Intersection Between Private Equity and Tech Companies

Over the past five years, I have transitioned from working in finance and strategy at large companies to running an operations team at an early stage startup. I made this decision while having an underlying interest in private equity (specifically search funds). The idea of being able to take over a company, initiate changes and grow a business over time is extremely exciting. The rationale for my choices is that there are a number of mature technology companies that need to reassess its core business model and assumptions. The best way to initiate this change (especially in the mid-market space) is to apply the private equity model. My belief is that operators looking to take over mid-market technology companies need to use tactics that are commonly seen within startups. 

Maturation of Tech Companies 

A number of transformative technologies (think artificial intelligence, ubiquitous communication, ecommerce) have created widespread societal changes. This has accelerated the maturity of technology companies. 

Signs of an aging technology company include: 

Frequency of product shipments: Companies need to get into the habit of shipping new features on a more frequent basis (ex: Drift launches a new feature/product every single month).

Reliance on high human effort channels: The most effective companies have streamlined their sales and support teams to rely on user communities or offshore teams. For example, Webflow's ‘university’ and sense of community makes it easier to launch a website on its platform relative to incumbents like Wordpress

Technical debt:  This can prohibit a company from doing what's best for the customer and being stuck in its ways. Patrick Campbell and Hiten Shah present an excellent case study of this with Evernote. While Evernote isn't exactly a Silicon Valley dinosaur (founded in 2004), the company has ceded ground to disruptive up-and-comers like Notion. 

Tech companies (regardless of their prior success) need to constantly rethink core assumptions and value propositions. 

Large public companies naturally go through this process and often have the resources to acquire new capabilities by building a new business unit in-house or acquiring a startup with a complementary offering. 

A great example of a large company that used both strategies is Microsoft. Prior to Satya Nadella, Microsoft was showing clear signs of a company that was starting to lag behind its competition (e.g. Google and the growth of Chrome, Gmail and Google Docs). However under its new leadership, Microsoft turned around its stagnant trajectory by building its own cloud powerhouse (Azure) and acquiring valuable communities (LinkedIn and Github). His ability to understand where the market was headed and make significant bets ($33.7B for LinkedIn and Github alone) was a dramatic shift away from over-optimizing on its existing product suite (e.g. launching the next Windows OS). 

Opportunity for Private Equity Firms

Smaller, aging technology companies don’t have the luxury of spending billions of dollars to build or acquire a new business. This is particularly difficult for founders/owners who would prefer to transition away from their business. 

This creates an opportunity for funds/individuals to buy and revamp aging technology businesses with proven products and existing customer base. Two particular companies that have done this extremely well are Constellation Software and Vista Equity Partners (check out my feature on Vista Equity Partners here). Both firms have applied the ‘private equity’ approach of purchasing fundamentally-sound technology companies using debt and making operational changes to improve the company’s trajectory.   

Changing Your Mindset

Search funders and other mid-market private equity funds, who are looking to revamp a technology company, need to have a slightly different game plan. It is incredibly important to: 

Instill a growth mindset within your team

It is no longer efficient to rely on a team of highly experienced individual contributors. It is important to have a growth mindset embedded into the culture of the organization. This involves pushing your team to continuously find better ways to do their jobs and eventually eliminating the need for their role completely. With the rise of no code tools, it is no longer necessary to have engineering skills to build and test product/operational improvements. As a manager, it is your role to make sure that your employees always have new responsibilities to grow into. 

Embrace remote work

There are practically no excuses to not employ remote workers with access to tools like Zoom.us and Slack. Whenever you see a repeatable process that cannot be automated yet, you have an opportunity to offshore it to a cheaper cost base. By offloading all the administrative work from your core team, you can reduce your cost base and make your team incredibly happy/productive. One of the processes that I am working on ‘offloading’ is business development on Email and LinkedIn. With a couple of tools and clear guidance, it is quite easy to offshore your email and LinkedIn prospecting and focus on prospects who are closer to signing a deal. 

Default to operating global

Search funds often cite global expansion as a reason to purchase a business. The reality is that technology companies today default to selling globally. There are very few reasons (often legal) as to why a company cannot sell across the world. I’ve also noticed a number of companies that have started to specifically focus around helping companies expand their ability to serve customers around the world without changing their process. For example, Unbabel is a Salesforce add-on that allows you to translate customer tickets into hundreds of different languages. 

Learn from B2C companies

Many B2B startups are beginning to use practices that were reserved for B2C companies (e.g. paid advertising, mobile centric applications and bottom-up sales approach). This falls in line with the general notion that the relationship between consumers and businesses are blurring. The benchmark for a great customer experience is a service like Amazon Prime regardless of whether they actually compete with your company. The norms for a great user experience will be determined by the applications that get daily usage (Facebook/Google). It is critical that you view your business and its customer experience in the lens of an everyday user who interacts with all the businesses I’ve just mentioned. 

Conclusion 

While the fundamentals of what makes up a good acquisition target will be the same, the playbook to drive growth for mature technology companies promises to be different. As the technology landscape continues to mature, I expect the opportunity for private equity/search funds to grow dramatically.


By

Suthen Siva

September 3, 2019