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Bootstrapped SaaS Companies: Poised to Profit from the Mid-Market Investment Surge

  • Why buyers/investors are focusing on mid-market investments
  • What opportunities this presents to mid-market bootstrapped SaaS founders

Due to the instability of the overall market, the M&A and capital raise market has seen some interesting trends this year. While overall transaction volume has gone down, there has been a promising surge of activity in the middle market that should excite stable, bootstrapped companies in this market.

Unstable Markets Put Greater Emphasis on Company Stability

According to the Wall Street Journal, "the overall value of private-equity-backed deals is down over 50% in 2023 versus the prior period, at a three-year low of about $256.7 billion, according to Refinitiv. But the number of transactions has fallen 4% to 6,458. That is the third-highest year-to-date tally in data going back more than 30 years, showing the resurgence of smaller deals."

Why has this dramatic decline occurred? Increasing borrowing costs, a volatile market, and uncertain economics times make valuation harder and large investments riskier. Smaller deals occur across the board during unstable market periods due to a few circumstances. Firstly, the larger the deal, the greater the source of capital needed—and in high cost of capital environments, the greater the source of capital needed, the harder it is to get things done.

Secondly, the path to an exit for a larger deal (IPO or large vendor acquisitions) dwindle because those massive businesses are impacted greatly and no one wants to IPO in a bad market environment.

Thirdly, portfolio diversification helps with stability. During uncertain economic times, deploying large sums of capital into a few assets is less appealing, but if you can divvy them out, you can still deploy capital without risking a massive blow from one bad bet.

Smaller transactions allow firms to keep investing, without debt, and with lower acquisition costs while making their current companies more valuable for future deals.

However, venture model companies are not ideal candidates because they are beholden to cheap capital due to burning a lot of capital while investing ahead of growth. On the other end of the spectrum, large late stage companies are struggling because they need big swings to make any real movement, but investments here are harder to come by because of current economic uncertainty and how poorly the public markets have performed.

So while deal volume has gone down and the tightening on the debt side creates greater challenges for investors to seek and get exits, larger firms who have greater pressures to continue to deploy capital have sought smaller assets in the lower, middle market as it has greater sustainability power to ride out the uncertainty.

Investment Surge in the Middle Market

Even when uncertainty kicks in and the cost of capital increases, investors still have resources that need to be deployed in order for them to generate returns that they can then deploy. And according to data provider Prequin, PE firms have more than $1.4 trillion to dedicate to this endeavor.

This is why investors have been turning to companies in the middle market, they tend to be profitable or near breaking even, which then creates greater stickiness, stability, and attractiveness for investments during more turbulent times. Their growth rates are good and steady—generally ranging from 30% to 100% or even 200%, depending on scale—and are showing promising supporting metrics. So the middle market is seeing greater demand for investments, and where there is greater demand but less supply, there’s more opportunity for founders to foster competition and further drive up valuations.

Bootstrapped, SaaS Companies: Poised to Profit

If there's more demand driving up competition and valuation for stable, mid-market companies, it will be even more so for bootstrap founders who by nature are more capital efficient. By nature they have built their companies to be efficient from the ground up. They start with a strong product to market fit and low cost of entrance then grow the roadmap alongside their customer base, which drives adoption and ultimate win rates—allowing them to do more with less.

So over time, and especially in times like these, they have better opportunities as investors focusing on efficient companies in the middle market that are able to put their dollars toward growth, not simply continuing to execute. Plus with the cost of debt at a high, there are not many cheap capital options to help with working capital. Bootstrapped companies may present a more stable option, and as a result an investor can help drive growth in more aspects of the business in order to get more potential returns than that of a business with a large burn profile.

It’s a more reliable, efficient model to begin with, so these founder-led, bootstrapped SaaS businesses are highly attractive right now.

Take Steps to See What this Could Mean for You

Investors are looking for stable, self-sustaining companies to help augment their portfolio. Bootstrapped SaaS companies are particularly attractive as, by nature, they have efficient systems in place to maximize efficiency and productivity, whether the market is stable or not. And since demand is high for these companies, but supply is down, founders of these companies have the upper hand.

Engaging with professionals who have a better understanding of the market and what buyers and investors are looking for is a good first step. Investment banks like Vista Point know the market and its movements and can help you assess whether or not you are in an optimal place to take advantage of this mid-market investment surge.

This material and the opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.

Modified on Sep 28, 2023