PE investors like to acquire companies in industries that are fragmented, growing, and not yet saturated with capital.
But how can you tell which investment stage ("inning") an industry is in? What defines the 1st inning (blue ocean) vs. the 9th inning (hyper-saturated)?
• # of consolidators. Are there any giant players yet? Is PE active? If so, how many exist?
• # of exits. If no exits yet, it's either a bad market or a new market, right?
• Multiple inflation. An early-stage verticals will see LMM multiples in the 4-6x range, where a late-stage aggregation arena will see double-digit multiples.
• Level of fragmentation. What is the relative market share of the biggest players? How many companies are in the space? Is everyone Mom & Pop?
• Level of tech sophistication. How developed is the ecosystem of tech/SaaS vendors. How standardized is the implementation of tech tools. How advanced are the integrations of tech tools.
• Playbook maturity. Is YouTube full of experts? Many podcasts? Is the playbook tried, tested, and proven? Can recruiters easily find talent who's "done it before"?
• Board members having non-competes already. In a new industry, where there hasn't been any exits, nobody is inhibited by non-competes yet. If you can't land the board members you want because they're all under non-competes, then it's not a 1st inning sitsj.
• Regulatory requirements and licenses. Increased barriers of entry. The industry is big and has attracted not only capital, but also regulatory oversight. Licenses are required. Red tape is increasing.
• Supply chain power. How developed are economies of scale. How hard is it for small new entrants to compete on COGS and gross margins.
• M&A. Are most deals in the space, even small ones, represented by sophisticated bankers & brokers? Are there always auctions? Or is it all proprietary and one-off offmarket?
