The software PE model of Vista, Thoma Bravo, etc. is fundamentally flawed.
Buying legacy market leaders in B2B SaaS categories, raising prices, offshoring a % of R&D, buying adjacent products you can cross-sell, etc. etc. - doesn't work that well anymore.
It might have worked from ~2000-2015.
But it doesn't work in the modern era of software and AI. Markets are too competitive and technology is changing too quickly.
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Vista founder Robert Smith's thesis- "Software contracts are better than first-lien debt. A company will not pay the interest on its first lien until after they pay its software maintenance or subscription fee. We get paid our money first. Who has the better credit?"
The problem with this premise is that software contracts have much shorter duration on average than debt.
The typical loan duration in private credit is 5-7 years.
The avg. enterprise software contract is 1-3 years. But in SMB and mid-market, it's rare to see contracts much longer than one year. Many companies with month-to-month contracts. Not to mention usage based pricing.
Additionally, there's a lot more liquidity in B2B software than their used to be. Software is easier to build. Markets are more competitive. Customers have more choices. And LLMs make migrations easier than they used to be.
The most under-discussed flaw in this thesis is that it treats the customer as a captive audience. Prisoners to your mission critical product that they can't live without.
Software companies usually win by building a great product that solves a meaningful problem.
It's trite to say, but this only happens if you're customer obsessed. Once you lose that, you become extremely vulnerable to up-starts that will obsess over the customer.
No one that views their customers as debtors is going to be customer obsessed.
This is less of an issue in commodity products / industries like CPG.
Oreo's in 2024 are pretty damn similar to Oreos in 1987.
But technology is constantly changing.
State of the art software in 2010 is miles behind what people are doing in 2024.
Distribution and brand moats can protect your legacy products for a while (esp in enterprise) but eventually you get lapped by competitors with better products, service, pricing, etc.
Buying other products doesn't fix this either. The answer to customer problems is not to buy other products and jam them together with your existing solution just so you can call yourself a platform company (rather than point solution).
Software is too competitive and changes too fast for this model to work in 2024.
Anyone competing with incumbents recently purchased by private equity (like we are) knows exactly what I'm talking about.
embedded payroll + benefits @ rollfi
1wCan only imagine where you and Steven Schmatz are 12 months from now!