Private equity interest in B2B SaaS firms has been strong. Clearwater International’s Wesley Fell-Smith talks to Unquote about how far the current investment wave has to go.
Recent years have seen high levels of PE activity in the B2B SaaS space across Europe. Just last month Clearwater advised on the PE sale of Kirona, a provider of field service management software used by social housing firms. Investment in enterprise resource planning (ERP) firms such as these, especially those focused on verticals, has been growing and there is every reason to expect this expansion to continue.
Workforce and resource management are going to be big growth markets over the coming years
Success in the ERP space has been enabled by a number of factors. Firstly, advances in mobile technology, tracking and telematics allow data to be collected and used in more useful ways as well as allowing it to flow between remote workforces.
“Workforce and resource management are going to be big growth markets over the coming years,” says Wesley Fell-Smith, Director at Clearwater International. “They’ve been around for a while - the user cases are becoming proven, with scheduling and efficiency increasingly demonstrated to be robust, and the ability to use data more meaningfully is becoming more credible.”
The second reason is the potential for expansion and cross-selling. “You used to sell a piece of software and that was its end-case, now you can bolt on packages that manage an ever broader proportion of your business. It gives opportunity to expand, to use data more efficiently and automate more processes,” Fell-Smith says. “PE is excited about it. You’ve got captive customer bases to which you can cross-sell products and capture proprietary data. There’s a lot of sectors in which that’s happening.”
A third factor is the potential for greater adoption. The biggest growth has been in products targeted at large businesses, which are likely to be replacing a previous product, but there’s very low use of such software by SMEs. “The adoption and penetration rates to date have actually been pretty low overall,” says Fell-Smith. “You’ve got a lot of consolidated sellers competing with one another for enterprise clients, but that’s swapping out enterprise products. The SME market seems to be where the greatest opportunity is because there’s less penetration. Low penetration markets are where people are focusing because that’s where the growth is going to come from, rather than being a replacement in more mature markets.”
Another related growth area has been in specialist B2B information providers, which has seen deals like HG’s acquisition of Financial Express, Bridgepoint’s acquisition of PEI Media and Synova’s investment in Mintec. “Those firms are vertical specialists, the ability then to have analytics tools and workflow tools to sell into that vertical base is hugely valued,” says Fell-Smith.
As the sheer quantity of company data continues to grow, utilising this effectively will become increasingly important especially in competitive industries like e-commerce. Clearwater recently advised Mouseflow, which provides session replay technology, on its sale to Offspring Capital, but the key to the success of these companies is the ability to analyse and present data in a user-friendly, easily actionable way.
Whether Europe will start going after those revenue-multiple-backed deals in order to compete with those US consolidators is something we’ll have to wait and see
Revenue over earnings
A feature of the US market that may yet engulf the European market is a greater focus on revenue rather than EBITDA in valuations for SaaS firms. In the US, deals for such firms have completed on a revenue multiple basis for some time and the so-called rule of 40 for evaluating SaaS firms – the idea that the revenue growth rate plus profit margin should exceed 40% - has crept into everyday language.
A shift may be prompted by the need to compete with US firms consolidating in their respective markets. These US firms expanding into European markets are tending to focus on the growth potential of their acquisitions rather than earnings. For instance, Clearwater recently advised Poppulo on its investment from Susquehanna Growth Equity, a US based fund with the deal based on a revenue multiple valuation. “Whether Europe will start going after those revenue-multiple-backed deals in order to compete with those US consolidators is something we’ll have to wait and see,” says Fell-Smith.