Software for pest controllers, water treatment centres and tractors might not sound sexy.
But it’s exactly the kind of company that a new generation of startup acquirers in Europe are looking for. These companies — known as software rollups — want to purchase dozens or even hundreds of software companies. And VCs now want to back them.
The rollup strategy isn’t new; one of the most successful examples is Canada’s Constellation Software, which was founded in 1995 and has a market cap of $60bn. But Europe is now seeing more pop up. According to a database of software rollups compiled by RollUpEurope, there are 61 software rollups in Europe, 19 of which have been founded in the past five years.
Four of those have VC investors. Earlier this month, UK company Shop Circle raised $120m in equity and debt from 645 Ventures and 3VC, among others, to buy and operate software for e-commerce sellers. In March, Threecolts, which operates in the US and Europe and has a London-based American CEO, said it had raised $90m in funding to buy and operate e-commerce software.
With companies struggling to grow organically amid the current macroeconomic climate, and North Americans bringing the rollup strategy to Europe, “we’ve seen the space explode to be completely honest,” says Nathan Placks, head of M&A and corporate development practice at Camino Search. This helps rollups build teams. “There is good dealflow out there.”
His company has helped place 40 M&A professionals in roles this year, beating “last year’s record quite a few months ago.”
Alex Prokofjev, who was CFO at Threecolts and has now founded the community RollUpEurope, says that another driver in software rollups being founded in Europe is greater availability of some forms of private debt, which smaller, independent rollups rely on to acquire companies.
“At the same time, a lot of those small SaaS businesses, particularly ones selling into the European market, have nowhere else to go. The VCs aren’t coming. So naturally the supply will increase as a lot more people want to consider a sale.”
What’s different from VC
Unlike VCs, which often dominate the software investing headlines, rollups aren’t looking for hypergrowth and massive scale; they want to back niche software in a specific vertical with extremely loyal customers. They want to hold on to these companies potentially forever.
These acquisition targets are also usually bootstrapped, profitable and have $1m-10m in annual recurring revenue with low churn. So, why do the founders want to sell to rollups?
The founder “is thinking, ‘Okay, I’ve been at it for five years, what’s next? What am I really going to do with this?’” says James Gasteen, cofounder and CEO of rollup Unaric. “Our messaging to founders is, ‘Come join us and be part of something bigger. We’ve got the scale to help you out.’”
In June, London-based Unaric raised $35m in debt and equity from London VC LocalGlobe and others to buy and operate independent software vendors making products on the Salesforce platform (there are 4,000 of these apps) and to make as many as 40 acquisitions in the next three years.
Gasteen that most of the founders of these kinds of businesses are “accidental entrepreneurs” who had a great product idea they have scaled to $500k+ in annual recurring revenue, but struggle with functions like customer success or marketing. And for Unaric, the more companies it has, the more it can upsell existing customers and acquire new ones more easily.
Investors say entrepreneurs who don’t have a succession plan can also see rollups as an attractive option. In most cases, founders stay on at the businesses.
Where else will VC and rollups meet?
With more VCs funding rollups in Europe and more VC-backed companies looking for an exit, some investors are wondering whether or not rollups will become acquirers of VC-backed companies.
So far, it seems the jury is still out. Rollup investors tell Sifted that VC-backed companies often have complicated cap tables that bootstrapped businesses don’t have to worry about and many are not profitable.
RollUpEurope’s Prokofjev says that he looked at a SaaS company that was 20% owned by VCs, with $8m in revenue, and had been valued by VCs at four times revenue at the last raise. The VC investors also had negotiated a 2x liquidation preference, which would mean they got double their initial investment before anyone else was paid out in the case of an exit.
Prokofjev says that the rollup would probably have been able to offer just half that valuation.
“The VC just said no, and the founder who would have been wiped out at that valuation said no as well.”
But Camino Search’s Placks says some larger VC firms might think about having their own rollup strategy if they have some balance sheet cash to spend and can secure a debt facility.
