Have you noticed the increase in SaaS growth equity funding and M&A activity in the last 3 months?
In Q2 2020, SaaS merger and acquisition (M&A) deal volume dipped below 600 for the first time since 2016. However, in Q3, TIMIA Capital has seen a significant increase in M&A and growth-stage equity funding activity in our portfolio.
Our sample size is small but early 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.
What is Fuelling SaaS M&A Recovery?
COVID-19, while severely affecting the overall economy, had less of an impact on the technology sector—particularly the software sector.
In the “new normal,” companies everywhere put greater emphasis on strengthening their digital capabilities, processes, and workflows. As such, they relied on existing software to keep businesses going, reallocated travel and conference budgets to buy new software to support work-from-home scenarios, and invested in software to deliver remote or physically-distanced services.
As a result, most software categories, with the exception of travel and entertainment, saw flat or growing revenue instead of declines.
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TIMIA Capital works with B2B SaaS and software-enabled
companies between $2 – $20 million ARR.
How Investors Reacted
Like most investors, TIMIA Capital paused new investment activity in March. We wanted to see how the situation evolved and ensure we had enough cash to support our existing portfolio through potentially difficult times.
After a few short months, most investors were delighted to discover that, for the most part, SaaS companies were not experiencing any abnormal customer churn rates. TIMIA Capital saw our portfolio companies’ revenue curves going flat for a short time before resuming their ascent. Perhaps they were not acquiring customers as quickly as before, however, most of them were still seeing new customer activity.
It wasn’t long before TIMIA decided to switch the investment machine back on again. It was refreshing to witness the robustness of the SaaS model. We were encouraged by the resilience of the B2B SaaS sector, in particular, and have greater certainty than ever in the model we have built.
Growth equity investors and acquirers are certainly seeing the same trends and reacting as such. Emboldened by the strength and value they witnessed over the past few months, they have resumed activity and are driving more transactions to close. As a result, we’re seeing increased exit activity in Q3 2020.
All of this activity is focused on growth-stage companies. In our world, that means companies with annual revenue of $3 million or more. We have not seen the same robust activity for early-stage venture capital. We shared some thoughts on that in a recent article that is more relevant than ever: The Venture Capital Model is Losing Relevance in SaaS.
Do you agree with our opinions on this? We’d love to hear your thoughts.Back to top