Private Equity Exits for Startups

In the past four years, Ping Identity faced a critical juncture. Though a long-standing participant in the single sign-on space, its offering hadn't achieved dominant market position. Following 14 years of operation and $128 million in venture funding, the company required a revised strategy for future growth.

An initial public offering had been considered previously, but by 2016, the organization started exploring potential acquisition opportunities. Vista Equity Partners submitted a $600 million proposal, coupled with a commitment to continued company development – a reassurance not typically offered by larger corporate acquirers. Ping Identity’s CEO and co-founder, Andre Durand, accepted Vista’s bid, viewing it as a means to provide returns to investors and employees and facilitate a successful exit. Importantly, the company avoided being integrated into a larger organization, a common outcome in standard mergers and acquisitions.

Ultimately, the decision between an IPO and an acquisition wasn’t mutually exclusive. Vista continued to invest in Ping Identity, strategically utilizing smaller acquisitions such as UnboundID and Elastic Beam to enhance its product development. Subsequently, Ping Identity completed its initial public offering last year. The company’s trajectory demonstrates that private equity can provide a viable exit path for established enterprise startups exhibiting solid, though not extraordinary, growth – a level often below the 100% or greater rates preferred by venture capital firms – allowing them to satisfy investors, compensate employees, and maintain independent growth.

However, a favorable result like Ping Identity’s isn’t guaranteed for all companies following this path. Certain organizations acquired by private equity firms experience executive team replacements, significant workforce reductions, or the divestiture of profitable business units, alongside a curtailment of product investment. Nevertheless, the three private equity firms interviewed – Vista Equity, Thoma Bravo, and Scaleworks – all expressed a desire for the success of their acquired companies, albeit through varying approaches.

Viable companies with good numbers

Generally, private equity firms target businesses demonstrating a strong financial base and worthwhile products, but which are currently trading at a lower valuation than their potential suggests. Alan Cline of Vista emphasizes their preference for enterprise SaaS businesses exhibiting respectable Annual Recurring Revenue (ARR), controlled operating costs, and a growth rate exceeding the average.

He highlighted that Salesforce’s success in penetrating large enterprise markets approximately a decade ago significantly broadened opportunities for subsequent SaaS companies. Following this shift, his firm redirected its focus from primarily seeking companies with on-premises enterprise applications to identifying undervalued SaaS businesses serving enterprise clients.

Cline points out that startups typically fall into one of three categories: those that fail early on, those that achieve substantial success through acquisition or an initial public offering, and those that operate in a middle ground. Companies in this third category, while not necessarily market leaders, possess a viable business model that can attract the interest of firms like his.

He clarifies that exceptionally high growth rates, such as 100%, are not a prerequisite for consideration. Instead, they prioritize consistent, solid growth, which can provide crucial support for companies that have established a significant presence but are no longer experiencing the rapid expansion required to secure further venture capital funding.

“If a business has proven successful but operates in a niche that doesn’t appeal to major corporate acquirers, or if its growth, while positive, doesn’t reach 100% annually, private equity presents an attractive option,” Cline explained. “We can offer investment to support continued growth and scaling, and growth rates of 20% or 40% are highly appealing, particularly when sustained alongside a valuable software product.”

Notably, Ping reported nearing $100 million in ARR with 40% year-over-year growth in 2015, positioning it favorably for acquisition by Vista in 2016.

Seth Boro, a managing partner at Thoma Bravo, indicates that his firm pursues similar company profiles, investing in a combination of established startups, privately owned businesses, and publicly traded companies with undervalued potential, and then leveraging its resources to foster their development.

“Our investment strategy has remained consistent throughout the firm’s history: to acquire companies with excellent products and substantial recurring revenue, and to collaborate with existing management teams,” Boro stated. “We typically work in partnership with the leadership already in place.”

Apttus serves as an example of this approach. Initially a promising quote-to-cash startup built on the Salesforce platform, the company secured $404 million in venture funding and initially aimed for an exit via acquisition or IPO. When those plans stalled, Thoma Bravo provided a viable alternative.

Although the specific financial details were not disclosed, Thoma Bravo acquired a significant ownership stake in Apttus. Supported by this private equity investment, Apttus subsequently purchased Conga, a company specializing in contract and signature management, for $750 million earlier this year. In this instance, Thoma Bravo utilized its financial strength to facilitate a merger between Apttus and a complementary business, expanding their collective market reach. This illustrates the value that private equity firms can bring to companies like Apttus.

Give a little, get a little

Accepting investment from a private equity firm does come with certain expectations regarding operational changes. While these firms provide capital, that investment necessitates adopting their established business approaches. A similar shift in methodology would occur during a corporate acquisition, however, private equity firms utilize a defined system to strengthen various organizational areas, including finance, sales, and marketing.

Company leadership teams accustomed to independent decision-making may initially find it challenging to implement new directives. However, these firms rely on proven strategies, and a willingness to comply is essential. In the case of Vista Equity Partners, acquired companies collaborate with the Vista Consulting Organization, a team of over 150 professionals dedicated to refining internal processes based on established best practices.

Vista has assembled a team of specialists covering all facets of a software-based business. This includes support and guidance in areas such as sales and marketing strategy, hosting infrastructure, and advanced services project management, offered to each portfolio company.

“Our initial focus is to grasp the company’s strategic objectives and determine how our consulting services can expedite their progress. Over the past two decades, we’ve compiled a comprehensive library of successful practices observed across our portfolio companies—techniques that have consistently delivered strong results,” a representative explained.

Orlando Bravo of Thoma Bravo confirms that his firm operates under a comparable model to Vista, aiming to enhance a company’s performance beyond its current capabilities.

“We typically collaborate with the existing management team, introducing our leading performance indicators and exclusive operational protocols to cultivate best-in-class operational efficiency,” Bravo stated.

More hands-on approaches

Private equity companies routinely become significantly involved in the running of the businesses they acquire, but certain firms take an even more proactive stance than simply offering advice. Scaleworks is a firm that targets startups that wouldn't typically attract the attention of larger firms such as Vista or Thoma Bravo. Instead, it concentrates on early-stage companies that are significantly undervalued but possess a promising concept and require improvements in their implementation.

“There’s a limited number of potential purchasers for businesses with revenue under $15 million, as they naturally present a higher degree of risk,” explains Ed Byrne, co-founder and general partner of the firm. These businesses often feature a compelling product but may be hindered by insufficient leadership or challenges in effectively reaching their target market. Scaleworks intervenes to assist them in achieving further development, seeking companies demonstrating growth between 10% and 30%, believing this provides a solid foundation for substantial expansion.

Byrne characterizes his company’s strategy as more akin to venture equity than traditional private equity, involving the acquisition of a company, the implementation of a new management team, and a concentrated focus on fostering growth. The objective is to elevate revenue from $10 or $15 million to $20 or $30 million, which they consider a worthwhile return on their investment, he stated.

The specific methods employed naturally differ, but for startup founders, companies like these can present an opportunity for an exit, sometimes smoothly, and other times with more difficulty.

Ping successfully achieved an exit under favorable conditions and ultimately went public. Currently, it boasts a market capitalization of $2.81 billion. While the performance of Apttus is difficult to ascertain as it remains a privately held company, a private equity firm such as Thoma Bravo facilitated its exit, even if the outcome differed from the founders’ initial plans.