Inertia is powerful. Most people prefer the status quo and innately resist disruptive change. It explains why moving homes or changing jobs can be such a mental challenge.
Companies are no different. The cost and emotional distress of making wholesale changes to business systems can regularly challenge even the most successful firms. Yet those who don’t evolve and adapt to the needs of their customers tend to flounder.
Today, even young companies hold legacy assets that have become outdated or obsolete. In many industries, investing in new infrastructure is essential to staying ahead of the competition.
Increasingly, that means tapping into enterprise software (ES). ES is computer software used by governments, large companies, universities and charities, rather than individual users. It allows companies to display, manipulate and store large amounts of data and support business processes with that data.
If you’ve ever purchased goods on Amazon or eBay, you’ve interacted with ES. It drives the back-end technology behind the intuitive customer experience. And if you use a computer in your job, you may appreciate the role ES plays in supporting your productivity.
Enterprise software has been one of the key drivers of innovation and productivity increases for decades.
ES has been one of the key drivers of innovation and productivity increases for decades. Many companies wouldn’t exist without the software that keeps their operations ticking on a day-to-day basis. Gartner has forecasted that total spending on ES will reach $201 billion by 2019.*
Smartphone banking is a rapidly growing area. A U.S. Federal Reserve (Fed) survey found that 43% of mobile phone owners with a bank account had used mobile banking in the previous 12 months, which is up 4% from 2014 and up 10% from 2013. Looking ahead, mobile and cashless payments are expected to grow 81% annually to 2020 in the U.S. alone, according to Statista. This will likely require future investment in tech infrastructure, underpinned by ES.
Several high-profile corporate security breaches and a subsequent wave of new regulations have ramped up ES on the corporate agenda. Gartner and Cybersecurity Ventures estimate that over 75% of U.S. Fortune 500 companies have been breached by cybercriminals. The proliferation of mobile devices can accelerate matters, with companies seeking out more efficient and transparent security solutions.
There is also a clear move toward the “cloud,” and service-based solutions that surround it. Known as “software-as-a-service” or “SaaS,” marketing, e-commerce and advanced analytics software are the areas expected to see the fastest growth.
Cloud-based business applications are being used in recruitment in areas like applicant tracking systems and interviewing and assessment techniques. Businesses are also increasingly using cloud-based applications in areas like price optimization, procurement and financial planning.
The value in SaaS and ES companies, in general, stems from continued renewals of the existing subscriber base, which ensures long-term predictable revenues. But this cash-flow sustainability is not without risk, and therefore, ES firms must invest for the future.
Perhaps the area that could most benefit from investment in ES is artificial intelligence (AI). Bank of America expects global spending on AI to reach $37 billion by 2025, driven by the growth of mobile devices, social media and the Internet of Things, the inter-networking of devices and other items. The rapid expansion of data production has also boosted investment in AI. This will increasingly require new ES solutions and a workforce with specialized knowledge to handle it.
Artificial intelligence is already creating seismic shifts in healthcare and drug development.
AI is already creating seismic shifts in healthcare and drug development. IBM Watson has designed a program that analyzes clinical data and reports to provide optimal treatments for patients with cancer. Elsewhere, AI company Atomwise has developed technology that analyzes billions of molecular structures in the search for new drugs. It found two drugs that significantly reduced infectivity of the Ebola virus. Such progress used to take months or even years. It took Atomwise one day.
In areas like these, the growth of technology is literally changing our lives, and we are only at the start of the journey.
Financing future growth
ES’s ascendance has been aided by the structure of the software industry. Smaller players with unique expertise that are able to cater to a variety of clients are in plentiful supply. Young and fragmented, this part of the industry is ripe for consolidation.
At the other end of the scale, some well-established companies are divesting divisions to refocus their business. For example, global technology company Hewlett-Packard is reportedly in talks with private equity buyers to sell its software business for $10 billion. In June 2016, U.S. computer giant Dell (now Dell Technologies) divested part of its software business to two private equity buyers for $2 billion with the aim of repositioning as an enterprise hardware business.
Private equity management can supplement the founding management team as the seed of an idea grows.
A core skill that private equity management can provide is supplementing the founding management team as the seed of an idea grows. The founders of a business then have access to experienced executives who can help identify a long-term strategy and provide capital for investment in areas like customer service, product development and innovation, and branding.
Venture capital (VC) firms are also taking a strong interest in the technology start-ups, in areas like information security, storage and SaaS. In particular, they can target smaller, attractively priced investment opportunities where there is less competition for deals.
The unique challenges for VC investors are judging how far to fund a new ES business before meaningful revenue accrues, and which portfolio investments to nurture, and which to let go. Significant equity is often required before these businesses turn a profit.
So where’s the catch? Well, as with other private market sectors, valuations are high. However, there are many attractive companies in need of funding. In-depth research can uncover such opportunities.
Technology and software are evolving at mind-boggling speeds. Companies that fail to adapt to social and technological progress could eventually lose out, both from a financial and a reputational standpoint. In business, as in life, change should always be anticipated and embraced, rather than avoided.
Diligent investors who recognize this – and the importance of ES in helping companies adapt to change – may be better prepared for their financial futures.
* Forecasts are offered as opinion and are not reflective of potential performance, are not guaranteed and actual events or results may differ materially.
Companies mentioned for illustrative purposes only and should not be taken as a recommendation to buy or sell any security. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.
The investments discussed herein may not be available or suitable for all investors unless the investor meets certain regulatory eligibility requirements.