Key Considerations for Selling a B2C Software Company
- Common challenges a B2C software company will face when marketing their business
- How to get ahead of these challenges and incite interest from buyers/investors
In order to successfully exit or raise capital for your B2C software business, you need to have the right level of preparation and experience to position the business in a way that is attractive to buyers and investors.
Below are some key considerations concerning the challenges and opportunities a B2C software founder will face when marketing their business.
Challenges of Selling a B2C Software Business
B2C software businesses usually don’t receive the same caliber of treatment from buyers/investors than their counterparts in the B2B space.
B2B is generally seen as a less volatile, more consistent, and more sustainable investable universe, unaffected by fads and trends. As a result, best-in-class B2B software companies are often valued on multiples of revenue or ARR, whereas B2C software businesses are more likely to be valued on multiples of EBITDA (a much lower base).
Buyers justify applying EBITDA multiples to B2C software companies because these companies tend to track lower in the areas where companies in B2B software outperform. Specifically, B2C software companies tend to have:
- Higher churn
- Lower switching costs
- Smaller price tags
- An unknown customer base
- Uncertain monetization
In light of these challenges, buyers and investors are often wary about investing in B2C software, resulting in fewer investors focused on companies with a consumer end market.
Despite the perceived disadvantages of B2C software, with the right expertise at their disposal, founders can successfully change the frame of reference and get in front of these issues. The key is to position the company so that buyers will consider the asset on its own merits. In doing so, founders can achieve a successful outcome in the sale of their business.
Focus Areas to Emphasize to Potential Buyers and Investors
A B2C software company has different dynamics than one in B2B, and as such should be marketed differently. Here are some of the main points to highlight when speaking with buyers/investors.
User acquisition and retention
As mentioned, the retention rates for a B2C software company are rarely as attractive as those in B2B. A best-in-class enterprise software company might experience 95% customer retention, while a best-in-class B2C likely won’t reach 80%.
When positioning your company’s retention rates, make sure to do so within the context of what good retention looks like in B2C software, not B2B. Rough annual benchmarks are as follows:
To further help break the B2B frame of reference, you should highlight strengths of B2C software companies that are often absent in B2B.
Specifically, B2C software companies often employ a set of cost-efficient go-to-market strategies that are highly profitable in terms of customer acquisition relative to LTV. Founders should emphasize how these go-to-market strategies can make customers profitable early in their lifetime.
For example, a B2C software company might use the freemium model as a customer acquisition strategy. Depending on the rate of conversion from freemium to premium users (as well as on other monetization tactics for freemium users), the unit economics of a B2C software company could be profitable from day one of a customer’s lifetime.
Other monetization opportunities
If your current monetization strategy is fairly one-dimensional (i.e. a subscription), you may be in a position to present additional monetization opportunities to buyers.
Common monetization strategies that B2C companies employ (other than or in addition to a subscription) include:
- Fees from payment processing (e.g. Venmo or PayPal)
- Revenue from in-app purchases (e.g. Duolingo)
- Advertising (e.g. Spotify)
- Other, such as referral fees from affiliate marketing
Your proposed monetization strategies can be fairly unique, such as Pokemon Go’s cost-per-visit model where they receive a payment from business sponsors when app users visit the sponsor’s location.
In some cases, you may not have even monetized yet, just focused on acquisition of freemium users to grow your base. In this case, you’ll need to spend a significant amount of time and energy building out the case for your proposed monetization strategy.
User engagement and community
B2C software companies with strong product-market fit tend to have highly engaged users, which are easier to monetize and retain. Focusing buyers’ attention on your engagement metrics in concert with potential monetization opportunities can open their eyes to low-hanging fruit to grow the revenue base.
The engagement argument is even stronger when you can demonstrate that users experience a sense of community on your platform. Having a sense of community makes your audience more loyal and therefore more likely to respond favorably to monetization. For example, Strava, Peloton, Spotify, Instagram, and others have created strong communities which have allowed for explosive growth.
Total addressable market (TAM)
Although the price point of a B2C software product may be low (<$200/year or even a few dollars/month/user through advertising), the product’s TAM can be massive if it has strong product-market fit across many age groups, demographics, and countries. B2C software companies frequently experience growth at levels unparalleled by B2B companies as word can spread rapidly through positive user experience, eventually reaching a large audience.
How an Investment Bank Can Help
Focusing buyers’ attention on the strengths of your B2C software company is a process that requires a strong sense of how buyers perceive potential investment opportunities. While as a founder you may have interacted with a few buyers/investors in the past, you likely don’t have a deep understanding of their motivations and objectives.
When preparing to run an M&A or capital raise transaction, the best move you can make is to hire an investment bank to oversee that transaction. An investment bank will help you tease out the strong points of your company’s story and present them in a way that will appeal to buyers. With an experienced partner on your side of the table, you’re much more likely to achieve a successful outcome.