Success Comes at a Price - Cost of Capital

At Sierra Pacific Partners, we're often contacted by founders who are considering an exit and have been successful in their current venture, including in attracting capital.

They're successfully growing, but that growth has decelerated in the current environment.

Back when growth was more exponential, they successfully raised in VC-led rounds, took on SAFE investors, or used venture debt backed by strong ARR.

The current lower-growth environment, combined with the capital stack, can halt an M&A process in its tracks if founders aren't careful in navigating a transaction:

Prior rounds, particularly large ones, put tons of pressure on growth and a large exit in excess of the round. That's tough in the current environment, but the good news is that this is less of a factor for companies that have raised under $20M or so.

Similarly, SAFE investors are also looking for a substantial return. Again, though, return expectations tend to be tempered for smaller companies.

Finally, venture debt will either be paid at closing as part of the purchase price waterfall or priced into the deal, lowering the proceeds available to equity. We also see this as a less prominent factor for smaller exits, with those targets being less likely to have taken on any or significant amounts of venture debt.

BOTTOM LINE: Free money isn't always free, and a seller's capital structure and the goals of those who commit that capital can heavily influence its strategic alternatives.