Rollup Fundraising 101. How to raise from VCs?

Welcome to RollUpEurope’s three-part series on fundraising for software rollups. In this edition, we will uncover insights from half a dozen founders and operators who have tried raising from VCs (to varying degrees of success). The second article will profile major PE backers of rollup platforms. The third article will explore debt alternatives available for rollups. 

Before we begin, let’s set the record straight: this isn’t about bashing VCs. Objectively, VCs and software rollups aren’t natural allies. VCs prioritise quality and scalability, while rollups thrive on discovering undervalued gems. However, VCs provide crucial capital and networks that can’t be overlooked. So, let’s explore the common diligence topics, how to handle them, and maximise the potential of this investor demographic. Ready? Let’s go!

The VC checklist

The macro

Start with your thesis: industry, region, and ideal customer profile (ICP). If an investor expresses bearishness on any of these aspects, respectfully move on. Don’t try to change their minds; it’s likely not their call. 

If you clear this hurdle, be prepared to discuss your integration philosophy. Two models have proven effective: limited product/tech integration or a thematic M&A strategy leading to a single “hero” product (leading to the core vs. non-core portfolio dilemma down the line). If you lack a solid answer, strike the investor off your list. Pitching a unified product suite like Amazon Web Services? Be ready for scrutiny on NRRs and cross-sell ratios. 

If you have the stats, congratulations! You’re done with the macro and can focus on the micro.

The micro

From here on, success hinges on how swiftly investors shift from software-specific metrics (LTV/CAC, NRR, % cross-sell) to industry-agnostic metrics like organic growth, profitability, and effectiveness of the M&A machine. Of course, SaaS benchmarking is crucial for target selection, for example, Bessemer’s State of Cloud, ChartMogul’s excellent cheat sheets or A16Z’s Guide to Growth Metrics. However, software rollups are value investors by nature. We acquire businesses that may lack top-tier user retention or scalable go-to-market strategies. Many of these businesses are also relatively old in “cat software years.”

Consider this: if you were paying high multiples for young businesses with stellar NRRs, you would be a VC – competing directly with the people you’re pitching to! 

Individual asset quality debates aren’t the path to success. Instead, focus on platform value-add: M&A origination velocity, return on invested capital (ROIC), a lean and motivated HQ team, and organic growth pre- and post-acquisition. Strangely, VCs who routinely back multi-year product builds and market share battles show little patience for unifying back ends or billing systems. Show them the ROI attached to every item on your product roadmap. Rollups excel at capital allocation – prove it!

What’s your exit strategy?

Controversially, I would not obsess over this. For sure, have your comps ready: hopefully you will have compiled them as part of the benchmarking analysis. Gone are the days when you needed a friendly banker with Factset access to maintain a database. With Google Sheets you can pull comps from just about anywhere, (almost) for free, for example, from MarketScreener. 

The bigger picture is this. With excellent unit economics and strong cash flow conversion, software rollups are emerging as a distinct asset class. Don’t fret about strategic buyers. If you consistently deliver, people will come knocking on your door (Like who? We’ll profile them in the next article).

Which VCs have actually backed emerging software consolidators?

Below is a non-exhaustive list of rollups established after 2021. Between them they have raised several hundred million dollars in seed and Series A, from a hodgepodge of investors – mainly angels, family offices and VCs.

SmartBear, a Boston-based roll-up focused on developer solutions for the Atlassian ecosystem, is perhaps the most “decorated” platform ever. Founded by Jason Cohen in 2003, it had first teamed up with Insight, in 2007. Francisco Partners acquired a majority stake in 2017. Finally, Vista acquired a stake in 2020.

Summary

• Understand that all investors have paradigms. VCs in particular heavily rely on data-driven analysis, emphasising organic KPIs such as LTV/CAC, NRR, and logo churn – because that’s what they know!

• Don’t waste time with funds that don’t appreciate your industry, country, or customer type. VCs and software rollups have differing focuses. VCs prioritise quality and scalability, while rollups seek undervalued assets. Pivot the discussion towards the platform value-add

• Be aware of comps / valuations in your sector but don’t obsess over exit strategy, especially if you’re just starting out

• Contrary to popular belief, prominent VCs do support software rollups, as evidenced by the SmartBear case study. Our analysis shows that they continue to invest in emerging platforms. These platforms may not be widely recognized household names, so conducting thorough research is essential

• Lastly, it’s important to remember that one person’s bad trade can be another’s restructuring opportunity. Stay connected with the VCs who have invested in your industry. Divestments and fire sales are becoming more common, and by maintaining strong relationships with VCs, you may be able to seize these opportunities.

By understanding investor paradigms, focusing on the value-add, and staying connected with relevant VCs, you can navigate the world of VC funding with greater confidence and increase your chances of success.

Happy fundraising!