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Application Software
Morad Elhafed  |  May 10, 2021
Three Ways a Private Equity Partner Can Help Your Software Company Grow

In the past, the term “private equity” has conjured up images of Gordon Gekko-like corporate raiders who take over a struggling company only to chop it up into saleable parts. They downsize the employee base, clean up the balance sheet and then sell the company again.

But that image is as outdated as Gekko’s brick-sized car phone. An increasing number of PE practices now operate from a fundamentally different playbook, one betting on the company’s long-term growth versus short-term financial engineering.

In particular, growth-oriented private equity is a growing force backing mature software companies who’ve already built steady, profitable businesses but see more runway ahead. Cloud-based enterprise software companies are particularly attractive to PE investors for the consistent revenue streams they generate. PE investment in software has increased steadily over time, too. PE tech deals increased almost 40% in 2019, even as total private equity deal volume was flat. In 2020, COVID’s arrival put a damper on deal activity in the first half of the year. But deal volume roared back in 3Q and 4Q, with no signs of fading.

Many tech companies are finding powerful partners in the PE world. Here are three ways a growing enterprise software company can benefit from partnering with a growth-oriented private equity firm:

1. Building infrastructure and professionalizing the management team to scale.

It takes capital to scale a software company. But it also takes expertise and infrastructure. Many software companies hit a point in their growth trajectory where they’ve achieved product-market fit and are poised for strong growth—but their founders and executive team have never led a large enterprise. They lack the experience needed to grow an enterprise-scale sales team that can grow bookings in predictable and repeatable ways, or that can sell to the Fortune 500 ‘whales’ of the world.

Then, when sales are working and more customers sign up, it is likely that the company’s IT infrastructure will hit a critical inflection point. When, and not if, that happens, having an experienced partner around the table will be important to nail critical product and infrastructure decisions that will have real implications on the long-term success of the enterprise.

In addition, the company might need assistance in building out its operational infrastructure, bringing on experienced executives to round up the management team, and building the internal systems that can support an exponentially larger business. A PE partner can help improve operational metrics and see around corners to future-proof company infrastructure and prepare them for the next stages of growth.

2. Growth through M&A.

Some PE firms are experts at growing companies through strategic acquisitions. This usually involves bringing in a complementary business or team that adds a new product, new market, or new buyer demographic. Again, a PE partner brings not just the cash necessary to do these deals, but the expertise to hunt for attractive targets and construct deals in a way that will ultimately build a whole that’s greater than the sum of its parts. A wise partner can also keep you from making the wrong acquisition, which happens more often than you might think and can have very damaging effects.

3. Giving founders a chance to take money off the table while remaining in the driver’s seat of the business.

Enterprise software founders stake their whole livelihood on an idea. During the company-building phase, every decision a founder makes for the company is also a personal decision: will I open a London office, or will I send my kids to a better school?

Working with a growth-oriented PE partner allows founders to start the process of decoupling their business from their personal finances, and to reap some of the rewards of their success. Until they go through the process, many founders don’t realize that taking some money off the table personally actually allows them to be more aggressive with the business. When you know your personal finances are secure, you can go after bigger goals and take healthy risks to grow your business.

Founders considering a PE partnership should think carefully about their own preferences for their role post-deal and then select a partner whose vision aligns with theirs. Founders should also ask a lot of questions, like: Will the founder be considered a true partner? Will there be room for her to participate in shaping the strategy, or will the PE firm take the business over and run it as they see fit? Will the founder have the opportunity to grow her skills as a CEO? Would she consider stepping back as CEO and moving into a functional lead role she’s always enjoyed?

Of course, growth-oriented private equity partners aren’t right for every company. But if you decide this path is the right one for you, it’s important to partner with a private equity firm whose vision for growth matches your own. You should understand that PE firms often specialize in certain growth tactics: Some excel at making operational improvements and building out infrastructure and teams, while others focus on strategic acquisitions. Still others go deep with vertical-specific expertise, offering well-developed ideas on how to drive organic growth within a sector.

Bottom line: you should do your own due diligence on any potential investing partner, just as the firm is doing on you! But in the right situation, a growth-oriented PE partner can become a valuable source of both capital and expertise, helping ambitious founders in the search for talent, building corporate infrastructure, and providing advice so they can achieve their goals.

A version of this article first appeared in Forbes.

This material is provided for informational purposes, and it is not, and may not be relied on in any manner as, legal, tax or investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any fund or investment vehicle managed by Battery Ventures or any other Battery entity. 

The information and data are as of the publication date unless otherwise noted.

Content obtained from third-party sources, although believed to be reliable, has not been independently verified as to its accuracy or completeness and cannot be guaranteed. Battery Ventures has no obligation to update, modify or amend the content of this post nor notify its readers in the event that any information, opinion, projection, forecast or estimate included, changes or subsequently becomes inaccurate.

The information above may contain projections or other forward-looking statements regarding future events or expectations. Predictions, opinions and other information discussed in this video are subject to change continually and without notice of any kind and may no longer be true after the date indicated. Battery Ventures assumes no duty to and does not undertake to update forward-looking statements.

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