Santosh Sharan’s Post

Why Salesloft’s acquisition of Drift signals the beginning of a nightmare-era for SaaS startups. Here's my analysis: I see a lot of comments congratulating Salesloft and Drift on this brilliant merger. I have friends in both these companies and I have resisted congratulating them. To me, this is a merger that marks the beginning of many such mergers across all VC and PE portfolios that will play out in the next 1-2 years. Let’s look at the two companies: During the good times, Vista paid a high multiple for both these businesses. Revenue multiple Vista paid for Salesloft (2022): 23x  Revenue multiple Vista paid for Drift (2021) : 17x [estimated] Now, when the hard times hit - we know the company valuations have dramatically decreased, churn and downgrades have increased and the market has changed in a way that there’s no coming back from. It’s no surprise that both Salesloft and Drift had layoffs in 2023. The competitive landscape for both these companies don’t look great either. Salesloft is in the Sales Engagement segment and Drift in Conversational Intelligence/ Chatbot segment. While both the companies are market leaders in their category, they face stiff competition as product differentiation rapidly wanes. On G2, there are 163 companies listed in sales engagement category and 169 companies listed in conversational intelligence. Both these categories are heavily commoditized. I don’t think Salesloft or Drift are particularly faring well as competition continues to chew up their bottom end. It made sense for Vista to combine the two businesses and cut their losses, this will decrease some costs and potentially leverage new synergies, particularly around buyer-led growth. Individually, both of these businesses would have a hard time maintaining their leadership, however they have a better chance to justify the high multiples together. This also signal’s Vista’s lack of confidence in the businesses to fare well on their own. Here’s why I worry: There were a large number of PE deals done at astronomical valuations in the last few years. A lot of them are likely under water now. We will see several mergers like what Vista just orchestrated. This is a sign that the powers to be have given up on their ability to run these companies independently to justify the high multiples. Things can get much worse from here. Buckle up. We're in for a bumpy few years.

Why Salesloft’s acquisition of Drift signals the beginning of a nightmare-era for SaaS startups. Here's my analysis: I see a lot of comments congratulating Salesloft and Drift on this brilliant merger. I have friends in both these companies and I have resisted congratulating them. To me, this is a merger that marks the beginning of many such mergers across all VC and PE portfolios that will play out in the next 1-2 years. Let’s look at the two companies: During the good times, Vista paid a high multiple for both these businesses. Revenue multiple Vista paid for Salesloft (2022): 23x  Revenue multiple Vista paid for Drift (2021) : 17x [estimated] Now, when the hard times hit - we know the company valuations have dramatically decreased, churn and downgrades have increased and the market has changed in a way that there’s no coming back from. It’s no surprise that both Salesloft and Drift had layoffs in 2023. The competitive landscape for both these companies don’t look great either. Salesloft is in the Sales Engagement segment and Drift in Conversational Intelligence/ Chatbot segment. While both the companies are market leaders in their category, they face stiff competition as product differentiation rapidly wanes. On G2, there are 163 companies listed in sales engagement category and 169 companies listed in conversational intelligence. Both these categories are heavily commoditized. I don’t think Salesloft or Drift are particularly faring well as competition continues to chew up their bottom end. It made sense for Vista to combine the two businesses and cut their losses, this will decrease some costs and potentially leverage new synergies, particularly around buyer-led growth. Individually, both of these businesses would have a hard time maintaining their leadership, however they have a better chance to justify the high multiples together. This also signal’s Vista’s lack of confidence in the businesses to fare well on their own. Here’s why I worry: There were a large number of PE deals done at astronomical valuations in the last few years. A lot of them are likely under water now. We will see several mergers like what Vista just orchestrated. This is a sign that the powers to be have given up on their ability to run these companies independently to justify the high multiples. Things can get much worse from here. Buckle up. We're in for a bumpy few years.

