Traders on the NYSE floor, September 14, 2022.
Since we see valuations falling in many parts of the market today, investors may feel these are uncertain times, especially in the tech sector.
However, upon close scrutiny, investing specifically in enterprise software will continue to be one of the best uses of capital anywhere in the financial and technology markets. The current environment will likely continue to create opportunities, in the same way that past disturbances did. Several factors play a role in this scenario.
As we’ve seen, enterprise software is a disruptive force with the potential to unlock unprecedented productivity and innovation. Just as the physical assets that powered the business world centuries ago, software and technology-enabled solutions are changing the way we live, work, and learn, and revolutionize the economy. our economy in the process.
The pandemic has accelerated reliance on enterprise software, as companies turn to technology to connect employees and customers, hold meetings and facilitate payments. This has led to a fundamental shift in business practices and a realignment of expenses that companies consider core to their operations.
The pandemic has also created an unprecedented pricing environment as inexperienced, less selective investors focus on the potential for multiple expansions and short-term returns rather than the underlying quality of companies. . At the same time, many general partners sacrificed discipline in pursuit of frivolous valuations, accelerating their deployments and running out of funds in a short amount of time. I suspect those who take this approach may have exposed themselves to changes in the market too much.
Not all technology is created equal. Consumer software depends on the spending habits of individuals, which will naturally tighten in times of inflation.
In contrast, as more businesses face commodity and wage inflation, they realize the value that enterprise software can bring to help manage the costs of daily workflows while increasing efficiency. fruit. Businesses will continue to deploy software that directly enhances their operations – in areas such as business continuity, data protection, secure remote access, and automation. We can already see this momentum playing out as consumer-oriented stocks are hit harder than their B2B counterparts.
According to an Evercore ISI study, 92% of respondents expect to increase their IT spending over the next 6 to 9 months – up from the January survey (83%). This suggests that IT spending today is less arbitrary than in previous cycles. As a result, it is expected that software will continue to be the fastest-growing sector in the economy with a market capitalization of $34 trillion by 2025, Vista Equity Partners found.
According to Vista, changing economic conditions do not change the structural advantage of investing in the private market, especially in enterprise software, where about 97 percent of companies are private. Mass markets often hold back even the most dynamic and visionary founders and CEOs against impossible timelines and unrealistic quarterly expectations. They demand short-term growth at all costs.
In contrast, private companies benefit from patient, strategic ownership, where they can implement best-practices that work toward long-term, sustainable value creation.
That said, even in the private market, producing favorable results in turbulent times requires investors to act on two factors.
First, they must know what to buy. Second, they must understand how to scale an organization. It sounds simple, but in an ever-changing pricing environment, determining a fair price requires a discerning eye, rigorous diligence, and steadfast discipline.
It means knowing the difference between a fundamentally healthy company and one that looks promising but is fraught with less obvious problems like technical debt, which can slow down – or jeopardize. risk – the integrity and development of the software and therefore an investment.
In addition to asset selection, there needs to be a truly collaborative approach between the investor and the founder or management team to ensure the investment reaches its full potential. Investors with industry expertise and experience understand how software companies work, the systems needed to succeed, what makes a successful management team, and how expand and develop these businesses. They can help empower the management team by driving operational excellence, identifying M&A opportunities, investing in product innovation, and facilitating a path to sustainable growth.
On the other hand, nothing can replace a founder’s innate passion, vision, and understanding of their business. The best investors know how to channel this knowledge and equip founders with the right tools and processes to thrive. When it works, positive momentum isn’t just felt by the people sitting in the meeting room – it’s evident throughout the company, creating a dynamic work environment that nurtures and retains top talent. best ability.
As the digital economy continues to expand, governments and consumers around the globe have embraced the potential opportunities that technology presents. Enterprise software will be crucial in shaping the future. When partnered with private capital, the result will be a stronger economy with innovative and resilient infrastructure — infrastructure ready to tackle the challenges of this century and identify possibilities. capabilities of the next century.
Robert F. Smith is the founder, chairman, and chief executive officer of Vista Equity Partners, a leading global investment firm that invests in enterprise software, data, and technology-enabled businesses. The company has more than $94 billion in assets under management as of June 30, and a portfolio of 85 companies serving more than 300 million users and employing more than 90,000 people worldwide.