February 2021 | Q&A Spotlight

Q&A Spotlight with Brian Jaffee of Thoma Bravo: How high-tech and software firms are going on offense in 2021

Software continues to be a growing trend in private equity. Where is the industry headed and what will value creation look like post-pandemic?

In recent conversations with our PE clients, most have an optimistic view of the economy and capital to invest—and they continue to view software as a growing space. The need to digitize and enable ops continues to be top priority for companies across all sectors.

Our latest signature research report also confirmed that the appetite for software investing is continuing to rise. Seventy percent of respondents plan to acquire as many as two high-tech & software companies over the next 24 months, with 27% intending to make three or four acquisitions.  

We spoke with Brian Jaffee of Thoma Bravo, a leading private equity firm focused on software and tech companies with 260 transactions over the last 20 years. Thoma Bravo also had a record-breaking 2020, raising $22.8 billion for three funds in one of the largest tech-focused fundraising hauls. We discuss the biggest areas of growth in 2021, what he expects to change this year, and the types of initiatives their portfolio companies are focused on for value creation.

What shifts did you see with software during the pandemic? How will that change in a post-pandemic 2021?

Brian Jaffee: Software touches every piece of the economy. We spend time with application software, infrastructure, and software that powers everything in the back end of these markets. That trend toward digitization was already happening. For example, the digitization of the mortgage process for Ellie Mae, one of our recent investments; we also owned a business, iPipeline, a company that helps digitize and automate the insurance process. The U.S. had 80% of its life insurance applications being filed on paper. Tedious processes such as mortgage applications or life insurance applications are finally shifting toward digital.

Another area we’ve seen digitization and acceleration is with Conga – formerly Apttus – selling CPQ and CLM software to support middle office operations across all markets. They’re focused on digitizing the front end of sales and marketing, quoting, and pricing a deal to accelerate time to revenue.

Being able to facilitate all these processes digitally during COVID has become that much more important.

Another area we’ve seen digitization and acceleration is with Conga – formerly Apttus – selling CPQ and CLM software to support middle office operations across all markets. They’re focused on digitizing the front end of sales and marketing, quoting, and pricing a deal to accelerate time to revenue.

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Being able to facilitate all these processes digitally during COVID has become that much more important.

Do you anticipate sectors like EdTech, that have been significantly impacted by the pandemic, to have increased growth opportunities next year?

I definitely think the EdTech market is poised for significant growth next year and beyond. The pandemic has forced learning institutions to completely rethink how they utilize technology. There was already a nice secular trend behind EdTech as schools and universities were increasingly leveraging technology to improve the effectiveness and efficiency of learning. COVID has accelerated this trend dramatically, and we think there’s been a fundamental shift in the way educators and administrators will leverage technology going forward.

Frontline Education is a good example of a company that should benefit from these trends over time. The company provides administrative software to most of the public K-12 districts in the U.S. These solutions help administrators do everything from recruiting and hiring teachers to managing the financials of the districts. This type of software will be critical for helping to find and retain teachers in an environment where there’s a significant teacher shortage and for helping district CFOs have better visibility into their budgets and the levers they have to drive efficiencies. These are just two examples of a much longer list of problems companies like Frontline can solve.

As it relates to EdTech, with “normalcy” being a shift toward in-person or hybrid learning rather than remote, how will that impact revenue targets?

My view is that you won’t see a return to normalcy have a negative impact on EdTech businesses. The pandemic has taught us that we need to be ready to flip back to a remote learning environment at a moment’s notice and it has also forced user adoption of technology that we think will last for a very long time. It’s hard to see things ever going back to how they were. And most of these businesses have recurring revenue models, so any uptick they experienced in 2020 should carry forward.

There are three ongoing issues that are top of mind for companies the software and high-tech industries. We recommend thinking through these as you’re planning for 2021. 

Keep margins healthy 

Continue to find operational efficiencies to improve margins. How are you tracking on the Rule of 40?

Get aggressive with top line growth

Whether it’s through organic growth or through M&A, many software companies have the capital and are planning to invest.

Be proactive around churn risk

While the economy is still rebounding, companies should focus on not losing customers.

What did a years’ worth of remote calls teach you? How important is the personal connection in your business?

The last year has proven there are things we can do a lot more efficiently using technology. The challenge that we’ve had in this environment hasn’t been as much on the diligence side but remains the lack of in-person collaboration. Apttus and Conga was a successful merger but did face unique challenges. It was a merger with two sizable companies with two very different cultures, two leadership teams, two employee bases that sat in different locations and trying to bring that all together without getting people in the same room was and continues to be really tricky.
I’ve been impressed watching our management teams adapt to the circumstances and overcome these challenges. It’s taught us that even in this challenging environment we can continue to execute on our ambitious growth plans which includes very strategic add-on M&A transactions.

When considering 2021 investments and value creation opportunities for your portfolio companies, what are your main areas of focus?

It’s different for every company, but big themes involve a thesis around improving systems, professionalization, and data. Some of the biggest deals and public companies we’ve acquired over the years have systems and data that need to be improved. Everyone thinks that with a public company, they must be sophisticated in how they run their business. We get under the covers and focus on driving operational efficiency, provide visibility into KPIs, and help implement scalable systems. 

Due to these investments, our companies are often able to make decisions based on the data and insights they’ve never had before.

This type of transformation is really powerful, and that’s one big theme that we’ll continue to push on. As part of the pandemic, having these systems be cloud-based and made accessible to everyone from home has been hugely beneficial for our companies.

What are your other priority areas of value creation? 

Another area we prioritize is go-to-market. We have a team of operating partners that have strong backgrounds in our industries and can be helpful to ensure the organization is structured properly, and that we have a clear line of sight to data-driven decision making.

Because it directly impacts top line revenue, we spend a lot of time thinking through the sales and go-to-market org design, people, systems, data, and making sure compensation plans are properly incentivizing people. We’ll often see compensation plans that are not aligned to company objectives, and companies struggle to hit their targets. It often comes down to simple improvements like that.

The two biggest things we always focus on: getting the data right and get the go-to-market organization right.

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In a lot of cases, we are buying fairly mature companies. They have good products that have revenue with customers, so we’re just trying to figure out how to make the business more efficient and making it grow faster. Those are the two biggest things we tend to pull on. 

Where is the first place you typically start? 

It usually starts at the front end, the order-to-cash process. When processes and reporting are broken, it starts from the data entry. We focus on fixing that, and then enabling a really clean view of the customer, and then you can talk about all the downstream implications.

It sounds like for every company, you create 30/60/90-day plans that tie back to those two themes – is that fair to say?

For every deal, there’s an operational plan that looks a little different. When we come in, we aren’t overly prescriptive, saying, “these are the five things you have to go do at every company.” We try to be humble enough to know that no matter how much diligence we do on a company, we will never know as much about company and the markets that they operate in as the managers.

What we do have is a set of experiences across 20 years of investing in software, across 70 platforms investments, and $70 billion in enterprise valuation that we’ve done. We have a ton of pattern recognition given our focus on the software sector.

Ultimately, these companies are seeing a similar set of challenges. There is a pretty good chance we are either currently dealing with a similar challenge in another company or have seen it in the past. As we work in our diligence to come up with that operational plan, those value creation levers, we are relying heavily on that experience set. That’s a reason why we think it’s hard for people to come into the software market and start buying companies; there are a lot of things we’ve seen and that we bring to the table that you couldn’t do without having that experience.

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