A few weeks ago, I tweeted that I expect an increasing amount of M&A activity involving energy transition software startups that fit the following profile:
- Raise $2–10M
- Exit for $10–75M
These exits are potentially great for founders and early investors.
For founders, the potential ownership at exit could land between 60–75%. For investors, the capital comes back quickly even if that means sacrificing on the multiple.
My hypothesis is based on two assumptions. First, massive, analog industries are shifting quickly. Second, a significant number of startups are in the midset of finding out if they are a feature or a product.
Simultaneous Digitization of 3 Sectors
OEM’s are shifting to the asset-as-a-service model. Oil and gas margins are shrinking while the workforce gets older. Utilities face an onslaught of connected and distributed assets.
Some incumbents are attempting to fill their needs by building solutions of their own, especially if they consider the problem core to their operations or value proposition to customers.
It’s a classic build v. buy business case, and I believe after attempting to build some of these features the sectors ultimately end up buying what they need to advance their own digitization faster.
The common scenario I see playing out in this case will fall on the larger end of the spectrum I defined above. They will raise $7–10 and receive an offer from a partner or customer that will be hard to refuse.
Features become products
Most startups begin as features that fill niche problems. This generally holds true regardless of sector or technology.
Over the next 18–36 months, we’ll start to see which startups can make the leap from feature to a product. Those who can’t make the leap will be targeted as small acquisitions by those who do.
These exits will initially fall on the small end of the spectrum above and may even include all-stock transactions that delay returns.
However, “rollups” like these are also the opportunity to go BIG in the energy transition. Full-featured platforms with state-of-the-art features will have the opportunity to replace incumbents like SAP, Oracle, etc…or create new ones around solar, EVs, and microgrids.
One last note, I’ve mentioned capital efficiency multiple times recently and it rings true here as well. An exit in the range of $20–50M is only good for all involved if it is a) quick and b) efficiently capitalized.
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