1Mby1M Virtual Accelerator Investor Forum: With Steven Mitzenmacher, Rackspace Technology (Part 4)

Sramana Mitra: What range would you put on your first two categories?

Steven Mitzenmacher: It’s so subjective. I used to live at a time when an enterprise software company could expect a 2.5 to 3 times revenue to be an appropriate multiple. Then you get into the SaaS world where it’s 30 to infinity times. Similarly, now being in the world of professional services, you used to live in a world where 1 to 1.5 times was appropriate. Now you see sexy cloud consultancy companies selling for 4 to 6 times revenue.

Sramana Mitra: For the acquihire, the higher price points would correlate with scarcity. If you have something very specific and sought after, that is where you get anything beyond reasonable. I’m a big believer in Bootstrapping to Exit – startups with an interesting strategic product that achieve product-market fit with no funding or with small amounts of capital infusion.

Steven Mitzenmacher: At any given point in time, when it’s just about the people, it’s 1 to 3 times revenue multiple. That’s the range. Then a capability deal could be a 3 to 10x. That being said, these are all very market-specific. It’s hard to be too generic. These things evolve and change constantly. Giving broad guidance is difficult.

What are your thoughts about such acquisitions? I would say that this is probably the majority of your capacity and capability acquisitions? Could you share a case study of both?

Steven Mitzenmacher: The more bootstrapping you can do, the more equity you can hold on to for yourself. However, capital is key to an organization’s ability to expand. You never want to limit your ability to grow in a market because of capital constraints. That’s why founders’ jobs are so challenging and difficult. It’s one thing to optimize capital structure when you’re the CFO of a big public company.

My view on capability deals is, those typically are the deals that are seeing legitimate Series A and Series B. You’re buying a business with a real scaled go-to-market. You’re doing tens of millions of revenue. The hit rates on all of these are very hard. It’s still large numbers that get filtered down at each level. I’ve certainly seen examples of amazing cases of founders that go very far bootstrapped.

Sramana Mitra: I’ll just add to what you said. It’s also the issue of what is the valuation at which somebody is willing to acquire. If you raise too much capital and price yourself out of the market, deals don’t happen. If you have arrived at $5 million in revenue with $20 million capital infusion, then the investors’ expectations for a deal to happen is going to be at a much higher price point than what an acquirer might be willing to pay. It depends also on what stage are you looking to exit.

Steven Mitzenmacher: That’s right. We just don’t think about control around the cap table from a financial perspective. There are also questions about how much of your vote gets diluted and how much governance control you have. That’s an important fact to consider. 

Sramana Mitra: Thank you for your time.

This segment is part 4 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Steven Mitzenmacher, Rackspace Technology
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