PE Firms Have Paid Richly For Software Startups. When Will They Resume Spending?

IPOs generate a lot of buzz. Acquisitions by private equity firms, not so much.

After all, most founders don’t start out with the vision of selling their startup to a leveraged institutional buyer looking to profitably offload it again in a few years. It arguably lacks the narrative appeal of, say, a sale to a tech giant or a smash public debut.

Nonetheless, for software companies in particular, acquisitions by private equity firms are statistically one of the more common kinds of exits. Over the past five years, the most-active PE buyers have collectively spent over $36 billion to buy dozens of private companies in the space, Crunchbase figures show.

As illustrated in the chart below, M&A deals for private companies peaked in 2020 and 2021, and slowed considerably in recent quarters.

A similar trend is apparent when we look at PE purchases of both public and private software companies:

Active buyers

We can point to a few factors over the past couple years that likely contributed to the slowdown in PE deals. For one, global software investment and M&A is down overall. Valuations have also been in flux, with high-flying startups readjusting following public market pullbacks.

Additionally, in hindsight, PE firms, like most acquirers, probably overpaid for many boom-era deals. That should leave them more wary of big-ticket purchases going forward. Higher interest rates and a chilly IPO climate serve as further hindrances.

Still, we shouldn’t let a few sluggish quarters distract us from the bigger picture. This is that, consistently, a handful of private equity firms account for a large share of the biggest software exits.

In particular, the eight firms listed below stand out.

Biggest startup deals

Many of the pricier deals involve venture-backed companies. Over the past four years, the largest include:

CRM software provider Pipedrive sold a majority stake to Vista Equity Partners in 2020 in a deal that reportedly valued the company at $1.5 billion. Previously, New York-headquartered Pipedrive had raised more than $90 million in known venture funding.
Software and tech-focused private equity firm Thoma Bravo reportedly paid $2.85 billion in 2020 to purchase a majority interest in Flexera, an Illinois-based provider of IT management software. The firm previously owned a majority stake in Flexera before selling several years earlier.
PE investor Hellman & Friedman acquired a majority stake in Atlanta-based application security provider Checkmarx in 2020 at a $1.15 billion valuation.
Vista Equity Partners acquired a majority stake in customer experience software provider Gainsight in 2020 in a deal that valued the company at $1.1 billion. Previously, San Francisco-based Gainsight had raised over $150 million in venture funding.

Notably, most of the larger deals happened at least a couple years ago. That’s not surprising, as PE deal volumes and prices tend to rise when exit opportunities are bountiful and financing terms are comparatively cheap. Lately, of course, those conditions have not applied.