Why ‘Boring’ Can Be Beautiful In Tech Investing
You’ve seen those Dos Equis beer ads starring “The Most Interesting Man in the World.” That’s not me. In fact, I might be The Most Boring Man in the World. My wife jokes that before we had children, the most dramatic moment in my day was deciding what to eat for dinner. I am, proudly, a predictable, pretty uninteresting guy.
So it’s only natural that in my job as an investor, I seek out boring companies. Nothing I invest in is “trending”—I spurn better, faster, organic food-delivery startups, or video apps for teens. But when I say boring, what I really mean is a tech company in a staid sector that isn’t growing very quickly. Thirty or forty percent annual growth rates? Not for me. My investment sweet spot is a mature software company, maybe located in the Midwest or some other non-coastal city, that’s at best plodding along with single-digit revenue growth, or perhaps growth in the teens.
It seems counter-intuitive. But often slower-growing software companies— ones with lots of promise, but perhaps suffering from poor management, lack of focus or unlucky market circumstances— can be diamonds in the rough for investors willing to buckle down and work with them. Often, these companies produce profitable exits for their backers and management teams.
The urge to merge
A common “boring” scenario is that a slower-growing tech company’s growth could be turbocharged by smart, strategic M&A activity. Often, though, existing management doesn’t pursue acquisitions because execs are too attached to a company’s legacy business to think outside the box. Or, they may simply need access to more capital to buy up other complimentary companies.
A long-time colleague and friend, Sean Feeney, walked into one of these situations when he took the helm of supply-chain collaboration and finance firm TradeCard in 2012. Investor Warburg Pincus had owned the business for many years, and the company wasn’t living up to growth expectations. Sean came in and applied fresh perspective to overhaul TradeCard’s sales and operations, and boost revenue.
A little more than a year later, with backing from his investors, he merged the business with a market competitor. The combined company rebranded and became a more viable and profitable business than either original company could have been alone. The result was a global cloud-commerce platform that eventually was acquired for $675M. That, to most people, was a pretty sexy outcome.
Similar to Sean, I was also hired for the turnaround and expansion of a highly boring company—HighJump Software*, based in Eden Prairie, Minnesota. HighJump was a supply-chain software company very much focused on warehouse management. It doesn’t get more exciting than that, right?
I had some fresh money and support of the board on my side to get creative with M&A.
We bought companies that would broaden the products available to our existing customers and create cross-selling opportunities. Our first acquisition was generating about $12 million in revenue and $2 million in profits when we bought it; we quickly grew it to over $20 million in revenue and $6 million in profits. We also bought a company in Denmark to create a beachhead in Europe.
And we made other significant changes like re-investing in our core warehouse-technology business and adding substantial R&D resources to improve the product, putting money into sales and marketing, completely rebuilding the management team and even creating a cloud product offering. Basically we transformed the business from a snoozer into one with almost $110M in revenue. By 2014, that growth caught the attention of private-equity firm Accel KKR, which bought HighJump for a nice price and merged it with their portfolio company, Accellos.
Focus, focus, focus
Another common boring-company scenario involves chasing growth—maybe by making too many acquisitions–and getting bogged down because the company has spread itself too thin. Going after the shiny new thing and over-investing in certain parts of the business is a big temptation, but companies need to focus on what can help them actually grow.
Infor, for example, is a big “enterprise-resource planning” (ERP) software company that has made dozens of acquisitions since 2002. Critics said the company didn’t spend enough time and money integrating its early acquisitions or investing across its product portfolio. The company also heavily used debt to finance some of these deals, and when the 2008 recession hit, it was in a pinch.
Then, five years ago, Infor’s investors, Golden Gate Capital and Summit Partners, executed a $2 billion take-private deal for a complimentary software provider, Lawson, which added healthcare and human-resources solutions to Infor’s product line. The beefed-up Infor then invested heavily in its business and added thousands of employees over just 15 months. Over time, the company also switched many customers from a licensed, on-premise software model to a more-predictable subscription setup, which has boosted revenue and profits. Today, Infor, which is privately held, is estimated to have revenue of close to $3 billion and more than 90,000 customers. By righting the ship and maintaining focus, Infor is a lot more attractive than it used to be!
Bringing in fresh blood
Finally, many boring software companies suffer from management that needs to step aside so that the company can grow and evolve. The visionary, technical founder is great when his company just needs a strong product person or a UI genius, but as the business scales, it needs a new type of leader with a different, larger-company skill set—including things like HR and financial expertise.
This can even happen at mature, non-venture backed companies. Case in point: Data Innovations*, a company based in Burlington, VT was founded in 1989 but, two decades later, it was run by its founders, who by then had sporadic day-to-day interaction with employees. Nonetheless, the company had a lot of potential, including a strong partner and customer base as well as solid technology. Boring, but important healthcare work.
In 2010, when Battery bought a majority stake in the company, experienced healthcare executive Mike Epplen took over as CEO. He built a sales team, shored up the back office and increased Data Innovation’s support to key corporate partners around the globe. In his first year, revenue increased by $4 million. Profits also started to grow. Last year, Roper Industries purchased Data Innovations and another medical-software company, SoftWriters, for a combined $450 million.
So, as I hope I’ve shown you, it is possible to create value from boring companies—as long as the right personnel are in place and investors are willing to back people and companies focused on business fundamentals, not glitz. They need to consider a variety of growth strategies, from M&A to increased R&D to new management. It’s not glamorous work. Not everyone has the stomach for it. But for some, it can really pay off.
*Denotes a former Battery investment. See here for Battery’s full list of all investments and exits.