In the grand mosaic of startup exits and financing, where the winds of change sweep across the landscapes of ambition and enterprise, the emergence of Leveraged Buyouts (LBOs) and, with a more nuanced flourish, Secondary Leveraged Buyouts (SBOs), signals a transformative era. This evolution, particularly within the vibrant French Tech ecosystem, is not merely a shift in financial strategies but a reflection of deeper market dynamics and the evolving aspirations of entrepreneurs and investors.

🧠 Quick Memo before reading

  • LBO (Leveraged Buyout)
  • An LBO is a financial strategy where a company is acquired using a significant amount of borrowed money, typically secured by the assets of the acquired company. The goal of an LBO is often to restructure the company, increase its value, and eventually sell it for a profit. Private equity firms commonly use LBOs to acquire companies.
  • SBO (Secondary Leveraged Buyout)
  • An SBO occurs when a private equity firm sells a company it previously acquired through an LBO to another private equity firm or investor. This secondary buyout often involves leveraging the company's assets to finance the transaction. SBOs are a common strategy for private equity firms to exit their investments and realize returns.

Let us embark on a literary exploration, enriched with figures and analysis, through the domains of this financial metamorphosis.

📈 Act I: The Ascension of Secondary LBOs

The Prologue of Perception

Once relegated to the shadows as symbols of distress, secondary buyouts have emerged into the limelight, redefined as strategic pivots or growth accelerants. The French Tech scene, a symbol of innovation and entrepreneurial spirit, has witnessed a notable transformation:

  • LBOs, since 2021, have grown to account for 10% of exits, up from a mere 5% in the years 2011-2015.

This seismic shift underscores a broader acceptance of LBOs as viable exit and growth strategies, heralding a new chapter in the narrative of startup evolution.

A Tale of Two Metrics

The marketplace, once intoxicated by the siren song of unchecked growth (Rule of 40), now soberly esteems profitability with newfound reverence. This paradigm shift is illustrated by the transition from revenue generation emphasis metrics a decade ago to a net income generation today, signaling a profound realignment of values towards sustainability and financial prudence.

⚔️ Act II: Entrepreneurs at the Crossroads

The Dilemma of the Modern Founder

Amid a stark contraction in global startup funding — dropping to the lowest point in five years (French startups raised only €6.8bn (41% YoY decline) across 632 funding rounds (17% YoY decline) — entrepreneurs stand at a pivotal juncture.

The LBO, particularly the SBO, emerges as a lighthouse in the tempest, offering founders a dual boon: a partial exit with the retention of control. This strategic maneuver allows for a rejuvenation of the capitalization table, enabling growth through strategic acquisitions.

The Quest for Sustainable Growth

The former era of "growth at any cost" now yields to a more judicious approach, with the market's appetite for EBITDA multiples overshadowing the once-prevalent ARR (Annual Recurring Revenue) metrics. This pivot from a growth-centric to a profitability-focused mindset necessitates a recalibration of expectations towards "profitable" multiples, with companies and venture capital backers aligning closer to intrinsic values rather than speculative potentials.

🔋 Act III: The New Norm of Secondary LBOs

The Evolution Towards Rationalization

As the narrative unfolds, we witness an ecosystem undergoing rationalization, with secondary LBOs standing as vanguards of this new dawn.

The investment landscape of 2023 is marked by a discerning philosophy, where a slight 5% of deals culminate in IPOs, a stark contrast to the 20% observed in the previous decade. This shift underscores a diminishing reliance on public markets in favor of strategic, LBO-driven transactions.

The LBO as the Modern-day IPO

The odyssey reaches its zenith with the realization that "LBO is the New IPO," a mantra encapsulating the transformed philosophy of startup exits and financing. This trend towards strategic, profitability-focused transactions signifies a maturation of the market, where sustainable growth and financial health are paramount. In this era, the secondary LBO not only emerges as an alternative but reigns as the preferred pathway, reflecting the market's selective yet dynamic nature.

Epilogue: A New Chapter for the French Tech Ecosystem

In this saga, set against the vibrant backdrop of the French Tech ecosystem, the narrative of the secondary LBO serves as a microcosm for the global startup journey. This evolution, from speculative ventures to enterprises of enduring value, marks a renaissance of the market.

As the realms of startups and private equity converge, the secondary LBO emerges not merely as an alternative but as the guiding light of the future, heralding an age where strategic foresight and financial prudence are celebrated.

Through this exploration, adorned with figures and insights, we witness not just the changing landscape of startup exits and financing but the dawn of a new epoch, rich with opportunity and growth, much like the innovations these startups endeavor to bring forth into the world.

Written by Simon Da Silva