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Back to Basics: For Tech Investors, Markets Change but Principles for Success Remain

Back to Basics: For Tech Investors, Markets Change but Principles for Success Remain

Posted on: Apr 11, 2023

Robert F. Smith Shares Principles for Success in Tech Investing

I founded Vista in 2000, at a time when few private equity firms were investing in enterprise software businesses, and only a handful were singularly focused on the asset class. Over time, more investors entered the market realizing what we at Vista believed all along: enterprise software is uniquely capable of unleashing productivity – providing unmatched value to customers and in turn, delivering consistent results to investors. But not all software companies are created equal, and not all investors understand how to select and scale best-in-class businesses that have the potential to prevail regardless of the economic environment.

The transition from lofty revenue multiples, rapid deal volume and inexpensive capital to a frozen IPO market, depressed valuations and limitations on financing has dampened the days of easy growth. We’ve entered a new paradigm where growth will be earned, not given, and where disciplined investment strategies and a fundamental approach to value creation are more important than ever. Here’s how enterprise software investors can meet the challenges of today, leveraging tools Vista has tested and fine-tuned over the last two decades.

Disciplined investing starts with a robust sourcing engine and a commitment to selectivity. Today, there are tens of thousands of enterprise software businesses at varying stages of maturity across end markets – all of which are competing for talent, capital and market share. As an investor, the ability to track, compare and evaluate performance across the market has never been more complicated or more critical. This is where a sector-specific focus can provide a substantial advantage, and it’s why at Vista, we decline about 95% of the deals we assess.1 Those of us who eat, sleep and breathe enterprise software understand the market, know the players and believe we are best positioned to identify and invest in the highest quality businesses.

Equally as important is price discipline at entry. In 2021, we saw enterprise software forward revenue multiples climb as high as 17.3x, compared to the trailing five-year average of 9.9x.2 Peak valuations coupled with unprecedented dry powder led many to overpay for businesses based on the assumption that multiples would continue to expand. We’ve since seen valuations revert to pre-COVID norms. Investors, like Vista, who maintained price discipline are in a much better position to navigate the current market environment.

But reaching a successful exit requires more than buying low or cutting costs – it takes sustained investment in growth. For example, in January, Vista’s Endeavor Fund sold Zapproved, an e-discovery software provider, even as others in the market struggled to generate liquidity. This outcome was a result of strong alignment with the management team and a shared commitment to building a stronger business by expanding Zapproved’s product suite, enhancing its customer success capabilities and scaling its go-to-market engine. This approach is not always easy, and it requires considerable investment in building an ecosystem with the expertise and resources to affect change at scale.

Selectivity, cost discipline and a commitment to value creation are not new ideas, but they’re also not correctly and consistently leveraged by many investors. Yet, embracing these proven practices is the surest way to hedge against external factors while building more resilient enterprise software businesses.

Robert F. Smith is the Founder, Chairman and CEO of Vista Equity Partners. Connect with Robert on LinkedIn and Twitter for more insights.

Past performance is not necessarily indicative of future results. Case studies presented herein are for informational purposes only and are intended to illustrate Vista’s sourcing experience and the profile and types of investments previously pursued by Vista. It should not be assumed that investments made in the future will be comparable in quality or performance to the investments described herein. Further, references to the investments included in the illustrative case studies should not be construed as a recommendation of any particular investment or security. The investments listed should not be assumed to have been profitable.


1 Vista database, as of 12/31/2022, inclusive of signed and/or closed Platform and add-on private equity and permanent capital investments. Past performance is not necessarily indicative of future results. There can be no assurance that historical trends will continue during the life of any Vista Equity Fund. There can be no assurance that any pending acquisition will be consummated at all or on the current terms of the agreement.
2 Source: Morgan Stanley Research, Refinitiv, Company Data. As of 01/09/2023

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