An organisation wants to acquire my SaaS and open source it
My question boils down to: How do you value a pre-revenue SaaS software?
My Co-founder and I met on IndieHackers and we've been working on this project properly since November 2019. Corona has changed our trajectory but we've identified a really good niche as a result of it.
We provide Audience engagement and a community platform to Social enterprise organisations that run community focused virtual and hybrid events.
We're still pivoting to reflect this focus properly and have an event on 1st July to properly launch:
We've had a lot of interest from the public sector. So much so , this week we've been hit with an offer to buy out our technology. We've been advised to come back with an offer. It's a huge curveball and we have 0 ideas on how to value the company, software and our time.
The potential buyers hope to opensource it to their community partners and other social enterprise organisations.
Has anyone gone through something similar and have any ideas on value metrics and "estimates"? What would you be happy with, if you were to sell this startup or yours?
Https://newny.io - our landing page is a little dated atm and doesnt reflect the new focus properly. I'm relaunching one in about a week. But it'll give you a good idea.
My one piece of advice (after handling an acquisition offer the wrong way)... DON’T SUGGEST THE FIRST NUMBER. Have them propose the number first and go from there.
If you’re looking to justify a number for yourself, I would say 2-3x of what you and your CoFounder would have made if you were getting paid at a full-time salary.
Also vet the buyer. How did they secure the funds to buy your product? Why are they buying your product? Are you going to stay onboard after the acquisition?
What do you mean with "Vet the buyer"?
When I say “Vet the buyer”, I mean truly understand why they want to buy your product and does the buyer actually have the funds to do so versus someone just looking to understand more about your company and just try to build it on their own. Typically people want to buy technology AND A USERBASE built in so I found this post strange when someone wants to buy tech before it’s even launched. This rarely happens and when it does happen it’s usually a VC/tech giant purchase trying to hit escape velocity in the specific space. I hope this is helpful!
Thanks, it definitely is :)
Thank you for this!
This is sound advice.
Read: https://www.priceintelligently.com/blog/all
Thank you!
Here are a few ways I've seen it done for venture backed startups:
$1M USD per developer head (acquihire)
some comp in the marketplace (a public company perhaps). So the public company trades at 10x revenue, they offer you 5x revenue. (everyone wants a deal).
If you don't have revenue, try and build a model that backs into the value the company will get from doing this, ideally using numbers they provide you or that you find.
Awesome, thank you for the insights.
For context they want our startup to be part of a £2M initiative they're launching this summer. Our startup fits into one of their major needs (public engagement).
There is direct value we can add here with our internal expertise on the subject and previous orgs we've worked with.
So the £2M is their "total budget" to spend on you guys + everything else they want to launch for this initiative?
That's correct, we're part of that "budget" for us and all their other initiative that they plan to fund.
Broadly:
Specifically:
Example:
$300k cash. + 40 hours of consulting (included). If they don't like the price, try adding more consulting hours included instead of lowering the asking price.
You've got it spot on here!
This is exactly how we were planning to apporach it. We've been cornered to set the price and using these anchoring techniques and % of their budget etc is our only option.
Tbh we can live without the deal, either way a great indicator of our potential. We just need to get this across to them on paper.
Thank you for the explanation.
This comment was deleted a year ago.
Delicate situation....
I didn't get what your solution is, and I know I don't answer to this question, but many people (corporation, startup,...) are working to develop solutions around "events".
Corona opens many doors, so many people are working on solution around online meeting, a bit like yours.
So my only little advice, and let's say I would be in your case, is to go fast with the deal.
If your solution has a patent, and the people who will buy the solution will offer that to large enterprise, could be a juicy deal...
Because no doubt that day after day, some smart guys like you will make similar tools.
And you are also in competition with large companies that are actually in the business of events.
With the way the market has changed. Differentiation has become somewhat difficult. We didnt start off in the market but based on user feedback we found ourselves here.
The competitive environment is also another reason why we are considering this exit. Or else we wouldn't.
As you said it's very delecate.
Thank you for your advise Tim :D
Get them to suggest a price. If it seems high then reject it and suggest a higher one.
Thank you!
This is really fascinating. I wondered, as did others, if such a proposition was really sincere.
I think the motivation to buy, would be that they need a solution, and want to avoid vendor lock in and annual fees. My guess is that their first stop was GitHub and nothing was suitable. Yours is either close to what they want, or barebones enough that they could add in the features that they want.
Following from that , I think that price is the key consideration. And they are looking for "cheaper and faster than building it themselves." If you come out with a price thats off, you might lose them because that is their primary buying criteria. If your price is right they might just add you to their list of options, and take it off to a lot of meetings and it slowly gets forgotten.
My advice is to first decide if you want to sell at all. There are lots of people selling magic beans on the road to the market. This won't be the last. Though I understand it is exciting.
Personally I would engage them as often as possible to build a familiar relationship and so that as their deadlines approach you are the first and easiest solution that comes to mind. But you do not sell the code. You might OEM it for them or give them a 10 year deal or something.
I would engage them in zoom calls, by mocking up flowcharts, adding features for them etc
This is a perfect analysis of the situation. The organisation is a public one and has some goals it wants to hit with its acquisition. Upon further inspection, It doesn't look like a feasible option at the moment. As you said they are looking for cheap exclusive rights to the software. Even if we built them a similar application to sell to them (or white label), we'd be building out a competitive product because they want to open source it. There doesn't really seem to be a good option for us outside of selling at a decent profit but at their expense (which isn't likely at all).
I think “2-3x of what you and your CoFounder would have made if you were getting paid at a full-time salary” might be a good heuristic for figuring out what it’s worth to you, but it’s an incomplete way of thinking about a valuation.
Best way to find a valuation is to try to empathize and figure out what it’s worth to the acquiring party.
A deal happens when what it’s worth to them is >= what it’s worth to you. If that condition is not met than there’s no deal.
Ultimately you should aim for: Max(what its worth to them, what its worth to you), and they will aim for Min(what its worth to them, what its worth to you).
If you take one thing away from this, let it be: the more clearly you understand how each party values the thing, the better off you’ll be! Spend 90% of your time figuring this out. It will pay off, I promise.
Doing the math is way easier when there is actual revenue of course. Here are two attempts at figuring out the first one (without revenue), but you should use whatever clues you have, and come up with whatever is logical in your case:
(A) Stringing together a set of demand-side assertions:
Market size = 10000 potential customers, assuming market penetration of y% this product’s run rate = z. At a n year multiple, it’s valued at v.
(B) The acquiring party has an adjacent customer base of 10000... assuming they reach y% penetration, how much are they making on this? Then multiply by a multiple to generate a valuation.
If this doesn’t help and you still have no clue what it’s worth to them, I don’t see a problem with letting them give you a number first to get some idea... just remember that if they are smart, they will be doing the same equations. Don’t let their number become an anchor in your mind! Stick to your guns and make your counter offer even though its far higher than theirs.
And of course if you offer first, multiply whatever initial number you land on by 110+% and let them negotiate you down to the price you actually want.
Thank you for this detailed analysis. It really gave us the ammunition we needed to structure a valid and reasonable offer. We'll see how it goes!