SaaS Talk

Let’s start off with you telling us about Latham's Emerging Companies & Growth practice, and what you do.

We basically cover all the legal needs from soup to nuts for growth companies and their lenders, investors and other participants—borrowers and companies, issuers, venture capitalists and private equity and all of the lenders and investors that invest in those companies.

What does “growth” mean? It largely means any technology or life science company. I'm pretty evenly split myself. Technology, broadly speaking, includes SaaS companies, hard tech, deep tech, fintech and anything of that nature. Life sciences, broadly, is anything from biotech to biopharma and down the line. It's generally from the inception of the company with a greater focus as they reach mid-cycle to late-stage, and also public companies on both the tech and life sciences sides. I usually try to define it as up to $20 million dollars of EBITDA, just so that there is a sense of a boundary for what “growth” can mean, but basically up to where they become a cash profit machine.

Lawyers have a great vantage point for this question because we always see the counter-cyclical elements. If things are good, we have certain practices accelerate more and if things are bad, other practices accelerate more.

2021 was off-to-the-races; deals were getting done and it was all up-and-up. 2022 was the opposite: It started going down from the peaks of 2021 and we saw a lot more emergency-type legal stuff (major restructuring, clients running out of cash, etc.).

2023 was really a flatline. We had folks pushing the gas and jamming on the brakes at the same time. Most of the really bad stuff occurred in 2022, like major restructurings, major layoffs and balance sheet clean-ups, so those were out of the way. At the same time, though, inflation and rate structures were were still uncertain.  Any time companies and lenders would push ahead, they would pump the brakes because the market was off-and-on, so 2023 ended up being a mixed year and basically a flatline. But—flatlining can only occur for a set period of time. You either have to move up or down. There are some businesses that are able to stay in the same place, but definitely not the growth businesses that I represent, that Golub Growth invests in and lends to.

At the end of 2023, we started to see movement in more of the ‘up’ direction. I think the last quarter of the year largely followed the public markets on the tech side, with the “Magnificent 7”¹ leading the way, but other companies like Eli Lilly and other big publics really pushing the privates behind them. The rate environment seemed to stabilize significantly, notwithstanding Chairman Powell's recent comments, which caused a lot of market gyrations. Rates are going to be stable. That stabilization has allowed the market to at least see daylight and move forward, so the flatlining started moving up.

Ultimately, it was a very active year for legal services. As long as there is movement up and down, every push on the gas is a transaction that we're helping with, and every push on the brakes is a transaction that we're helping with. In the end it was definitely a pump-and-go type of year, which is why I think I've lost a lot of hair.

I have two views on 2024.

The first is that it could be similar to 2023, and that we could continue doing the pump-and-go. I think the Fed Chair’s statement that rates aren't coming down anytime soon will put some brakes on more transactional plays that folks would want to execute in a down-sloping rate environment.

Now, we're seeing the ‘go’ at the same time. We know that there is quite a bit of capital out there, and there’s a need to put capital to play. I am a cheery person—notwithstanding the fact that I'm a lawyer—and I think 2024 is going to be more up-and-up. I think we're going see some of what we saw at the end of 2023.

I think the market has two main inputs that are going to drive that for our clients, specifically on the growth side, but also generally. One of them is just the immense amount of capital out there. I think 2023 was one of the lowest dollar amounts put out of any given year in terms of new capital. And I think the rate environment is good. The fact that it's not likely moving anywhere, that it's going to be at stasis…at a minimum, having that stability will allow folks on the capital side, as well as on the company side, to make decisions. I think we're going to start seeing folks having to utilize the cash that's out there, even if it's more expensive.

One of the biggest legal developments that occurred in 2023 that will feed into more private equity M&A in 2024 is the increasing comfort with earnouts. We've seen major growth in the number of earnouts and deals structured with what I call “right-way risk.” I think private equity buyers are going to utilize that significantly.

I am hesitant to say the PE side of software M&A is going to skyrocket, because there still seems to be a divide on valuations. If companies can continue to access other capital, they're going to likely do that and will put some pressure on private equity.

