Way too successful to shut down, but struggling to raise VC?
A private equity minority round might be the ideal fit.
Take some money off the table — provide liquidity to founders, early investors, and employees, plus bring in growth capital that’s more aligned with where your B2B SaaS company is right now.
This is for founders who want to be rich, not king:
My name is Einar Vollset. I did YC W09. I am now investor at TinySeed and founding partner at Discretion Capital, where we specialize in helping founders achieve amazing exits to strategics and Private Equity firms like Blackstone and PSG.
(Yes, companies can be sold as well as bought) :)
Does any of this sound familiar?
VCs keep passing: “Too early,” “Want to see more traction,” “Cheering from the sidelines”. What they really mean is: you’re not growing fast enough and our math doesn’t work unless we think you can IPO, which we don’t think you will. They’re too kind to tell you, though. Or more bluntly, they’d rather keep the relationship alive in case you manage to pull a rabbit out of your hat.
Existing investors are getting unresponsive: Everyone is still nice, but it’s clear their focus is elsewhere. You’re not the hot asset that would make them go out of their way to pull favors. The brutal truth is that the shine has come off for some of your early champions.
Running out of runway: You’ve been trying hard to hit the growth numbers you keep being told you need, but it’s meant spending more and more trying to get something to work. And you need more funding, but nobody will give it to you on reasonable terms, because your growth isn’t there.
All your wealth is tied up in this thing: When I did YC, I had net negative wealth (thanks, student loans). You probably aren’t exactly swimming in cash either. You kinda need this to work — at least to some degree. You’ve spent years on this thing. Hell, you could have worked at a FAANG this whole time and raked in a lot more cash!
What got you here won’t get you there: You know there are things that need to change to get to the next level. Maybe your enterprise sales efforts need fleshing out. You should probably tweak your pricing. Or maybe overhaul it completely. So much needs doing, but you’re a little lost. The fizz has gone a bit flat. And it all seems so overwhelming.
Cold, hard truth: Most startups don’t IPO
Looking only at YCombinator, they’ve backed 4667 companies, yet only 18 have made it to ring the bell at Nasdaq.
That’s 0.4%. Long odds indeed.
What happens to the rest?
Sure, some have amazing acquisitions. But a lot go out of business, pivoting endlessly until they give up or get acqui-hired (sorry, I mean “Excited to join forces with Google to bring our vision to a broader audience” 😉).
But some are like you — way too successful to shut down, but nowhere near the growth rate needed to stay on the VC track to IPO.
Maybe you’re growing pretty well, though. Maybe your last twelve months saw 30, 40, or even 80% growth. But that just isn’t enough to secure your next line of VC funding. VCs want 200-300% year on year growth or more (unless you’re an AI company… have your investors asked about your AI strategy yet?).
Honestly, you’re in a pretty bad spot.
So, what to do?
You’re doing more than a million in ARR. Maybe even $5m or $10m. There must be value there, right?
A crazy bridge financing round might work. You know, with a 3x liquidation preference and a down round (maybe disguised with warrants) that you use to double down at whatever growth channel seems most likely to work.
Of course if that doesn’t work, what would be left for you and the team? Is it worth risking the business and value you’ve created on a Hail Mary?
Or you could sell the company now. (We can help you if you want. We’re very good at it).
But what if you’re not quite ready to pull in your oars? Is there no other path?
Are your only choices throw a hail Mary or sell?
Not at all. VC is just one pool of capital you can tap into. It’s not even the largest one — in the U.S., venture capital is a subset of the larger software PE world.
Granted, a lot of that is for buyout funds, but a significant and growing portion is what we call “software growth equity”. This is where PE firms take minority positions (typically 25-49%) in software firms with the intention of 3-5x'ing their investment in 3-5 years.
This is very different from your standard seed/A stage VC approach. It’s not “Gimme a 1-2% chance of 1000x.” It’s “I’m happy if I can 5x in 3 years with a minimal chance of losing everything.” The incentives are very different. And those incentives might work better for you.
There’s nothing wrong with either approach, but it usually boils down to:
Do you want to be rich, or do you want to be king?
If you want to be king, then you want the long odds to become a well-known founder with tremendous wealth and you don’t mind the 1/100 (or worse) odds.
If, like me, you’d prefer to be rich — and you’d prefer to not lose everything you’ve worked for by taking a moonshot — then you need a different solution.
A different solution: Private equity minority growth
I know what you’re thinking.“Private equity? Aren’t they the people who fire everybody? Isn’t there a Bruce Springsteen song about them?”
