Private Equity Firms: Power-Up Your Software-Based Portfolio Companies

August 7, 2017

By Steve Mezak

Does revenue from your Private Equity (PE) portfolio of companies depend on software and the ongoing development of software? Odds are good that at least some of your PE’s growth strategies rely on software-enabled products and services. Why? Because PE firms are buying up software companies left and right, according to a 2016 article by CNBC. In fact, the National Venture Capital Association (NVCA) says that software companies attracted the lion’s share of venture investment in 2016: $33 billion was invested into the space, representing 48 percent of total invested capital (PitchBook-NVCA Venture Monitor).

“Investors have driven up the shares of the hottest tech startups in the land and sent their valuations – on paper, at least – into the stratosphere,” noted Bloomberg in a 2015 article on how Private Equity firms benefit startups. “Uber is now valued at $41 billion! Airbnb could be worth $20 billion! Snapchat is pushing for $19 billion! Palantir and SpaceX are already worth more than $10 billion each!”

One example of a Private Equity firm that sees the value of software-fueled businesses is TVC Capital. The firm focuses specifically on investments in software companies and software-enabled service firms. It currently has $235 million under management and closed its 19th and 20th software-geared growth equity investments in 2016, per socalTECH.com.

However, while PEs are clearly motivated by and see the benefit of software-focused businesses, many middle-market portfolio companies are not equipped with the proper level of resources needed to effectively manage their technology functions, says CohnReznick LLP, a nationwide accounting advisory firm. “Turning to outsourcing allows a company to benefit from the collective experience of a team of professionals that specializes in areas most needed and are able to assist in aligning IT strategy with a company’s corporate strategy,” shares the firm.

For a Private Equity firm to see ROI from its software-based companies, those companies need skilled software engineers. Yet the market for this talent is on fire, so it can be challenging to recruit anywhere but to the hottest tech businesses or tech cities. On top of that, Private Equity firms are under constant pressure to generate revenue and cut costs (when needed), without putting execution or business value at risk. Outsourcing provides the balance between cost efficiency and quality software development.

PEs Realize Cost Savings, Ensure Quality

Many PEs already know that when they outsource software development, they increase their firm’s profitability because they avoid the higher spends on engineers’ salaries. A Software Engineer/Developer/Programmer, for example, can command an average of $73,957 per year, but salaries go up to $110,000 based on location, according PayScale.com. While outsourced software developers’ fees vary by region, experience and technology, the one constant is that you will pay less for higher quality work when you outsource.

Outsourcing also supports the popular PE “Operating Partners” model, but with a twist. Instead of building different in-house teams to support software development across the PE’s portfolio companies, a dedicated outsourced team can jump right in to increase value. A PE firm can also grow its relationship with an outsourced team, and use that team (or teams) across its various portfolio companies, just as it would with an internal Operating Partner.

Think about how much time, effort and expense goes into recruiting and onboarding good software developers, if your portfolio companies decide to hire in-house? A lot. It can take as much as six to 12 months to locate and onboard those professionals. Adding further stress, the tight and high-salary market for these professionals makes hiring a major challenge. With outsourcing, none of that is on you. A world-class software development provider takes care of all HR issues, such as motivating, recruiting and training. And, when you outsource, team members who leave or don’t work out are quickly replaced. Instead of a disastrous loss of a critical employee, “shadow developers” – who are already familiar with your software initiative – step in when someone leaves. Thus, retaining employees is not an issue.


Launch a Software Initiative with Agility, Uptime Assurance

A good software development provider can ramp up its work-ready team immediately. We call this “Sprint Zero.” Outsourced software teams are used to fast starts with new clients. They know how to quickly assemble for fresh requirements. Whether your Private Equity firm invests in companies for fast profit or a more growth-centered model, you have to quickly support and build each company to make money. Outsourcing suits either strategy. It reduces costs, removes delays and supports the overall aggressive development agendas of PE properties.

If you’re a Private Equity Firm that’s already utilizing outsourced teams for software development, here’s a tip for you that I like to call “The 5 Percent Rule.” This rule states that unless your company’s outsourcing engagement uses a team of developers greater than 5 percent of the total number of developers at your outsourcing partner company, then you are not likely to get the attention you need to be successful. My work with clients consistently proves this.

For example, a large Silicon Valley firm had an outsourced team of 80 developers at an Indian outsourcing company with 8,000 developers total. Despite being a well-known, marquee client, they were getting poor results at only 1 percent of the outsourcing company’s business. If you need an 80-person developer team for a software initiative at one of your portfolio businesses, the right size outsourcing company should be in the range of 1,600 developers.

Many large, well-known outsourcing companies have more than 10,000 developers, and it can be hopeless to get good results from them, if you’re only using a very small percentage of their software engineering workforce. Thus, The 5 Percent Rule is the key to get the attention and results you need.

Overall, more and more PE firms are choosing outsourced development teams for their ongoing software initiatives, because creating bigger in-house teams goes against the grain of most PE philosophies. Contact Accelerance to find out how we can be a trusted Partner and Advisor for your Private Equity firm and its portfolio of companies, and we’ll connect you with the best-suited, pre-vetted and certified software development teams – at no cost – to grow your businesses. You don’t have to conduct endless searches and travel the globe to find the best software teams. We’ve already done that for you, so you quickly bring on a highly-educated team with an impressive portfolio, a proven ability to deliver, and a commitment to best practices in engineering, project management and business. And with an Advisor like Accelerance, you can be as agile as you want to be.

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