In terms of the strategics, the venture-to-venture, the big public companies: I think you're going to see huge growth. There's a pile of cash for public companies to fund M&A, and there's also a pile of cash for acquisition financing at the right price. Importantly, earnouts and structuring incentive base for companies is easier on venture-to-venture. I expect more venture-to-venture strategic than private equity, but this market is not a vacuum. PE could be willing to step up their game on valuations to not lose opportunities.

I'm going to be like a broken record on my themes from earlier. It could be either a pump-and-go, it could be more of a flatline or it could be a little higher. I believe the IPO market largely follows the M&A market in many ways.

I will tell you this: At Latham right now, we've never seen a larger lineup of clients who have actually started taking IPO preparation steps. As the market opens up, you're going to have a lot more companies willing to take a lower valuation in order to open up the opportunity for their employees to access public markets. I think that pressure has grown significantly at a lot of these companies, and I'm expecting if there's a flatline in the market, the IPO market will still be a little bit higher. Are we talking 2021-type numbers? No, absolutely not.

Our capital markets team is very important to me, so I really want them to be hyper busy. I'm always cheery on the capital markets and I think that even if the IPO market doesn't spread, you're going to see a lot of the early-stage public companies already out there doing all sorts of interesting transactions in the capital markets. Our senior notes, our convert teams have never been busier. The fact that that market is opening up so significantly is usually a harbinger of the regular IPO market also opening up, and I think folks will get there.

First of all, I appreciate you calling me a leader!

Look, I am very direct. The one thing I want our companies to understand is that no one functions in a vacuum. You can't just say, “Oh, I just need XYZ advice for where I'm at right now.” You need to know everything that could hit you in the next stage, so you can execute on it and maximize your ability to access capital, your ability to get the right investors and your ability to make strategic decisions. My best advice—which may seem simple—is to make sure that you're not a deer in the headlights in terms of anything that might approach you. A lot of earlier-stage or middle-stage founders and even investors don't always understand the complexity of the capital markets and all the options in front of them.

You should have advisors. Make sure to talk to the right people early so that you understand any potential issues in case you need to pivot or pump the brakes. If the gas happens, you need to make sure that you know what to say to investors like Golub Growth so that you can get that capital and access it. Have all the inputs that they would need to move quickly on it. Ask questions like: if I'm doing a structure, is it going to get in the way of an IPO? If I'm LLC, is an up CIPO versus a different type of an IPO an option? What do I need to line up earlier?

The Latham platform is really great because we try to think one, two, three or even four phases ahead and lay out at least the basic things that you will need to do in those scenarios. We can deep dive into those things as needed. Some folks understand them and don't need them, and again, no one's wanting to waste time or money. But the constant things I see is, “Oh, I didn't think this was going to happen” or “Oh hey, I really need you guys to help on this.” And we’re obviously going to help—but this is something you should have thought about two or three months prior, like waiting for where your cash position is now, or waiting to position yourself to a lender, investor … These are the things that I would highly recommend for all SaaS companies in general, and specifically ones that are not yet over the capital delinquency hill. Make sure that you're ready to have those conversations and get educated on those options earlier rather than later. As long as your eyes are wide open, that's the only thing you can really ask for.

You’re super effective only if you know what you are going to be facing and understand it and are able to pivot for it. And then, after you get that knowledge, in my view the only thing that will make you even more effective is being decisive on which path you want to take. So get the information, make sure you’re not a deer in headlights, be thorough and get the advice you need.

What we see really get companies in trouble is not being decisive. Because as you move forward and the company gets more and more successful, you need to be able to make decisions faster, not slower. For SaaS companies in particular, it's understanding all the metrics and what they need to do, right? So aside from all the access to stuff is understanding the CACs, understanding what the contribution margins are, understanding which investors they can talk to, how to flip the profit margins, what their ARR is and how they can convert it. I rarely see companies not successful because of actual liquidity.

It's performance that really matters, and positioning yourself for the right performance with the right access to capital down the line is key. Usually by the time we're talking to companies about liquidity, they've kind of already missed the boat because they weren't prepared to access the capital in the right way.