Today, as we see valuations falling in many parts of the market, it can feel like an uncertain time for investors, especially in the technology space.
However, upon closer inspection, investing specifically in enterprise software will continue to be one of the best uses of capital in the financial and technology markets. The current environment is likely to continue to create opportunities as previous dislocations have done. Several factors play a role in this scenario.
As we have seen, enterprise software is a disruptive force with the potential to unleash unprecedented productivity and innovation. Like the physical assets that powered the business world for centuries, software and technology-enabled solutions are changing the way we live, work and learn, revolutionizing our economy in the process.
The pandemic accelerated enterprise software dependency as companies turned to technology to connect employees and customers, conduct meetings and facilitate payments. This has led to a fundamental change in business practices and a re-prioritization of the spending that companies see as core to their operations.
The pandemic has also unleashed an unprecedented environment for valuations as less selective, inexperienced investors focused on the potential for multiple expansions and near-term returns over the underlying quality of companies. At the same time, many complements sacrificed their discipline to chase inflated valuations, quickly increasing their pace of delivery and depleting funds within a small window of opportunity. I suspect that those who have taken this approach have overexposed themselves to changes in the market.
Not all technologies are the same
Not all technologies are the same. Consumer software is subject to individuals’ spending habits, which naturally intensify in inflationary times.
Conversely, more and more companies facing commodity and wage inflation are realizing the value that enterprise software can offer to manage the costs of day-to-day operations while increasing efficiencies. Enterprises will continue to implement software that directly improves their operations in areas such as business continuity, data protection, secure remote access, and automation. We can already see this dynamic as consumer-focused stocks have been hit harder than their B2B counterparts.
According to an Evercore ISI study, 92% of respondents expect to increase their IT spending in the next six to nine months – up from their January survey (83%). This suggests that IT spending is less discretionary today than in previous cycles. As a result, software is expected to continue to be the fastest growing sector of the economy through 2025, with a market cap of $34 trillion, Vista Equity Partners noted.
Benefits of private markets and enterprise software
Changing economic conditions aren’t changing the structural advantages of investing in the private markets, particularly in enterprise software, where about 97% of companies are private, according to Vista. Public markets often hold even the most dynamic and visionary founders and CEOs to impossible timelines and unrealistic quarterly expectations. They demand short-term growth at any cost.
Conversely, privately held companies benefit from patient, strategic ownership that allows them to implement operational best practices with a view to sustainable, long-term value creation.
Choosing the right investments
However, even in the private markets, investors need to consider two factors in order to achieve favorable outcomes in turbulent times.
First, they need to know what to buy. Second, they must understand how to scale an organization. It sounds simple, but in a changing valuation environment, determining a fair price requires a keen eye, rigorous due diligence and unwavering discipline.
It means knowing the difference between a fundamentally healthy company and one that looks promising but is plagued with less obvious issues like technical debt that can slow or jeopardize the integrity and growth of software, and therefore an investment.
A partnership with private capital
Beyond asset selection, there must be a true partnership approach between an investor and a founder or management team to ensure an investment realizes its full potential. Investors with experience and expertise in the industry understand how software companies operate, what systems are required for success, what makes a successful management team, and how these companies can be scaled and grown. You can help the management team improve its position by accelerating operational excellence, identifying M&A opportunities, investing in product innovation and enabling a path for sustainable growth.
On the other hand, there is no substitute for a founder’s passion, vision and innate understanding of their business. The best investors know how to channel that knowledge and arm the founder with the right tools and processes to succeed. When it works, the positive momentum isn’t just felt by board members—it’s visible across the organization, creating workplace dynamics that nurture and retain the best talent.
As the digital economy continues to expand, governments and consumers worldwide have embraced the potential opportunities that technology offers. Business software will play a key role in shaping the future. In collaboration with private capital, the result will be a stronger economy with an innovative and adaptable infrastructure – one poised to address the challenges of this century and define the possibilities of the next.
Robert F. Smith is Founder, Chairman and CEO of Vista Equity Partners, a leading global investment firm investing in enterprise software, data and technology-enabled companies. The company had over $94 billion in assets under management as of June 30 and has a portfolio of 85 companies serving over 300 million users and employing over 90,000 people worldwide.
