Why B2B software is one of the most attractive investment opportunities?

B2B enterprise software has four appealing characteristics.

Predictable revenues

Compared to most traditional businesses, where every year your P&L starts from zero, the annual subscription model gives comfort to future revenue. A stable, growing MRR (monthly recurring revenue) is an excellent indicator of success. Additionally, software companies can upsell their existing customers with relative ease. Net retention rate is, therefore, one of our driving key performance indicators indicating the quality of the company’s product offering.

Scalability

Another aspect that is appealing about the software business model is the scalability compared to other industries. Software companies don’t require many of the overhead costs and capital expenditure of other businesses, and whereas scaling internationally is still challenging, it is easier than in most other businesses.

Efficient use of capital

Not only do software companies provide predictable revenue, but most software companies use capital in the most efficient way. Compared to other businesses, software companies have been proven to generate a higher quality of revenue than other business models, which can be measured with different indicators (E.g. cash conversion ratio, credit collection, contract lifetime value against the customer acquisition, …)

Significant room for growth

Technology has transformed industries and has driven progress and efficiencies in many sectors. Several sectors are only getting started on their digital transformation journey, providing significant runway for growth.

But, … these benefits come with higher valuations and multiples.

That is correct, but did you know that value creation in the software PE business is largely driven by earnings expansion, whereas in traditional businesses, PE funds predominantly create value by multiple expansion? If you know that earnings in B2B software are recurring and enterprise software is very sticky, earnings expansion is more sustainable and less risky. 

Growing earnings in software, however, requires in-depth expertise and hyperfocus. More than in any other sector of the economy, software investing demands differentiated expertise capable of generating proprietary insights and pattern recognition. That’s why we believe focus is so important.