Key Takeaways

  • Felicis dedicates 10% to 20% of its operational time directly to engineering exits rather than leaving liquidity to passive market timing.
  • Tech corporate buyers almost never pay more than 1% to 2% of their total equity market capitalization for private acquisitions, setting a hard ceiling on M&A outcomes.
  • Senkut spent six months restructuring a struggling Texas portfolio company with only one interested buyer, securing 40 to 50 cents on the dollar rather than accepting a total loss.
  • IPO exits now require companies to reach $1 billion to $10 billion in revenue at high velocity, forcing venture firms to bucket outcomes early.
  • Felicis tests exit math against potential buyer balance sheets using The Newtonian Law of Strategic Acquisitions.

The Newtonian Law of Strategic Acquisitions

  • 1-2% Acquirer Market Cap Sizing: Almost all acquirers acquire companies at a purchase price representing roughly 1% to 2% of their own market capitalization.
  • Target Buyer Mapping: Visualize potential acquirers with multi-hundred-billion or trillion-dollar market caps to evaluate whether the expected exit valuation aligns realistically with the 1-2% buyer capacity.
  • Scenario Engineering: Map out exit paths into three distinct tiers: high-scale IPO candidate ($1B-$10B revenue), strategic acquisition (1-2% rule of buyer cap), or PE/secondary liquidity recapitalization.

“We have this rule of thumb that's almost like a Newtonian law of gravity,” (play from 49:27) Senkut says. “Almost all the acquirers, if you look at it, the acquisition price is always around 1 to 2% of their market cap.” (play from 49:31)

At Felicis, that reality dictates how the portfolio is triaged. “Engineering exits is a science, it requires focus and time,” (play from 50:55) Senkut explains. The firm allocates 10% to 20% of internal operational reviews to understanding, visualizing, and engineering exits across secondaries, strategic sales, and recapitalizations.

That discipline also applies to salvage operations. “One area that is less talked about is you also have to squeeze every cent on the dollar,” (play from 49:48) Senkut observes. “A company did not work out, I just spent 6 months on a company in Texas. Not only was the acquisition market bleak, there was literally one acquirer. We basically did everything we can, kept the company in business, had to do a lot of hard things, hard decisions. And at the end, we barely got 40, 50 cents on the dollar.” (play from 49:54) Squeezing partial recoveries out of broken positions preserves capital that compounders need later.

When This Works (and When It Doesn't)

The 1% to 2% rule works when evaluating potential strategic M&A exits for growth-stage tech companies to benchmark realistic acquisition purchase prices relative to prospective corporate buyers. If a growth round values a business at $2 billion, the buying universe is limited to firms holding at least a $100 billion to $200 billion market cap. If that list is two companies long, the valuation is structurally trapped.

The framework breaks down during defensive platform shifts or once-in-a-decade platform consolidations. When an incumbent faces an existential threat, balance sheet discipline evaporates. Facebook paid roughly 10% of its market cap for WhatsApp in 2014, and Google paid nearly double-digit percentages of its value for early assets like YouTube. Outliers exist when buyer survival is at stake, but banking on an outlier as an underwriting base case destroys fund returns.

Why It Matters

Public markets have raised the bar for initial public offerings. With institutional asset managers demanding $1 billion to $10 billion in top-line scale before offering liquidity, the middle tier of high-growth software is orphaned. Strategic M&A is the only viable exit for companies stuck between $50 million and $300 million in ARR.

Senkut's rule exposes the arithmetic trap created by late-stage venture rounds. When funds price series C and D rounds at high multiples, they assume strategic buyers exist who will write multi-billion dollar checks casually. In practice, public boards treat checks above 2% of equity value as major corporate balance sheet events requiring extensive shareholder scrutiny. If a portfolio company cannot realistically clear the 2% threshold of known corporate acquirers, its valuation must clear public equity market hurdles or face secondary discounts.