Which software rollups are going to succeed?

Here’s the deck that Pavel, myself and Christian Binder from Redeye used to kick off the software serial acquirers conference in Stockholm.

Enjoy!

• As you move from left to right, churn rate increases and institutional investor interest decreases

• VMS and enterprise software are the two hottest categories

• In order to succeed, you need a differentiated origination strategy!

Pictured below is the Allalinhorn in SaaS-Fee, Switzerland.

What’s the connection?

Allalin it is considered to be one of the easiest 4000-metre Apine peaks. There’s an underground funicular that takes you almost all the way up, just 580 metres below the summit.

Just like with ascending Allalin, there’s low hanging fruit with software company aggregation. You can make it easy - or as hard as you want.

• Let’s start with the first value driver: multiple arbitrage, enhanced by leverage

• No rollup deck is complete without the picture of an American billionaire behind a gigantic serial acquirer…

• …whereas we would argue that many new HoldCos actually resemble Daniel Kretinsky

• Daniel is a Czech investor who got going in the early 2000s by buying undervalued, end of life coal power plants

• He later used that cash flow to diversify into other assets, notably in France, including a bid for a division of Atos…

• …which itself is a challenged software rollup!

• Well oiled M&A machine is key to maintaining capital allocation discipline

• You have to be prepared to sift through thousands of very small companies if you want to buy cheaply and at scale!

• It’s fascinating to see newcomer aggregators raise equity at $15, $25M pre-money with nothing but a slide deck and a pipeline

• A year later, the same people are back in the market trying to raise at 20X EBITDA

• This is true in private as well as public markets, although we suspect that the flameouts of businesses like Pluribus and WeCommerce have cooled investors’ appetite for newcomers

• Not long ago we published an article that helps investors evaluate software aggregators against Constellation’s value creation checklist

• Much like the skull you see in the slide below, some rollups are not going to reach the oasis of liquidity

• There’s no point arguing whether vertical SaaS is better than horizontal, or that HoldCos are better than buy & build

• What we do know is that the pressure to deploy capital, at the expense of asset quality, is a sure road to perdition

• We conclude the presentation with a couple of slides on the so-called platform plays

• These are aggregators that target specific enterprise cloud marketplaces, which have mushroomed in recent years

• Ecommerce SaaS has been very popular given the broad opportunity set and the sellers’ propensity to transact

• We would argue that platform plays are the next big thing, particularly as we’re nearing “peak VMS HoldCo”

• By plugging into large, and growing enterprise ecosystems like Shopify, Salesforce or Atlassian, software businesses gain access to distribution at scale

• The second advantage are the communities of reseller and implementation partners, who can be very effective at driving growth