Carta has seen 287 Carta cap table companies acquired so far this year (through H1 of 2023). This is already above 2019 and 2020 but will likely end the year close to the 2022 numbers. There are some indications of a big increase in acquisitions at the end of the year so it may even come up higher than 2022 but that depends in some ways on the broader public markets. Having spoken with several public company Corp Dev leaders in the last few months, they are all quite actively looking but not quite consummating deals yet. There are issues with regards to recent internal cost cutting measures (e.g. layoffs)  which make it hard to justify new external deals. On the other side,  general valuation expectations from startup boards have softened, which is driving action inside Corp Dev teams. Another interesting point is how consistent the acquisition rate is by stage over time and through various market cycles. → Pre-Seed and Seed stage companies represent about half of all acquisitions, which is logical as there is a large universe of companies who want the team and the technology and the price point is usually quite reasonable. → Series-A stage companies represent just under 30%, and these startups typically have a product that a larger organization wants to roll out via their sales channels. → Series-B stage and beyond companies have made a commitment to scaling, and there are not many companies that can afford to acquire them when they are this large. This breakdown was always widely discussed in investment circles, and it’s nice to see real data at scale confirming that this is the case. 

In 2022, Cognism acquired a French startup called Kaspr for €21M. The acquisition has been a tremendous success and the final payout milestone was just hit! Here’s a breakdown of the deal and how we approach acquisitions: BACKGROUND: Acquiring overseas companies has been an important strategy for Cognism. Two years ago, Cognism acquired Kaspr - France’s leading PLG Sales Intelligence Company. When we first looked at Kaspr they were $1.5 million ARR. As of today, they have hit $8 million ARR. Why did Cognism do the Kaspr acquisition? There are two reason: 1. To gain the number one sales intelligence asset in France 2. To acquire PLG expertise (Allan B. who founded Kaspr is now heading Cognism’s new PLG initiative) Acquiring a French company did not come with any of the stereotypical negatives typically thrown at such acquisitions. The French government is one of the MOST most pro-tech governments in the world. French talent is exceptional and Paris is a joy to visit on a regular basis (if you needed any other reason to do M&A in France). France now has 28 Unicorns, in the last 10 years French startups are estimated to have created over 1 million jobs. The French tech scene is booming! So what made the Kaspr acquisition successful? I would put it down to the following points : 1. Expertise Phil Garlick Garlick, a Cognism board member and former Head of Corporate development at ZoomInfo, negotiated and structured the deal. Having an experienced industry corporate development expert on our board helped execute the deal without heavy banking fees. 2. Earn Out We structured eight milestones by date with pay-outs at each milestone. Each payout was hit! 3. In Person Meetings The teams had similar “Be Nice” cultures and ensuring the teams met in person helped us connect as teams. Cognism invited Kaspr to our summer party and it was reciprocated multiple times with one highlight being the Kaspr team taking me to an incredible restaurant in Paris called Chez Lulu for my birthday. 4. Creating Space for the Companies to Align Cognism did not immediately disrupt the Kaspr team and merge platforms. Initially, we swapped best practices across our own SLG and PLG teams. We now understand each others strengths and are working on a more in depth merger.  Could we have moved faster? Maybe but I would say our teams were not as ready as they are now and an earlier more aggressive merge would have been negative on growth. Want to see a copy of the template Letter of Intent we sent Kaspr? Comment KASPR below and I will send it to you. 

Grandfathering - How to leave $$$ along the way. I see quite a lot of SaaS companies whose pricing is a complete mess. Price changes made over the years have resulted in 20+ different rates, depending on when customers first signed up. Plus various discounts, other special terms, lifetime deals, etc. My advice: 👉 Go and fix it asap - at the latest before you engage in exit conversations. Aside from the money/growth opportunities you miss out on, this chaos can create a bias with potential acquirers - which may have an additional negative impact on your exit value. #saas #startup #founders #mergersandacquisitions #pricing #pricingstrategy #exitplanning #growth