Private equity remains a bit of a mystery to most software founders. It’s not surprising — there are a lot of PE investors out there, and some of them are of the "strip mining” variety. They want to cut costs by any means and milk the profits while the company slowly dies.
But that view of the PE world is incomplete.
At its core, PE is just private capital looking for a certain risk/reward profile, and some PE funds are looking to 3-5x in 3-5 years while protecting their downside. They know software. They’ve got operators and recruiting teams on hand that have the experience you lack. Like building out an enterprise sales team to take you from $5m to $20m in ARR, for example.
What about debt?
Debt is an excellent avenue. There’s revenue-based financing, invoice factoring, venture debt, etc, etc. It’s great if it makes sense, and you can be damn sure that your debt provider will make sure it makes sense before they lend you money. Lenders’ incentives are pretty much always “Don’t lose money. Ever.”
But for the right situation, debt can definitely work. We’re happy to make introductions in that space — or, for venture debt, your existing investors are also likely to be a good source of introductions.
Okay, so why don’t I just chat with one of the numerous firms in my inbox?
You definitely can, but you’re unlikely to get an optimal outcome for a number of reasons. Specifically, before you spend any of your time talking to PE investors (and trust us, you can waste a LOT of time talking to PE investors), you’ll want to:
▸ Get Ready
Just like when you first went out to raise your pre-seed round, or present at Demo Day, you need to have your ducks in a row to get the best outcome.
What PE investors are looking for can be radically different from the VC investors you’re used to talking to. You want to make sure that the documents and data the investors will inevitably ask for during diligence present you in the best possible light.
▸ Increase Competition
Nothing makes PE investors happier than dealing one-on-one with a founder. They even have a term for it: proprietary deal flow. That’s why they invest so much in all those outreach emails you’re getting. They know that if they build rapport with you, they’re likely to get a better deal.
Better for you to bring in a number of investors and let them compete among themselves — or at the very least, present their various approaches. Not every PE investor has the same strategy. Some are very hands-on. Some are not. Some like secondaries (money that goes directly to you or other shareholders), and some don’t. Etc.
▸ Keep Out Bad Actors
PE has a mixed reputation for a reason.
Some firms (even some really large, successful firms) basically rely on founders being clueless about what their company is worth. These firms look to buy assets at a massive discount and will optimize for profit extraction above all else. That might be fine for you, or it might not be (they rarely pay very well, so it probably isn’t).
This is where we come in.
Our firm, Discretion Capital, is the leading sell side investment bank focused on B2B SaaS between $2-10m ARR. We know most of the players in this space, and can help you navigate to an outcome that is win-win for everyone.
Usually, we focus on assisting folks in selling all or most of their business — frankly, the fees are greater here than when assisting with fundraising from minority growth investors, so we tend to avoid that. (Helping raise minority growth funds on a one-on-one basis is just as much work as selling the whole business, but with 1/10th the fees. We’re capitalists, so we like to get paid.)
However, we’re experimenting with what we’re calling the NextCatalyst.
The NextCatalyst
During 2023, the average annual growth rate to required to raise a Series A was 600% and the minimum was 250% (!). That is a historically high bar.
However, there is a different path, and that is what we’re going to help you navigate with the Next Catalyst.
The NextCatalyst is a program designed for 5-10 B2B SaaS founders like yourself, with $1-20m ARR, who are ready to explore coming off the VC track and instead raise from investors who are aligned with your goal of “rich, not king”.
A successful outcome will see you raise anywhere from $5-50m, probably split between primary (cash on the cap table to keep growing further) and secondary (cash to you and other early investors/employees).
But cash is not the whole story. The best PE software investors have a wealth of experience, and in some cases seasoned operators they can bring to the table to help you get to that next level. For example, it’s very common that a SaaS company can become quite successful without really cracking enterprise sales. Hell, you might even hate the idea of enterprise sales! But you know that to get from $3m to $30m or from $10m to $100m in ARR, you’re going to need to build out an enterprise sales team. Very often PE firms have operating partners who have been there, done that, and can help.
Source: https://twitter.com/garrytan/status/1752701867090702728Reminder: Neither Garry nor YC is associated with NextCatalyst
If you’re curious, book a call
If bringing in quality PE software investors sounds like something you’re interested in exploring, the next step is to set up a call with me. We’ll discuss your specific situation, and see if you being part of the first batch of NextCatalyst founders makes sense.
I will be brutally honest on this call. If I don’t think we can help you, then I will say so. Better some hurt feelings than a waste of time.
Fill in the form, and I’ll be in touch to schedule a time to talk. Alternatively, feel free to just email me directly: [email protected]
Best, Einar