Opportunities are waiting for investors in the technology sector. This is an angle ripe for growth
Traders on the NYSE floor, September 14, 2022.
Source: NYSE
As we see valuations falling in many parts of the market today, it can be an uncertain time for investors, 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 unleash 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, revolutionizing the economy. ours in the process.
The pandemic has increased reliance on enterprise software, as companies turn to technology to connect employees and customers, conduct meetings and facilitate payments. This has led to a fundamental shift in business practices and a reorientation of the costs that companies consider core to their operations.
The pandemic has also created an unprecedented valuation environment as less selective, inexperienced investors focus on the potential for multiple expansions and short-term returns relative to the underlying quality of companies. . At the same time, many general partners have sacrificed discipline in pursuit of sky-high valuations, accelerating deployment, and depleting funds in a short amount of time. I suspect those taking this approach may have exposed themselves to market changes too much.
Not all technology is created equal
Not all technology is created equal. Consumer software depends on the spending habits of individuals, naturally tightening during periods 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. . 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 see this momentum playing out as consumer-facing stocks suffer harder than their B2B counterparts.
According to an ISI study by Evercore, 92% of respondents are expecting an increase in IT spending over the next six to nine months – up from a January survey (83%). This shows that IT spending is less arbitrary today 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 said.
Private market advantage and enterprise software
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.
Choosing the right investment
That said, even in private markets, 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.
Cooperation with private capital
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 impart this knowledge and give founders the right tools and processes to thrive. When it works, positive momentum isn’t just felt by those sitting in the meeting room – it’s evident throughout the company, creating a workplace drive to cultivate and retain employees. best talent.
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 an innovative and adaptive infrastructure – one that is poised to meet the challenges of this century and define the possibilities 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.
