🥅 Thank You, Buyout Funds: Embracing the New Wave of Startups

The might be smaller, but they will likely be mightier

In the ever-evolving landscape of software and technology, we're witnessing an exciting shift driven by private equity buyouts and the rapid advancements in AI. As these buyouts create gaps, new startups are emerging to fill them with innovative solutions. This post explores why I'm particularly excited about this wave of startups and how AI-native solutions are poised to disrupt the market.

The Backdrop: PE and AI

Private equity firms have been on a buying spree, acquiring large software companies and entire categories. While these buyouts like often lead to financial optimization, they can also stifle innovation. A prime example is Vista Equity Partners' acquisition of Pluralsight, which culminated in a $3.5 Billion write-off. Read more about Vista’s perspective here. Such outcomes reveal the limitations of financial engineering without a focus on true value creation.

Simultaneously, it has never been easier to build incredible software products thanks to advancements in AI and software development. This democratization of technology is paving the way for small, nimble teams to innovate and address specific industry needs with agility and precision. By building a product with AI at its core, one can provide unparalleled personalization, predictive analytics and provide users with true superpowers.

The Opportunity and An Example

The current environment presents a unique opportunity for scrappy entrepreneurs. With incumbents bogged down by financial strategies rather than innovation, there's a clear opening for new players to introduce fresh, AI-native solutions. This is especially true in industries where legacy systems are the norm and the main competition is 20-years old.

As an endurance sport and overall fitness junkie, the gym and fitness studio management sector serve as a particularly interesting example. The incumbent, Mindbody, was acquired by Vista in 2019 and has since offshored the majority of its customer facing operations and largely focuses its efforts on internationalization rather than innovation. As time goes on, the overall customer value goes down and dissatisfaction becomes common. This backdrop creates a significant opportunity for a new entrant to step in, promising to revolutionize operations and customer experiences in this industry with modern software, AI-powered workflows and a state-of-the-art billing system. A new system could not only manage but legitimately enhance the overall fitness experience for everyone involved.

Why This is Hard

Building these vertical SaaS platforms is not rocket science; it's the execution that counts. Many can build similar software and will make these market openings quite competitive. Success hinges on a team’s ability to deliver a superior product, continuously innovate and absolutely nail the sales pitch. The sale needs to be dead simple and onboarding needs to be seamless. These platforms are also perfect for niche influencer involvement to help accelerate distribution as a competitive advantage.

Success also hinges on recognizing where fundraising can help and where it can hurt the business. A bootstrapped business with $20M in ARR could be a huge success. A VC-backed business that has raised $100M with $20M in ARR is far less exciting and has artificial time pressure associated with it.

Conclusion

The wave of new startups emerging through the openings created by large software buyout funds is incredibly exciting. With the right focus on innovation and execution as well as a responsible approach to fundraising, entrepreneurs can and will be incredibly successful in a variety of markets from home services, to manufacturing, to fitness and many, many more.

Let's seize this moment and create something truly remarkable. Please reach out if you want to talk more about what you’re working on or what I am thinking about.