I learned a lot about finance and business when I led my first technology buy-out. Here I list my top 5 lessons that helped me convince my IC.
#1 A Healthy Technology Company has Healthy Sales
Audit your revenue breakdown. Not all techCos are built the same. Make sure you are able to separate out true SaaS revenues from perpetual licenses and other ancillary revenue including market place revenue.
#2 Size your Market… Wisely
Make sure you really know your TAM. Very common especially in VC land to assume everything the sun touches is TAM. In reality, if you’re in the driver seat make sure this is a realistic market. Some segments will have established competitors or are technologically unreachable
I learned the hard-way that just grabbing a McKinsey report saying that X industry is +$50B in the US is not a good method to convice your investment committee or your LPs.
Dig into the various aspects that form your niche: sub-sector, end-users, geography.
Often times a SAM is more telling than a TAM.
#3 In the Middle Market, your Management is Your Destiny
Make sure your management team is on its A-game.
Your techCo will be closely linked to the quality of your management to keep up with evolving markets and execute the business plan.
#4 Figure out Customer Concentration
Get to the bottom of customer concentration ASAP.
Don’t get caught by surprise with a contract that is a disproportionate amount of your sales that doesnt really appear to come from a single customer. customers can be affiliated to each other or are agglomerated various channels and this may be a sneaky way that sellers try to score a goal on you vis-a-vis higher valuation or simly selling to you in the first place.
#5 Reasonable Cost Structure
I saw this in portfolio management as well as in my buyouts: Audit the entire cost structure to find fat or conversely operating leverage as the business growth. This will lay the blueprint for success post close as you will have levers to mitigate a downturn assuming you are closely aware of how the cost structure fluctuates.
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