We all know about the unicorns of the startup world -- fast-growing companies that appear to be on the road (or have already arrived at) valuations of $1 billion or more -- and we hear a lot about the unfortunate ones that either run out of money or fail for another reason. But what about the startups in the middle -- reasonably good companies that aren't going away anytime soon, but also aren't exactly setting the world on fire?
Now a new private equity firm called Think3 has been founded with $1 billion in backing with an aim of buying these up, specifically startups working the area of Software as a Service, so that their founders can go out and build new companies again, giving them either $500,000 (with no equity) or $1 million (with equity) in funding to do so. It will aim to spend between $5 million and $30 million on these startups -- although the price may vary.
"The sweet spot of the companies we target are in the $5-30 million in revenue range though we are happy to look at larger companies also," CEO and founder Andy Tryba said in an interview with TechCrunch -- sent by email as he was travelling back from the Saastr event in San Francisco (where he may have already started his scouting). "These companies can be making or losing money. We consider both. We typically pay one to two times revenue for the company."
Think3 -- based out of Austin and an offshoot of another enterprise buy-out firm called ESW Capital, which has made about 50 acquisitions to date -- is not your average PE firm, which typically targets older and bigger companies that are failing to grow fast and could do with some restructuring before being put out to market again.
Rather, its aim is the "modestly-growing company", which Think3 wants to buy out in order to take the founders out of them and put them back into startup land. The aim is to let founders make the transition in 100 days from the close of the sale.
"Think3 is the only PE fund that is targeted towards enabling entrepreneurs to take another shot at starting their next company," said Tryba. "Most PE firms require the founder and team to stay on with the acquired company. We go the other way, where we encourage them to go start their next company." He confirmed that the $1 billion has already been secured for the venture.
"Founders should think of 'time' as their portfolio — making the call earlier if their current company is growing fast enough for exit velocity. Too many founders hang on too long hoping for a growth miracle — killing their career," he said in a separate statement.
What exactly is "too long?" No exact age of target company is given, nor is there a specific age of founder mentioned, but one number that Think3 does have in mind is 15: this, it believes, is the average "lifespan" of a founder where she or he is most likely to go out and start businesses. After that, it's a question of math to maximise the chance of having a hit.
"If they launch a company and hang on for seven to eight years, for example, they have two shots to achieve their unicorn," Think3 believes. "If instead founders transition every three years, they have five shots. People undervalue their time, but it's the most valuable asset they have."
As for the startup, this is also where Think3 differs from other PE firms. "We continue to operate the companies, and run them forever," Tryba said. "We do not look to ‘flip’ the companies but instead plan for a longer term horizon on how to make the company successful."
You can see why the concept might sound compelling. Not every startup is a breakout success, but neither are they all failures (in fact, the old saying that 90 percent of startups fail is widely thought to be quite misleading).
Founders usually have a number of great ideas in them, so this is another way, short of shutting down, looking for a buyer, or finding another leader who will take wheel, that they can gracefully move on. If the company has some potential in it but might benefit from some restructuring, that's where the PE firm might stand a more interesting outcome rather than simply hiring a new leader and keeping the startup going as it was.
What Think3 doesn't address is whether sometimes the startups that are only modestly interesting are worth keeping around in the long run, and whether they may ever thrive in the same way when the founding team and founders depart. Those are, perhaps, questions no one has answers to in startup land -- and I'm sure that there have been some sales and closure decisions made with regret.
And, for the different ways that investors look to drum up deal flow these days -- and the fact that we appear to be in the middle of a startup glut where we keep seeing new records set both for amounts of funding and number of funding rounds -- it will be worth watching to see if Think3's approach works.
Tryba -- whose own background includes time as the head of strategy at Intel and the CEO of a remote talent management group called Crossover, among other things -- said that he's also working with VCs (unnamed) to "review their portfolios and determine which companies fit the criteria" -- which is based around a "great founding team on a modestly growing company that want to go start a new company."