Keep in mind the fact that companies do not acquire companies  – people do. This means that you need to establish and build relationships with General Managers, Vice Presidents, EVPs, and SVPs who run corporate development for large companies.

If this requires you to move domicile from India to the US or Europe, consider it as a necessary investment worth taking. The founders of many Indian SaaS startups that were successfully acquired have shown us how moving to these key markets and engaging with potential acquirers on a sustained basis has led to great outcomes.

It is important to engage early and build relationships – both top-down and bottom-up – and ideally should be led by the founder herself. Often, the founder is the brand and the first brand ambassador.

“Be so good that they can’t ignore you”

Your potential buyer is both your partner and your competitor – it is a dynamic with a nuanced difference that is easy to gloss over. Consider the risks and benefits of both and act in a balanced manner.

Understand how you can partner with your acquirer. Do they have a partnership program or a marketplace where you can list yourself? Do they have an API or platform that you can integrate into? Is there an option to raise funding from a potential acquirer as a strategic investor?

In all these efforts, start with small steps – singles rather than home runs. Over time, build out your offering and integration iteratively in a sustained manner. If possible, explore GTM motions in partnership with your acquirer – figure out if you can demonstrate that their customers see value in a combined offering and will help them with key customer wins.

Alternatively, demonstrate that with you in tow, they can explore larger or adjacent markets that can open up new revenue streams. Can you show that your solution fills a key gap in its functionality or brings significant cost advantages? On the contrary, is there an out-of-the-left-field play where your solution is a point of pain to a large company and they see you as someone whose presence hurts them in some way?

Establishing your value to an acquirer is a multifaceted endeavor. For one thing, PR and publicity is critical. PR is not just about releasing press statements – it is about customers telling your acquirer about you, it is about the press writing about you editorially, it is about consulting firms praising you. Of course, none of this is easy or inexpensive but as long as you are clear about your objectives, it is possible to make them affordable and valuable.

The end goal of all these efforts is to be so good that they cannot ignore you and have to make you an offer!

Ace the End Game

The game doesn’t end when you get an acquisition offer, rather it is the start of the end game. All your efforts will come to naught if you don’t ace this part of the game.

For starters, be sure whether you want to sell or not – there is no maybe. If you are, do you want to sell now and will you do what it takes to sell? If the answer is yes, your end game has begun.

The end game begins with setting the broad price range and terms of the acquisition. Treat these as starting points for figuring out the final contours. Be transparent and honest in your dealings and communicate your expectations openly. Don’t play games – buyers are usually experienced professionals and they probably do this for a living. 

Don’t be afraid to assert your acquisition expectations but prepare to negotiate and compromise. Let the buyer know you’re flexible. Neither you nor the buyer will end up with exactly what you want, but once you make peace with that, you are more likely to succeed than fail.

Deal structures are ripe for negotiation. Do you want an all-cash or equity-cash mix? What is the upfront and pay-out ratio? There are countless ways to split the pie. Have a rough idea of minimum thresholds but don’t be religious on specific terms – know the standard terms and fight for the right things.

If possible, bring on board an experienced advisor who can guide you through the process. It might be a worthwhile investment to bring in a banker to shepherd the deal through. These professionals can provide guidance on valuation, deal structuring, negotiations, and due diligence.

Be prepared for due diligence by organizing your legal, financial, and operational documents. Ensure all contracts, agreements, and compliance records are easily accessible. Anticipate potential questions and concerns from acquirers and address any potential red flags proactively. A well-prepared due diligence process demonstrates your professionalism and readiness for acquisition.

Finally, deal in good spirit –  if the acquisition goes through, you might work for them for a while and it is good to start that relationship with positivity on both sides.

The Epilogue

There is little doubt that we are in a market that is largely bearish – both in general and specifically with respect to funding. But we are already seeing the green shoots of fertile grounds for mergers and acquisitions in the last four to five months.

Public tech valuations are on the upswing, companies that had frozen hiring have started doing so again and private equity and venture capital valuations are trending upwards, especially in areas such as generative AI.

This foreshadows an environment where acquisition options are going to improve for startups and emerge as the primary route for exits. Founders need to be thoughtful and diligent to capture this opportunity and make it the proverbial “best of times”!

About the author

Vinod Muthukrishnan

Founder & CEO, Cloudcherry (acq by Cisco)

Sumanth Raghavendra

Co-Founder & CEO, Presentations.ai
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