We evaluate software companies for investment based on several key criteria:
Our approach revolves around guiding portfolio companies on a path to profitable growth. We have an operations team comprised of experienced software industry leaders who have been CEOs, CFOS, and have real expertise in software operations—and they serve as mentors to the company's management teams. These mentors join the boards of the companies we invest in and conduct regular operational reviews. These reviews encompass a comprehensive set of operational processes and metrics that reflect best practices in the software industry.
We make strategic investments in product and technology with a focus on features that drive long-term revenue growth. We also allocate resources to sales and marketing initiatives, ensuring they are directed effectively to generate incremental growth and improve profit margins. Throughout the investment horizon—which spans several years—we aim to enhance products, technology, and operational efficiency. Our operations team plays a crucial role in mentoring and implementing these strategies, contributing to the company's growth and success.
We do three types of acquisitions: The first is where we acquire small competitors who can no longer invest in their product or technology, allowing us to support their product and provide an upgrade path to our customers. This type of acquisition requires minimal integration.
The second type is a product extension type of acquisition that complements our core product but may require more integration. We seek businesses with strong standalone product functionality and technology. Just like in our platform evaluations, we look for modern and flexible technology in these tuck-in acquisitions.
Our integration strategy focuses on API or UI/UX integration rather than rewriting the entire platform or acquired product in the same technology stack. Therefore, we avoid acquisitions with significant tech debt built on outdated systems, as integrating such acquisitions becomes more challenging.
The primary challenge software companies face on their path to profitable growth is often a cultural one. In the software industry, there's a natural tension driven by their entrepreneurial origins, venture capital backing, and rapid growth potential. Initially, the focus is on investing for growth, capturing market share, and building the best products, technology, and management teams. Investors in this phase prioritize growth over profitability, a strategy that makes sense.
However, when companies mature, attain market leadership, and look toward profitability, a cultural shift becomes necessary. This change involves transitioning from a growth-oriented mindset to one focused on consistent innovation and generating strong profits. This shift can be challenging because the entire organization, from the management team to employees, has been accustomed to the growth-centric approach for many years.
So, the biggest obstacle on the journey to profitable growth in the software industry is often the need to adapt the company's culture to align with a more balanced approach that emphasizes both innovation and profitability.
As for challenges among different industries, there's very little differentiation between markets, whether that be the end market or the type of software solution, an application software business or a security software business, finance, or in healthcare. The basic processes and metrics usually stay the same, and that’s what we love about software and our models.
Of course, each sector has its own dynamics in terms of competition, business processes, and where the market is going, but the way a software company is operated stays the same for the most part.
To me, digital means one word: software. Software is what's enabling digital transformation across every business sector. It's allowing banks, car companies, and pizza delivery businesses to go from being old-world businesses to technology companies. Software is really the key to this digital revolution.
West Monroe's team of experts and guests pull back the curtain on how to build digital throughout an organization. Through real-world examples, you will learn how to spot digital transformation in real life, and how to make small decisions every day that make a big impact on growth.