The year has just begun, and it’s already proving tumultuous with civil unrest and rioting in the U.S., a seemingly endless pandemic, and an uncertain global economic outlook.
Despite the gloomy start to 2021, most SaaS entrepreneurs are cautiously optimistic about the future. The resilience the SaaS sector demonstrated in 2020 gives us good reason to look forward to brighter days ahead.
TIMIA Capital is tracking several growth capital trends that are contributing to the positive outlook:
1. SaaS Industry Growth
The COVID-19 pandemic accelerated the digital transformation roadmap of many businesses, significantly increasing the demand for B2B SaaS solutions. According to Gartner, this trend will continue in 2021 and lead to a SaaS market worth a whopping $120.9 billion by the end of the year, up from $104.7 billion in 2020.
For new SaaS businesses coming to market, the greatest opportunity is in vertically-specific areas, delivering more business value and better outcomes to a narrower targeted user base. However, this means that the likelihood of a future IPO is decreasing. The more likely outcome for SaaS companies that emerge today is to sell for a modest price (e.g. $50M to $100M)—is a good outcome for founders with low dilution, but not a worthwhile outcome for a venture capitalist.
We predict newer SaaS companies will seek alternatives to venture capital to fuel their growth in 2021 and beyond.
2. Continued M&A Activity
In the first half of 2020, SaaS merger and acquisition (M&A) deal volume dipped below 600 for the first time since 2016. However, the resilience of the SaaS industry during COVID-19 meant that we saw a surprising number of exits and buyouts in the latter half of the year, as growth equity players resumed activity with vigor.
TIMIA Capital noticed a significant increase in M&A and growth-stage equity funding activity in our own portfolio, with nine companies exiting successfully (six in the second half of the year). The sample size is small but reports from the Software Equity Group appear to reflect our experience.
A recent outlook from Ernst & Young also found that 70% of investors expect M&A activity to improve over the next 12 months. Much of this investment is private capital. If public markets continue to soar, there may be an impact on private valuations with some predicting valuation multiples to hit the double digits.
3. Increasing Relevance of Venture Debt
The revenue predictability and relative capital efficiency of today’s B2B SaaS companies mean that the debt discussions are happening earlier in a company’s lifecycle, around the $1–10 million ARR stage.
A recent study found that by the time companies surpass $5 million in ARR, over three-quarters are using debt capital.
That’s because non-dilutive capital makes sense to these SaaS companies. It can help them scale, clean up their cap tables, or build their valuations to be in a better negotiating position with equity investors down the line.
Looking for non-dilutive capital?
TIMIA Capital works with recurring revenue technology
businesses between $2 – $20 million ARR.
4. Alternatives to VC
The growth capital industry has changed in the past year, leaving a bigger gap than ever for SaaS companies in the $1-10 million ARR stage.
Today, debt fund lenders and venture banks like Silicon Valley Bank are only focused on VC-backed companies—and usually only those that are scaled beyond $10M in ARR. Some revenue-based debt lenders dabbled at the lower end of the scale in the past, but even players like Espresso Capital have pulled back to serve only the larger end of this market.
TIMIA Capital remains dedicated to serving SaaS companies in the $1-10 million ARR stage in 2021 as its tech-enabled lending platform continues to scale.
5. Increasing Investments as Economy Stabilizes
While SaaS growth capital deal volume stalled in the first half of 2020, it picked back up in the latter half and is expected to increase further in 2021 as vaccines roll out and the economy stabilizes and recovers.
TIMIA Capital has capital ready to deploy and is looking forward to serving entrepreneurs with the product at the right stage of their growth journey.
If you’re a B2B SaaS business with $1-10 million in ARR and would like some advice about non-dilutive capital options, please don’t hesitate to get in touch.Back to top