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28.02.19

Sovereign SmartViews: Should software companies grow organically or via acquisition?

by Oliver Bee

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Software companies, particularly those in enterprise software, have a particular attraction for investors. They often have scaleable business models, low churn rate due to deep customer integration, and high recurring revenues through licenses and subscriptions. This all results in a great platform for further investment to accelerate a software company’s growth. As demonstrated by Sovereign’s recent investment in Asset Control, a global provider of financial data management software to financial institutions, we are actively investing in enterprise software companies.

A typical Sovereign investment includes committed follow-on funding, which can be used to fuel both organic and acquisitive growth. So which avenue is best for software businesses?

Organic growth? Investment in organic growth initiatives can create value through top-line growth, profit margin improvement or increasing valuation multiples. For example:

  • product enhancement: by adding new features (e.g. analytics capabilities) or improving functionality (e.g. developing a more intuitive user-interface) to meet customer demands;
  • developing new offerings: by expanding into new customer segments and regions to increase share of wallet or productising (e.g. standardising certain products) existing offerings to reduce variable costs;
  • transitioning to a SaaS business: and provide a software-as-a-service offering both in terms of deployment model (cloud vs. on-premise) and the business model (subscription vs. perpetual); and
  • sales optimisation: by enhancing the sales and marketing function, developing new distribution channels and managing the partnership ecosystem.

When do acquisitions complement a company’s growth? Strategic software acquisitions can help a business achieve in 1 year what might take over 5 years organically. For example, when Sovereign invested in Cordium, a technology-enabled compliance services company, the team identified a need to develop a compliance workflow product. To reduce the risk and time associated with developing the product in-house, Sovereign supported the acquisition of EvenWheel, which had a market-leading product in the space. This enabled Cordium to successfully accelerate against its strategic initiative, while generating additional revenue and cost synergies.

Is your market and product strategy robust? Defining the market and product strategy ensures the best allocation of capital and resources, whether management are considering funding for organic growth or acquisitions. As Brian Traquair (ex-President of Capital Markets at SunGard, who led c.15 acquisitions during his tenure) notes, “Once the product strategy has been defined, companies must make commitments on both funding and timeframes, both internally and to clients.” Therefore, software companies should use funding to drive growth by investing in organic growth initiatives and use acquisitions to accelerate against these.

How can Sovereign help? We work in partnership with management teams to unlock both organic and acquisitive growth opportunities: helping appoint industry leading Chairs; leveraging our due diligence to assess growth opportunities; utilising our origination team to identify acquisition opportunities; or acting as a strategic sounding board for management. This is all underpinned by our committed follow-on funding. For more information on our approach to investing in software businesses contact me: oliverbee@sovereigncapital.co.uk

https://www.sovereigncapital.co.uk/your-journey

FURTHER INFORMATION

 

Julie Sieger, +44 (0)20 7340 8800 or email: juliesieger@sovereigncapital.co.uk