Private equity buyouts have effectively become a third major exit route for software companies as IPOs and M&A slow, according to venture capitalist David Sacks.
“Historically we only had two good exits for software businesses,” Sacks said on the “All-In Podcast” released on April 24. “One was IPO, the other was M&A. And then these big private equity shops came along and gave us a third potential exit.”
That third path, selling to private equity firms using heavy debt, is gaining traction as traditional exits cool and AI reshapes SaaS economics, said Sacks.
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Public Software Rout Sets The Backdrop
Sacks made the comments during a sharp downturn in public software stocks.
Recent market performance highlights the pressure, with ServiceNow (NASDAQ:NOW) down 54%, Snowflake (NASDAQ:SNOW) down 43%, Adobe (NASDAQ:ADBE) down 33% and Figma (NASDAQ:FIG) down 67% over the past six months.
The podcast discussion was partly driven by concerns around Medallia, a Thoma Bravo-backed company reportedly struggling, with sales teams missing targets.
Sacks pointed to a deeper shift as enterprises replace vertical software-as-a service tools with internally built AI solutions. “Agents have become so good and so fast and so cheap that many enterprises can simply spin up an alternative to a vertical SaaS solution,” he said. “That’s crushing the sales team’s ability to sell in.”
This is weakening the predictable recurring revenue that has long been central to SaaS business models.
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Why Debt-Fueled Buyouts Are Under Pressure
Private equity deals typically rely on stable cash flows and are often structured with roughly one-third equity and two-thirds debt. “It was believed for a long time that software did have those predictable cash flows, at least for the mature businesses,” Sacks said on the podcast.
That assumption is now being tested. Declines in net revenue retention, in some cases from over 120% to 80%, are challenging the ability of leveraged companies to service debt, he said.
Sacks sees both opportunity and risk.
Public valuations have dropped sharply. The median enterprise value-to-revenue multiple now stands at 3.4x as of March, down significantly from peaks above 18x in 2021, according to Adventis Advisors. “You can buy a dollar for 50 cents,” Sacks said.
But rapid AI disruption could challenge the traditional private equity playbook, which often depends on executing operational improvements over a multiyear holding period.
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A Lifeline For Founders With New Realities
For founders and venture investors, private equity can offer a fallback as IPO and M&A windows remain constrained, Sacks said.
Such deals, however, are likely to involve tighter assumptions, more hands-on operations and less reliance on financial engineering, he said.
From SaaS Slowdown To Broader Growth
Sacks framed the SaaS struggles as part of a broader economic transition on the “All-In Podcast,” citing Federal Reserve Chair nominee Kevin Warsh’s comments about AI’s deflationary impact during his confirmation hearing on April 21.
Warsh described AI as a major driver of productivity gains that could expand the economy’s potential output and ease inflation through real efficiency improvements. Sacks agreed, arguing the deflation reflects genuine efficiency rather than economic weakness.
While AI is …
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