The perfect prosperity formula for a software company.

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We looked at the top investments made in software-focused companies and found a common theme across nearly all: More than ever, investors are focused on acquiring mission-critical, recession-resistant businesses.

Data from the SaaS market shows that these mission-critical companies have maintained the highest EV/EBITDA multiples compared to other categories, primarily due to their mission-critical nature and crucial customer dependence on product offerings.

At a time when digital transformation is a high priority for most organizations, cloud-based SaaS businesses are much more attractive to the market compared to on-premises solutions.

Q3 2022 SaaS company M&A figures show that there is still strong demand and investor appetite.

The perfect prosperity formula for a software company.

While many of the elements that define attractive investment opportunities remain consistent, investors tend to place more emphasis on certain criteria depending on broader economic conditions. With most economists predicting an economic slowdown in the near future, we’ve brought a deeper look into what’s most important to investors considering making new investments today.

We looked at the top investments made in software-focused companies and found a common theme across nearly all: More than ever, investors are focused on acquiring mission-critical, recession-resistant businesses.

Here’s a brief summary of how investors define these businesses.

What do these companies have in common?
Strong metrics

While there are many factors that investors consider when evaluating opportunities, gross margin and gross retention are among the most important.

Gross profit margin is a good indicator of a company’s scalability, as it shows how much money is left to reinvest in future growth. While gross margin alone shows that a company can quickly onboard and serve new customers, it doesn’t mean it can keep them. The combination of high gross margins and high gross retention is especially attractive to investors because it means a business is growing efficiently while minimizing customer churn, so any future success will only increase its profitability rather than offset the loss. . And if a recession hits, they may feel less of this impact.

A mission-critical industry or function

There are several ways to define this. It could mean supporting a sector that is considered essential, such as agriculture, healthcare, government, food and beverage, manufacturing or life sciences. Think of industries whose employees were deemed “essential workers” during the COVID-19 pandemic. They may have cut costs and suffered manpower shortages, but they continued day-to-day operations. Many actually saw a significant increase in sales.

Another way to look at it is how critical your technology is to the operation of certain businesses. Software that supports ERP systems, supply chains or security, for example, can have pervasive implications for many industries. They are critical to your end customers’ day-to-day business from an operational, regulatory or compliance standpoint. This makes it painful and challenging for end users to switch providers and almost impossible to go without a solution.

Public SaaS market data shows that these mission-critical companies have maintained the highest EV/EBITDA multiples compared to other categories, primarily due to their mission-critical nature and crucial customer dependence on product offerings.

A scalable delivery model

At a time when digital transformation is a high priority for most organizations, cloud-based SaaS businesses are much more attractive to the market compared to on-premises solutions. These solutions are easier to implement and don’t require a large upfront investment or significant costs to update and maintain. They also allow for greater flexibility.

A strong product

An organization’s ability to withstand challenging economic times comes down to two factors: its product and its value to customers. Is the product really different from other solutions on the market? Is it an integral part of operations? How difficult would it be for customers to switch to a new provider? These are important questions that CEOs must continue to reassess as the market shifts, budget priorities shift, and new competitors enter the picture.

Recession-resistant businesses focus on fundamentals

Q3 2022 SaaS company M&A numbers show that there is still strong demand and investor appetite for mission-critical, recession-resistant businesses. Even if your business isn’t mission-critical, you can focus on other fundamentals, including improving your product offering, ensuring an efficient and cost-effective delivery model, and remaining committed to customer success.

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