Middle-market SaaS companies face brutal probability distributions. Understanding this math is essential for portfolio construction.
The Probability Distribution
| Outcome | Probability | Description |
|---|---|---|
| Die | 60% | Run out of runway, churn accelerates, acqui-hire or zero |
| Drop to Floor | 20% | Slash prices, fire sales team, race to the bottom |
| Rise to Ceiling | 15% | Add services, go enterprise, build lock-in |
| Zombie | 5% | Break-even purgatory, no growth, no exit |
The Broken Risk/Reward
Investing in the middle means betting on the 15% that successfully migrate to Ceiling — while paying middle-market valuations.
You’re taking Floor-level risk (60%+ probability of total loss) for Ceiling-level prices. The risk/reward is structurally broken.
Why This Math Is Unforgiving
- The 60% that die often consume 2-3 additional funding rounds before failing
- The 20% that drop to Floor rarely return capital — they become small, unprofitable businesses
- The 15% that rise need exceptional execution AND favorable market conditions
- The 5% zombies trap capital for years with no liquidity path
Related: Learn to spot middle companies in Middle Red Flags. For existing investments, see Portfolio Triage Framework.
The structural reality: There is no optionality premium for the middle. There is only risk.
This is part of a comprehensive analysis. Read the full analysis on The Business Engineer.
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