The PE buyout opportunity amid tech’s reckoning

Raphaëlle d'Ornano
6 min readJun 4, 2024


Jason Goodman

The tech industry continues to go through a difficult reset following the investing frenzy that drove unsustainable valuations. As I noted previously, more than 75% of high-growth companies are facing an existential funding crisis that will either end in collapse or M&A at a severely depressed value.

Many Private Equity investors have reacted by pulling back their growth-stage investment activity. But amid this reckoning, a critical opportunity is emerging that PE managers should recognize: venture-backed buyouts or “Venture buyouts”, i.e. buyouts of companies that were previously venture-capital backed

D’Ornano + Co. had the privilege of working on one such deal, serving as strategic advisor to PE firm Bridgepoint in its $650 million acquisition of LumApps, a cloud platform improving employee engagement and productivity. LumApps’ previous venture investors sold their shares to Bridgepoint, which assumes full control and will play a pivotal role in defining and financing future growth strategies.

This deal points to a larger trend. LBO deals still represent 54,7% of all PE deals in the US in Q1 per Pitchbook data, while software is surprisingly experimenting a downward shift in overall PE deal value and count (12,2% in Q1 vs. 13,3% for the 10 year average). Venture buyouts could help reverse the trend, as software should take the lion’s share of these buyouts. For savvy PE investors, there is a kind of perfect storm. Many high-growth companies — +40% annual growth — face falling valuations, no access to growth equity, and no appealing options for exits. To fuel their next stage of growth, they need a partner with sufficient capital.

PE is one of the few asset classes with the resources to step in. The good news is that despite the financial squeeze being felt by many of these high-growth companies, some of them have built innovative products and platforms that remain solid foundations for successful businesses. And because these are relatively younger companies, their tech stack is likely SaaS-based and so won’t require costly infrastructure overhauls to unlock growth.

The challenge for PE is to correctly evaluate potential venture-based buyout targets. This is essential for setting the right valuation and developing the playbook for leading the company to achieve a rate of growth above 20% and profitability. PE managers must have a granular view into the factors that drive a company’s growth and how much leverage they will have to improve their metrics.

Let’s look at 6 key criteria that command the success of a Venture Buyout:

Gross Revenue Retention

Achieving sustainable growth and profitability starts with GRR. This is the most fundamental metric to establish whether a company can grow efficiently. GRR reflects an amalgam of customer satisfaction, competitive positioning, and relative market share. High GRR means less dependency on new bookings and incremental customers to grow, and more predictable revenue GRR signals the stickiness of the product because customers using it are satisfied. Gross retention indicates what % of revenue the company has maintained over a given period. It nets out the revenue from customers who churned or downgraded the service but does not take into account expansion or upsell.

A strong buyout candidate should have GRR above 80%, while best-in-class enterprise companies demonstrate a 90% + rate. To be relevant GRR analysis should be performed at the right level of granularity, for example at product and customer segment levels/

When Klaviyo went public in 2023, it reported a GRR of 88%. That’s outstanding for a company that targets SMBs. A key element of GRR is also the rate of renewal. ServiceNow has a renewal rate of 98%, which signals elite performance.

Net Revenue Retention

Net retention, in contrast to GRR, takes into account expansion and upsells.

NRR measures the ability to expand within your customer base and should be above 110%. In our analysis last year of the most successful and efficient SaaS companies valued at 10X, NRR was 120% among this cohort. This is a critical element for growing ARR, with existing customers accounting for 63% of new ARR at top-performing companies.

The land-and-expand strategy should include the potential for upsells, cross-sells, and price increases. DataDog has set the pace here, typically posting NRR above 130%. Klaviyo also reported NRR of 119% last year, which included the ability to implement a price increase.

Quality Of Customer Base

This is a critical layer below NRR and GRR. The ability to retain and expand will be undercut if customers are likely to fail or have little potential for their own growth.

Beyond customer base quality, customer size is important. Good buyout targets will have a customer base indicating the ability to expand significantly notably through upsell in number of users, especially by going into other business units within the larger enterprise. An easy way of approaching that is by looking at the number of customers generating ARR above $100,000 and above $1m, suggesting there is leeway for maximizing their growth opportunity with an existing customer. If that customer has been sticky, that points to a positive relationship and a strong chance for internal recommendations to other departments.

ServiceNow, for example, reported that the number of customers with an Average Contract Value of more than $1 million increased to 1,933 in Q1 2024, up from 1,687 customers in Q1 2023, respectively. This indicates a solid business with quality customers.

Gross Margin

When acquiring a venture-backed business, Gross Margin is a critical indicator and the starting point for the whole margin structure. Gross Margin should be at least 80%, including license and professional services revenues, and more in the 90% + zone when considering only license. In the case of AI driven businesses, cloud costs imply a lower margin closer to the 70% — 80% zone.

Companies in our 10x analysis had median Gross Margins of 76%. This gives them sufficient headroom for critical costs such as S&M, R&D, and G&A (more on these below). These should be important levers for growth. But if Gross Margin is too low, say 50%, then hitting a 30% EBIDTA target leaves only 20% for those other elements. It simply won’t leave enough room for a PE owner to maneuver and achieve the overall growth targets and any buyout consideration can stop right here.

OpEx Structure

Coming back to S&M, R&D, and G&A, a strong venture-based buyout candidate will have an efficient cost structure. For example, 80% of the companies in our 10x report were able to reduce their S&M spending as a percentage of revenue over the previous 18, generating average improved margins of 7 pp.

The best way to measure this is through ARR per FT employee. The median implied ARR per employee for our best SaaS companies was $350,000. The companies in our 10x studied performed well above the Iconiq index of $255,000, demonstrating remarkable operating efficiency.

GenAI Impact

AI businesses will be challenging for PE. GenAI will create a new wave of disruptive companies while also increasing the risk for many existing tech leaders to be disrupted.

Any analysis of a buyout target should include its vulnerability to GenAI as well as its potential to get productivity gains from GenAI. SaaS businesses have been considered among the safer bets for PE thanks to their recurring revenue, but GenAI is changing that as it is still unknown where the value will accrue between native GenAI companies vs. existing SaaS companies implementing GenAI. Certainly, these SaaS incumbents will have advantages such as data and workflows if they can correctly deploy and increase revenue through new GenAI features. Yet many could be threatened by GenAI-native rivals provided they develop strong economic models.

At the very least, these SaaS players must be able to deploy GenAI in a manner that drives margin gains through greater automation and productivity.

Beyond that, there needs to be some ability to create new revenue.

The ability to get that operating leverage from GenAI is part of our broader analysis that the Rule of 40 will become the Rule of 55 (read here).


PE is in a unique position to support some of the most innovative companies to emerge in recent years and deliver strong returns. Succeeding requires adopting an analytic approach that is specifically designed for high-growth companies switching to a more mature mode — though with growth rates still north of 15% — and can deliver the right insights.



Raphaëlle d'Ornano

Managing Partner + Founder D’Ornano + Co. A pioneer in Hybrid Growth Diligence. Paris - NY. Young Leader French American Foundation 2022. Marathon runner.