RollUpEurope
Posts
Ready to launch a software rollup? Read these 4 insights from other founders

Ready to launch a software rollup? Read these 4 insights from other founders

Alex Prokofjev
July 21, 2023

At RollUpEurope, we maintain a database of software and tech-enabled rollups. As of the date of writing, we have identified approximately 100 names that are actively acquiring. Out of these, about one-fifth are independent, meaning they are neither PE-backed nor part of a conglomerate such as Constellation Software. After speaking with several of these independent entities, we have noticed emerging patterns. Since many of our readers are considering starting their own rollups, we believe these four insights may prove useful.

Insight #1: PE framework > VC framework

There is nothing inherently wrong with the VC community, but statistically speaking, you are more likely to gain traction with PE (or PE “alumni”) and family offices when it comes to fundraising.

So why not adopt the structuring framework favored by PEs and search funds? Incorporate your rollup as a company with two or more share classes: preferred and ordinary. As a founder, you should have exposure to both to obtain outright ownership. Founders receive carry equivalent to 20-30% of total equity provided preferred return thresholds are met.

By establishing clear economics from the beginning, friction over valuation can be avoided.

No bargains on your rollup equity Part 1

No bargains on your rollup equity Part 2

Insight #2: Cultivate connections

Carefully consider who you would like to have on your board, investment committee, and advisory panel. Seek out investment industry veterans and experienced operators who can assist with fundraising, deal sourcing, and operational excellence.

Surround yourself with individuals who can enhance your rollup’s credibility, particularly crucial for first-time founders or investors. In terms of cash or dilution, these appointments may not cost you much, but they can make a tremendous difference.

Insight #3: Manage your leverage

Borrowing 4X to acquire an asset for 4X sounds like a no-brainer, right?

Well, debt can be likened to an Instagram filter that momentarily makes even subpar investment decisions appear picture-perfect. However, costly debt and/or multiple tiers of debt can send a negative signal to equity investors, which may complicate your future efforts to secure additional debt.

There is no definitive capital structure that is right or wrong, but it is advisable to extensively stress test your chosen structure. Ask yourself: what is your refinancing plan? Do you genuinely require a PIK feature?

Insight #4: Avoid declining businesses

Rollups are inherently value investors. Nevertheless, there is a substantial difference between a flat or declining business with a 95% gross retention rate (e.g., VMS) and one with a 85% retention rate (e.g., PLG). This is precisely why PE firms have such a fondness for VMS and enterprise software.

There are SEO playbooks available for upgrading PLG businesses. However, turning around an SME-focused business besieged by cheaper copycats, with departing affiliates, is exceedingly challenging. It is not an impossible endeavor, but it diverts resources from other initiatives that potentially offer higher returns on investment.