Recently, a CEO approached me for advice on an acquisition, with three specific goals in mind:
- Enter a new market without existing product or customers;
- Add at least $10 million in additional revenue for the year; and
- Limit the impact on their burn rate.
The CEO was interested in acquiring a startup with $10 million in annual recurring revenue (ARR), despite its stagnant growth and being far from the top player in the market. I had invested in the leading player with over $200 million in ARR, so I was familiar with the industry. However, the CEO was determined to expand into this adjacent market.
Ultimately, they acquired the smaller competitor with $10 million ARR, but with minimal growth and a price tag of about $80 million.
Objectively, a SaaS startup with stagnant growth at $10 million ARR is not worth $80 million. From a DCD analysis, it may have little value and would not attract Series B funding from VCs or PE firms. However, in certain strategic cases, a larger company may be willing to pay a premium for a startup that provides market knowledge and customer base.
There are no guarantees in this scenario. Stalling growth below 30% at $10-20 million ARR can be challenging. However, for cash-flow neutral startups with moderate funding, there is still potential for a decent M&A offer, especially in a valuable market. Even if growth has slowed, there may still be interest from potential buyers.
