The Present & Near Future Alpha in Tech: Rise of Private Equity & Micro Private Equity
I met a founder friend back in 2023 in Montreal after a 5 year hiatus. He had sold his last few companies so he had done well. I asked him what he was up to.
He told me he had just put in an offer to take over a well funded VC backed startup. The issue is growth had stalled out, the VCs had written it off, and founders were tired after grinding it out for 8 years and unwilling to recap it.
The idea is to buy it out for a good price at a massive discount to the last valuation. Put in new management, fix the cost structure and find new distribution channels. Grow the equity value or just take out dividends from the profits.
This is going to be more common and many PE funds will feast well in the next few years.
Too many of the 1400 Unicorns raised at crazy multiples of revenue, at valuations that are too high whose growth expectations can never be reached. Or at least not reach for many years.
Like the previous story mentioned and worth repeating: VCs have pretty much written these growth stage companies off. Or worse if it’s an east coast hedge fund, trying to squeeze nickels out or selling secondaries for pennies on the dollar to get some cash out. The founders are diluted and or/ just damn tired to continue.
VERY Big opportunity for PE. Come in: replace the leadership team and gut the cost structure. It works extra well when it’s enterprise software or SaaS business. It works for big public cos and for the first time in a while, for growth stage private co.
Constellation Software is an excellent model which acquires software companies and holds them for a long time. They have bought over 500 acquisitions since 1995 and deals range from $5M to $250M usd.
We’re even seeing PE funds buy out publicly traded software companies. Thoma Bravo took private enterprise software company Coupa after beating Vista Equity Partners in a $6.2B deal. There will definitely be more of these. And they bring a new skill set of financing and operating with a clear eye and operational expertise on margins and profitability.
Add on top of the example that Elon did at Twitter by cutting 70+ percent of an over bloated staff. This will become standard practice at many of these newly privatized tech cos. Which results in massive margin and profit expansion as a consequence.
I’ve always said PE firms are the vultures, jackals and sharks of the financial world as they do the dirty but valuable clean up after a massive bubble of excess. The tech industry is at this point now. It will be painful and bloody but necessary as private equity feasts on the carcasses of these zombicorns, right sizing and turning them around. Or going further and rolling up several competitors in a category, ending ruinous competition and building out a dominant player in the space.
Once this is done, it clears up the field for future growth in our ecosystem and for a new generation of awesome startups to rise.